C A N A D A’ S I N S U R A N C E A N D R I S K M A G A Z I N E . C A N A D I A N U N D E R W R I T E R . C A
M A R CH 2 0 1 2 A Business Information Group Publication #40069240
Under the Microscope BY VANESSA MARIGA
Class Actions in Canada BY JAY CASSIDY AND ALEXANDRA KINDBOM
Commercial Lines Survey BY CRAIG HARRIS
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Š 2011 FM Global. All Rights Reserved.
UNDERSTANDING HOW FM GLOBAL IS DIFFERENT IS AKIN TO
To learn more, visit fmglobal.com/insuranceevolved/light
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SEEING THE
If you remember just one thing about FM Global, here it is: FM Global believes that most loss is preventable. That’s why we link underwriting to loss prevention engineering. A proactive approach that helps us identify, minimize and assume risk before disaster strikes — and only FM Global does it. With over 1,500 engineers around the world and a $100 million research campus, FM Global takes the time to learn about risk. So, our clients experience smaller and less frequent losses, ensuring business continuity. Maybe that confidence is why our client list includes one third of the top Fortune 1000. Underwriting through loss prevention engineering. Now, that’s insurance evolved.
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VOL. 79, NO. 3, MARCH 2012 CANADA’S INSURANCE AND RISK MAGAZINE. PUBLISHED BY BUSINESS INFORMATION GROUP
www.canadianunderwriter.ca
COVER STORY
Under the Microscope
32 FEATURE
18
46
Class Actions
Mobilizing Against Fraud
Secondary market liability class actions have increased markedly in Canada, resulting in new policy wordings that have thus far been untested in court.
The Ontario Auto Insurance Anti-Fraud Task Force has taken preliminary steps to establish the scope and appropriate response to fraud.
BY JAY CASSIDY AND
BY WILLIE HANDLER
ALEXANDRA KINDBOM
24 Earthquake Clusters
54 Automating Total Losses
Current research suggests giant earthquakes happen in “clusters,” a discovery that may redefine earthquake risk management.
Automation has improved the claims process for repairable vehicles. Now it is being applied to the process for total loss claims as well.
BY KATE STILLWELL
BY BRUCE CARRICK
4
Canadian Underwriter March 2012
Supply chain risk has come under scrutiny recently because manufacturers that re-located their operations from Japan after the 2011 Tohoku quake suffered unforeseen flood damage in Thailand. Insurers have responded by taking a very detailed look at the global supply chain risks of their clients (and their suppliers). BY VANESSA MARIGA
14 Quake Research
42 Braced for The Big One
Seismicity-based earthquake forecasting has made it is possible to give a warning of a few seconds — and even up to 70 seconds — prior to an earthquake strike.
It is important for Canada to be prepared for the uncomfortable reality that it is due to be hit by a major earthquake.
BY KRISTY F. TIAMPO
BY CLAUDIO TOTINO
50 How Much is Enough?
Any given municipality has several property and casualty exposures. All it takes is one event to damage its reputation forever.
How should commercial brokers handle a discrepancy between how much coverage their clients think they need and how much coverage brokers believe their clients require?
BY JULIE BOYD
BY THE CIP SOCIETY
28 After the Losses
56 Commercial Lines Survey
22 Parks and Reputation
Rates and exposures were up as of Canada’s January 2012 renewal season. The implications for primary rates, particularly in personal lines, should be clear. BY DONALD P. CALLAHAN
Commercial loss ratios are starting to rise, and yet rates are expected to remain stable. When will commercial rates begin to increase? BY CRAIG HARRIS
Every file is different
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VOL. 79, NO. 3, MARCH 2012
PROFILE
Editor David Gambrill david@canadianunderwriter.ca (416) 510-6796 Associate Editor Vanessa Mariga vanessa@canadianunderwriter.ca (416) 510-6793
12 Horizons 2012 RIMS Canada Conference co-chairs Doug Brown and Lisa Brost sketch what’s on the horizon when Canada’s premier risk management conference is held in Saskatoon this September. BY DAVID GAMBRILL
SPECIAL FOCUS
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Senior Publisher Steve Wilson steve@canadianunderwriter.ca (416) 510-6800 Associate Publisher Paul Aquino paul@canadianunderwriter.ca (416) 510-6788 Account Manager Michael Wells michael@canadianunderwriter.ca (416) 510-5122 Account Manager Christine Giovis christine@canadianunderwriter.ca (416) 510-5114
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Editorial
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Connect with Canadian Underwriter
60 Moves & Views
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62 Gallery
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EDITORIAL
Walking on Water
Consumers might appreciate the clarity that comes with overland flood damage being covered under their homeowner policies, but how will insurers and politicians convince them to pay the additional money that will no doubt be required to cover the risk? David Gambrill, Editor david@canadianunderwriter.ca
8
Canadian Underwriter March 2012
Remember those heady days in the mid-2000s, when personal and commercial property claims ratios were more in the range of the high 50s and mid 60s, instead of the low-70s that we see now? Sadly, we are all too used to seeing high claims ratios in auto insurance. But insurers are starting to make noises about worrisome trends in property lines as well. Water damage is a huge factor in the increase. Recently, the Insurance Bureau of Canada, an association of home, car and business insurers, toured Atlantic Canada and sketched out the numbers in more detail. Specifically, water losses quadrupled in New Brunswick between 2005 and 2009, and doubled in Halifax over the same period. It should be noted these water damage losses are based strictly on wastewater and sewer back-up issues inside the home. Losses due to overland flooding in Canada are not covered in any home insurance policies. A movement is afoot within part of the Canadian property and casualty insurance industry to at least discuss the possibility of covering water damage due to overland flooding in Canada. The debate is likely to gain more traction in Canada as governments start cutting an increasing number of emergency cheques to cover flood damage to homes. The projected bill to pay for damage
costs related to Manitoba flooding in Spring 2011, for example, is more than $800 million. High property damage costs such as these are a likely result of more intense storm events predicted for the future. It is difficult to believe the federal, provincial governments wouldn’t mind some kind of public-private sector arrangement to help offset some of the costs associated with overland flooding damage in the future. The thing is, whether governments or insurers step up to front the costs for water damage, the public will ultimately be left paying the final invoice. This could come in the form of higher taxes (if the government foots the bill) or higher premiums (if the private insurers cover the costs). This is going to be a public issue in the future, especially if storm water damage escalates as predicted. Certainly insurers’ claims patterns over the past three years indicate something is going on out there. As one insurance company CEO put it: “We’re all weather forecasters now.” As people in the industry often say, insurers can underwrite anything — for the right price. Naturally, if you live in a flood zone, the price of flood insurance would be higher than if you lived in an arid, landlocked area of the country. The problem thus far has been marshaling the data to assess where the water risks are. To this end, insurers will be gradually rolling out a new in-
strument called the Municipal Risk Assessment Tool (MRAT) in 2013. This is not for overland flood insurance, which, as stated above, doesn’t exist. Rather, MRAT is to help insurers gather granular data to determine very specific sewer back-up and wastewater risks in particular areas. Needless to say, this will expose some neighbourhoods as ‘high-risk’ for sewer backup. For those areas, it is not difficult to imagine premium increases. Similarly, flood maps, required to analyze and potentially underwrite flood risk, would also expose areas at high risk of overland flooding. In order for overland flood coverage to work, the government would have to enact laws to prevent people from building in these high-risk areas, so premiums won’t go through the roof. Herein lies the challenge: even if consumers might appreciate the clarity that comes with overland flood damage being covered under their homeowner policies, how will insurers and politicians convince them to pay the additional money that will no doubt be required to cover the risk? The tune of covering overland flood is indeed nice to hear, but someone will have to pay the piper when all is said and done. Consumers interested in taking up such an option will want to have some idea of how much they might be expected to contribute.
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Canadian Market IBC TOURS ATLANTIC CANADA WITH CLIMATE CHANGE ADAPTATION MESSAGE Insurance Bureau of Canada (IBC) took its message of climate change adaptation to Atlantic Canada in February. Speaking to the Saint John Board of Trade on Feb. 22, IBC president and CEO Don Forgeron observed that water damage losses in New Brunswick have almost quadrupled over four years — escalating from $7 million in 2005 to $23 million in 2009. “That’s huge,” he said. “And when we compare this relative growth to losses from fire, water wins the race, hands down.” Insured water losses in Nova Scotia almost doubled over four years, increasing from more than $20 million in 2005 to more than $38 million in 2009. Acknowledging that the federal government committed close to $150 million towards a climate change adaptation strategy, Forgeron said the sum “is not enough to address the adaptation problems our country faces.” Forgeron said he met with Finance Minister Jim Flaherty during pre-2012 budget consultations and encouraged the federal government to “undertake a focused effort to work with all other levels of government to
10 Canadian Underwriter March 2012
improve water and wastewater infrastructure.”
CANADIAN COMMERCIAL RATES EXPECTED TO REMAIN STABLE ACROSS MOST LINES Canadian commercial insurance rates are expected to remain stable across most lines of business in 2012, continuing a trend that began in the second half of 2011, according to a report by Marsh. In its report Navigating the Risk and Insurance Landscape: Canada Insurance Market Report 2012, Marsh noted substantial catastrophe losses and reduced investment returns have prompted many insurers to seek rate increases in 2011. Property insurance rate reductions will likely cease in 2012, especially for Canadian insureds with significant loss histories or U.S. catastrophe exposures. Companies with U.S. catastrophe exposure will likely see rate increases of up to 15%. Rates for financial and professional lines, including for directors and officers’ liability, are expected to remain stable in 2012, although some rate decreases are still achievable.
Claims CANADIANS CAN ANTICIPATE MORE INTENSE WILDFIRES OVER THE NEXT CENTURY Canadians can anticipate more intense wildfires that are too difficult to stop using traditional fire fighting tech-
niques, according to Mike Flannigan, a senior research scientist with Natural Resources Canada. Flannigan presented his team’s latest research in Vancouver at the annual meeting of the American Association for the Advancement of Science. “It’s going to be incredibly difficult in the future to manage forest fires because the intensity of forest fires is going to be increasing,” Flannigan is quoted as saying by PostMedia News. Flannigan predicted two to three times more fire activity in the northern hemisphere by the end of the century. “Virtually all of Russia, Canada, the U.S.” will be affected, PostMedia quotes him as saying, adding that his analysis represented a conservative estimate.
ONTARIO COURT SAYS 60-DAY MEDIATION PERIOD IS SOLID, DESPITE SERIOUS CASE BACKLOG Despite a serious mediation case backlog in Ontario, claimants may nonetheless proceed with legal actions against insurers if mediations are not completed within 60 days of an application for mediation being filed with the Financial Services Commission of Ontario (FSCO), the Ontario Superior Court has ruled. Section 19.1 of the province’s Dispute Resolution Practice Code says “...mediation must be concluded within 60 days of the filing of an application for mediation.” This timeline holds
firm whether there is a case backlog or not, the court confirmed. “While some accident victims may choose the court route, others will not, and FSCO can continue to try to get sufficient resources/mediators to comply with the 60day period,” Ontario Superior Court Justice James Sloan wrote in a decision issued on Feb. 8. “Alternatively, FSCO could seek a change in the 60-day time period and/or ask for legislative direction to extend the 60-day period in appropriate circumstances.” FSCO recently announced it is engaging the services of private mediation companies to help clear up the case backlog.
Regulation CCIR LOOKING AT RULES FOR INSURANCE SALES ONLINE The Canadian Council of Insurance Regulators (CCIR) has circulated an issues paper about issues raised by insurance sales on the Internet. In particular, the paper identifies the absence of a regulatory framework specific to the distribution of online financial or insurance products. It lists seven desired consumer protection goals related to the online sale of insurance. The paper does not address the role of social media in the online distribution of insurance, although stakeholders are invited to comment on this. The deadline to submit comments to the CCIR about the issues paper is Apr. 27.
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“While there is legislation in all Canadian jurisdictions governing electronic commerce in Canada, none applies specifically to financial products, unlike the European Union and the United Kingdom where there are regulations designed specifically for the distance marketing of financial services and general insurance, respectively,” the paper observes. The full issues paper can be found at: http://www.ccir-ccrra.org/en/ init/Elec_Commerce/ECC%20 issues%20paper%20EN.pdf
Risk Management
year time span of the research. “About 50% of the events we researched had to do with problems with the company’s business strategy or model,” he said. “Fifteen per cent
were from lawsuits, 10% were due to M&A problems. Notably, until 2011, natural catastrophes were not a factor in these reputation crises.” Given that the insurance in-
Specialized claims adjusting takes specialized expertise and experience. Specialized losses are by their very nature intricate, complex and full of challenges. In the absence of strong leadership these losses can and frequently do take on a life of their own. At Cunningham Lindsey we provide this leadership.
BUSINESSES CONCERNED ABOUT REPUTATIONAL RISK, BUT ONLY 10% OF THESE EVENTS ARE INSURABLE: WILLIS About 95% of major corporations have suffered at least one major reputation crisis in the last 20 years, but less than 10% of these events are insurable, according to Willis Group Holdings. Phil Ellis, CEO of Willis Global Solutions Consulting Group, spoke at the Risk Frontiers conference in London, United Kingdom recently. He researched the performance of 600 publicly held companies, finding that major firms suffer a significant reversal of fortune once every seven years. Furthermore, 19 out of 20 companies suffered at least one such reversal over the 20-
dustry primarily offers protection against named perils, less than 10% of major reputation-damaging events are due to an insurable, perilrelated event, Ellis said.
