Canadian Underwriter September 2012 by Annex Business Media

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

S E PT E M B E R 2 0 1 2 A Business Information Group Publication #40069240

Crop Dust BY CRAIG HARRIS

Solving Solvency II BY J. BRIAN REEVE

Give & Take of M&A BY JULIAN BROWN AND VANESSA IAROCCI

In 2012, our links with our partners continued to gain strength.

2012 Full Partners

Thank you all.

Proud Supporter of Brokers Displaying this Symbol

Every year, the links with our insurer partners continue to build as we gain strength from each other.

Link by link, initiative by initiative, we are together forging a relationship with that most important audience of all: the Canadian consumer. At the very core of the broker profession is trust, and gaining the trust of consumers is the single most important thing we can do, since our strength in the marketplace and in Canadian society depends on it. The most significant consumer-oriented tool we have is the Broker Identity Program, designed to raise the profile and enhance the professional reputation of insurance brokers, and thereby reinforce, and assure the perpetuation of the broker distribution channel in Canada. This ongoing quest for customer satisfaction and loyalty is important to us all, which makes it equally important that we, as brokers across Canada, express our heartfelt thanks to you as our valued associates in the industry, and pay tribute to the partnerships we mutually enjoy.

Participants Underwriters, Lloydâ&#x20AC;&#x2122;s England, Pafco, Northbridge

Ad Name: IBAC_ThankYou_CdnUnderwriter2012_EN Size: 16.25â&#x20AC;? x 10.875â&#x20AC;? Colour: CMYK Publication: Canadian Underwriter â&#x20AC;&#x201C; September 2012 Agency (Contact): Thursby & Associates Inc. (Stephen Thursby â&#x20AC;&#x201C; 416.863.1499) sthursby@thursby.ca (Michael Braley â&#x20AC;&#x201C; 416.454.2226) mbraley@thursby.ca

In 2012, our links with our partners continued to gain strength.

2012 Full Partners

Thank you all.

Proud Supporter of Brokers Displaying this Symbol

Every year, the links with our insurer partners continue to build as we gain strength from each other.

Participants Underwriters, Lloydâ&#x20AC;&#x2122;s England, Pafco, Northbridge

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VOL. 79, NO. 9, SEPTEMBER 2012 CANADA’S INSURANCE AND RISK MAGAZINE. PUBLISHED BY BUSINESS INFORMATION GROUP

www.canadianunderwriter.ca

COVER STORY

Crop Dust

36 FEATURES

14 Solvency II

Distracted Driving

Will Canada get on board with the Solvency II wave sweeping the globe or does it believe a home-grown solution is a better bet?

Being distracted while driving is never a good or safe thing. What are the implications of failing to keep eyes on the road and hands on the wheel?

BY J. BRIAN REEVE

BY ANGELA STELMAKOWICH

Defence Costs

Digital Communication

Ontario’s Appeal Court has ruled that costs arising from a provincial letter requesting information about a contaminated site was not a “claim” for defence cost purposes.

Consumer behaviour is changing with the adoption of personal technologies and the rise of social networking. How can the insurance industry adapt?

BY MICHAEL TEITELBAUM

BY JAMES HOGG

4 Canadian Underwriter September 2012

Insurers and reinsurers are bracing for a stiff hit expected to be delivered by the harshest drought in the United States since the mid-50s. Canada, parts of which have also seen drought-like conditions, can expect to share the pain. BY CRAIG HARRIS

20 Building Code

50 Risk as Business

Earthquake-related demands in the National Building Code of Canada have improved with research and understanding. Still, many buildings were constructed in advance of those protective changes.

Clients and prospects may be in the know when it comes to risk. What language needs to be spoken to become a trusted risk advisor?

BY MURAT SAATCIOGLU

32 Mergers and Acquisitions Some in Canada’s insurance industry have identified mergers and acquisitions as a good way to increase market share and grow volume. BY JULIAN BROWN AND VANESSA IAROCCI

BY CRAIG ROWE

54 Interest Rates Stubbornly and persistently low interest rates have put property and casualty insurance companies on notice. What do lower investment yields mean for pricing and underwriting discipline? BY CRAIG HARRIS

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VOL. 79, NO. 9, SEPTEMBER 2012

PROFILE

Editor Angela Stelmakowich astelmakowich@canadianunderwriter.ca (416) 510-6793 Senior Publisher Steve Wilson steve@canadianunderwriter.ca (416) 510-6800

12 The Road Ahead Stephen Halsall, incoming president of IBAC, is not looking to reinvent the wheel. Using the map written by years of effort by his predecessors, coupled with a few ideas of his own, should help chart brokers on a smooth road.

Associate Publisher Paul Aquino paul@canadianunderwriter.ca (416) 510-6788 Account Manager Michael Wells michael@canadianunderwriter.ca (416) 510-5122

BY ANGELA STELMAKOWICH

Account Manager Christine Giovis christine@canadianunderwriter.ca (416) 510-5114

SPECIAL FOCUS

Account Manager Elliot Ford eford@canadianunderwriter.ca (416) 510-5114

Art Director Gerald Heydens Art Consultation Sascha Hass Production Manager Gary White (416) 510-6760 Subscriptions/Customer Service Gail Page gpage@bizinfogroup.ca (416) 442-5600 ext 3549 Circulation Manager Mary Garufi mgarufi@bizinfogroup.ca (416) 442-5600 ext 3545 Print Production Manager Phyllis Wright President Bruce Creighton Vice President Alex Papanou

Editorial

10 Marketplace

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www.CanadianUnderwriter.ca/MediaGroup Canadian Underwriter is published thirteen times yearly (monthly + the Annual Statistical Issue) by BIG Magazines LP, a division of Glacier BIG Holdings Company Ltd., a leading Canadian information company with interests in daily and community newspapers and business-to-business information services. Business Information Group is located at 80 Valleybrook Drive, Toronto, Ontario, M3B 2S9 Phone: (416) 442-5600. All rights reserved. Printed in Canada. The contents of this publication may not be reproduced or transmitted in any form, either in part or in full, including photocopying and recording, without the written consent of the copyright owner. Nor may any part of this publication be stored in a retrieval system of any nature without prior written consent. ÂŠ Published monthly as a source of news, technical information and comment, and as a link between all segments of the insurance industry including brokers, agents, insurance and reinsurance companies, adjusters, risk managers and consultants. Privacy Notice From time to time we make our subscription list available to select companies and organizations whose product or service may interest you. If you do not wish your contact information to be made available, please contact us via one of the following methods: Phone: 1-800-668-2374 Fax: 416-442-2191 E-mail: jhunter@businessinformationgroup.ca Mail to: Privacy Officer, 80 Valleybrook Drive, Toronto, Ontario, M3B 2S9 Subscription Rates: 2012 Canada 1 Year $49.95 plus applicable taxes 2 Years $73.95 plus applicable taxes Single Copies $10 plus applicable taxes Elsewhere 1 Year $73.95 Annual Statistical Issue (included with above subscription) or separately $38 plus applicable taxes Subscription Inquiries/Customer Service

