Competition in the marketplace is good for consumers. It benefits them by providing checks and balances that help keep prices competitive and the quality and choice of products and services high.
To measure the level of competition for products and services in a market, many government agencies and regulators use the Herfindahl-Hirschman Index (HHI). This index is a common measure of market concentration.
HHI is measured on a scale of 0 to 10,000. A market with an HHI of less than 1,500 is considered a competitive marketplace, an HHI of 1,500 to 2,500 is moderately concentrated, and an HHI of 2,500 or greater is highly concentrated.
Using data from MSA Research, an independent and impartial analytical research firm focused on the Canadian insurance industry, Insurance Bureau of Canada (IBC) has found that the competitiveness of the property and casualty (P&C) commercial insurance market has improved over the past few years with an HHI of 642 in 2018 improving to an HHI of 629 in 2023. Today, there are over 100 commercial insurance companies competing in the Canadian marketplace, a 10% increase from 2018. Further, in every province, there is now more choice available to businesses shopping for insurance coverage than there was five years ago.
This increase in market competition for commercial insurance is positive news for businesses, especially after a challenging period of high demand and low supply – known in the insurance industry as a hard market – between 2020 and 2023.
A healthy and competitive commercial insurance market is critical to the success and growth of the Canadian economy. Insurers protect the economic system from potential financial disruptions by assuming many of the risks inherent in the production, distribution and use of goods and services. This transfer of risk frees insured businesses from worrying that an accident or mistake could cause large losses or even financial ruin. With the current highly competitive commercial insurance market, businesses can find the right products that help enhance economic growth opportunities, innovation and entrepreneurialism.
As a financial service, the insurance industry is heavily regulated in Canada – insurance companies are supervised by both prudential and market conduct regulators. The federal Office of the Superintendent of Financial Institutions ensures companies offering P&C products remain financially sound, while also ensuring a regulatory environment that is attractive for capital investment. The availability of insurance capital is critical to Canadian businesses.
While the current competitiveness of the Canadian P&C market is a sign that domestic and global insurers see Canada as an attractive market for investment, IBC believes it’s important to continue to look for ways to facilitate further opportunities for businesses to grow.
Earlier this year, IBC released a report that highlights how governments can improve insurance market conditions for Canadian businesses.
In developing the report entitled, “Fuelling Business Prosperity – Government’s Role in Fostering a Sustainable Commercial Insurance Market,” IBC sought input from business organizations, including the Canadian Federation of Independent Business, to understand ongoing challenges and provide governments with policies and reforms that can lead to a healthier operating environment for businesses.
Taxes charged on top of commercial insurance policies emerged as one of the top concerns for Canada’s business organizations. The report finds that depending on the province or territory, insurance premium taxes and retail sales taxes can be up to 20% of commercial insurance premiums; this can result from an overlaying of taxes, otherwise known as “a tax on a tax.” The significant cost taxes add to a premium may deter businesses from securing adequate coverage. IBC’s report advocates for eliminating or reducing taxes charged on insurance policies, and suggests such a move would encourage businesses to invest in more comprehensive insurance and risk management plans to ensure resilience against unforeseen events.
In addition to tax relief, the report suggests that governments should consider other measures to help reduce existing risks that affect the cost of some commercial insurance products. These measure include the following:
Support flood mitigation and adaptation efforts, and amend building codes and land-use planning to make buildings more resilient to damage and to avoid building in areas where the risk of damage is high, such as flood plains.
Create a more proportionate joint and several liability framework that distributes damages based on full proportionate liability, balancing responsibility among defendants.
Establish a robust policy framework for cyber security within Canada by bringing together government agencies, the tech industry, the financial services sector and business groups.
Without adequate insurance coverage, businesses are at risk of being financially ruined by a disaster or a lawsuit. A healthy and robust commercial insurance market helps unlock the potential for Canada’s approximately 1.3 million businesses.