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March 2012 Canadian Underwriter
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PROFILE
Over the Horizon David Gambrill Editor
RIMS Canada Conference co-chairs Doug Brown and Lisa Brost are organizing the 2012 RIMS Canada Conference, dubbed ‘Horizons.’ Saskatchewan has always been known for its expansive views, and risk managers can expect to see that broad perspective reflected in the program of Horizons 2012, the RIMS Canada Conference to be held in Saskatoon, Saskatchewan, on Sept. 9-12. “The theme, of course, is Horizons 2012, where today’s risks meet tomorrow’s solutions,” says RIMS Canada Conference co-chair Doug Brown. The ‘horizon’ theme has always been a part of the provincial lore, and is even the subject of local humour. “There’s a joke about Saskatchewan: You can watch your dog run away from home for days,” quips RIMS Canada
12 Canadian Underwriter March 2012
Conference co-chair Lisa Brost, adding in a more serious vein that there is so much more to the horizon motif. “You follow the sun as it goes down on the horizon, and again when it comes back up,” she says. “It’s brilliant, it’s beautiful and it’s fantastic here in Saskatchewan, and that’s what we want to emulate at this conference.” Brown also picks up on the limitless horizon captured in the joke about the dog running away from home. “The opportunities in Saskatchewan are endless, too, it seems,” he says. “The provincial economy is booming. The resource sector is a strong foundation block in the provincial economy. Whether it’s potash or uranium mines, oil or natural gas, resources play a big part in the provincial economy right now. “The population is expanding. If Saskatoon is not the fastest-growing city, it’s one of the fastest-growing cities in Canada. And we want to try and play off that, too.” A broad range can also describe the professional backgrounds of Brost and Brown. Brost has been a senior risk analyst for a diversified natu-
ral resources company, BHP Billiton, since September 2011. Prior to that, she worked in various roles for 15 years at Cameco Corporation, a uranium mining company. During her last five years at Cameco, she worked as a risk manager helping to develop the company’s Enterprise Risk Management (ERM) program. Previous to that, she had experience at the company in the role of a quality control administrator and statistician. What did she like about risk management? “I liked the analytical aspect and the fact
The theme is Horizons 2012, where today’s risks meet tomorrow’s solutions. that it was closely related to the continual improvement of quality management, improving the processes, improving the communication, putting controls in place,” she says. “In the uranium industry, you can imagine there are some significant risks involved. Learning more about what they were was very, very exciting. The good thing is, I al-
ready knew a lot about the industry and the company because I was there for 10 years prior to my work in risk management. Working closely with subject matter experts at the mines and corporate office aided in building a successful risk management program.” Brown, who is the risk manager for The City of Regina, says his risk management background followed a path through insurance adjusting. He started his career in 1972 with Saskatchewan Government Insurance. He worked there for 18 years, rising up through the ranks of the adjusting profession. He left SGI in 1990 and worked as an independent adjuster for a couple of international companies, subsequently joining the City of Regina in 1995. He has been at the City of Regina since. Brown said the City of Regina, which doesn’t yet have an ERM program, practices a “traditional, bricksand-mortar type of risk management.” Specifically, his group handles complaints and concerns from the public, as well as doing formal risk assessments and risk reviews, contract reviews, purchasing
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PROFILE
appear to be a benefit when organizing a national conference for risk managers. Brown says risk managers can expect to hear from their own at this conference. “We are hoping to have a panel of risk management experts,” he says. “Risk
broad range of professional experience in the risk management industry. They include Hans Laessoe, senior director of strategic risk management at LEGO Systems A/S; Daniel H. Kugler, corporate risk manager and assistant treasurer at Snap-On
ture,” he says. “It poses several risks. It has an effect on the city’s ability to deliver services. It’s harder to maintain. Potholes in areas or cracks in sidewalks can lead to damage or people being injured.” The wide-ranging experience of Brown and Brost in the private and public sectors would
managers would like to hear from more risk managers.” Right now, the exact number of sessions and the precise list of topics and speakers for the RIMS Canada Conference is still a matter for discussion. But definitely four speakers booked thus far show a
Inc.; Craig Tilford, director of risk governance at TELUS; and Carol Fox, director of strategic and enterprise risk practice for RIMS. Brost is in charge of planning the social portion of the program. “The feel of the conference will be very much Saskatchewan, which will be
Photo: Kelly Taylor-Faye/Riverstone Studios
insurance and managing the insurance workflow.” The risks facing the City of Regina aren’t out of line with the risks facing many municipalities across the country, he observes. For example, “we’ve all heard and are more or less familiar with aging infrastruc-
bursting with hospitality, entertainment, fun, camaraderie, a lot of networking opportunities, and a lot of really fun surprises,” she says. Surprise also promises to be a key element of events at the Exhibit Hall this year. “We are going to be putting a huge focus on our sponsors and our industry partners,” Brost says. “We will have a lot of activities in the Exhibit Hall, making it the place to be. We’ll be putting a couple of very creative twists on it. This will be a different conference. We are doing a few things that haven’t been done before.” In an effort to “go green,” the conference will be foregoing a hard copy of the conference program, and people can expect to hear about the conference primarily through ramped-up online communications. And speaking of electronic media, this year’s conference, as in Ottawa last year, will have a mobile app, allowing conference delegates to access information on their mobile devices. “If you download the app, you will be kept up to date on the conference and have access to conference information via your smart phone, iPhone or other mobile device,” Brown said.
March 2012 Canadian Underwriter
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Warning System
The development of earthquake early warning systems provides rapid information about upcoming shaking just before the arrival of large seismic waves. Dr. Kristy F. Tiampo
Professor, Faculty Scholar, Department of Earth Sciences, Western University (London, Ontario)
We have been reminded repeatedly over the past few years about the potentially catastrophic impact to life and property from large earthquakes. The Magnitude-7 earthquake in Haiti in 2010 became the fifth most deadly earthquake on record, killing more than 200,000 people and resulting in $8 billion in direct damages. The economic impact from the Magnitude-8.8 earthquake that struck Chile in 2010 is estimated at as much as $30 billion.The Magnitude-9 earthquake and tsunami that struck Japan in 2011 caused at least $200 billion in estimated losses. As a result of this potential regional and national impact, research into earthquake prediction has existed on some level for almost 100 years. Over the past 40 years, however, the increasing density of seismic networks in active tectonic regions around the world has resulted in the availability of a wealth of seismicity data at unprece-
14 Canadian Underwriter March 2012
dented small magnitude levels. It has long been recognized that temporal and spatial clustering is evident in seismicity data, but past research associated with these patterns tended to focus on a relatively small fraction of the events, primarily at the larger magnitudes. The availability of these new, larger data sets and the computational advancements that facilitate simulations, rigourous statistical tests and innovative filtering techniques provided a new impetus for earthquake forecasting and earthquake early warning (EEW) systems.
EARTHQUAKE FORECASTING Time-dependent earthquake forecasting Over the years, a suite of empirical data has been the subject of studies into precursory phenomena, including seismicity patterns, tilt and strain precursors, electromagnetic signals, hydrologic phenomena and chemical emissions. None have been successful in providing reliable and repeatable earthquake predictions. However, the first prospective forecast using small-magnitude seismic data was published in 2002. This initial publication was followed by a renewed interest in seismicity-based methodologies and prompted a renewed effort to better define and
test these techniques. The physical motivation is that small-magnitude seismicity acts as a sensor for the underlying stress changes in the earthquake fault system. Changes in that seismicity provide an indicator of earthquake locations in either the short-term (days to weeks) or intermediate-term (years to decades). Landmark initiatives in earthquake forecasting validation and testing followed, including the working group on Regional Earthquake Likelihood Models (RELM), as well as the Collaboratory on the Study of Earthquake Predictability (CSEP), both founded after 2000. Improvements in the accuracy and evaluation of these seismicity-based earthquake forecasts over the past 10 years suggest they provide the most promising avenue for actionable, operational earthquake forecasts. Current techniques include binary forecast techniques, with alarm regions of various sizes and time periods, as well as those that automatically generate probability fields. Significant work remains related to evaluating the various methods, determining optimal forecast time periods and accuracies and identifying reasonable levels of probability gain. Finally, a gap clearly still exists between forecasts that perform well on the order of days to weeks (foreshock and aftershock forecast models) and those performing well over a five- to 10-year period. Both types of seismicity-based forecasts are limited by the quality of the data and the relatively short time length of the instrumental catalog. Errors or lack of information in these catalogs can result in large errors in the resulting forecasts, particularly for large events that have sparse statistics. In addition, the small number of large events that occur either regionally or worldwide makes definitive statistical evaluation of all these techniques extremely difficult at the present time. This serves to emphasize the importance of understanding the various time scales associated with the natural earthquake process and the fact that longer testing periods will be necessary to properly evaluate the
viability and efficacy of forecast models. One notable benefit of these methods is that they are generally formulated so that they can be updated to account for the changing nature of the earthquake fault system. These seismicity-based forecasting techniques allow for both regular updating of their forecasts as well as revised forecasts after the occurrence of large events, theoretically capturing the dynamics of the system.
Operational earthquake forecasting The term operational earthquake forecasting refers to the capability to provide actionable information on the short-term time dependence of local or regional seismic hazards. As discussed above, seismic hazard changes dynamically in time: stress conditions change and alter the conditions that lead to new earthquakes. For example, the short-term stress and seismicity changes associated
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with aftershock sequences are well understood; they can be characterized relatively reliably in areas with longer seismic records. For example, the short-term earthquake probability (STEP) model that has provided aftershock forecasts for the United States Geological Survey (USGS). The combination of statistical and physical analysis of earthquake interactions has made progress in understanding seismicity clustering such as aftershocks and swarms, leading to a considerable, ongoing effort to quantify the probability gain in these short-term forecasts — including attempts to incorporate it into the next version of the Uniform California Earthquake Rupture Forecast (UCERF). It is anticipated these seismicity-based operational forecasts will display order-of-magnitude improvements in probability gain over time periods of days to weeks. These developments suggest it is time to consider how best to prepare emergency
hazard providers, businesses and the insurance industry to respond to shortterm operational earthquake forecasts.
EARTHQUAKE EARLY WARNING (EEW) SYSTEMS The goal of EEW is to reduce the damaging effects of earthquakes by providing a warning of between a few seconds and a few tens of seconds before the arrival of damaging ground motion. EEW systems are a new, promising tool to provide rapid information about upcoming ground shaking before the arrival of the large seismic waves. The physical basis for EEW systems is the fact that destructive secondary and surface waves travel at about half of the speed of the first, smaller seismic waves. These are much slower than signals transmitted by telephone, Internet or radio. EEW systems use the capability of real-time monitoring and communications systems to process and transmit information faster than the slower seis-
The goal of earthquake early warning systems is to reduce the damaging effects of earthquakes by providing a warning of between a few seconds and a few tens of seconds before the arrival of damaging ground motion. mic waves propagate, once the initial wave registers at a seismometer. The EEW system then provides information that an earthquake is occurring and potentially damaging ground motion is approaching the user site. Possible warning times can reach up to 70 seconds, depending on the distance between seismic source, sensor and user site. A real-time EEW system consists of (1) sensors deployed in the field (a network of seismic stations); (2) some
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form of telemetry for communication between the seismic stations and a central receiving station; (3) a central receiving station for real-time data acquisition and processing; and (4) a broadcast system to send the information to the user sites. EEW warnings can be used to evacuate buildings, shut down gas pipelines, slow or stop rapid-transit vehicles and high-speed trains, shut down manufacturing operations to decrease potential damage, save vital computer information and prevent data loss, shut down critical systems such as nuclear reactors and generate ground-shaking maps for emergency response and disaster relief operations. Today, a number of countries are testing and implementing EEW, including the United States, Japan, Mexico,Turkey, Taiwan, Romania, Italy, Switzerland, and China. Integration of the resulting EEW notifications into emergency operation, business planning and government
preparedness will provide an unprecedented opportunity to reduce damage and loss of life from these large, damaging events. • Cavallo, E., Powell, A., Becerra, O., 2010. Estimating the direct economic damage of the earthquake in Haiti. InterAmerican Development Bank working paper series, No. IDB-WP-163. • Daniell, J.E., Wenzel, F., Vervaeck, A. [2011] “The Socio-economic effects of the 2011 Tohoku earthquake”, Geophysical Research Abstracts Vol. 13, EGU201114270. • Field, E.H., 2007. Overview of the Working Group for the Development of Regional Earthquake Likelihood Models (RELM), Seis. Res. Letts. 78, 7-16. • Jordan, T.H., 2006. Earthquake predictability, brick by brick, Seis. Res. Letts. 77, 3-6. • Jordan, T.H. Jones, L.M, 2010. Operational earthquake forecasting: Some thoughts on why and how, Seis. Res. Letts., 81, 4, 571-574.
• Kanamori, H., 1981. The nature of seismicity patterns before large earthquakes. Earthquake Prediction: An International Review, AGU Monograph. AGU, Washington, D.C., pp. 1 – 19. • Kovacs, P., 2010. Reducing the risk of earthquake damage in Canada: Lessons from Haiti and Chile. ICLR Research Paper Series, 49. • Rundle, J.B., Tiampo, K.F., Klein, W., Sá Martins, J., 2002. Self-organization in leaky threshold systems: The influence of near mean field dynamics& its implications for earthquakes, neurobiology and forecasting. PNAS, Suppl. 1, 99, 2463. • Tiampo, K.F., Rundle, J.B., McGinnis, S., Gross, S., Klein, W., 2002. Mean-field threshold systems and phase dynamics: An application to earthquake fault systems. Eur. Phys. Lett. 60, 481-487. • Wu, Y. M., Kanamori, H., Allen, M. and Hauksson, E, 2007. Determination of Earthquake Early Warning Parameters, _ c and Pd , for Southern California. Geophys. J. Int., 170: 711-717.
demands a decisive response. FirstOnSite has the leadership and ability to manage any disaster restoration situation. Our work is our proof. From the devastating fires in Slave Lake, to the windstorms in Southern Ontario; from Atlantic hurricanes to the F3 tornado that hit the town of Goderich, our teams of CAT experts mobilized and successfully led large scale recovery responses across the country. FirstOnSite is committed to providing rapid and superior disaster restoration services in times of emergency. Visit us at www.firstonsite.ca/CATresponse for more information.
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Putting the Action into Class Actions
Co-Chair, Financial and Professional Services (FINPRO) Claims Advocacy Practice, Marsh Canada Ltd.
Alexandra Kindbom
Co-Chair, Financial and Professional Services (FINPRO) Claims Advocacy Practice, Marsh Canada Ltd.
We have seen a marked increase in the number of securities class actions filed under the Bill 198 secondary market liability provisions across Canada over the past three years. Driven by several factors, including weakened financial markets and a greater focus on corporate disclosure, this increase only heightens the risks for companies, their corporate officers and their directors. According to NERA Economic Consulting (NERA), there were 15 new securities class actions filings in Canada in 2011, nine of which were what we commonly call “Bill 198” claims, or secondary market liability claims. Since the inception of the secondary market liability regime, we have seen a total of 35 actions filed. Eleven actions have settled to date for a total amount of nearly $100 million (excluding defence costs).
18 Canadian Underwriter March 2012
CASE LAW INCONCLUSIVE The first Bill 198 case is still before the courts. In IMAX, Ontario Superior Court Justice Katherine van Rensburg set a low standard for plaintiffs, ruling that plaintiffs only have to show there is a reasonable possibility for the action to succeed and that it is brought in good faith. She certified a class action based on common law claims and the secondary market civil liability sections of the Ontario Securities Act, allowing a global class of investors to be captured by the Ontario proceeding.
Illustration by Sandy Nichols/www.threeinabox.com
Jay Cassidy
Secondary market liability class actions have increased markedly in Canada, resulting in new policy wordings. How the new policy language will fare in the courts is anybody’s guess.
In most cases, these settlements were funded by a combination of corporate contribution and insurance. In many instances, they were funded by insurance proceeds alone. In the cases that settled, defendants paid an average of $10 million, with a median settlement of $6.2 million, according to NERA. Collectively this appears to show a trend: settlements amount to approximately 10.7% of the total damages set out in the claim itself. This may seem small when compared to the amounts claimed, but this number does not include defence or other administrative costs. We have seen instances in which those amounts can equal the amount of the settlement itself.