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6 Canadian Underwriter September 2012

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EDITORIAL

Awesome, Awful Auto Fraud

Transforming the public view of auto insurance fraud as a cost for “them” to a cost for “us” will provide some additional focus. Angela Stelmakowich, Editor astelmakowich@ canadianunderwriter.ca

It is by turns inspiring and deflating to witness the innovation, inventiveness and ingenuity of those whose sole purpose is to rip off others. Such is the world of auto insurance fraud, a world inhabited by everything from the subtly sneaky to the downright brazen. Perhaps the fraud revolves around fake brokers offering unsuspecting motorists toogood-to-be-true deals on insurance through recognizable companies; purchase of used vehicles on the cheap before faking their thefts and filing claims; staged collisions and false medical billing; or “wrongfully acquired” vehicles being resold after insurance money had been paid out. These sorts of schemes can produce some big reactions. In fact, the aforementioned staged collision fraud in Ontario led to 142 charges against 46 suspects in connection with an estimated loss of $5 million, while defendants in the British Columbia reVINing case have been ordered to pay $850,000 (the Insurance Corporation of British Columbia alleges about $2 million in claims was honoured). “The conspiracy defendants whom I have found liable, were involved to some degree or another in a well-organized and executed criminal enterprise to defraud the plaintiff of a significant amount of money,” Justice Austin Cullen of the Supreme Court of British Columbia wrote in his ruling.

Canadian Underwriter September 2012

“The cost to the plaintiff is, of course, the cost to the motoring public,” he noted. And it is that simple caution that likely offers the greatest traction in the fight on auto insurance fraud. Transforming the public view of auto fraud as a cost for “them” — insurance companies — to a cost for “us” will provide both focus and fodder for plenty of questions. What is government doing to address the problem? Do regulators have sufficient authority? Do police have the resources to identify and knock down these fraud schemes? What can companies and motorists do? In a recent report, Deloitte points out that auto insurance and workers’ compensation are the two biggest sources of an estimated $30 billion in insurance fraud south of the border. “Some companies have invested in improving data quality and adopting technology tools, but still lack the business processes, workforce competencies and organizational structure needed to act on the insights gained from data analysis.” Getting a fix on fraud is well-advised in light of the associated costs. A recent study by KPMG pegs the cost of auto fraud in Ontario at $769 million to $1.6 billion. Ernst & Young has suggested that the figure may not tell the whole story because it does not specifically address premeditated fraud, which could add another $130 million to $260 million annually.

The range is expansive, true, but the vagueness may serve as the vehicle for public complaint, if not public ire. The Insurance Bureau of Canada (IBC) recently made its own bit of noise, taking to the airwaves September 2 with The Price is Wrong. Meant to explain how insurance policies work and why premiums are high — despite cars and roads being safer, and accidents being less severe — IBC points one of its fingers squarely at fraud. Arguing that what people pay for insurance is based on claims cost, IBC says in many cases the costs are “through the roof” as a result of fraud and abuse in the system. Until those costs are brought under control, the bureau cautions, Ontarians should expect to continue to see premiums that everyone would agree are too high. Concern over effects on premiums is clearly not confined to Canada. Insurers in the United Kingdom, for example, have responded to a 5% hike in fraud last year by launching a register of insurance fraudsters. The register is meant to make it easier for insurers to prevent fraud by making details of known fraudsters available to insurers through a secure protocol. Persistent messaging holds the promise of removing fraud from the shadows of balance sheets and thrusting it into the public spotlight. Without doing so, fraud may be a matter of premium death by a thousand cuts.

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Canadian Market IMPROVED RESULTS FOR CANADIAN P&C INSURERS Federally regulated property and casualty insurers in Canada reported improved financial results for the first half of 2012, posting a collective quarterly profit of $1.52 billion as opposed to $1.09 billion for the same period last year. Insurers wrote net premiums of $15.9 billion for the first six months of this year, up from $14.5 billion for the first half of 2011, note figures from the Office of the Superintendent of Financial Institutions (OSFI). For Canadian p&c insurers, the claims ratio in the auto insurance personal accident category rose marginally in 2012 Q2 to 59.99%, up from 56.87% in Q1; the claims ratio in personal property lines increased from 52.87% in 2012 Q1 to 57.52% in Q2; and the claims ratio on the commercial property side decreased marginally to 63.18% in 2012 Q2.

Regulation RBC THUMBING NOSE AT FEDERAL RULES: IBAC The Insurance Brokers Association of Canada (IBAC) has charged that the country’s largest bank

persists in defying federal rules, arguing in a letter to OSFI that RBC seems to be allowing its insurance arm to solicit new business from current banking customers. IBAC cites marketing correspondence on RBC Insurance letterhead. “As an RBC Royal Bank credit card client, you already have a relationship with RBC Royal Bank. Now you can trust RBC Insurance for your insurance needs.” The marketing material “attempts to leverage the customer’s relationship with RBC Royal Bank in order to entice and solicit the customer to insure his cars and home with RBC Insurance,” Dan Danyluk, CEO of IBAC, notes in a July 20, 2012 letter to OSFI. This is at odds with Section 8 of the Insurance Business (Banks and Bank Holding Companies) Regulations, Danyluk writes. RBC’s response has been that it is “committed to regulatory compliance and respects the Bank Act and privacy legislation.”

OSFI RELEASES DRAFT REVISIONS TO GOVERNANCE GUIDELINE OSFI is seeking comment on its Draft Revisions to the Corporate Governance Guideline, which have not been changed since 2003. Among other things, the 20-page draft guidelines contain a section that includes a number of

10 Canadian Underwriter September 2012

recommendations concerning the recognition of risk management principles by boards of directors. These include that the organization’s board of directors should periodically commission independent third-party reviews to assess the federally regulated financial institution’s (FRFI) risk management systems and practices, and an FRFI should have a boardapproved risk appetite framework that guides the amount of risk that the FRFI is willing to accept.

Risk Management LOW YIELDS COULD LEAD INSURERS TO HIGHER-RISK INVESTMENTS Sluggishly low interest rates and the ongoing European debt crisis have spurred more insurance companies to look at boosting their returns through potentially riskier investment vehicles, note results of a recent survey of chief investment officers (CIOs) by Goldman Sachs Asset Management (GSAM). The poll of CIOs at 152 global insurers representing $3.8 trillion in assets indicated current yields are resulting in lower investment returns. Twenty-six percent of insurers expect to increase overall investment risk, while 14% expect to decrease risk.

“Insurers are migrating down the corporate credit quality spectrum via increasing allocations to high yield, bank loans and mezzanine debt. In addition, insurers intend to increase their allocations to such asset classes as real estate, emerging market debt and private equity,” GSAM states in the report, Seeking Return in an Adverse Environment. The survey also points to reported intentions with regard to risk management infrastructure. “In our view, insurers are now better-positioned to add risk incrementally to portfolios, as they are well-capitalized, continue to invest in their risk management infrastructure and are seeking return through prudent diversification.”

