Why a Larger Insurer is Sometimes Better…and Sometimes Not

Small and large insurance companies

In Canada, we love small business, and with good reason. Who doesn’t want to know their local grocer or mechanic, or have their kids go to school with their insurance broker’s kids? As Canadians, we have a natural preference for small family businesses. They are our neighbours. We trust them.

When it comes to insurance, however, there may be some very good reasons to choose a larger insurance company, with a larger support team, broader customer base on which to base its underwriting and pricing, and more resources to invest in the latest technology.

Don’t Worry, Your Claim Will Be Paid

The fact is that in Canada, even the smallest insurance company, so long as it’s properly licensed, is one that you can absolutely rely on to be there for you when you need them. Every insurance company is itself protected from large-scale losses by purchasing what is called re-insurance, usually from large international companies that spread risk all over the world, thus protecting against localized events like hurricanes etc. that can cause hundreds of millions in losses all in a small geographic region.

Also, thanks to a robust regulatory system that requires insurers to hold a certain percentage of premiums in reserve for a rainy day (literally), the chances of an insurance company running out of money to pay claims is extremely low.

But even if an insurance company runs into financial difficulty, all insurers are required to contribute to a fund that compensates policyholders if a company fails and is unable to pay claims (PACICC). Security, therefore, is not a reason to choose a larger insurer.

Benefits of a Larger Insurer

However, size, or more specifically volume of claims experience, can help larger insurance companies gain better knowledge of claims behaviour, and so they may be able to better predict future claims volumes by type of customer, and offer pricing that more accurately reflects a customer’s true level of risk. For certain types of customers, this can be a big advantage.

Thanks to economies of scale, larger budgets for research and development and larger cash reserves, larger insurers may also be able to offer more innovative products that require lots of up-front investment and may not pay dividends right away. This advantage is not what it used to be, as most of the new technology in the industry is now being developed by third party vendors, who typically offer pricing that is relative to the size of the insurer.

Larger insurers may also be able to offer better service in the form of longer service hours. Imagine a small insurer with only one office, say in Ontario, with a total of 50 staff. That insurer is unlikely to be able to answer your inquiries outside regular business hours or on weekends. Compare that to a company with 1,500 employees that are spread out over 3 or 4 offices across the country. They may be able to offer longer hours, not only because they can rotate more service staff, but also because they may be in 2 or 3 different time zones.

Benefits of a Smaller Insurer

There are also certain benefits to be gained from working with a smaller insurance company, specifically if they are focused on a particular region or a particular kind of specialty insurance product. These smaller insurers can develop a deeper understanding of that particular market and offer products that better fit the insurance needs within the market.

When you buy insurance, you’re essentially buying peace of mind. For that reason, almost every insurance company wants to present itself as being your friendly neighbour that is there to help. Sometimes, that may be exactly what you need, but sometimes you’ll feel much more secure knowing that you have the resources of a larger business behind you if anything bad should happen. There is no right answer, and the moral of the story is that because you live in Canada and insurance companies are heavily regulated, there really is no bad choice.

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