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Unfortunately, the bar is so low that a plaintiff can easily receive leave to proceed. Worse still, it has been upheld on appeal: Ontario’s Divisional Court held that there was not “good reason to doubt the correctness” of the earlier decision. The application for appeal was denied and thus the decision stands. In a departure from IMAX, the Ontario Superior Court in McKenna v. Gammon Gold refused to certify the plaintiff’s common law negligent misrepresentation claim. In rendering this decision, the court held common law claims for misrepresentation are not appropriate for certification, since each class member is required to prove reliance on the alleged misrepresentations. The plaintiffs appealed.The Divisional Court subsequently ruled that with respect to the common law claim of negligent misrepresentation, “there is no reason to conclude that the motion judge erred on his assessment of the case law on this subject. In fact, it is because of this that the legislature came up with a statutory remedy for secondary market shareholders,” namely Bill 198. IMAX and Gammon Gold are somewhat conflicting decisions in Canada. It is still early days in terms of the development of the law in this area. We will have to wait and see how the law will ultimately be interpreted. Round v. MacDonald, Dettwiler and Associates Ltd. (MDA) was the Supreme Court of British Columbia’s first reported decision on the test for leave to bring a secondary market liability claim under that province’s statutory regime. MDA put forth three distinct arguments in opposing the leave application: • The material facts Lesley Round outlined in her petition before the court all began and concluded before the statutory cause of action existed in British Columbia. • The shares Round owned were not acquired on the secondary market, but were instead distributed by treasury. • Round neither acquired nor disposed of any shares during the material period complained of. These arguments were compelling and led to the rejection of the submissions
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of the applicant’s counsel. But they were not as helpful in setting a precedent standard for the leave test in British Columbia.The court’s decision is clear that from an evidentiary perspective, the applicant failed on any level to meet the statutory conditions for leave and demonstrate any chance of possible success at trial. Defence counsel will be quick to extol the virtues of this decision in future
Given that carriers have added many new D&O policy wordings related to securities class actions into the marketplace in the past 18 months, we will finally see the policies tested for coverage. It is inconceivable that this will happen without litigation over the terms and conditions of these policies. leave applications. But equally competent plaintiff counsel will attempt to distinguish the MDA decision on the facts. They will no doubt point out that the court indicated the discussion on the test itself was not strictly necessary due to the factual failings of the case. For now, we have learned two things: 1) poorly constructed applications without any merit or sound statutory
foundations will continue to be summarily dismissed by Canadian courts; and 2) when it comes to the proper standard for the leave test in secondary market liability cases, the final word is still awaiting us down the road (how far down that road is anyone’s guess).
IMPLICATIONS FOR DIRECTORS AND OFFICERS What does this mean for directors and officers and their insurance needs? Two significant developments on the horizon need to be closely monitored. The first is the number of claims and the corresponding losses and settlements paid by insurance. With carriers now paying out on a repetitive basis, and with losses mounting, it is only a matter a time before carriers start to look for ways to reduce their exposure. This will typically mean three things: a reduction in coverage grants; tighter terms and conditions; and higher prices.The amount of competition in the marketplace may help slow this process, but it seems inevitable that change will occur. The second major development is related to the nature of the coverage and litigation itself. Given that carriers have added many new policy wordings into the marketplace in the past 18 months, we will finally see the policies tested for coverage. It is inconceivable that this will happen without litigation over the terms and conditions of these policies: carriers will try to protect their losses through tight coverage opinions and their insureds will fight diligently for the coverage they need to resolve these claims. As a result, Canada will finally have a body of case law surrounding the application of directors and officers’ insurance policies in relation to securities class actions, in much the same way that a vast supply of case law on the subject has been built in the United States. Only time will tell how all of these matters play out. However, it can certainly be said we are at the beginning of a compelling time for both officers and directors and those who serve to protect their interests.
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Parks and Reputation Any given municipality has several property and casualty exposures. All it takes is one event to damage its reputation forever. Julie Boyd
National Director, Public Sector, Zurich Canada
It’s 7:30 a.m. and you’re running early. This never happens, so you decide to drop off the overdue library books before whisking your children off to school. Once that’s done, it’s the highway or the subway to work. By 8:30 you’ve already been in contact with several facets of the public sector. Thankfully, the highway maintenance crews have already tended to the potholes, the subway ran without a hitch and the library’s icy steps had been salted. But what happens when the people in charge of these necessary services aren’t so diligent?
EXPOSURES Several exposures threaten the public sector, from schools to roads, and parks to libraries. Most of these exposures fall under one of two categories: property and casualty.
Property Physical damage to property can cost a municipality millions of dollars each year. Swings need to be fixed, potholes repaired, trees trimmed, 22 Canadian Underwriter March 2012
alongside a bevy of other “housekeeping” duties. These tasks are especially important during the transition from winter to summer — even in years that experience milder-than-normal winter weather like the one we had in Ontario. Keeping on top of these tasks is costly but necessary. The alternative could result in expensive litigation due to negligence.
Casualty For example, a Whitby woman went for a morning walk in June 2005. At one point, she caught her foot on a crack in the sidewalk, tripped and fell. She suffered a broken elbow and a number of facial scrapes. The crack was due to uneven slabs of concrete: one was about an inch higher than the other. As a result, the town had the concrete shaved and evened out, but not before the woman filed suit against the municipality for her damages. Although the courts found her partially at fault, the woman was still awarded a handsome sum. A similar situation occurred in February 2002. A Kingston man was on an early morning walk when he slipped on a patch of ice and landed on his back. He suffered a broken ankle; as a result, he had to walk with the aid of a crutch or cane for the subsequent four months. Again, the municipality was found to be only partially responsible, and yet the man was rewarded for his loss. Today’s citizens are aware of the compensation awarded for injuries sustained on properties
managed by the public sector. An increasingly greater emphasis on litigation exists now than in the past. This trend shows no signs of slowing down.
A CITY’S REPUTATION LASTS A LIFETIME Aside from the cost of managing property and casualty exposures, the reputation of a municipality may also be harmed. Given the increasing influence of social media, it is becoming easier for citizens to produce, access and spread information widely and quickly. The May 2000 tragedy related to Walkerton, Ontario’s contaminated water supply is one example of a municipality’s reputation being irreparably harmed. Twelve years later, the township is still known for its most famous incident, in which a dangerous strain of E. coli bacteria was found to have contaminated the local water. Local officials denied contamination at first, leading to more people becoming affected. Seven people
died, and half of the municipality’s 5,000 people reportedly fell ill as a result.
NEW STANDARDS The Government of Ontario has recently done its part to update the province’s safety regulations. For example, in February 2010, Ontario made amendments to its minimum maintenance standards (MMS) for municipalities, primarily for the upkeep of the roads, snow accumulation, icy roads and missing signage. Under Section 16 in the updated MMS, amendments include inspection requirements that, had they been conducted in 2002, might have saved the City of Kingston a lawsuit. Sidewalks must be inspected once a year for discontinuities. If a discontinuity exceeds 2 cm, action must be taken to treat it (including taking reasonable measures to protect citizens, repairs and alerting sidewalk users). The following two additions to the MMS are also worthy of note: • Section 10: 10(0.1) The minimum
standard outlining the frequency of inspecting all luminaries is now once per year.This is to check to see that they are functioning. • Section 11: 11(0.1) The minimum standard outlining the frequency of inspecting signs of a type listed in subsection (2) — stop, yield, speed limit or school zone signs, for example — is once per year. This is to make sure they meet the retro-reflectivity requirements of the Ontario Traffic Manual. A number of detailed and customized risk management services exist that outline systematic processes to help manage these kinds of risks. These include slip, trip and fall seminars, online training and webinars, fire protection and liability assessments by specialists, sprinkler plan reviews, short risk articles and much more. As long as there is an articulated, systematic plan in place, the public sector can efficiently manage its risk. In doing so, the public sector will continue to protect and fulfill its responsibility to its citizens.
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Forewarned is Forearmed
Kate Stillwell
Product Manager, Earthquake Products, EQECAT Inc.
Do giant earthquakes, like the Magnitude-9.0 quake that struck off the coast of Japan just a year ago, occur randomly over time or in cycles? As scientists increasingly support the latter theory, concerns are mounting about the possibility of another mega-quake — measuring Magnitude 8.5 or higher — striking in the foreseeable future.This apparent global clustering of devastating temblors has far-reaching implications for how the re/insurance industry manages earthquake risk, especially in Canada.
CLUSTERING DEFINED To put the potential impact of this phenomenon into perspective, it is useful first to understand the concepts of clustering. At the most basic level, spatial clustering of earthquakes — those tending to occur in some locations rather than others, without respect to time — is a reflection of plate tectonics. Most seismically active geographies are located near tectonic boundaries, and so the causality of spatial clustering is thereby implied. These geographic concentrations form the underpinnings of both modeled hazards and building code definitions of seismic zones. Spatial and temporal clustering in the shortterm refers to the fact that after a significant
24 Canadian Underwriter March 2012
earthquake, other, usually smaller, quakes in the same area — aftershocks — are more likely to occur in the ensuing days, weeks and months. Spatial and temporal clustering over the longer-term is still in the early stages of discovery. According to this concept, a major earthquake that relieves stress on the ruptured segment of a fault can then concentrate and therefore increase the stresses on adjacent segments of the same fault.This phenomenon of an earthquake being triggered by an adjacent one is related to calculation of time-dependent probabilities.Therefore, it can currently be quantified only for select faults, such as in California,Turkey and Japan, for which there is significant data. Four earthquakes exceeding Magnitude 8.5 have struck since 2004. Two occurred in Sumatra (Magnitude 9.1 in 2004, Magnitude 8.6 in 2005), one in Chile (Magnitude 8.8) in 2010, and last year’s Great Tohoku (Magnitude 9.0) in Japan.The previous cluster, from 1950 to 1965, saw six events ranging between Magnitude 8.6 and 9.5. Although we do not know the cause of these quakes, we do know that between the two clusters, no earthquake exceeding Magnitude 8.5 occurred anywhere. The random chance of such clustering is less than 1%. If the current cy-
Illustration by Sandy Nichols/www.threeinabox.com
Current research suggests giant earthquakes happen in “clusters,” which may change the way earthquake risk management is approached.
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cle follows the one that occurred in the 1950-65 timeframe, it stands to reason we may only be about midway through it, with the largest quake yet to happen. A logical next question: What other locations across the globe are most susceptible to that future giant earthquake? And what consequences might be reasonable to expect? Historically, giant earthquakes have occurred on mega-thrust fault zones, where subducting tectonic plates converge with overriding plates. Such zones encircle the Pacific Ocean and lie beneath the Himalaya — including, not surprisingly, Indonesia, Japan, the Philippines, the west coast of both Central and South America, and also the Pacific Northwest of North America. The Cascadia subduction zone off the west coast of North America converges only half as fast as tectonic plates in Chile or Japan, but it does have a history of generating Magnitude-9.0 earthquakes, albeit not since 1700. A quake of this magnitude in the Cascadia zone would affect the cities of Vancouver, Seattle,Washington and Portland — representing a total population exceeding 10 million. Estimated insured losses could approach $100 billion, with Vancouver and Seattle each sustaining about 20% of losses. Total economic damage could exceed $400 billion.
IMPACT ON RISK MANAGEMENT The potential threat of this current cluster calls for innovative assessment of the extraordinary perils associated with giant earthquakes. However, although it is always critical to conduct a full accounting of uncertainty, current catastrophe models characterize the loss consequences of such effects only minimally — if at all.Too little data exists for the science to have matured or even developed. Put simply, we cannot calculate what cannot be measured. How then to quantify the effect of surprises from giant earthquakes? As demonstrated in the past, shakinginduced surprise perils can be as significant as the shaking itself. To establish rational expectations, risk owners must account for such consequences even if
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they are typically excluded from catastrophe models. Case in point:The largest losses from the events of 2011 stemmed from surprise perils of tsunami and flood. The sea walls in coastal Japan, built for a tsunami estimated to be a maximum of 10 metres high, suffered a deluge nearly four times as high. It should be no surprise to the industry that such “known unknowns” would be agents of major damage and loss in any future large earthquakes. The industry must find ways to anticipate these surprises, even if they are not well captured by existing modeling techniques.The prudent first step is to con-
sider worst-case scenarios. Comprehensive planning requires going beyond the limitations of current catastrophe models and thinking more broadly, more holistically. You may not be able to quantify what you do not know, but it is important to imagine it. As with Japan’s Tohoku quake, the most significant losses from a Magnitude-9.0 quake in the Cascadia zone would include widespread destruction of seaside communities caused by unprecedented tsunami heights. Damage would include disrupted utility and transportation networks, causing delayed recovery; extensive ground failures including landslides and liquefaction; hazardous materials contamination; and severe shaking amplification in tall buildings and long-span bridges due to a long period of shaking. Some concerns would be locally focused. For example, Vancouver has started to relocate underground its out-
dated, wood pole-mounted transformers, which have exploded and sparked fires in past earthquakes. Other concerns, related to long-term business disruption, could affect the entire country. For example, what if the Alaskan pipeline was severed for four months? How would it affect your business? What if the main trucking lanes were shut down because multiple bridges were out? From an internal perspective, paint a picture of how the disaster would affect your portfolio, earnings and reserves. In most instances, a model can provide the dollar value of insured losses, but for this exercise it is important to go deeper. In particular, you should reconsider strategies and decisions for underwriting and pricing that are driven by tail risk. When assessing the tail losses most affected by giant quakes, applying a standard treatment of uncertainty that uses mean values in intermediate steps and synthetic uncertainty at the end can lead to underestimating the loss, often severely. The multi-decadal time span of clusters makes it possible to optimize capital accordingly. Presuming that capital adequacy reserves are maintained to a specific recurrence probability, the chosen strategy would depend on the current position within the cluster. A catastrophe modeling firm can help re/insurers think through such scenarios. The word “clustering,” as it is most often used in the scientific and academic communities, implies a known mechanism. In contrast, when considering global clustering, we acknowledge there is no known mechanism. If we ultimately accept the evidence of a current global cluster, and our likely position midway through it, then the probability of another giant earthquake striking at some point in the future can no longer be dismissed. If industry leaders put into practice new insights on clustering, then one can expect these new insights will be incorporated into leading-edge models as well. If we acknowledge awareness of the possibility of this phenomenon, then we can plan for it. As the saying goes, forewarned is forearmed.
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After the Losses Opinion/Analysis
Donald P.Callahan President, CEO, Guy Carpenter Canada
Catastrophe rates were up as of Canada’s January 2012 renewal season. The implications for primary rates, particularly in personal lines, should be clear. Will the upward pressure affect commercial lines? Given the catastrophic activity of 2011, both globally and locally, industry observers expected the reinsurance market to harden as of Jan. 1, 2012.The surprise lay in the extent of the hardening and the degree in which capacity was reduced. The chronology of 2011 loss events and the reality that most Canadian renewals take place at Jan. 1 conspired against brokers and buyers. Rates and exposures were up and the implications for primary rates, particularly in personal lines, should be quite clear. Whether this upward pressure will be similarly exerted on commercial insurance rates is not as readily perceived, but it’s certainly worth looking at some of the indicators.
2011 LOSSES Let’s quickly review the 2011 losses.The current total for significant catastrophe losses (each over $1 billion) in 2011 is hovering around $105 billion. This comes very close to eclipsing the historical record set in 2005, the year of Hurricanes Katrina, Rita and Wilma (KRW). Whereas the KRW losses were largely personal lines events arising from a single peril in one region, the 2011 activity was far more varied with respect to regions, perils and classes of business. The severity of the 2011 losses also stands in contrast to the relatively meek 2010 experience. (Please see Figure 1 on Page 30.)