Claims $180 MILLION IN INSURED COSTS FOR TWO STORMS The preliminary estimate of insured damage for a severe thunderstorm in and around Edmonton in mid-July is pegged at $100 million. Thousands of claims have been filed for damage to homes, cars and businesses in the wake of the storm, confirms data collected by Property Claim Services Canada (PCS-Canada) and released by the Insurance Bureau of Canada (IBC). The heavy rainfall resulted in flooding to streets, base-

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ments, businesses, automobiles and construction sites, IBC reports. The storm brought with it strong winds and golf ball-sized hail. The estimated losses edged out those for a band of thunderstorms in Ontario on July 22-23 that stretched from Hamilton to Ottawa. PCS-Canada notes a preliminary estimate of $80 million in insured damages related to claims for homes, cars and businesses. IBC reports the storms spawned strong winds, heavy rains, flash flooding, hail and reports of tornadoes.

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INCREASED CHANCE OF ABOVE-NORMAL HURRICANE SEASON The National Oceanic and Atmospheric Administration (NOAA) predicted in August that an active Atlantic hurricane season, with six named storms at that point, would likely be joined by at least as busy a second half of 2012. Storm-conducive wind patterns and warmer-thannormal sea surface temperatures are in place in the Atlantic, reported NOAA’s Climate Prediction Center, a division of the National Weather Service. The updated outlook, which was issued by NOAA on August 9, “still indicates a 50% chance of a nearnormal season, but increases

the outlook projected 12 to 17 named storms, five to eight hurricanes and two to three major hurricanes.

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September 2012 Canadian Underwriter 11

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PROFILE

True Believer Angela Stelmakowich Editor

Stephen Halsall, the incoming president of the Insurance Brokers Association of Canada, has his sights on a familiar road ahead. Stephen Halsall has no intention of trying to reinvent the wheel. The incoming president of the Insurance Brokers Association of Canada (IBAC) knows full well that yearafter-year efforts so impressively accomplished by his predecessors and IBAC staff has set brokers on the road to the right destination. As always, a few bumps should be expected along the way. But that inevitability only makes everyone all the more determined to get things running smoothly. “Everyone who comes into these positions continue the good work that everyone has done before them. It’s not like a new sheriff in town,” Halsall says, laughing.

12 Canadian Underwriter September 2012

Halsall came by being a broker honestly; his father worked in insurance and even served as president of the broker association in New Brunswick. Halsall began his career at the family brokerage, and once hooked, worked hard to enhance his insurance education. Looking to spread his wings, he was quick to seize the opportunity when a position as a marketing representative opened up at General Accident. He remained at the company for six years, working his way from marketing representative to commercial underwriter and, finally, as marketing supervisor. His time there gave him a different perspective of the business. But despite the experience gained, his heart was with brokerages. So in 1996, Halsall made that want a reality with the purchase of Halsall Insurance Limited in Saint John. It would be almost two decades more before he would partner with five friends and colleagues to form GoToInsure, or GTI Brokerage Group Inc. The group — made up of Halsall, John

Stevens, Steven White, Denis Daigle, Marc Leger and Terry Gaudet — are all secondand third-generation brokers and past presidents of the Insurance Brokers Association of New Brunswick. All six share a goal: keep brokerages independent and available for the next generations of brokerage owners. That objective illustrates both the opportunities and challenges that brokers face today — and is expected

“Everyone who comes to these positions continue the good work that everyone has done before them.” to figure prominently in Halsall’s efforts over the coming year. While the issues to be tackled in the coming year fall along usual lines, familiarity makes them no less important.

COMMUNITY SPIRIT “Twenty-five years ago, every year you’d see four or five different new brokerages start

up in your trading area. Now you hardly see any,” Halsall comments. “I think that’s something we have to work on as an industry, to make sure we still have some new entrants.” So much for the new. What about the old? Brokers will inevitably retire and brokerages will be put up for sale, but should these always go to the highest bidder? Surely not, Halsall says. Since its launch, GTI has acquired three brokerages and expects more to follow. That said, two of the brokerages in question continue to be locally run. “We added new partners rather than just taking over and eliminating,” he says. When a brokerage is up for sale, “I hope brokers across the country will give their local competitors a chance to continue in their community,” Halsall says. “We’re true believers in the broker channel so that’s what we want to look at going forward.” That objective will be greatly aided by not only service, but efficiency. That is where technology can play

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PROFILE

an important role for both brokers and brokerages. “Technology is what drives our cost-effectiveness and we’ve got to take the new platforms and technologies and use them,” Halsall contends. And that means all brokerages — small, medium and large.

“We want to have brokers have the ability to do transactions right on the spot, right on the company’s portal,” he says. “All these things will make us more effective in dealing with direct writers and other competitors.” One thing Halsall would

like to emphasize over the course of his presidency is to promote the importance of succession planning. “Succession is key to the strength of our industry on the brokerage side,” he points out. “I want succession planning for brokerages because so many of the key players and the owners are at an age where they’re starting to think of retirement,” he says. Beyond succession, though, is renewal. The goal would be to give those on the independent side “an equal shake at the opportunity to try to transfer ownership. There’s always players out there with more cash, but I think the independent broker down the street needs to have just as much opportunity to make a financial arrangement with the current owner,” he says. “I would like to have more broker-to-broker sales in succession because I do get a little worried when I see the large consolidators, sometimes taking out of the channel and putting in the direct route,” Halsall says. “I know everybody says bigger is better, but with the diversity of Canada, I think there’s a lot

of room for small and mediumsized brokers in the number of communities we have across the country.” Although no one wants a competitor right across the street, he acknowledges, “we all realize that if there’s room for another competitor, I’d rather have a broker than a direct writer or some other form of channel.”

GIVING BACK It all comes down to giving back. Previous generations have donated their time, effort and resources to get IBAC to where it is today. “We’ve all done this to make the industry better, make it stronger and ensure the consumer is looked after,” says Halsall, a perennial participant in industry associations and an instructor of numerous insurance courses. But there is also getting to the giving. “The people you meet, the friendships you make, the things you learn, all strengthen your business,” Halsall says. It is time to give back to the industry that has provided him and his family with so many opportunities over the years. And believing in that is easy indeed.

September 2012 Canadian Underwriter 13

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J. Brian Reeve Partner Cassels Brock & Blackwell LLP

As the difficult economic conditions over the past few years have continued to expose weaknesses in many international financial institutions, it is clear that a co-ordinated international approach to regulation has never been more important. Co-ordinated and consistent international regulatory standards, such as Basel III for banks, will become an essential foundation of global commerce. For insurers, the movement to adopt Solvency II (or equivalency under those rules) has become the key international regulatory initiative.The new Solvency II regime, scheduled to come into force in January 2014, is aimed at better regulating insurers, particularly through new capital requirements.

