Managing Risk in Hard Markets

Electricity Canada: The Grid 2022

Vanna Willerton

Legal & Finance Program Administrator, Electricity Canada

The Canadian insurance industry is currently in a difficult position – what is known as a “hard market”. Insurers are facing low investment returns and there is a surge in claim payouts, all of which leads to price adjustments in order to secure enough cash to protect customers. In hard market situations like these, insurers often pull out of certain high-risk activities or industries altogether, making it difficult for insurance buyers to maintain the same coverage at the costs they’re used to.

The cause for the current hard market can be attributed in large part due to an increase in natural catastrophes and the subsequent surge in insurance payouts. According to the Insurance Bureau of Canada (IBC), in 2021 severe weather led to 2.1 billion dollars in insured damage in Canada alone. The hardening market worsened in 2020 when the surge in claims was coupled with an economic downturn, leading to poor investment returns for insurers.

The hard market affects the Canadian and global insurance industry as a whole. However, electricity companies are particularly hard hit due to their regulatory structure. If insurance rates increase dramatically during a regulatory period, these excess costs can’t be recovered, impacting the economic feasibility of major projects.

This is a serious concern for Canada’s electricity companies as they work toward decarbonizing, reinforcing their aging infrastructure against extreme weather, and electrifying the economy.

Here is the good news: this won’t last forever.

The last hard market took place roughly twenty years ago and the insurance market has historically cycled through many periods of soft and hard markets and back again. The economy is predicted to bounce back shortly, which will drive a softening of the market. However, we can expect extreme weather events to continue to

Electricity Canada: The Grid 2022

increase. Climate change has driven us outside of historical norms when it comes to severe weather, and since insurance rates are based on historical data, it is unclear how this will continue to affect the insurance market in the coming years.

Cyber liability is the other new and unpredictable line of insurance which will continue to remain an outlier as the market softens. A lack of historical data makes it difficult to determine and negotiate insurance. Cyber attacks, most frequently ransomware attacks, are only increasing in frequency and sophistication. Gord Payne, Director of Risk Management for Fortis Inc. and insurance negotiator for the company, identified cyber liability as the most challenging line for Fortis Inc., “As cyber liability insurance matures it will likely stabilize, but I’m not sure we’ve seen the worst of it yet.”

In the face of this additional financial challenge to our Net Zero goals, governments, regulators, and utilities themselves should do everything they can to improve utilities’ resilience to extreme weather and cyber attacks. This will have the benefit of improving utilities’ abilities to serve Canadians, and of allowing utilities to negotiate better insurance rates – translating to customer savings and more funds to accelerate decarbonization projects.

What Can Utilities Do?

Demonstrate that You Proactively Manage Risk: As underwriters tighten certain terms and conditions, they will look to ensure you have done your part to mitigate risks. The Insurance Bureau of Canada has risk management resources to help businesses put together their best insurable story to get the best possible rates. This is a free service to assist companies in identifying and addressing issues to reach insurance savings. Gord Payne states that, for Fortis Inc., “the underwriting submission is our corporate resume”. He recommends utilities work with a broker and provide as much information as possible about the company’s risks and mitigation tactics. In hard markets, insurers tend to have top-down mandates and decision-making becomes more centralized. Underwriters likely have less flexibility than before, so Payne emphasizes that underwriters, trying to make exceptions for your business, need to be provided with as much information as possible in order to make a case to their superiors.

Shop for New Insurance Company: If you still feel that you are paying too much for your insurance, try to shop around for other options. Keep in mind that the market is hard and that companies tend to prioritize existing relationships under such conditions. Knowing this, you should not restrict yourself, and be ready to consider all options.

What Can Regulators Do?

Be aware: Regulators should be aware and make efforts to understand the hard insurance market. Most people at the table negotiating rates would not have seen the last hard market. Large peaks in insurance costs may raise questions for regulators, so understanding what is inside and outside of utilities’ control will be the key to facilitating conversations.

What Can Governments Do?

Assist Electric Utilities in Climate Adaptation and Cyber Security Investments: Federal and Provincial governments should recognize that utilities will need to invest heavily upfront in climate adaptation and cyber security in order to ensure that the system remains cost-effective and resilient. These investments will protect the grid and keep insurance rates reasonable moving forward.

Federal and local governments should work with stakeholders to accelerate current efforts to understand long-term climate variability projections and facilitate utility investments in climate change adaptation and grid resiliency.

In the Government’s recent report: Canada in a Changing Climate: National Issues, increased awareness and technological innovation are critical first steps in developing a climate-resilient energy sector. The government should conduct a national assessment of Canada’s climate change adaption needs in the energy sector and create an Energy Climate Adaptation Fund.

The government should provide further funding for research, development, and deployment of cyber security programs and technologies for the electricity sector.

Proactive management of cyber and climate risks keep insurance costs manageable and can be facilitated by federal and local governments.