28 Canadian Underwriter March 2012
Specifically, the earthquake in Christchurch, New Zealand on Feb. 23, 2011 is the third costliest earthquake in history. Its source was a previously unidentified fault.The significance of this loss for reinsurers was the severity relative to the regional premium base. Less than three weeks later, the Tohoku earthquake in Japan, an undersea mega-thrust quake measured at a magnitude of 9.0 Mw, knocked out three nuclear reactors and shut down six Sony factories that manufactured such diverse items as camera lenses, integrated circuit cards and a substantial share of the world’s lithium-ion batteries. Toyota, Honda and Nissan were all shuttered for extended periods as a result of the quake. So were auto plants in the United States, Canada, Germany, Sweden, Mexico and Brazil due to a lack of Japanese-made components. This was the year’s first reminder of the daunting exposures inherent in contingent business interruption (CBI) policies. It would not be the last. As the year unfolded, there were floods in Australia, tornadoes across the United States, Hurricane Irene and, with disastrous timing, the flooding of two-thirds of Thailand. The floods in Thailand hit the manufacturing facilities of global corporations such as Honda, Toshiba, Sony (its second-largest plant outside of Japan), Canon and Fujitsu. In fact, the country’s 2011 Q4 gross domestic product dropped 4.6%
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Figure 1
Significant (Over $1B) Catastrophes: 2010 to 2011 A Japanese Earthquake B New Zealand Earthquake C TC Yasi/Aus Floods D US Storms May E US Storms April F Hurricane Irene G Copenhagen Floods H Thailand Floods
60 50
Japan EQ $40B
40 A
30
New Zealand EQ $15B
20 10
B
0
C
Q1 2010
Q2 2010 Q3 2010 Q4 2010
as a result of the production shutdowns at countless facilities. CBI coverage once again took an unprecedented hit. Again, the loss was primarily commercial in nature. In addition, as in the New Zealand quake scenario, the event happened in a non-peak zone where decades of reinsurance premiums were insufficient to cover the loss. Lastly, the flooding began in October, just as reinsurance renewal negotiations were in full swing. Coinciding with a heavy global cat year, the Canadian experience included the devastating fire at Slave Lake ($750 million), Alberta wind and hail in July ($200 million), a tornado in Goderich, Ontario ($100 million) and lastly, after most reinsurance renewal quotes had already been formulated, the freak Calgary wind loss of Nov. 27 ($200 million). Despite its lower quantum, this last item seemed to shake the market more than the Slave Lake event. This is partly because it happened so late in the year. Also, it caused damage that hadn’t really been seen before — like glass blowing out of downtown office towers — or that, according to building codes, wasn’t ever supposed to happen. With all of the foregoing in mind, noteworthy characteristics of the major catastrophic events of 2011 are as follows: • Earthquake (with tsunami) frequency and severity was sufficient to remind reinsurers that Canada is subject to major quakes on the West Coast, in Quebec and in zones where faults have not yet been identified.
30 Canadian Underwriter March 2012
Thailand Flood $10B-$20B
D
USA Storms $20B E
Q1 2011 Q2 2011
F G
H
Q3 2011 Q4 2011
• Canada is a non-peak zone. As such, it delivers insufficient premium to cover potentially severe catastrophe losses. • CBI coverage has not been sufficiently modeled or adequately priced. • Events occurring late in the year, particularly the Thailand floods globally and the Calgary windstorm locally, set the treaty quote process back by at least two weeks. • Canadian mini-cat ($10 million plus) frequency was higher than it has ever been, with harsh implications for cat aggregate contracts.
JANUARY 2012 RENEWALS With all of these factors playing significant roles, Canadian treaty negotiations were slow, laborious and stressful. Now that the dust has settled, we have had an opportunity to look at some of the numbers. Guy Carpenter’s share of the Canadian treaty market is about 40%, and our client base is diverse. Many clients incurred substantial losses as a result of the Slave Lake wildfires, the Alberta windstorm and the Goderich tornado. Others had minor cat occurrences below their reinsurance retention. Our client list includes national writers who are heavily oriented toward personal lines. We also serve provincial Crown corporations and regional clients who write in one or two provinces. We have clients who focus almost exclusively on commercial lines. Our portfolio, therefore, is not in any way homogenous. Looking for trends, means and averages amidst such diversity is no simple task.
Given these caveats, I can report that our average client probable maximum loss exposure grew by 17%. Average catastrophe limits increased from $660 million to just over $800 million. Top layer rates on line moved up 12%, whereas program rates on line were 6% higher than a year earlier. Catastrophe aggregate excess of loss, risk and attachment adjusted, were up more than 50%. Overall, our catastrophe clients spent 28% more, keeping in mind that they also purchased more reinsurance. These purchases were not easily negotiated. Many programs came in well below prior year authorization levels;most came down to the wire on Dec. 30 for completion. The emergence of non-concurrent terms provides another indicator of the hardened market. Some brokers increased the rate to attract the last 20% or 30% of a placement.We do not view this practice as providing a cost benefit to our clients (over an accurately targeted rate at the outset).The renewal hurdles for 2013 will likely trigger painful price adjustments as reinsurers seek ultimate rate equality. Where does all this lead? We think insurers in the personal arena are already primed to transfer the increased cost of reinsurance to the consumer.Those costs are not insignificant; in our modeled estimates, they will account for as much as 20% of homeowner policy premiums. Commercial insurance is a different animal. Cat losses in Canada have not been meaningful for many commercial writers. Numerous players access their capacity through global covers that may not have been hit with large rate increases, or that can be lost sometimes in a regional allocation. The handful of heavy commercial writers in this country has generally reported strong results. But the writing is on the wall and the experience in places like Japan and Thailand will have ramifications. Capacity for industrial companies will have to come at a higher price. Manufacturing facilities should feel the ripples of the global CBI experience. Certainly, the dominant indicators suggest that the commercial insurance market has hit bottom and upcoming renewals will see moderate upward rate movement.
Where Today’s Risks Meet Tomorrow’s Solutions September 9 - 12, 2012 Saskatoon, Saskatchewan
Co-Chairs Doug Brown: dbrown@regina.ca Lisa Brost: lisa_brost@cameco.ca
Contact Charlene Roth-Diddams: charlene@pophasemail.com
PRESENTED BY
RIMS CANADA
TM
Under the Microscope Commercial insurers are taking a much closer look at their clients’ supply chain and business interruption exposures after the double-whammy last year of the 2011 Tohoku earthquake and tsunami, followed by the worst Thailand flooding in decades. VANESSA MARIGA
32 Canadian Underwriter March 2012
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atural catastrophes rattled the global supply chain to its core in 2011. A massive earthquake, which triggered a tsunami and nuclear crisis, ground Japan’s manufacturing sector to a halt in March 2011. Many manufacturers, mostly of electronic and automotive products, picked up shop and moved operations to Thailand — only to have that country’s major industrial parks washed over during the worst flooding to occur in 50 years. Factor in political unrest in the Middle East, earthquakes in New Zealand, tornadoes in the United States and an unprecedented financial crisis in parts of Europe, and it seems as though companies looking for a safe harbour for their manufacturing and component sourcing operations have nowhere left to go. Experts say 2011 has re-shaped the way risk managers and underwriters manage supply chain risk. During renewals this year, underwriters are expected to subject companies seeking coverage to a whole new level of scrutiny.
March 2012 Canadian Underwriter 33
COVER STORY
Under the Microscope Traditionally, the emphasis when determining risk accumulations has been on physical assets — upon how many suppliers are the insureds relying, and where are these suppliers located? Now, sources say, risk managers and their brokers will also be asked to provide details about the: • supplying manufacturers’ risk management programs; • geophysical landscape surrounding the supplying factories; • other major customers of that supplying factory; • suppliers upon which the supplying manufacturer relies; • manufacturers’ ability to withstand financial shocks. In other words, the days of the unnamed supplier are gone. Welcome to a new era of examining the interconnectedness of the supply chain and the relationships that exist within it. Urs Uhlmann, head of Zurich Global Corporate Canada, foresees a reduction in the availability of contingent business interruption limits, particularly for unnamed suppliers. “In those cases where unnamed supplier sublimits were provided, we will see a reduction in that, and probably a reduction in coverage of suppliers of suppliers,” he says. “It may be more difficult as an insured to get adequate limits, particularly if you don’t have the necessary information in your underwriting submission.”
What’s unique about the insured losses of 2011? Sources say business interruption and supply chain-related losses are outpacing physical damage. For example, looking at the flooding in Thailand, the country’s industry ministry estimated insured damages to the almost 10,000 affected factories hovered around $25.6 billion — including both physical damages and losses due to suspended business. Since only 1% of household residential properties
LINKS UNDER A MICROSCOPE
In those cases where unnamed supplier sublimits were provided, we will see a reduction in that, and probably a reduction in coverage of suppliers of suppliers.
2011 IN REVIEW According to Aon Benfield’s annual catastrophe study, insured losses from natural catastrophes in 2011 were nearly 300% higher than insured losses seen in 2010. Published by Impact Forecasting, the report says 253 separate events generated a record total economic loss of $435 billion in 2011. At $107 billion, the total insured loss from natural catastrophes was the second-highest on record, surpassed only by the $120-billion insured loss reported in 2005 (of which $90 billion in damage resulted from Hurricanes Katrina, Rita and Wilma). 34 Canadian Underwriter March 2012
noted in an analysis posted on its website. “However, the recent flooding may lead to a substantial increase in insurers’ liability for those claims.” To make a business interruption claim, an insured business must mitigate its losses in order to recover under its insurance. Many Japanese manufacturers moved production from earthquake and tsunami-hit regions of Japan to Thailand in order to mitigate those losses. “Moving production from Japan to Thailand was a ‘Plan B,’” RPC says. “The question now is whether those businesses have a ‘Plan C.’ The insurance market will be working with insureds to implement cost effective contingency plans as soon as possible.”
in Thailand have flood coverage, losses related to this event will come almost entirely from the impact to the manufacturing and supply chains, A.M. Best noted in a briefing. Law firm Reynolds Porter Chamberlain LLP (RPC) says the event constituted a double-whammy of sorts for insurers. “Many Japanese companies, particularly in the automotive and electronics sectors, moved production to Thailand, and/or found alternative component suppliers in Thailand after the Tohoku earthquake to minimize their business interruption losses,” RPC
Events in 2011 constituted a wake-up call for risk managers in terms of supply chain risk, says Deborah Luthi, president and director of the Risk and Insurance Management Society (RIMS) and risk manager for San Francisco Water, Power and Sewer. “A couple of surprises came out of the events of 2011 for risk managers: how there are unexpected connections when the crisis occurs, and just how deep within our organizations those connections went in terms of supply chain,” Luthi says. “I think for risk managers it’s a challenge for us to uncover those connections before it’s too late.” Examples of these connections within the chain go beyond the following, basic scenario: 1) organization depends on supplier; 2) supplier’s operations are hit by a catastrophe and no longer able to supply; and therefore 3) the organization’s production is crippled. Last year, for example, supply chain breakdowns saw organizations stumble when their suppliers halted operations. Their suppliers halted operations not because they had sustained damage themselves, but because one or more of their other major customers did. As a result, the customer was no longer able to purchase from its supplier, thus stifling that supplier’s revenue stream and consequently its operations. In a different scenario, an
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Under the Microscope organization’s supplier ceased to be able to meet the organization’s demand because one of the supplier’s key material providers has been hit in an event. Uhlmann says in order to develop an understanding of these connections, risk managers and insurers will have to drill down deeper than just analyzing the first link of a supply chain. “Most of us, whether you’re an insurer or an insured, have a good handle on our physical assets, we know where they are and what they are,” Uhlmann says. “If you look at some of the losses coming out of the Thai floods, I think some of the insurers may have been quite surprised as to the losses they faced because of the impact the floods in Thailand had in all different parts of the world, in all different kinds of industries.” The challenge moving forward, he says, is to improve data analysis techniques so that insurers can actually manage their accumulations and track the information provided to them by brokers and risk managers. “So when the next flood hits Thailand, for example, we will know more than just the physical assets we insure there,” he says. “We will know the impact [of the flood] on all of the various contingent business interruption limits we have provided to our insureds around the world.” Colin Short, RSA Canada’s chief underwriting and risk officer, says risk managers should be prepared to provide as much information about their suppliers as they do for their own organization. “We ask for as much information on suppliers and the types of resources they have, the type of building they’re located in, as we do about our own insured,” Short says. “That’s something we’ve learned over the years: the importance of not just understanding the suppliers, but the customers as well. It could well be that your insured is selling to some big customers upon whom they are dependent. If those customers get hit by an event and they don’t need our insured’s goods anymore, then you have a business interruption loss that way, too. It works both ways. You also have to know the insureds’ major 36 Canadian Underwriter March 2012
suppliers, and what their alternative sources of production might be if the suppliers’ suppliers go out of business. Getting a handle on the exposures is understanding what these relationships and interdependencies are.” Luthi points to an FM Global study, China and Natural Disasters — A Case for Business Resilience, to illustrate the magnitude of risk accumulations within the global supply chain. FM Global’s
Brady Family professor of operations management at the Georgia Institute of Technology’s College of Management, says in the report. “It would slow down the global economy, as China is not only a major exporter of goods, but also a major importer of goods. It would cause shortages in many consumer and industrial products that could lead to inflation. And finally, it would devastate the share price of companies.” The increased supply chain risk exposure in China underscores the need to look at supply chain resiliency beyond just certain risk management tactics and geography, the report continued. It should be more fundamental and strategic.
INCREASING COLLABORATION
What’s unique about the insured losses of 2011? Sources say business interruption and supply chain-related losses are outpacing physical damage. report examines the potential effects on the global supply chain if an event similar to the Mar. 11, 2011 earthquake and tsunami were to occur off the coast of China. Fourty-three per cent of the North American-based companies surveyed by FM Global were reliant upon Japan for key components in their product lines, but 86% are more reliant on China for key components. “A natural disaster-related supply chain disruption in China would have a far-reaching and long-lasting negative economic impact,” Vinod Singhal,
In order to get their arms around supply chain risk, risk managers need to start challenging some of the assumptions they have been working under for the past few years — particularly the assumption that suppliers and second-tier suppliers are mitigating risks appropriately, says Gary Lynch, global leader of Marsh Risk Consulting’s supply chain risk management practice. “Risk managers need to go beyond the first tier. They need to look further upstream in order to develop an understanding of the current state that ‘they’ — Tier 1 and Tier 2 suppliers, material providers, material brokers, material transportation providers and even the energy providers, particularly in Asia — manage the broad set of risks,” he says. “With the collection of all of this data, emerging best practices see risk managers then building this understanding into a profile of the environment in which their supply chains lie, and then actively monitoring it. It’s about shifting to data that really tell you more about the potential risks as things change. It’s a profile of the environment. Risk managers can then run analytics against it to measure the degree of exposure on an ongoing basis. They can measure the return on investment for risk management initiatives taken — like diversification of inventory, for example.”