14 Canadian Underwriter September 2012

Solvency II was adopted by the Council of the European Union and Parliament in November 2009. Since then, however, it has become an international movement. In an attempt to harmonize the global insurance market, Solvency II has established a mutual recognition/equivalency regime for countries outside of the European Economic Area (EEA). “Equivalency” allows subsidiaries or group entities within other countries to converge with EEA-based group supervisors under Solvency II. The main benefit is the ability to align capital requirements. Numerous countries outside the EEA — such as Bermuda, Switzerland and Japan — have either committed to adopting Solvency II or have expressed interest in forming a transitional regime. The National Association of Insurance Commissioners in the United States is also considering its position and participation in Solvency II, and equivalency has not been ruled out. A key issue for insurers operating in Canada is how the Office of the Superintendent of Financial Institutions (OSFI) will position Canada

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Will Canada Become an Island?

Northbridge CU September 2012.pdf 1 28/08/2012 3:45:00 PM

CMY

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within the international regulatory movement of Solvency II. OSFI has not yet formally announced any intention to adopt Solvency II or to seek equivalency. It appears that OSFI has decided to defer adopting Solvency II and, instead, is continuing to develop its own similar, but not identical, regulatory system. As such, Canada remains one of the few major jurisdictions that has not expressed a formal decision to adopt Solvency II or to seek equivalency under it.

WHAT IS SOLVENCY II? Solvency II creates a principles-based focus on policyholder protection through enhanced risk management, financial reporting and group supervision. Solvency II can be conceptualized as containing three pillars and a roof.

Pillar 1: Quantitative Requirements The first pillar of Solvency II sets out the main capital management criteria, including minimum capital requirements and a “prudent person” approach to investments. It is important to note that OSFI has also used a principles-based approach to regulation for a number of years and the regulator already requires some, although not all, of the reforms provided by Solvency II. For example, Solvency II and OSFI guidelines have similar two-tier capital requirements (target and minimum capital levels).

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A fundamental change under Solvency II is the option for companies to use internally developed market-based models to analyze their own solvency risk and to set their target capitalization. In contrast, the previous Solvency I framework focused primarily on standard scenarios — which is what OSFI now requires — to calculate required capital.

It remains unclear if OSFI will commit to the use of internal capital models. OSFI has a conservative approach to quantitative analysis and may be wary of risk factors used by insurers’ internal models. Although companies will still face minimum capital requirements, the move is intended to allow insurers to more efficiently use their capital. Insurers often criticize capital models imposed by regulators as being arbitrary and not always appropriate for the types of business that they write. It remains unclear if OSFI will commit to the use of internal capital models. OSFI has a conservative approach to quantitative analysis and may be wary of the risk factors used by insurers’

internal models.There may be concerns regarding whether or not the appropriate risks have been identified and included in a given model. A recent OSFI vision paper points out that the implementation of an internal capital model approach is scheduled to occur no earlier than 2015.

Pillar 2: Qualitative Requirements The second pillar addresses fundamental risk management issues through enhanced self-governance and harmonized group supervision.The core component for insurers will be developing their own risk and solvency assessments (ORSA), which are designed to identify various internal controls necessary to ensure solvency requirements are met. OSFI has already employed a similar requirement to internal risk analysis through stress testing and forward-looking analyses. Each year, all licensed insurers in Canada must have an appointed actuary prepare a dynamic capital adequacy test.This tests the effects of various adverse scenarios (e.g., changes in interest rates and multiple large losses) on an insurer’s capital levels. Pillar 3: Prudential Reporting and Transparency The third pillar requires better disclosure of capital management, risk and other governance elements. Enhanced

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transparency is expected to encourage market discipline and to allow better monitoring of compliance. Insurers will be required to provide both an annual disclosure document to the public and a private report to the group supervisor. The disclosure offers greater transparency on the financial condition of insurers by requiring public access to their financial statements and material undertakings. Although OSFI similarly requires certain levels of private disclosure, public disclosure is not currently required in Canada.That said, OSFI does provide access to some financial information regarding Canadian licensed insurers on its website.

Roof: Consolidated Group Supervision Group insurance supervision is a new and important concept. It addresses the concern that large insurance groups may operate in a number of jurisdictions, but jurisdictions are only able to regulate the local operations of global insurance companies (i.e., within their own country). Group supervision will allow one regulator to be appointed as the lead and to co-ordinate the activities of regulators in other jurisdictions. OSFI also appears to be interested in group supervision as a proactive measure to managing capital risk. During a speech last summer, OSFI superintendent Julie Dickson confirmed the office considers group supervision to be a very good idea since it allows insurance supervisors to have a full understanding of the risks in a financial group.

IMPLICATIONS FOR THE FUTURE Solvency II allows insurers to align their capital requirements by having the same set of capital requirements for all jurisdictions in which they operate. This harmonization will then allow for a more efficient use of capital. It is likely that European insurers with Canadian branches will impose either most or all Solvency II requirements on their Canadian subsidiaries. As a result, Solvency II will start to become more well-known in Canada, regardless of whether or not is it formally recognized by OSFI.

18 Canadian Underwriter September 2012

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OSFI’s approach to insurance regulation is principles-based and is clearly similar to Solvency II in a number of respects. Since OSFI has adopted the International Association of Insurance Supervisors’ (IAIS) core principles and methodology, the two frameworks agree on similar reporting standards, disclosure and some quantitative aspects, such as a similar approach to minimum and target capital requirements. OSFI has continued work on a parallel track to evolve the capital framework for Canadian licensed insurers.

The regulator needs to continue to evaluate if a similar but separate regulatory framework is required for Canadian licensed insurers and their policyholders. OSFI appears to be committed to being part of the international insurance regulatory community and is an active member in IAIS. In particular, OSFI is currently consulting with IAIS to develop the ComFrame initiative, or Common Framework for the Supervision of Internationally Active Insurance Groups. ComFrame was developed by IAIS to harmonize group-wide supervision. On August 2, 2012, OSFI announced it had signed the IAIS Multilateral Memorandum of Understanding (MMoU). The MMoU is an international supervi-

sory co-operation and informationsharing agreement that has been signed by 30 countries. It will now allow OSFI to request and share information about the insurers it regulates on a formal basis with insurance supervisors in other jurisdictions, an important development that will allow OSFI to obtain better information on the insurers it regulates. Since OSFI seems to be in favour of many aspects of Solvency II, the apparent decision not to seek equivalency at this time is interesting. One issue for OSFI may be a reluctance to relinquish full control over how insurers are regulated in Canada. Even if OSFI agreed with all current aspects of Solvency II, a danger still exists that it might disagree with future changes or amendments. Another issue is that OSFI’s current solvency and risk management regulatory framework may in fact be more evolved than Solvency II. As a result, it is possible that OSFI might view the adoption of Solvency II as a step backward in some respects. Despite OSFI’s reluctance to formally adopt Solvency II, it has taken a number of significant steps to update insurance regulation in Canada.The regulator needs to continue to evaluate if a similar but separate regulatory framework is the most optimal approach for Canadian licensed insurers and their policyholders. Making that choice may be a difficult one since the Canadian insurance regulatory framework may arguably be viewed as being superior to Solvency II. An approach where Canada remains an island with its own set of rules — even if the rules are seen as better — may provide better protection to Canadian policyholders in the short term, but may ultimately lead to a less competitive and more inefficient insurance market in which consumers have less choice and pay more for their insurance. In the long term, Canada may have no choice other than to adopt Solvency II to remain a competitive player in the international insurance community. The research and preparation of this article was greatly assisted by Jared Puterman, a summer law student at Cassels Brock & Blackwell LLP.

