A paradigm is coming. Are you ready for ‘the next big thing’ in commercial lines?


Paradigms and paradigm shifts are cyclical in nature. As soon as one paradigm shift ends or is close to ending, another paradigm surfaces and trends from there. There are always unsustainable forces that drive the paradigm. They go on long enough for people to believe that they will never end even though they obviously must end.


Ray Dalio—Investor, hedge fund manager and philanthropist, writes extensively on the effects of paradigms and paradigm shifts in finance. He says, "Identify the paradigm you’re in, examine if and how it is unsustainable, and visualize how the paradigm shift will transpire when that which is unsustainable stops." [1]

When it comes to commercial lines, we’ve seen plenty of paradigms and paradigm shifts over the years. Once common paradigm is the inevitable shift from hard market to soft market and back again. Let’s examine two paradigms that are taking place right now that will impact the hard market.

Paradigm Number One: Low interest rates.

According to Statistics Canada, the current prime interest rate is 3.95%. In 1989, it was 13.33%. As Canadians, we’ve been enjoying single-digit interest rates for decades. So long in fact, most Gen-Xers and millennials can’t even remember when a 10% interest rate or higher was the norm.

Is this unsustainable? Yes. The Canadian economy entered a recession in the second quarter of 1990, following a period of slowing growth over the previous year. Even though that recession was relatively short, the prime interest rate continued to go up to 14.06%, then drop to 5.94% by 1993.

Because of low interest rates, insurers are not profiting from the investment income they previously enjoyed allowing their price-per-share to drop, making them vulnerable for acquisition. A commercially-focused brokerage that may have had 20 markets to work with in 1990, may only have 10 or fewer to choose from in 2019.

Paradigm Number Two: Extreme weather and climate change.

This paradigm isn’t coming, it’s here. In the past decade alone:

  • The Ottawa-Gatineau tornadoes and windstorms in 2018 caused $295 million in insured damage.
  • The 2016 Fort McMurray wildfire cost close to $4 billion in insured damage.
  • The 2013 Toronto flood caused $943 million in insured damage.
  • In 2012, parts of Southern Alberta had a hail storm that resulted in $530 million in insured damage.

According to the Insurance Bureau of Canada, insured losses for extreme weather averaged $400 million per year thirty years ago. Now they average $1 billion per year.[2]

There were more natural disasters than this, but I’m sure you see the trend. More frequent and severe natural disasters are affecting the insurers bottom line. Paying billions in claims means less profitability and less profitability means rate increases that get passed onto insureds. Insureds are not happy about paying higher premiums, especially if they’ve been claims-free for years. Unhappy insureds are more likely to shop around and that effects their bottom line too.

The truth is, a paradigm shift isn’t easy to see at first. It can take up to 20 years or roughly one generation for a paradigm shift complete its cycle. Firstly, because older generations became accustomed to the situation and normalized it. Secondly, because the younger generation identified a need for change and incorporated those changes for the shift to begin.

The same applies to your brokerage. For example, moving away from typewriters and fax machines—once the powerhouse of the brokerage, didn’t happen overnight. The younger generation was introduced to computers, the Internet and other technologies in school. When the time came for them to join the workforce, the shift was well under way.

Such is the way of the paradigm and paradigm shift.These are just a couple of paradigm shifts taking place in commercial lines. If you’ve experienced others in the course of your career or see a shift on the horizon, let me know, I’d like to hear them.

[1] https://www.linkedin.com/pulse/paradigm-shifts-ray-dalio
[2] 2018 Facts of the Property and Casualty Insurance Industry published by the Insurance Bureau of Canada.

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Topics: Commercial_lines, profit, revenue, hard_market