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Under the Microscope FM Global’s report notes that 65% of companies plan to increase collaboration with the suppliers upon which they rely. One complication is that most of these suppliers are based in developing economies, where risk management is essentially in its infancy. Uhlmann says the collaboration must start with knowing which company supplies which part to the organization. Furthermore, there should be clarity about the suppliers upon which the suppliers are relying. “And then, what are the alternatives in case one of those suppliers can’t deliver anymore?” he says. “In many cases, unfortunately, that information is not as easily available for large corporations as one may assume.” The next step would be to try and find alternatives for when suppliers can’t meet their obligations, and to make sure that the organization’s suppliers have alternatives for their critical parts. “These are conditions that could and should be built into supply contracts,” Uhlmann says. Lynch stresses there is more to this analysis than just laying out a series of risk mitigation expectations and expecting the suppliers to meet them. “The strategy today is to set an expectation and just tell your material providers to do that,” he says. “This means the material providers have to have either the expertise or the resources to do it, and they have to be motivated to do it. I don’t think that kind of thinking is optimal when it comes to correcting the problem.” Lynch says an organization can establish an expectation of managing day-to-day risk through education programs, as well as by providing monitoring tools and incentive programs that are similar to — but not as severe as — whistleblower protection programs. “The point is, risk managers will have to get in there and apply what they believe is a valid way to manage risk,” Lynch says. “But they have to understand the motivations of the supplier.” If the risk manager’s organization is not the supplier’s only customer, or if it’s not the supplier’s biggest customer, then the risk manager will have to bring 38 Canadian Underwriter March 2012
data reflecting these facts back to the procurement team so that it is made aware of the situation. “It requires risk managers to understand lead times, single and sole-sourced materials and geographical aggregation of risk,” Lynch
It could well be that your insured is selling to some big customers upon whom they are dependent. If those customers get hit by an event and they don’t need our insured’s goods anymore, then you have a business interruption loss that way, too.
says. “They need to understand all of those concepts so that they can relay it back to the organization as it plans to move its business forward.” RIMS board member William Montanez, director of risk management for ACE Hardware Corporation, says his organization is increasing its compliance activities. The point is to ensure the company’s suppliers can withstand both
natural catastrophes and man-made events such as a financial shock. “We’re in the process of beefing up our compliance departments and making sure we have the proper people in place to communicate that information, particularly to senior management,” he says. “At the end of the day, that comes back to us in the risk management department. We can build that part of the story into our underwriting submission.” Most companies are not going to volunteer this information. But ultimately the organization’s fiduciary duty is to gather that information and validate the information it’s given, Montanez says. He feels site visits are the best way to understand major suppliers’ operations. For example, he notes that in countries outside of North America and Europe, government resources such as flood maps are likely to be scarce. “I would think that if surveys aren’t available in those individual countries, then perhaps as a company you can hire a hydrologist or a specialized engineer to properly evaluate your exposure,” Montanez says. “Some of it would just be common sense, but you would be surprised how many companies never think about it. Sometimes, all it takes is a site visit.”
MEETING NEW DEMANDS The evolving requirements can be daunting. For risk managers at multinational organizations, developing an understanding of each and every supplier with this degree of data is overwhelming. “What really seems to have changed is that, at a risk identification level, you’re seeing the risk manager making more of a connection with the business priorities through quantification of value,” Lynch says. Risk managers are developing an understanding of which products have the widest profit margins for their organizations, and then prioritizing those products’ supply chains. “They need to have some of that alignment up front, otherwise they’re just going to get run over,” Lynch says. Montanez agrees, noting that priorities will vary from company to company. That’s why it’s important to engage
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Under the Microscope
What really seems to have changed is that, at a risk identification level, you’re seeing the risk manager making more of a connection with the business priorities through quantification of value. senior management, he says. “You have to have involvement from senior management on what, exactly, the game plan is going to be in case something does happen,” he says. “You can’t start thinking about and implementing solutions when you’re in the middle of the battle. When these things start to happen, it’s too late to start planning, you have to start implementing. In order to do that, you have to know what will be top-ofmind for your particular organization.”
RESHAPING THE CHAIN The events of 2011 will likely not only re-shape the way in which supply chain risk is managed, but there’s a good chance it will re-shape the chain itself. Short refers back to the insurance notion of ‘proximate cause’ when considering how the global supply chain might shift. In other words, he looks to the main drivers of the 2011 losses. “Just-in-time management has led manufacturers to keep a very low level of ongoing stock,” Short says. “In order to keep costs low, and to utilize capital more efficiently, a lot of them have gone to this system or methodology whereby they call upon their components when they need them. I think the buffer of stock a lot of these firms have kept has reached a minimum level, such that any disruption to the supply chain has an effect over and above the impact that a normal interruption should have. I think they are so dependent upon the ability to source the components when they need them, without holding them 40 Canadian Underwriter March 2012
in their own stock, that they have placed themselves in an over-dependence on their suppliers. And if anything goes wrong with their suppliers, then the impact gets magnified all the way down the supply chain. That’s when things go really wrong. And that’s what’s happened here.” Uhlmann agrees. He says the cost benefit of outsourcing might be outweighed by its associated risks. “As a corporation, when you assess your exposures overall, I think the supply chain risk will gain influence,” he says. He predicts companies will consider more carefully the trade-off “between getting the cheapest deal for your supplier” and “actually making sure you can deliver on your product” so as to avoid a negative impact on the brand. “I do think that some companies may change their approach to outsourcing,” he says. “The trend [towards just-intime outsourcing], if it isn’t reversed, will definitely slow down. It’s so difficult to control the impact on your business if everybody else is producing for you and you don’t have proper control over them.” Supply chain risk management is moving beyond response and recovery, and minimizing impact, experts say. For Lynch, a properly managed supply chain presents a strategic opportunity. “It not only allows you to respond quicker than your competitor, but it also allows you to take significant market share as a result of a failure of someone else in that space,” he says.
Perhaps one of the most publicized examples of a manufacturer gaining market share thanks to a competitor’s faltering supply chain is that of General Motors Co. and Toyota. The Globe and Mail reported in February 2012 that Toyota, battered by disruptions to its supply chain following the Japanese quake and tsunami, had taken a second hit when the flooding in Thailand cost the car manufacturer another 240,000 vehicles in lost production worldwide. As a result, Toyota ceded its title as the top seller of vehicles in 2011 to GM (a company that not so long ago teetered on the edge of bankruptcy) and Volkswagen AG. “What we did as risk managers was traditional back office data collection, risk measurement and risk identification,” Lynch said. “That’s now potentially turning into something the decision makers — the executives, the financial institutions and the hedge funds — want. They’re asking: ‘How do I exploit the opportunity? How do I understand the interdependencies?’ This data is something to which the risk manager has access.” Risk managers’ skills, mindsets and tools are evolving in order to create a sustainable solution for supply chain risk, Lynch adds. They are doing more than simply taking a snapshot of the risks. “Risk managers have to create something that’s going to live and breathe with the organization, so that if the organization changes its contract manufacturers or introduces a new product line in a new market, the solution is agile enough and the technology is there to support it.”
Product Recall has one speed – fast. Angela Feudo, Product Leader, Product Recall, Specialty Casualty, LIU Canada
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Bracing for
The
Big Claudio Totino
Head Property, Canada, Swiss Re Corporate Solutions
More than 4,000 earthquakes are reported every year in Canada, and it’s important to be prepared for the uncomfortable reality that the country is due for a major earthquake to strike. It is an uncomfortable reality to confront, but one day Vancouver, Montreal or Ottawa are likely to be hit by a major earthquake that could cause loss of life, property damage and economic disruption on a huge scale. More than 4,000 earthquakes are recorded every year in Canada, according to a report from the Ontario-based Institute for Catastrophic Loss Reduction (ICLR). Most of them are small and will only be felt by sensitive monitoring equipment. But experts agree a major earthquake in Canada is inevitable, and it is most likely to happen in the West, in the fast-growing region including the cities of Vancouver and Victoria. There is at least a 30% chance that an earthquake strong enough to cause significant damage will occur in southwestern British Columbia within the next 50 years, according to the ICLR.The re-
42 Canadian Underwriter March 2012
gion is vulnerable because the Cascadia subduction zone is located west of Vancouver Island, where the North American and Juan de Fuca plates meet. In Canada’s interior, a 5% to 15% chance exists of a damaging earthquake striking southern Quebec or eastern Ontario sometime during the next 50 years.This region includes Montreal, Ottawa and Quebec City. In southeastern Canada, two to three potentially damaging earthquakes greater than Magnitude 5.0 are experienced each decade on average. Ottawa, Montreal and Toronto residents felt a moderate earthquake, measured at Magnitude 5.0, in June 2010. But seismologists believe the region could one day be hit by a massive magnitude 7.0 earthquake. Taken together, these regions of Canada, where there is a high or moderate risk of a major earthquake striking a large urban centre, are home to almost 40% of the people and businesses in the country.
RISK MODEL REACTION Since a big, destructive earthquake has not hit Canada in living memory, too many risk and insurance managers in Canadian industry dismiss the risk. At Swiss Re Corporate Solutions, we don’t rule out the possibility, however remote.
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Board Members of WICC BC present cheque to Barbara Kaminsky, CEOCEO of CCS Board Members of WICC BC present cheque to Barbara Kaminsky, of CCS
Women inin Insurance Cancer Crusade (WICC) BCBC hashas Women Insurance Cancer Crusade (WICC) raised $1$1 million dollars forfor thethe Canadian Cancer Society. raised million dollars Canadian Cancer Society. We our generous supporters andand hard-working Wethank thank our generous supporters hard-working volunteers who have made this amazing achievement volunteers who have made this amazing achievement possible. possible. Join inin our goal to to raise another $1 $1 million forfor thethe CCS. Joinusus our goal raise another million CCS. For information, contact wiccbc@gmail.com or or Formore more information, contact wiccbc@gmail.com www.wicc.ca. www.wicc.ca.
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Businesses with most of their assets in a limited geographical area, such as a single city, might be tempted to buy as high a deductible as possible to help keep their insurance costs down. But the consequences of this strategy could prove to be disastrous. If the deductible is stated as a percentage of the value-at-risk, it could turn out to be a very big number indeed.
We monitor and model earthquake exposure in Canada and rate it as we do fire or flood risk. We use a proprietary modeling system supported by our expert knowledge of the risk and the latest scientific data from recognized authorities such as the United States Geological Survey to develop loss estimates on a risk or portfolio basis over varying recurrence periods. But it does not end there. We also compare and validate our findings against results from third-party software that some insurers and insureds use. Our historical diligence for assessing and modeling earth movement events did not cause us to revise our loss estimates, as some insurers did, following recent upgrades in some third parties’ modeling products. Many insurers felt they were overexposed after running the catastrophe model revisions; they reacted by curtailing capacity or decreasing lines. Unfortunately, that created a potential problem for some insureds, which, as a result, saw the limits on their coverage reduced. In Canada, property policies are ‘all risks.’ Losses resulting from earthquake are included in that definition. But the earthquake component of the cover can be sub-limited to less than the full limit and many insureds take this route to keep the premium cost down and within budget.
DEDUCTIBLE DECISIONS It is important for insureds to identify their probable maximum losses accurately before deciding how much cover to buy. Having sufficient cover could
44 Canadian Underwriter March 2012
one day make the difference between a business surviving or being wiped out by an earthquake. Achieving the most effective structure for an insurance program can be critical. Decisions about deductibles, for example, should be tailored to the insured’s operations. If, for example, businesses have most of their assets in a limited geographical area, such as a single city, a single event could affect all of these assets. These businesses might be tempted to buy as high a deductible as possible to keep their insurance costs down. But the consequences of this strategy could prove to be disastrous. If
Recent tragic events in New Zealand and Japan should have been a wake-up call for Canadian businesses, and many companies did in fact review their catastrophe insurance coverage. the deductible is stated as a percentage of the value-at-risk, it could turn out to be a very big number indeed, especially if all of its facilities are affected. The recent tragic events in New Zealand and Japan should have been a wake-up call for Canadian businesses, and many companies did in fact review their catastrophe insurance coverage. But for many insurance and risk managers, the increased cost of insurance for an event that may or may not occur in the near future proved hard to justify to a chief financial officer or a CEO.
FOREWARNED IS FOREARMED There has been a big debate, especially at the federal level, about Canada’s level of preparedness for and resilience to a powerful earthquake. The government has taken action to improve the dialogue between different stakeholders. But insureds have to take some responsibility for loss prevention and mitigation. Businesses have to make sure they are up to date in terms of building standards, for example. If they are not up to date, they should consider upgrading or retrofitting their property assets. Upgrades are particularly important in the context of fire following an earthquake. Insureds need to make sure that their sprinkler systems will still function after an earthquake, for example. Also, businesses need to inform their underwriters about any upgrades they make.The granularity of insurance submissions is important, since insureds can benefit from providing insurers with information that truly reflects the risk.We always ask our insureds to submit detail about their properties.This includes the age and type of construction and if earthquake upgrades have been carried out. If our underwriters don’t have that kind of information, then model results will have a greater degree of uncertainty and therefore may not accurately reflect the exposure. Ultimately, if a big earthquake hits Canada, we all want the same outcome. We want insurance coverage to play the most effective role possible in the recovery of our businesses, communities and the national economy.
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Mobilizing
Against Fraud
The Ontario Auto Insurance Anti-Fraud Task Force has taken preliminary steps to establish the scope and appropriate response to fraud. Willie Handler Consultant, Willie Handler and Associates
Recognizing the importance of preventing auto insurance fraud, the Government of Ontario appointed the Auto Insurance Anti-Fraud Task Force on July 29, 2011. Directed by a five-person steering committee, the Task Force is independent of the government. Its mandate is to: • assess the extent and nature of fraud in the Ontario auto insurance system; and • recommend actions to reduce the incidence of fraud for the benefit of policyholders. The Task Force submitted an interim report to the government on Nov. 21, 2011. The interim report describes what the Task Force has learned during the four months since its appointment; outlines actions with short-term benefits that
46 Canadian Underwriter March 2012
might be taken; and establishes an agenda for the balance of its mandate. The final report of theTask Force is due by Fall 2012.
EARLY OBSERVATIONS For some time, a figure of $1.3 billion has been used to describe the cost of fraud in Ontario, but the Task Force believes this figure is not reliable. The Task Force indicates in its report that a comprehensive research and analysis on the scope of auto insurance fraud in Ontario will be undertaken over the remainder of its mandate. The Task Force has categorized fraud into “organized,” “premeditated” and “opportunistic.”These defined categories will create some controversy among auto insurance stakeholders, since some groups do not agree they all constitute fraud.
Organized fraud The Task Force defines “organized” fraud as an organized scheme designed to generate cash flow through either staged accidents or fabricated accidents. Individual claimants are not the organizers of these schemes: they generally rely
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The categories of ‘organized,’ ‘premeditated,’ and ‘opportunistic’ fraud will create some controversy, since some auto insurance stakeholders do not agree they all constitute fraud. on white-collar professionals to support the schemes. Stakeholders in the system completely agree that these activities constitute fraud.
Premeditated fraud Premeditated fraud is defined as continual pattern of charging insurers for goods and services that are not provided or that are unnecessary. A claimant may or may not be complicit in the fraud. As well, in this type of fraud, the participant is not dependent upon a larger organization. Some stakeholders do not consider that claiming for some of these goods and services to be fraud. Rather, they believe these are simply disagreements over what constitutes reasonable and necessary expenses. Opportunistic fraud Opportunistic fraud involves an individual claimant who pads the value of his or her auto insurance claim by claiming for goods and services that are unnecessary or unrelated to the accident. Again, some people will see this as a disagreement about what constitutes a reasonable or necessary expense rather than a deliberate, fraudulent “padding” of claims.
notes that theses costs are concentrated in the GTA. According to Exhibit 3 in the interim report, accident benefits claims costs increased by $2.4 billion or $370 per vehicle between 2006 and 2010. Exhibit 6 shows that $2 billion in accident benefits claims costs or $300 per vehicle is unexplained. This gap was calculated by comparing actual accident benefits claims costs with projected accident benefits claims costs over that same period had they grown at the same rate as private health expenditures in Ontario. Another concern for the Task Force was the increased frequency of accident benefits claims. Between 2006 and 2009, 6,400 fewer people were injured in auto accidents, based on Ministry of Transportation statistical reports. And yet, accident benefits claims increased by 14% over the same period. The Task Force concluded that the fastest-growing categories of auto insurance fraud are premeditated and organized fraud. This is based on the belief that opportunistic fraud through the padding of claims could not have grown so quickly in such a short period of time.