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Shaken and d Stirred

Canada has a large inventory of buildings designed and constructed before the enactment of building code provisions that have evolved with the increase in research Murat Saatcioglu and understanding. Professor, University Research Chair Department of Civil Engineering University of Ottawa

Research in earthquake engineering over the last four decades has helped drive the evolution of seismic provisions of the National Building Code of Canada (NBCC). In step with this evolution has been an increase in the understanding of Canadian seismicity over the years, resulting in improved seismic hazard values for which buildings are designed. However, buildings designed and constructed prior to the enactment of modern seismic code provisions may be deficient in resisting earthquakes.This is especially true for buildings constructed before the mid-1970s, which accounts for a large inventory of existing buildings across the country. These buildings may be at risk when subjected to strong earthquakes. This not only poses a threat to the safety and well-being of Canadians, it also carries potentials for significant seismic

20 Canadian Underwriter September 2012

damage, disruptions in services and considerable economic losses. The Geological Survey of Canada (GSC) reports that approximately twothirds of Canada’s population living in urban centres are exposed to three-quarters of its seismic risk (See Figure 1 on Page 22). Seismic risk associated with building construction can be computed by following a two- or possibly three-tier approach with increasing levels of sophistication in each tier.Tier I assessment forms rapid seismic screening, which helps to establish priorities for further assessment with more detailed and costly analysis techniques. By its very nature, however, seismic screening is not intended to be an accurate tool.What it does is help identify more vulnerable and more critical building infrastructure with higher seismic risk potentials for further assessment.

SEISMIC RISK Seismic risk associated with buildings can be computed as the product of building damageability and consequence of failure. As such, the consequence of failure reflects the importance and/or exposure of a building. A post-disaster building (for example, a hospital or a fire station) is expected to function during and after an earthquake and, as such, is classified as an “important” building with severe

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consequences of failure. Similarly, a densely populated movie theatre is likely to lead to higher fatalities than a scarcely populated farm building, revealing use and occupancy as a major risk parameter.

Figure 1

Relative contributions to seismic risk in Canada (Source: Geological Survey of Canada)

For global seismic risk assessment of a city or a geographic region, this factor reflects the exposure of infrastructure in the region to seismic actions, with large and densely populated cities having higher exposures. Building damageability can be assessed by integrating both site seismic hazard and building vulnerability, the former reflecting the seismicity of a region, including the effects of ground conditions.The GSC has developed seismic hazard maps for Canada, which indicate the intensity of earthquakes in different regions across the country.This information is incorporated in the NBCC for use in building designs. Seismic maps were developed in 1953, 1970, 1985 and 2005, all in line with the progression of enhanced knowledge and improved statistical analyses associated with the increase in strong motion data that has become available over the years.The 2005 seismic hazard map for Canada (Figure 2, upper right, forms the basis for the seismic provisions in the current 2010 NBCC.) Researchers often identify ground shaking associated with earthquakes as the dominant seismic hazard factor in prompting building damage. Other factors connected with earthquakeinduced ground movements, such as landslides and liquefaction (See Figure 22 Canadian Underwriter September 2012

Page 30

4 on Page 24), are classified as consequences of ground shaking, and are not considered part of site seismic hazard for the purpose of Tier I seismic screening. These effects can nonetheless have severe consequences on building performance and should be assessed separately. For example, there have been building collapses as a result of liquefaction and associated loss of support at building foundation. However, the site soil condition, through which seismic waves travel, is considered in hazard values. There is a substantial difference in the magnitude and frequency content of seismic waves that travel through soft soils and hard rock. Soft soils amplify the effects of seismic waves on structures, and may increase risk for buildings on such soils. This difference in site seismic hazard values is reflected in terms of soil types (classifications).These values can be expressed more conveniently in the form of seismic microzonation maps, based on different soil types and seismicity of the region. Microzonation, in turn, permits site-specific risk analysis. (Figure

Seismic damage can result from the use of unreinforced masonry construction coupled with a lack of sufficient seismic design and detailing practices in reinforced concrete buildings. 3, lower right, shows the microzonation of Ottawa with areas of different soil types identified on the basis of the 2010 NBCC soil classification.) Building vulnerability is computed by integrating deficiencies in the structural system. Deficiencies in buildings are primarily attributed to the use of brittle construction materials, lack of proper seismic design and detailing practices, selection of improper structural layout, poor quality of construction and irregularities in the structural system that tend to increase seismic force and deformation demands. Buildings utilizing brittle construc-

tion material â&#x20AC;&#x201D; such as unreinforced masonry or conventional reinforced concrete construction (without seismic design and detailing practices) â&#x20AC;&#x201D; do not have the ability to deform in the inelastic range of materials to dissipate seismic-induced energy. Ductility, defined as the ability to develop inelastic deformations without significant strength decay, and associated energy dissipation capacity combine to

Figure 2

2005 Seismic Hazard Map of Canada (Source: Geological Survey of Canada)

be one desirable feature of earthquakeresistant construction. Building codes promote ductile design principles for earthquake-resistant construction. Seismic damage can result from the use of unreinforced masonry construction coupled with a lack of sufficient seismic design and detailing practices in reinforced concrete buildings. Plan irregularity, often resulting from the eccentricity of the centre of building mass and the centre of rigidity â&#x20AC;&#x201D; as is the case for elevator shafts with concrete walls located near the end of a building,

Figure 3

Microzonation of Ottawa (Source: Hunter, J. A. et al. 2012)

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as opposed to located symmetrically â&#x20AC;&#x201D; produce torsional effects.This produces greater seismic force and deformation demands on critical vertical elements. Vertical irregularities in the form of either discontinuous walls or setbacks (See Figure 5 on Page 25) also augment seismic demands at locations of discontinuity, thereby increasing building vulnerability.That said, deformation control in buildings is an asset for minimizing damage to brittle structural and nonstructural elements, including exterior faĂ§ades, building cladding and glass windows, which helps to reduce building vulnerability. Buildings laterally braced by properly designed shear walls and other bracing elements often perform well during earthquakes, controlling potential seismic damage substantially. Factors that affect building vulnerability are many, necessitating that parameters considered in seismic screening be limited to those that are most important, based on previous experience and knowledge of structural performance.