TASK FORCE ANALYSIS COST TRENDS A significant portion of the Task Force’s interim report is dedicated to analyzing the costs structure and trends in the Ontario auto insurance system. Although the Task Force did not make a quantitative estimate of the extent of fraud in the system, it did make a number of interesting observations. The Task Force identified a large — and as yet unexplained — gap between changes in accident benefits claims costs and changes in factors that are expected to influence those costs. The report
The Task Force spent a considerable amount of time collecting and analyzing available historical data. This gives us a very good perspective of how the Ontario system has gone off the rails over the past few years. However, the historical analysis is based on a system that no longer exists. Ontario’s auto insurance reforms, implemented in September 2010, dramatically changed the landscape of the province’s auto insurance system. Prior to the reforms, the largest increases in accident benefits costs from 2006 to 2010 were assessments and ex-
aminations (228%), caregiver benefits (186%), housekeeping expenses (178%) and medical benefits (105%), according to Exhibit 16 of the interim report. All these benefits were affected by the reforms. Caregiver benefits and housekeeping expenses are now only paid to catastrophic claimants (about 1% of claims) and policyholders who purchased the optional coverage (also about 1% of claims). Anecdotal feedback from health care professionals conducting medical assessments and examinations indicates business is down 50% since the reforms were introduced. Meanwhile, a number of insurers report that 50% to 70% of their claimants are being treated under the Minor Injury Guideline and are consequently subject to the $3,500 medical and rehabilitation cap. And so, assuming most claimants no longer claim caregiver benefits and housekeeping expenses, if health professionals are conducting half the number of assessments as they did pre-reforms, and if at least half of insurers’ claimants are subject to the $3,500 cap, one would expect significant claims cost reductions since September 2010. I estimate this should work out to a reduction in costs of roughly $1.3 billion. This leaves about $700 million in current unexplained costs in the system. This is still a significant figure, and it speaks to the need to gain a good understanding of the extent and source of fraud in Ontario, particularly during the post-reform period.
EXPECTED CHANGES The Task Force is already working on changes that should have a positive effect on the auto insurance system.These include working on optional e-learn-
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ing for police officers; changes in Health Claims for Auto Insurance (HCAI), the electronic system health professionals use for transmitting auto insurance claims forms to insurers, that allow health professionals to check for unauthorized use of their identity, FSCO guidelines on health care billing practices; and new anti-fraud brochures and Internet material. More substantive recommendations
are still to come. The interim report highlights some of the possible recommendations including: • licensing and/or regulation of rehabilitation clinics; • enhancing regulation of the towing industry; • establishing a dedicated fraud investigation unit; and • developing a consumer engagement and education strategy.
Licensing/regulating rehab clinics The Task Force indicated interest in the licensing requirements introduced by Hillsborough County, Florida in September 2011. Some of those requirements include: • A physician must be responsible for operating a clinic. • All persons associated with operating a clinic must submit 1) a copy of their state license; 2) a list of criminal convictions, if any; and 3) a set of fingerprints. • A clinic must agree to inspections by county code or law enforcement officers. These changes are new, so there is little experience to date regarding their effectiveness as an anti-fraud measure.
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It is also difficult to determine what body in Ontario would take on this regulatory responsibility, which would include licensing, inspection and enforcement activities. Ontario is reportedly facing a $16-billion deficit and has appointed former bank economist Don Drummond to conduct a public service review. Under the current fiscal environment, don’t expect new money and resources from the Ontario government to regulate rehabilitation clinics. Is there an alternative model? Well, there are the health regulatory colleges. But moving in this direction would require a substantial change in mandate to cover multidisciplinary facilities. In addition, the colleges have their own fiscal and resource restraints.
Regulation of the towing industry Towing operators and drivers are currently licensed and regulated by a patchwork of municipal bylaws. Some are effective but many are not.
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Regulation of the towing industry was proposed in a private members bill (Bill 147) introduced in the Ontario Legislature in April 2011. Bill 147 did not proceed past second reading before the fall Ontario election; therefore, it died on the Order Paper. Had the bill passed, it would have introduced a self-regulatory body, the Towing Industry Council of Ontario. Don’t expect to see the bill revived under the current session, because the towing industry does not yet have the infrastructure in place for self-regula-
The Task Force believes fraud prevention includes a betterinformed public. If it happens, it will require funding. Expect the final burden of funding consumer education campaigns to fall on the insurance industry.
fraud. Fraud organizers use this lack of public knowledge to their advantage. Some consumers participate in fraud schemes without their knowledge and without understanding the risks. The Task Force believes fraud prevention includes a better-informed public. The extent of any potential public education campaign is unknown at this time. But if it happens, it will require funding. FSCO and the Ministry of Finance have no
history of funding consumer education campaigns dealing with auto insurance, so expect the financial burden to fall on the insurance industry. The Task Force’s interim report received almost no media coverage, but expect more interest when the final report is completed and released later this year. None of these issues are simple, so the Task Force has its work cut out for itself.
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tion. Government expenditure constraints will challenge the Task Force to develop a framework that will require minimal public resources.
Dedicated fraud investigation unit The Task Force has shown interest in the U.S. National Insurance Crime Bureau (NICB). The NICB partners with insurers and law enforcement to identify, detect and prosecute insurance criminals. Data analytics is a critical tool of the NICB. The mandatory reporting of data by insurers facilitates the data collection. Introducing a similar model in Ontario would likely require legislation and engage some discussions about existing privacy legislation. Where in Ontario would such a potential fraud investigation body be housed? Again, government financing constraints would likely be a factor. Building in some way on the experience of the IBC’s Investigative Services makes sense and more closely follows the American model. Consumer education strategy The Task Force concluded there is little public awareness of Ontario’s auto insurance system and existing types of
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How Much is Enough
?
The CIP Society Ethics Series
The CIP Society Insurance Institute of Canada
The CIP Society represents more than 16,000 graduates of the Insurance Institute of Canada’s Fellow Chartered Insurance Professional (FCIP) and Chartered Insurance Professional (CIP) Programs. The CIP Society, through articles such as this, is working to bring ethical issues to the forefront and provide learning opportunities that enhance the professional ethics of all insurance professionals.
Commercial brokers can sometimes find themselves caught in a discrepancy between how much coverage their clients think they need and how much coverage brokers believe their clients require. How much counsel is enough?
Brokers in their role as advisers are often caught between their own versus their clients’ understanding of what constitutes the right coverage, for the right price, for the potential risk. Here is one such scenario: Feeling the pressure of the challenging economic times, the owner of a small manufacturing business was determined to cut costs. The company’s commercial insurance policy appeared to be a potential target because it was due for renewal. The owner chatted informally with
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a local broker to whom he had promised an opportunity to quote on his business. The broker was motivated to win this account, since the business owner was an influential person in the community and securing his business might open up other business opportunities. However, the broker understood the price sensitivity attached to the quote. When discussing coverage, the broker suggested reducing the amount, since this would save the business owner considerable premium dollars. The broker suggested the amount of liability insurance currently in force was excessive, given that he did not know of a claim of that magnitude ever successfully settled. The client’s intent to save money provided the justification for the broker’s proposal, and so the broker felt further research was not warranted. Do you feel the broker was well informed and advising his client appropriately? Do you feel that the client was well informed and being advised appropriately? If not, then how was the thought process misguided?
Randy Bushey, CIP General Manager, Knox Insurance Brokers Ltd. When the “cheapest price” is the dominant feature in a buying decision, it is particularly difficult for brokers not to compromise their legal and ethical responsibility to the client. This scenario helps explain why. The nature of most liability claims is this: they get settled many months or years following the incident that gives rise to the claim. Often the largest claims settle five to eight years, or longer, after the damage or injury was sustained. Therefore, when a broker assists their client in making an informed decision, the discussion needs to review past and current legal judgment decisions — but with a view to the future. Today’s decision about liability limits may be called upon to provide protection against a court judgment years down the road. Here is a question for the client: If you
are defending an action in court in 2020, what liability limit will you wish you had purchased in 2012? In that context, it is almost always unwise to recommend a reduction in liability coverage limit. The final buying decision always belongs to the client. But the broker must be able to look in the mirror knowing that she met her legal and ethical responsibility, providing to her client informed and prudent advice in protecting against risk — now, and well into the future.
Carla Martin, CRM, Vice President, HKMB Hub International If the broker really wants to position himself as a trusted advisor to this client, he should do his homework, get to know his client’s business and help the client understand his business risks. Here are a number of steps that could be taken:
• The client should review his contracts with all his major customers to see what limit they require him to carry as the manufacturer (particularly if he is selling to regional, national or international retail chains). • The broker could review the insured’s website to see what implied “warranties or guarantees” are being given to customers. • The Canadian-based client and broker should review the number of sales the company makes in the United States and other foreign countries and let the owner know about U.S. litigation. Also, the higher the sales figures, the more you need adequate limits. • The broker should gather information about recent lawsuits involving his client’s industry profile in Canada, the United States and other jurisdictions as appropriate. • The broker should inform the client that he could sell his product to a customer in Canada, who in turn could
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The issue here is not just one of a broker’s errors and omissions risk. It is also one of ethical behaviour. Part of our commitment to clients is to keep them abreast of new coverage, coverage restrictions and insurance-specific case law.
sell it to a U.S. entity, and he might not even be aware of that. • Suggest that he look at higher deductibles in order to reduce his premium. • The broker should check to see if there is any benchmarking for his specific industry profile, regionally, nationally and internationally. • The broker might emphasize to the insured that his liability policy also pays for defence of a covered loss. This should also be taken into account with respect to the limit. • The broker could provide assistance regarding “risk management,” assisting the insured with their product quality control, keeping detailed records, making sure all employees are trained properly and any other safety tips. • The broker could explain to the insured that the cost of higher limits can be far less than the consequences of having inadequate insurance limits if a catastrophic claim occurs. • The broker could offer a finance contract to the insured to assist them with paying their insurance premium over a period of nine or 10 months. • The broker could provide a quotation for various limits. Ultimately, in the end, it would be the client’s decision. But both the broker and the client need to know that risks were considered, advice was given and a signed acknowledgement from the client would be required to that effect.
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Maurice Audet, Aon Reed Stenhouse What is a broker’s obligation to advise clients of appropriate levels of coverage? Based on the 1977 Ontario Supreme Court [now the Court of Appeal] decision in Fine's Flowers Ltd. v. General Accident Assurance Co. of Canada, a broker is obliged to do more than simply issue a policy. Insurance brokers have an obligation to provide advice as to the availability of coverage, arguably the appropriateness of insurance policy wordings and the adequacy of insurance limits. Recently, I was asked what would be appropriate liability limits for a local contractor to carry. While not a local manufacturer, the question of acceptable levels of liability coverage struck me as similar. I was advised that local contractors did not purchase more than $5-million limits; since there were no claims in Canada exceeding this amount, the brokers would not advise their clients to purchase higher limits. __ First of all, many judicial awards and settlements in Canada have exceeded $5 million. For a broker to advise his or her clients properly, it is imperative that brokers educate themselves about the state of the law with respect to damages and to advise their clients accordingly. At the end of the day, it is up to the client to decide what limits to purchase. But the broker has an obligation to provide proper advice and not simply tell a client what the client may want to hear. A client may choose, for compet-
itive reasons, to purchase lower limits, but they should be made aware of the consequences. __ The issue here is not just one of a broker's errors and omissions risk. It is also one of ethical behaviour. Part of our commitment to clients is to keep them abreast of new coverage, coverage restrictions and insurance-specific case law. We are not lawyers, but we do have an obligation to keep abreast of changes in the legal climate and to communicate these to our clients.
THE LAST WORD . . . The role of the commercial broker is to provide sound risk assessment and professional advice on the best insurance coverage, products and price, to the best of their ability. Brokers must not reinforce misconceptions about insurance limits that do not accurately reflect potential exposure. For example, a manufacturer may require limits that are higher than what is standard in the industry for a variety of reasons, which should be identified. It is a broker’s ethical obligation to ensure that the client understands why they require the coverage they need, even if the client and/or the community has historically accepted lesser amounts.As suggested above, many ways exist to ensure fuller understanding of the client’s business and risks. The broker’s role is to ensure his or her clients are well informed, well educated and capable of managing the risk transfer on behalf of the client.
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Automating Vehicle Loss Valuations
Bruce Carrick
Senior Director, Product Management, Mitchell International
Automation helps the claims process for repairable vehicles, and now it is being applied to the process for total loss claims as well. The repairable vehicle claims process is well understood and well documented. Electronic estimating, imaging desks and Internet-based workflow modules have truly allowed for a paperless claim file.This has eliminated manual tasks such as decoding the Vehicle Information Number (VIN), gathering parts costs, determining labour hours, transferring photos and of course calculating the cost of the repair. Contrast this with the vehicle total loss settlement process. Total losses represent approximately one-fifth of all Canadian vehicle claims by volume, but significantly more by insurer payout. Up until now, the settlement process for
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total losses has been arduous and labour intensive. Usually a dedicated team of total loss specialists is required to settle claims, in part because of the level of detailed knowledge required to arrive at and negotiate the settlement. In an age of technologically complex vehicles, cars and trucks total out more frequently than ever before. Vehicles reach the total loss threshold much faster now, due to the advanced electronics for traction control, anti-lock brakes and engine management computer modules present in later model automobiles.
SEARCHING FOR COMPARISONS The first step in a typical total loss claims process has been for the adjuster to search for comparable vehicles via the Internet — a process involving a minefield of issues. Privacy issues prevent the VIN from being displayed; usually, only the model level information — missing trim and sub-trim information — is available online. Once a few comparable vehicles are found,
Illustration by Sandy Nichols/www.threeinabox.com
Opinion/Analysis
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the adjuster will have to calculate adjustments manually. The odometer difference between the loss vehicle and the vehicles found online will need to be considered, as well as regional differences in the event that the comparable vehicles are geographically far from the loss. In addition, equipment must be compared. If the vehicle option packages found online do not match that of the loss vehicle, each piece of equip-
The repairable vehicle claims process is well understood and well documented. Contrast this with the vehicle total loss settlement process. Up until now, the settlement process for total losses has been arduous and labour-intensive. ment must be valued and then added or subtracted from the total. If the insured provides receipts, then more calculations are required to depreciate those options to real-time. The adjuster may also consult published guides such as the Canadian Red Book or Canadian Black Book, which provide estimated values. Finally, the adjuster takes the calculation of the average value of the adjusted list price, combines it with screenshots of similar vehicles found for sale online and supplies this all to the insured in either a PDF or Word document.
BEYOND A ‘GUT FEEL’ If you think the above process is painstaking and time-intensive, you are right. But now the adjuster is tasked with explaining to the insured how the total loss vehicle settlement was derived. Since the methodology is not consistent or backed by a credible third party, the consumer is often hesitant to accept it. This leads to a lengthy negotiation. Not only is this time-consuming for both parties, it generally leads to customer dissatisfaction.
Only recently have extensive databases of Canadian vehicle data been leveraged with econometric algorithms to create solutions that instantly value vehicles. These databases comprise both advertised and sold records, which are then filtered for incomplete records or data with suspect information such as extremely high or low mileage values. While an adjustor may “eyeball” a record to determine if it looks out of order using the manual process described earlier, an automated system will use an algorithm to determine if the record is reasonable. Using the example of odometer values, a rule may filter the
values based on a number of standard deviations beyond the average for that specific year-make-model. Once reasonable-looking comparables are found, the database will sift through thousands of records in order to find the most similar comparable vehicles near the loss vehicle, again using specific rules developed based on historical data associated with that particular model. By comparing sold records for that specific loss vehicle against advertised vehicles, an adjustment factor can be applied. All these adjustments are automatically calculated against each sold or advertised vehicle to arrive at an adjusted comparable price.The average of
all listed comparables is then used to determine the value of the loss vehicle. What is the net result? Within a minute of providing the loss vehicle VIN, the adjustor receives a professional-looking report detailing the loss vehicle’s information, as well as each comparable advertisement and their associated adjustments. In addition, vehicle history reports can be provided as part of a comprehensive package. Armed
New total loss valuation tools promise a win-win for the insurer and the claimant. The insurer gets quicker, more accurate settlement values that take less effort. Consumers receive clear documentation of how the market value of their vehicle was derived. with a report from a credible third party that clearly quantifies the value of the insured’s vehicle, the adjustor can much more efficiently settle the claim. Rhonda Bricknell, supervisor of auto physical damage at Unifund Assurance, summed up the value of these new technologies. “What makes it effective is that clients can see the actual report and details on how the true value of their vehicle was determined. It's not based on someone's opinion of the value of the vehicle — total loss reports make the adjustments based on facts, so it is a more efficient, reliable and easier process.” These new total loss valuation automation tools promise a win-win for the insurer and claimant. The insurer gets quicker, more accurate settlement values that take less effort. More importantly, consumers receive clear documentation of how the market value of their vehicle was derived, allowing them to put the claim behind them and move on following an extremely emotional time in their lives.
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Bottom Craig Harris Freelance Writer
Canada’s commercial insurance market is “in transition,” meaning rates have flattened out in most lines of business, with small increases in some areas such as property. Few, however, see signs of an actual hardening. After an eventful 2011, evidence exists that the insurance industry is past the bottom of a lengthy soft commercial market pricing cycle. Steadily low or declining premiums, plentiful capacity and relatively generous terms have been the hallmark of commercial renewals over the past five years — a span that has included a global credit crisis, significant natural disasters and general economic malaise. Now, there are signs of change.
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In a country-specific report released earlier this year, Marsh characterizes Canada as a “market in transition . . . where insurers are moving towards a more disciplined approach to underwriting, which is likely to start to drive rates up . . . Global and local events have started to erode the positive underwriting results of the previous three-to-five years for Canadian insurers. As a result, many insurers are taking a bottom line approach to pricing, rather than simply looking at top-line premium income.” Elaborating, David Mew, managing director and national placement leader for Marsh Canada says: “When we say the market is in transition in commercial lines, it means that it is no longer soft, particularly after a prolonged period of pricing decreases. So far, however, we are not seeing the 15-20% increases that would signal a hard market.” Underlying conditions are pointing to movement in the marketplace, Mew notes. First, the loss ratios in some key commercial lines of business are deteriorating, most notably in property lines. After the Slave Lake fire, heavy flooding in
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regions across Canada, a tornado in Goderich, Ontario and a late fall windstorm in Alberta, the claims ratio in commercial property increased to 78.5% in the third quarter 2011, well up from the 67.4% posted for the same period the previous year. “In commercial property, the loss ratio has been increasing steadily,” says Mike Lardis, senior vice president of commercial lines underwriting and pricing for Aviva Canada. “I think here, specifically, more insurers are looking to achieve rate adequacy.”
When we say the market is in transition in commercial lines, it means that it is no longer soft, particularly after a prolonged period of price decreases. So far, however, we are not seeing the 15% to 20% increases that would signal a hard market. Deborah Moor, president of Lloyd’s Canada, says 2011 was a tough year for the insurance industry. A high level of global catastrophes led to industry-wide claims of around $107 billion. “The Canadian insurance market is not immune from those events, and we’ve also seen events closer to home such as the Slave Lake fires,” she says. “We are starting to see more stability in property lines as a result.” Reinsurance renewal contracts for primary insurers, the majority of which were done in January, have also seen price increases, particularly for catastrophe treaties. “Generally, reinsurance costs are up between 5% and 15%, depending on the line of insurance,” says Neil Morrison, president and CEO of Hub International HKMB/Ontario. “Some primary insurers will have trouble passing those
costs onwards, but it will certainly put pressure on a firming rate landscape. Sometimes we don't appreciate the fact that even though a typical insurer may spend 20% of premiums on reinsurance, and a 5% reinsurance price increase translates into just 1% on their premiums, that 100 basis points at the margin on $500 million or $1 billion of revenue is a big hit to the bottom line.” Global catastrophe losses and significant losses in Canada were factors in Canadian reinsurance renewals this year, resulting in some price increases and available capacity reductions by global reinsurers, adds Moor. “This should drive price firming in the catastrophe exposed commercial lines in the coming year.”
CONDITIONS FOR A HARD MARKET Given meager interest rates and investment income that is too flat to have much of an impact on any underwriting losses, Mew says at least three of the four conditions of a hardening market are present: increasing loss ratios in some lines, higher reinsurance pricing and limited investment income.The one missing factor is a key exception: lack of capacity. A competitive market shows that both foreign and domestic insurers still view the Canadian market as a good place to do business. “In discussions with my colleagues, I don’t see any big signs of a turn or significant rate increases in property and casualty lines,” says Steve Pottle, director of risk management services for York University. “I think there is enough capacity in the Canadian marketplace, and plenty of competition. No one insurer wants to put its neck out there and be the first to make those large increases. If one company does do it, there are 30 or more waiting in the wings saying ‘Good luck with that.’” Several sources say capacity and rate are highly dependent on specific lines of business and individual risk profiles.
“While globally we have seen insurance rates increasing in regions and lines of business that experienced catastrophes last year, this has not happened across the market as a whole,” notes Moor. “The same is true in Canada. Certain specialized areas such as sawmills, where major players have pulled out of the Canadian market, and energy business, where there have been large losses in Canada as well as elsewhere, have seen rates rising.” However, other areas of commercial business, including liability (with a third quarter loss ratio of 64.5%), small and medium sized accounts and professional liability remain highly competitive in pricing, with abundant capacity. “Directors and officers liability and professional liability is still very competitive,” Mew says. “You have 45 to 50 insurance companies chasing this business in Canada. “ This heightened competition and robust capacity may delay the transition to a firmer commercial market in Canada, according to some sources.
At least three of the four conditions of a hardening market are present: increasing loss ratios in some lines, higher reinsurance pricing and limited investment income. The one missing factor is key: a lack of capacity. “A few large multinational insurers believe their combined loss ratios to be in the mid 90s and they are taking that as license to attempt to build market share — including in Canada,” observes Morrison. “Concurrently, new capacity is entering the Canadian market. Lloyd's syndicates and Bermuda operations are setting up shop here and looking for premium. Meanwhile, domestic Canadian
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CU March 2012 Quarter Century
3/8/12
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Announcing the
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Complacency, a byproduct of relatively easy past renewals, is a potential issue for risk managers and commercial insurance buyers. They might become accustomed to insurance costs as flat or decreasing. Some may think insurance rates will always be fixed or declining, but we don’t know where premiums are going down the road. We have to build in some planning for that.
insurers are not inclined to let the additional and new foreign capacity eat their lunch; they are predictably being competitive in order to keep what they have.” Many insurance companies writing domestic risks have worked hard to build up a good book of business and they don’t want to walk away from it, Mew adds. “The acquisition costs of getting new business are much higher than the retention costs, and I think that is where we are right now,” he says. “There is a lot of waiting right now in a transition market.” For Lardis, this competition plays out particularly in the small to medium sized market for “straightforward” risks. “We are looking at a new operating model for straightforward risks that involves a service centre-type approach,” he says. “Clearly in commercial lines, some risks are more complex. But if the account is relatively simple, we are focusing on getting a rate out very fast to brokers. With this business, I think we can be more aggressive for the right kinds of risks.”
INSURANCE BUYERS A long soft market and consistent pricing has benefited many insurance buyers, Pottle says, but risk managers still have to contend with some obstacles. “One area of frustration for risk managers is the feeling that the ‘incumbent shouldn’t be encumbered’ by less ag-
gressive rate offerings on renewal,” notes Pottle, chair of the RIMS Canada communications and external affairs committee. “Why would insurers and brokers be aggressive on new accounts and not do the same with retained business? Why don’t they treat old clients like new clients?” Complacency, a byproduct of relatively easy past renewals, is another potential issue for risk managers and commercial insurance buyers. “One concern from an internal perspective is that we are becoming accustomed to insurance costs as flat or decreasing,” Pottle says. “That is the way it’s been for the past at least five or six years. Some in the organization may think insurance rates will always be fixed or declining, but we don’t know where premiums are going down the road. We have to build in some planning for that.” The likelihood of double-digit insurance rate increases is slim, according to several sources. “For us, this is not a situation where we will simply take a rate increase across the board,” says Lardis. “I think you will get selective hardening of a few percentage points in 2012 and then likely increases in the 3% to 5% range in 2013, with more pressure on commercial property. However, we are not looking at sudden 10% to 15 % price changes.” Barring a major catastrophe or a sharp withdrawal in capacity, any rate changes
should be gradual and orderly, according to Morrison. “The real but hopefully remote risk is a sudden withdrawal of that foreign capital/capacity, which would result in unwanted upwards price volatility and ensuing political heartburn for the industry,” he says. Lardis says an exclusive focus on rate changes may obscure what insurers are trying to accomplish through a more targeted approach to underwriting individual risks. “This goes beyond rate to underwriting, data and analytics,” he says. “Insurers are taking a much more granular view of individual risks. If we feel we can use data and analytics better, we will go after certain risks. If not, we are willing to walk away. In property, I think we are getting some areas of reduced capacity, where insurers are willing to exit on certain risks.” In other words, insurers are showing a much greater commitment to underwriting discipline and risk appetite. How that discipline plays out in a stillcompetitive commercial marketplace will determine where rates are heading for the rest of this year and into 2013. “It will be interesting to see in the second and third quarters of this year if the underwriting and rate discipline will stick,” Mew concludes. “I think right now in this market, brokers have to work harder to get the best deal for their clients. But that is in the nature of this business.”
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MOVES & VIEWS UPCOMING EVENTS: FOR A COMPLETE LIST VISIT
www.canadianunderwriter.ca
AND CLICK ‘MY EVENTS CALENDAR” ON THE HOME PAGE
1
Borden Ladner Gervais LLP has created a national insurance corporate/regulatory group. Crawford Spratt, Jill McCutcheon and Kelly Morris, all insurance law practitioners, have joined the firm. Spratt will serve as the national head of the group, McCutcheon as the group’s regional head, and Morris as a partner. All three will be based out of Toronto. Grace Tam also joins Borden Ladner Gervais’ Toronto office to provide the group with regulatory and registration support. The group’s regional heads include Christian Faribault (Montreal), Bruce Churchill-Smith (Calgary), Sean Muggah (Vancouver) and Jeremy Farr (Ottawa). “The insurance industry is evolving with new market entrants and a trend towards consolidation,” said Bob Hutchison, partner and national business department leader. “Combined with the firm’s existing financial services group and extensive insurance litigation and coverage practice, our insurance corporate/regulatory group makes BLG a full service firm for insurers, reinsurers, intermediaries and other sector participants.”
2
Policy Works Inc. has launched a mobile app for commercial-lines. The Policy Works Producer App will be released to a select group of brokers for beta testing in early April. The general release is slated for July 2012. To use the producer app, bro-
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kers must be customers of Policy Works and running the current version of the Policy Works CMS desktop system. The first version of The producer app is available on the Apple iPad only. “With the Policy Works Producer app, the discussion between producer and prospect around risk, coverage and pricing will be more detailed, engaging and professional than ever before,” said Kevin Campbell, Policy Works’ president. “Once the information is reviewed with the prospect, the producer will be able to send it electronically, and in real-time, to their marketer or spreadsheets to cart back to the brokerage.”
3
The CG&B Group Inc. has announced several management changes and appointments. Len Notaro, senior vice president, will assume responsibility for the operations and management of the company’s consolidated Marine & Transportation divisions. He will also continue to be responsible for other CG&B specialty lines such as yacht and media. John Cook, vice president, will head up the new loss control and specialty services department, which will include claims management, loss control, risk management services, special accounts and sub-brokered commercial business. Mark Sampson will be appointed senior vice president and responsible for managing the operations of the mid-mar-
5a ket commercial department at the Markham office. As part of the new structure, he will also oversee the small commercial department in Markham. Bob Manson will be appointed senior vice president and responsible for sales and marketing for commercial insurance and personal insurance. This will include the sales and production divisions for Markham midmarket commercial, new business sales for small commercial, and personal insurance.
4
The Dominion has launched a free mobile app for its auto and property policyholders. Its mobile app includes: • The first steps to take when in a car collision and what to do following an emergency situation at home (i.e. property claims such as water, fire or theft losses). • GPS-enabled access to screened and trusted repair facilities. • A collision checklist. • Assistance in finding local hospitals, gas stations, towing services and more.
5b The app also allows for broker branding. Once downloaded, the consumer can enter a unique broker code that will automatically populate the app with the broker’s branding and information. The app is available through the iPhone App Store, BlackBerry App World and Android Market.
5
The Economical Insurance Group has added two new members to its board of directors. David Wilson [5a], past chair of the Ontario Securities Commission, and Richard Freeborough [5b], chair of the International Order of Foresters and the board of governors of the University of Guelph, have joined Economical's board. Wilson served as the vice chair of Scotiabank and chair and CEO of Scotia Capital. The Economical will draw on Wilson’s depth and expertise through his membership on the board's investment and risk review committee and its special committee responsible for the demutualization process. Freeborough served as the deputy chair of KPMG
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11 LLP. The Economical will leverage Freeborough’s experience through his membership on the company’s audit and corporate governance and conduct review committees.
6
Zurich Canada has added a new online portal that gives brokers access to builders’ risk and equipment breakdown coverage and allows them to quote and bind business quickly and easily. The portal is called ZurichEZclick.ca. The portal houses both ZurichBuildersRisk and EBmadeEZ online solutions. EBmadeEZ allows stand-alone equipment breakdown policies to be quoted and issued in just a few minutes directly from a computer. There is no need for supporting business coverage and the solution suits both small and large size organizations. Minimum premium is as low as $300. EBmadeEZ can insure up to 20 locations and $50 million in total insured value. When the coverage is placed, 13 additional coverages are automatically included in the policy and a variety of optional
12 coverages can be purchased. The policy covers extra expenses such as emergency overtime, new parts and labour charges
8
Frank Cowan Company, a provider of Canadian municipal, health care, education and community service insurance solutions, has introduced a new insurance program for health care organizations and professionals called Health & Wellness. The company says the Health & Wellness program distinguishes itself from others in the market by offering: • No general liability annual aggregate. • Abuse coverage. • Medical malpractice coverage. • Workplace disruption (pandemic insurance) coverage. • Computer violation (data breach insurance). • Legal expense, including the Criminal Code. • Multi-line package policy.
9
RSA Canada has launched a mobile app that offers both home and auto claim reporting. The
app is available on BlackBerry, iPhone and Android platforms. RSA customers can use it to report a home or auto claim, locate a broker, access product information, find auto repair shops and contact both emergency services and RSA. “Research shows a significant trend towards the adoption of mobile technology, with 33% of Canadians owning smart phones,” said Irene Bianchi, senior vice president of claims and corporate services. “In the event of a claim, our customers want a fast and simple way to access the information and assistance they need and it makes sense they would use their cell phones.” The app is available through the iPhone App store, BlackBerry App World and Android Market.