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Figure 4

Building collapse due to liquefaction during the August 17, 1999 Earthquake in Turkey (Saatcioglu et al. 2001)

These parameters are often associated with design requirements outlined in building codes, which have progressively improved over the years. That means that the year of construction is an important indicator for vulnerability assessment.

SEISMIC SCREENING MANUAL A manual was developed in 1992 for seismic screening of buildings in Canada (NRCC 1992).The manual is meant to be

used as the first step in a multi-phase seismic assessment process to identify buildings requiring further such assessments, while also providing seismic priority indices to prioritize the assessments. Buildings deemed to be in need of further investigation must be analyzed using more refined techniques before decisions can be made regarding seismic vulnerabilities and needs for seismic risk mitigation strategies. The 1990 edition of NBCC, which is based on 1985 seismic hazard values, serves as the reference building code in the screening manual.The latest edition of the code, NBCC 2010, not only employs the fourth generation seismic hazard values, it recently was revised to also incorporate new ductility and overstrength-related force modification factors. These changes necessitated modifying the screening manual, which resulted in computer software Screen, detailed in Seismic screening of buildings in Canada based on the Canadian seismicity as per NBCC-2010 (Saatcioglu, M., Shooshtari, M. and Foo, S. 2012).

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The method used for seismic screening is based on computing the product of relevant seismic risk factors as indicated below: • SPI = SI + NSI — Seismic priority index (SPI) consists of structural index (SI) and non-structural index (NSI); • SI = A * B * C * D * E — Structural index consists of seismicity factor, soil condition factor, structure type factor, building irregularity factor and building importance factor; • NSI = B * E * F — Non-structural index (NSI) consists of soil condition factor, building importance factor and non-structural hazard factor. SPI scores of less than 10 may indicate low priority; 10 to 20 may indicate medium priority; and those 20 or higher may indicate high priority for further assessment. Buildings with SPI scores of 30-plus can be considered potentially hazardous. Note: This article references material from the National Research Council of Canada, including the Manual for Seismic Screening of Buildings for Seismic Investigation;

Page 32

Figure 5 Loss of a storey due to vertical irregularities during the February 27, 2010 Earthquake in Chile (Saatcioglu et al. 2012)

(a) Rear view showing setbacks

(b) Front view showing damage

the Ottawa-Gatineau seismic site classification map from combined geological/geophysical data from the Geological Survey of Canada; and a number of research papers (Saatcioglu et al), including Seismic

screening of buildings in Canada based on the Canadian seismicity as per NBCC-2010 and Performance of masonry and steel buildings during the February 27, 2010 Maule (Chile) Earthquake.

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Requested and Denied

Partner Hughes Amys LLP

In General Electric Canada Co. v. Aviva Canada, Inc., the Appeal Court determined the MOE letter request for information relating to contamination at a former company property was not a “claim” for defence cost purposes. Upholding the application judge, Justice Michael A. Penny of Ontario’s Superior Court of Justice, the court states in its

26 Canadian Underwriter September 2012

SUMMARY OF FACTS General Electric (G.E.) was seeking a defence for an environmental loss: the historic release of a chemical used as a degreasing solvent from a former G.E. industrial property in Toronto, in respect of which both the MOE and the TTC sought remediation and damages, respectively. Justice Penny concluded the expenses incurred by G.E. to respond to the MOE letter were not “costs of defending against the MOE’s claim but, in fact, the costs of complying with the MOE’s

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An Ontario Court of Appeal ruling that a letter from the Ministry of the Environment (MOE) requiring information about a contaminated site did not constitute a claim for which defence costs were recoverable is noteworthy for its extension of the pleadings rule.

August 2, 2012 ruling that the letter related to “compliance costs” and not “defence costs.” In so doing, the court found the “pleadings rule” used to determine whether or not a defence obligation exists can also be applied to a “demand” letter. Beyond the issue of whether or not the MOE letter was a “claim,” Justice Penny also addressed in his 2011 ruling an action by the Toronto Transit Commission (TTC) that had been instituted and in which a defence was owed, and allocated defence costs equally. Interestingly, that part of his decision was not in issue on the appeal.

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claim.” As such, no coverage was available for the more than $4.5 million incurred as “indemnification expenses.” The judge considered two comprehensive general liability policies issued by the predecessor companies of Aviva and Dominion of Canada General Insurance Co. (now The Dominion). The MOE letter to G.E., dated April 16, 2004, was primarily in issue. It requested further information concerning the potential trichloroethylene (TCE) contamination and required G.E. to take certain action. Specifically, the company was to delineate the source area of the TCE plume on its former property, as well as determine the current levels and full vertical and horizontal extent of all contamination within the soil and ground water. The letter noted the MOE was willing to enter into an agreement with G.E. to pursue the required action items voluntarily, but reserved the right to issue a director’s order to resolve matters in the event of unsatisfactory progress. G.E. responded to the MOE request by agreeing to co-operate. The company incurred $2.1 million for investigation costs, $1.86 million for remediation costs, and $750,000 for legal costs, and sought to recover these from its insurers. Justice Penny concluded the application on this point raised two questions: 1. whether it is “possible” that the MOE letter amounted to a “claim” that fell within the policies and, thereby, triggered the insurer’s duty to defend; and 2. whether G.E. was seeking a defence to the MOE’s “claim” or, rather, an indemnity for the cost of compliance with the MOE request. The judge also observed that in terms of the April 2004 letter, the coverage questions were whether: 1. with respect to the Aviva policy, the letter constituted a “claim” for “damages because of damage to or destruction of property” or a “suit” against G.E. alleging damages on account of damage to or destruction of property; and 2. with respect to the Dominion policy, the letter constituted a “notice” of “damage to property of others” or a

28 Canadian Underwriter September 2012

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“suit” against G.E. for damages alleging damage to property of others. Either would engage the duty to investigate and the duty to defend under the respective policies. In concluding that there was no duty to defend, Justice Penny stated the duty to investigate and defend is only triggered in the context of the policies by a “claim” arising from an alleged liability for damage. Under the pleadings rule (to determine whether or not a defence

The judge made no findings about whether or not matters alleged and requested in the letter “fall within the coverage language” of the two insurance policies from an indemnity perspective. duty is owed), one looks at the “claim” to establish if it falls within the scope of the coverage afforded by the policy, he noted. Justice Penny held that there is a “distinction in the policies between the obligation to investigate/defend and the obligation to indemnify.” In his view, there is “also a distinction between the cost of an investigation/defence of a claim and the cost of compliance with a claim.” G.E. argued the steps it took were “in the nature of ” defence costs in that the company sought to delineate and reduce any liability. Justice Penny found the argument to be flawed in that the

only “claim” by the MOE entered into evidence on the application did not allege liability for clean-up costs to ameliorate damage to the property of others, but simply noted an obligation to conduct a delineation exercise with respect to TCE contamination. The company complied with the MOE’s request and performed the work on the basis that it was thought to be in its best interests to do so, the judge added. Justice Penny rejected G.E.’s request for a declaration that Aviva and Dominion have a duty to investigate and to defend the ministry’s request “solely on the fact that there was no investigation or defence of the MOE’s claim at all,” and that what G.E. is seeking is rather “indemnification for its costs of complying with the MOE’s claim.”That said, he made no finding about whether or not matters alleged and requested in the letter “fall within the coverage language of the Aviva and Dominion policies from an indemnity perspective.” The time to determine the insurer’s duty to indemnify is at the conclusion of the underlying litigation, not during the abbreviated application for defence costs, Justice Penny wrote. His conclusion was, therefore, without prejudice to the parties’ positions.

ON APPEAL To dispose of the appeal, the court found it had to deal with whether or not Justice Penny “erred in limiting his analysis of the MOE’s assertion of liability to the literal text of the April letter and in failing to consider the underlying statutory context and the broader liabilities it imposed on a PRP (potentially responsible party) like G.E. Canada.” G.E. argued the application judge’s focus on the language of the April letter led him to ignore a substantial potential liability for property damage imposed by the Environmental Protection Act (EPA), thereby failing to appreciate that the letter involved the possibility of broader off-site liabilities. The company submitted the letter should be read as an allegation that G.E.’s operations at its former site were

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The Supreme Court indicated the authorities established that “as a general rule, for a ‘claim’ to be made, there must be some form of communication of a demand for compensation or other form of reparation by a third party upon the insured.” responsible for a TCE plume that was the source of downstream contamination at a property owned by the TTC. It also noted Justice Penny failed to consider the underlying statutory scheme and the range of liabilities for property damage that would flow from G.E. being a responsible party under the EPA. The Appeal Court considered the scope of the “pleadings rule” articulated by the Supreme Court of Canada in a number of cases. “Although in most cases the ‘pleadings rule’ applies to a statement of claim or similar pleading, it can apply to a letter that asserts liability for damages against an insured,” the ruling notes. The court also referenced the Supreme Court’s consideration of what the necessary requirements are to establish a “claim” that would give rise to a duty to defend. Referencing the 2006 decision Jesuit Fathers of Upper Canada v.The Guardian Insurance Company of Canada, the court notes the Supreme Court indicated the authorities established that “as a general rule, for a ‘claim’ to be made, there must be some form of communication of a demand for compensation or other form of reparation by a third party upon the insured, or at least communication by the third party to the insured of a clear intention to hold the insured responsible for the damages in question.” On behalf of a three-member panel, Justice Robert P. Armstrong states that G.E. did not oppose, defend or investigate the request that it take action in delineating the source of the TCE contamination. “G.E., as it was invited to do in the letter, voluntarily complied with the request of the MOE. It cannot

30 Canadian Underwriter September 2012

be said that it suffered any defence or investigation costs recoverable under its insurance policies,” he notes. “The fact that G.E. provided a list of costs, which it has characterized as potential defence costs, does not, in my view, change the analysis of whether the April letter triggers a duty to defend,” he adds. “I see no merit in the argument that the application judge erred in failing to consider the underlying statutory scheme of the EPA and the range of liabilities for property damage that might

be imposed on G.E.To do so would have been to invite speculation: it would not have served any useful purpose.” The Appeal Court also agreed with the application judge that G.E.’s reliance on the Ontario Superior Court judgment in Bridgewood Building Corp. v. Lombard General Insurance Co. was not helpful to the analysis in this case. In that decision, the court found that payment of claims under Ontario New Home Warranty Plan legislation was covered and stated in obiter that the legislation was “akin to environmental protection legislation which requires pollution clean-up and

costs thereof to be carried and absorbed by persons regardless of proof or negligence or fault.”

OF NOTE At first blush, one would think that in light of the obiter comments in Bridgewood, there might be some basis for G.E.’s argument that the April letter clearly implied more than it said. The court here, in agreeing with the application judge, took a very literal approach to the content of the letter in finding it did not constitute a claim that attracted a defence. “Notwithstanding the usual approach of giving the ‘widest latitude’ to the allegations made, it appears the Appeal Court was of the view that the letter was not sufficiently ‘threatening’ in terms of being some form of a demand for compensation or other reparation, or at least communication of a clear intention to hold the insured responsible for the damages in question. Without specifically saying so, it appears the court did not view the threat of a director’s order as meeting this requirement.” The court viewed these costs as “compliance costs, and not defence costs.” Ultimately, however, the question of whether or not the expenses incurred may constitute indemnity payments for which coverage is available remains to be determined. In the final analysis, this decision turned on the court’s strict reading of the MOE letter, which the court held can be treated as comparable to a pleading for the purpose of determining whether or not defence and investigation expense obligations flow.

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travelerscanada.ca St. Paul Fire and Marine Insurance Company and Travelers Insurance Company of Canada are the Canadian licensed insurers known as Travelers Canada. © 2012 The Travelers Indemnity Company. All rights reserved. Travelers and the Travelers Umbrella logo are registered trademarks of The Travelers Indemnity Company in the U.S. and other countries.

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The urge of

& ergers M Acquisitions Some in the Canadian insurance industry are looking to increase market share and appear willing to try to grow volume through mergers and acquisitions (M&A). Julian Brown

Partner PwC’s Deals practice

Vanessa Iarocci Director PwC’s Deals practice

Mergers in the Canadian insurance industry have been trending upwards since 2009 as companies try to increase market share and gain economies of scale in this mature market. There are indications that 2012 merger activity will be as strong or even stronger than 2011. The route to profitable growth is volume and if total volume is flat, then the only way to grow volume is through acquisitions. According to Standard & Poor’s Capital IQ, 29 insurance deals were announced in 2011 compared to 21 in 2010 and just 12 in 2009. The large majority of the deal activity in 2011 was driven by the brokerage and managing general agents (MGAs) sector, which accounted for 23 acquisitions in 2011 compared to 11 in 2010. The announced deal value surged to more than $3 billion from $1.3 billion in 2010 and $329 million in 2009. This spark of activity was ignited by the acquisition of Western Financial Group by Desjardins Group in December 2010. Desjardins then went on to announce six more acquisitions last year. Another serial acquirer, Hub International, made

32 Canadian Underwriter September 2012

three brokerage acquisitions of its own in 2011. However, the big story of the year was AXA’s exit from the Canadian marketplace. Beginning with the sale of multi-line operations to Intact Financial this past May for $2.7 billion and continuing with the sale of its life insurance operations to SSQ Financial Group in September, AXA’s departure drove almost all of the $3 billion announced deal value for Canadian insurance M&A in 2011. This was similar to 2010, where just a few transactions drove most of the $1.3 billion announced deal value. The pricing surrounding AXA’s departure indicates the pent-up demand for quality insurance targets in Canada. Strong balance sheets, surplus capacity and an appetite to build scale is increasing demand for premium volume from domestic insurers. However, there is still a lack of willing sellers among carriers. Indeed, last year saw carriers looking for deals along the value chain, driving activity in the brokerage sector as they looked to capture premium volume from the companies they acquired.This was seen again in 2012 with Intact’s $530-million deal to buy Jevco Insurance Company from The Westaim Corporation. Transactions in the insurance brokerage and MGA space will continually be made as smart entrepreneurs and aging owner-managers exit while the seller’s market continues.