10
Patrick Lundy is the newly appointed chief agent and CEO for Zurich Canada. Lundy replaces Alister Campbell, who departed the company in February. Since starting his career in the insurance industry 15 years ago, Lundy has held various executive management and underwriting positions. He started his career in Toronto and worked for Zurich until 2000, rejoining the company in 2009, a Zurich release says. His most recent role was head of Zurich’s healthcare practice. Prior to that position, he served as head of energy casualty. Lundy rejoined
Zurich from Travelers, where he was vice president of field management and operations for its oil and gas division.
11
Rong Chen [11] has been appointed head of property in Canada for Allianz Global Corporate & Specialty Americas. Chen has been with Allianz since 2009, when he joined as an executive underwriter. “Rong brings an extensive amount of experience and expertise in property underwriting and risk management with global and Canadian P&C insurers,” an Allianz release said. He will continue to report to Timon Mueller, regional property leader Americas, and Thomas Paap, chief agent of Canada. He will also continue to work out of the Toronto office.
12
Pat Van Bakel has been appointed chief operating officer at Crawford & Company (Canada) Inc., effective Mar. 1. Van Bakel has been with the company for more than 20 years, having most recently served as senior vice president of operations and insurer markets. He began his career as an adjuster and has moved through a number of management and special assignments. Van Bakel is a member of many industry organizations, currently chairing and serving on several institute committees.
March 2012 Canadian Underwriter
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The Dominion’s annual CPA Ontario Curling Classic bonspiel raised more than $130,000 in support of the Ontario Canadian Paraplegic Association (CPA). Now in its 11th year, the event brings together a cross-section of participants including employees of The Dominion, fellow insurance colleagues and curlers both at the amateur and elite levels. “The Dominion is so proud to be associated with an organization like the CPA, because their work is profoundly beneficial,” said George Cooke, president and CEO of The
Dominion. The event took place on Feb. 1 at St. George’s Golf and Country Club. Some of Canada’s finest curlers brought their support of both The Dominion and the CPA to the rink. Special guests this year included a number of world, Canadian and provincial curling champions. From Team Howard: Glenn Howard, Wayne Middaugh, Craig Savill and Brent Laing. From Team Middaugh: Sherry Middaugh, Jo-Ann Rizzo and Leigh Armstrong. From Team Wall: Kirsten Wall, Jill Mouzar and
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Danielle Inglis. From Team Epping: John Epping, Scott Howard, Scott Bailey and David Mathers. Curlers Mike Harris, Al Hackner and Rick Lang also attended the event.
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Canadian Underwriter March 2012
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RIMS Canada Conference - Saskatoon
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RSA – Royal & Sun Alliance Insurance Company of Canada
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Starlight Insurance Gala
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WICC Ontario Chapter
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Zurich Canada
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APPOINTMENT
GALLERY See all photos from this event at www.canadianunderwriter.ca/gallery
QRIMA, RIMS' Quebec chapter, hosted a luncheon on Jan. 19 at which senior industry leaders predicted the direction of the insurance market. Lynn Oldfield, president and CEO of Chartis Insurance Company of Canada, Brian Bullock, Marsh Canada’s managing director and zone leader of eastern Canada, and Christine Lithgow, president and CEO of Aon Reed Stenhouse, spoke of emerging risks. They provided an overview of the market and the impact on industry results of global natural disasters in 2011.
Georgiana Chen
Tammie Norn, CEO of ProFormance Group is pleased to announce the appointment of Georgiana Chen, CIP to the role of Director of Marketing for the ProFormance Group of companies. In this role, Georgiana will be responsible for directing overall marketing and strategic planning programs for both ProFormance Adjusting Solutions Inc and ProFormance Specialty Claims Inc. With over 17 years of experience in the Insurance industry and her proven ability to develop, build and nurture relationships, we are confident Georgiana will excel in this new role. ProFormance Group consists of 2 Independent Adjusting companies each providing specialized claims handling services. ProFormance Adjusting Solutions Inc specializes in Accident Benefit and Bodily Injury Claims handling as well as Mediation and Settlement Negotiations. ProFormance Specialty Claims Inc. specializes in Commercial Auto, Transportation, Casualty, Liability and E&O and D&O handling. Operating under the umbrella of ProFormance Group these sister companies provide the Insurance Industry an alternative solution to utilizing multi-line companies to handle very specialized claims.
www.proadjusting.ca www.prospecialty.ca
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The Insurance Institute of Ontario held its 113th Annual Convocation & Awards Night on Jan. 26 at the Metro Toronto Convention Centre. Paul Martin, president of the Insurance Institute of Ontario, served as the master of ceremonies. Karen Barkley, chairwoman of The Insurance Institute of Canada, addressed more than 400 Chartered Insurance Professional (CIP) and Fellow Chartered Insurance Professional (FCIP) graduates. Humanitarian, social activist and bestselling author Craig Kielburger was the keynote speaker. Kielburger cofounded Free The Children in 1995 at the age of 12. He also co-founded Me to We, a social enterprise that encourages daily choices that change the world.
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APPOINTMENT
GALLERY See all photos from this event at www.canadianunderwriter.ca/gallery
Pat Van Bakel Pat Van Bakel has been appointed to the position of chief operating officer, Crawford & Company (Canada) Inc.,effective March 1. Van Bakel has been with the Company for more than 20 years and most recently served as senior vice president, Operations, Insurer Markets. Starting his career as an adjuster, Van Bakel has moved through a number of management and special assignments with increasing responsibilities that have positioned him well to take on this new role. A graduate of Wilfred Laurier University, Van Bakel is a member of many industry organizations and currently chairs and serves on several institute committees. He is also dedicated to continuing education, having invested in his career through technical, leadership and executive training. “Pat has been an invaluable member of our team for many years, and has shown great leadership skills and a strong dedication to our mission and values,” said John Sharoun, chief executive officer of Crawford & Company (Canada) Inc. “Crawford will benefit greatly from his contributions to the company in this new role.” Crawford & Company (Canada) Inc. is a wholly owned subsidiary of Crawford & Company. Based in Atlanta, Ga., Crawford & Company is the world’s largest independent provider of claims management solutions to the risk management and insurance industry as well as self-insured entities, with an expansive global network serving clients in more than 70 countries. The Company’s shares are traded on the NYSE under the symbols CRDA and CRDB.
www.crawfordandcompany.ca March 2012 Canadian Underwriter
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The 30th anniversary of the Ontario Risk and Insurance Management Society ORIMS curling event was held on Feb. 13, 2012. Now held in memory of Edward C. Ricketts, the event was held at the St. George's Golf & Country Club. The sold-out event helped raise a $2,000 donation to WICC (Women in Insurance Cancer Crusade).
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The CICMA/CIAA Ontario Chapter’s 45th Annual Joint Conference, Auto Reform‌Did It Perform, was held on Feb. 7, 2012 at the Metro Toronto Convention Centre. Panels of guest speakers discussed recent auto reforms and results across Canada. Speakers included Becky Cameron, Aviva Canada; Tammie Norn, Proformance Group Inc.; Fred Plant, Plant Hope Adjusters Ltd.; Philippa Samworth, Dutton Brock LLP; Sandra Corbett, Field Law; and Dennis Giesbrecht of LifeMark Health. Eric Grossman of Zarek Taylor, Grossman Hanrahan LLP moderated the event. Keynote speakers included Kirk Quinn and Kathy Metzger of IBC Investigative Services.
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Putting the pieces together.
Events and Seminars Calendar You work hard to protect your clients’ property. Now, it’s time to ensure that you apply the same kind of energy and commitment to your own success. CIP Society Events and Seminars give you the opportunity to learn, to network, to catch up on industry developments and to think about your career.
CIP Society Events:
CIP Society PROedge Seminar
Moncton – CIP Society First Annual Spring Fling Event . . . . . . . . . . . . . . . . . . . . April 19 Toronto – CIP Society Symposium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 26 Vancouver – CIP Society 10th Annual Golf Tournament & Dinner . . . . . . . . . . . . . June 7 Toronto – CIP Society Annual Fellows’Golf Tournament . . . . . . . . . . . . . . . . . . . . June 11 Victoria – CIP Society 6th Annual Golf Tournament & Dinner . . . . . . . . . . . . . . . June 22
“Breakthrough Communication: How can I get through to you?”– Glenn Foster This seminar by internationally recognized author Glenn Foster will focus on communication and how to break through common communication barriers utilizing techniques from his latest book, How Can I Get Through to You? Hamilton/Niagara . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 23 Kitchener . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 24 London . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 25 Ajax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 27 Toronto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 30 Ottawa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .May 1
CIP Society PROedge Seminars: Edmonton – Leading Cases with Mario Fiorino . . . . . . . . . . . . . . . . . . . . . . . . . . . April 24 Ottawa – PROedge Spring Luncheon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 21
Keeping you at the forefront of the P&C industry. The CIP Society. MEMBERS BENEFIT. www.insuranceinstitute.ca/cipsociety
S
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Hundreds of insurance claims industry guests attended the 6th Annual Post CICMA/CIAA Joint Conference Cocktail on Feb. 7, 2012. Entitled The Big Mingle, the event featured a Prohibition Era theme. Giffin Koerth Forensic Engineering and Blouin Dunn LLP hosted the event, held at the Maison Mercer in Toronto. Event sponsors included Direct IME, MasterClean, A.R.S., Belfor, FirstOnSite, ServiceMaster, STRONE and WINMAR.
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More than 150 exhibitors from across Canada showcased their works at the Ontario Insurance Adjusters’ Association (OIAA)’s Professional Development & Claims Conference in Toronto on Feb. 8, 2012. The event featured a trade show and seminars covering a wide variety of timely claims topics. Olympic and humanitarian champion Mark Tewksbury was the luncheon keynote speaker.
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INSURANCE INTERNET DIRECTORY ASSOCIATIONS Canadian Independent Adjusters' Association (CIAA) "The voice of Independent Adjusters in Canada" www.ciaa-adjusters.ca Honourable Order of the Blue Goose—Ontario Pond Our fraternal organization has been dedicated to fellowship and charity since 1908. www.bluegooseontario.org The Insurance Institute of Canada The professional educational arm of the industry. www.insuranceinstitute.ca Risk & Insurance Management Society Inc. Dedicated to advancing the practice of effective risk management. www.rims.org
CLAIMS ADJUSTING FIRMS ClaimsPro Inc. Committed to providing leading-edge claims management services. www.scm.ca Crawford & Company (Canada) Inc. Enhancing the customer experience, every day. www.crawfordandcompany.com CRU Adjusters Calm in the face of a storm. www.cruadjusters.com Cunningham Lindsey International independent claims services. www.cunninghamlindsey.com Kernaghan Adjusters Doing What Is Right®. www.kernaghan.com McLarens Canada International Loss Adjusters and Surveyors. www.mclarens.ca
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PCA Adjusters Limited Adjusting to Meet your needs™ www.pca-adj.com Quelmec Loss Adjusters Identifying, Investigating, Resolving...for over a quarter century! www.quelmec.ca
CONSULTING FIRMS Cameron & Associates Insurance Consultants Ltd. Claims consultants to the insurance and reinsurance community. www.cameronassociates.com Keal Technologies Complete technology solutions for insurance brokers. www.keal.com
CONSTRUCTION CONSULTANTS MKA Canada, Inc. Providing creative solutions to the Construction, Legal and Insurance Industries. www.mkainc.ca
Walters Forensic Engineering Inc. Providing scientific answers to complex engineering incidents. www.waltersforensic.com
EMPLOYMENT ONLINE I-HIRE.CA Canada's Insurance Career Destination. www.i-hire.ca
ENGINEERING SERVICES Giffin Koerth Forensic Engineering and Science Investigate Understand Communicate www.giffinkoerth.com Rochon Engineering Inc. Forensic Consulting Engineers & Code Consultants. www.rochons.com
The ARC Group Canada Inc. Your Partner in Insurance Law & Risk Management. www.thearcgroup.ca
GRAPHIC COMMUNICATIONS Informco Inc. Integrated Graphic Communications Specialists. www.informco.com
INSURANCE COMPANIES Aviva Canada Inc. Home Auto and Business Assurance. www.avivacanada.com Catlin Canada Underwriting Ambition. www.catlincanada.com Chartis Insurance Company of Canada Your world, insured. www.chartisinsurance.com FM Global The leader in property loss prevention. www.fmglobal.com
DAMAGE COST CONSULTANTS SPECS Ltd. (Specialized Property Evaluation Control Services) Providing Innovative Solutions to Control Property Claim Costs www.specs.ca
INSURANCE LAW
Grain Insurance and Guarantee Company Commercial Lines Underwriters www.graininsurance.com RSA Leading car, home and business insurer. www.rsagroup.ca Sovereign General Insurance Company of Canada Since 1953 www.sovereigngeneral.com
INSURANCE SOFTWARE APPLICATIONS Keal Technologies Complete technology solutions for insurance brokers. www.keal.com
REINSURANCE Guy Carpenter & Company The world’s leading reinsurance intermediary. www.guycarp.com Munich Reinsurance Company of Canada Complete reinsurance coverage from Canada’s largest reinsurer. www.mroc.com Swiss Reinsurance Company Canada The leading P&C reinsurer in Canada. www.swissre.com Transatlantic Reinsurance Company For all your reinsurance needs. www.transre.com
RESTORATION SERVICES Winmar Property Restoration Specialists Coming Through For You! www.winmar.on.ca
RISK MANAGEMENT The Guarantee Company of North America “Specialized insurance products...professional service” www.gcna.com
The ARC Group Canada Inc. Your Partner in Insurance Law and Risk Management. www.thearcgroup.ca
SPECIALTY INSURANCE Wawanesa Insurance Earning your trust since 1896. www.wawanesa.com
William J. Sutton & Co. Ltd. Insuring Special Risks since 1978 www.wjsutton.com
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CARSTAR Automotive Canada Inc. was named one of Canada’s 50 Best Managed Companies for 2011. The honour is awarded by Deloitte, CIBC, National Post and Queen’s School of Business. It recognizes Canadian-owned and run companies that excel in overall business strategies and sustained growth. The award was announced on Feb. 21 in a special feature published in that day’s edition of the National Post. “CARSTAR has helped transform an entire industry by creating systems, standards and professionalism, and we are pleased to say that CARSTAR is one of this year’s recipients,” said John Hughes, partner of private services at Deloitte. “They have a relentless commitment to their vision, mission and values [and] are very strategic in the development of their business.”
CARSTAR’s 50 Best Managed Companies application centred on its BRIDGE strategy. This includes: • Building of the brand. • Renewal of leadership. • Integration through their Care Centre and information technology. • Diversifying products and services. • Growth. • Enhanced value propositions to their customers and partners. “We are very honoured to receive this award and the timing is impeccable, as we are on a company- and nationwide mission to be best-inclass in all that we do,” says Sam Mercanti, president and CEO of CARSTAR. “Thank you to our franchise, insurance and vendor partners for their involvement in helping us achieve this milestone, and for their ongoing contribution in the improvement of our business.”
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The CIP Society held its GTA Annual Fellows Reception at The National Club in Toronto on Feb. 9. The evening recognized the newest FCIP graduates in the Greater Toronto Area (GTA) and included a presentation of the prestigious Fellow of Distinction Award. This year’s Fellow of Distinction Award recipients were Carol Jardine, FCIP, CRM, from TD Insurance, and Michael J. Boyce, FCIP from HIROC. The valedictorian for the 2011 FCIP class was Meghan Callaghan, FCIP from BFL Canada Risk and Insurance Inc.
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