VALUATIONS Demand for quality assets has increased both competition and pricing.While valuation metrics vary between different sub-sectors, valuation

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multiples have been trending higher across the board over the last five years. Pricing is partially a function of the nature of the acquirer and its ability to drive value from the deal. For example, a carrier can generally attain greater synergies from the acquisition of an MGA than another broker or MGA could. As a result, the carrier is usually able to offer a higher valuation because of these stronger synergies. Demand for premium volume and scale from both brokers and carriers has pushed valuation multiples for insurance brokers to an all-time high. Many brokers have been priced out of broker-to-broker acquisitions because of competition from large domestic carriers.The average transaction multiples for insurance carriers is 1.5 to 2 times book value, 2 to 3 times revenue for MGAs, and 3 to 4 times revenue for insurance brokers. Other company-specific, controllable factors will also affect the saleability and valuation of a company in a transaction, including the quality of historical earnings, strong underwriting results, consistently low loss ratios, critical mass, a strong niche and proprietary technology or analytics. If performed early enough, vendor due diligence, where the prospective seller hires a third party to perform a business review as a buyer would, will help the seller identify and mitigate factors that could decrease the value during a sale and/or emphasize those factors that will drive stronger pricing and demand for their company.

BUY CANADIAN Interestingly, five of the top six announced Canadian insurance deals by value in the past two years were to domestic buyers. The only exception was the sale of Sun Life’s reinsurance operations to Berkshire Hathaway. (While RSA Canada’s parent company is based in the United Kingdom, given that RSA Canada is a major player here, we considered this as a Canadian consolidation play.) The relative strength of the balance sheets of Canadian financial services companies, the strong Canadian dollar and the fact that the key driver is local

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market consolidation appear to have kept foreign buyers from going after many of the big deals.

ISSUES AFFECTING M&A We expect a number of issues will impact deal activity in the industry in 2012, including the following: • Solvency II — Solvency II may increase the amount of capital European insurance and reinsurance are required to hold, making it more challenging for them to compete in Canada. Interest in the Canadian market by European investors appears to be on the decline partially as a result of the uncertainty around whether or not Solvency II will have an effect on the capital they will

The pricing surrounding AXA’s departure indicates the pent-up demand for quality insurance targets in Canada. Strong balance sheets, surplus capacity and an appetite to build scale is increasing demand for premium volume from domestic insurers. be required to hold at their foreign subsidiaries, an issue compounded by the current strength of the Canadian dollar versus the euro. • Low yields — The low-interest rate environment is likely to continue through this year and probably next year. Low yields will likely impact the pricing considerations for many insurers that rely on investment results to drive returns. Insurers will be evaluating their pricing and growth strategies, which may lead some companies to sell lower-margin or capital-intensive businesses. • Catastrophe-related losses and pricing — Excess capacity and low catastrophe-related losses have softened property and casualty rates over the last few years. A change in rates might not take place until adverse development on reserves from catastrophic events in 2011 are realized, which is likely to occur over the next quarter and into 2013.

• P&C demutualization — Economical Insurance’s proposed demutualization could lead to opportunities for private equity players to deploy capital. While there have been many life insurance demutualizations in Canada over the past 20 years, there is currently no legislative framework here for the demutualization of a property and casualty firm. Economical is working with the Office of the Superintendent of Financial Institutions to build that process. Once the framework is finalized, other companies might demutualize and there could be increased demand for capital and additional consolidation in the property and casualty market. • U.S. insurers — Many of the U.S. and foreign insurance companies have recapitalized over the last several years and begun to return excess capital to shareholders. Insurers will evaluate whether or not they should continue with that strategy or deploy excess capital in another way, such as expanding their core business through M&A. • Regulatory and legislation uncertainty — U.S. buyers are reluctant to make deals because of changes in federal regulations. The impact of health care reform is far from over and the oversight of the Federal Insurance Office is expected to have further implications on life insurance operations and costs in the U.S.

OUTLOOK We expect M&A deal volume in the Canadian insurance sector to continue to strengthen this year. Generally, there appear to be more buyers looking to add scale and enter new markets than there are willing sellers. With investment yields likely to stay low and premium rates stagnating and continuing to put pressure on margins, this phenomenon will probably continue for the rest of the year. Outside of potentially market-changing events, such as the demutualization of property and casualty carriers, activity will likely continue to be driven by the brokerage and MGA sectors. The key is finding sellers seeking to exit at historically high multiples, which should not be too onerous a task.

Crop Dust

The harshest drought in the United States since the mid-1950s is taking a huge toll on farmers and the agricultural industry, but also on insurers and reinsurers. This year will likely mark the first time in a decade that crop insurers have posted an underwriting loss. Canada, which has experienced drought-like conditions in parts of the country, will share some of this pain. BY CRAIG HARRIS

36 Canadian Underwriter September 2012

it with what the U.S. National Climatic Data Center has called the most severe drought to descend on the American Midwest since 1956, insurers and reinsurers are preparing for worst-case scenarios and setting aside significant reserves. While the extremely dry conditions have drastically cut production in key crops, especially corn and soybean, agricultural groups are hedging their bets until the harvest is complete in the fall. When the dust settles, (re)insurers are expected to face their first crop insurance underwriting loss since 2002. Munich Re was the first major crop insurer to publicly set aside $200 million in reserves in August. For the German-based reinsurer, one of the world’s leaders in the agriculture market, about 70% of its premium income in agricultural insurance is derived from the United States. “Based on current estimates, Munich Re anticipates a net burden of approximately €160 million ($200 million) [before tax] from losses under crop failure covers, as a consequence of the persistent drought in large agricultural areas in the USA,” the company notes.

September 2012 Canadian Underwriter 37

COVER STORY

Crop Dust

“We do think it will be severe and probably one of the severest losses for this market ever,” Munich Re chairman Nikolaus von Bomhard told CNBC. “It’s too early to tell what the exact claim will be because we have to wait until the harvest is done.” Other crop insurance companies have followed suit, with projections as to how hard the 2012 drought will hit their bottom lines. In a second-quarter earnings conference call with analysts, ACE chairman and CEO Evan Greenberg said the company is adjusting its yearto-date crop loss ratio in the third quarter up by five points, equal to roughly $68 million in after-tax earnings. The company’s worst-case loss scenario would be an additional $200 million after taxes, Greenberg reported. “The U.S. drought is indeed a ‘catastrophic’ event,” Gregory Locraft, insurance analyst at Morgan Stanley, writes in a recent note to clients. It is “likely the largest [insurance] crop loss in history.” The top U.S. crop insurers include ACE USA, QBE North America, Rural Community (Wells Fargo), American Financial, Fireman’s Fund (Allianz), Endurance, XL Reinsurance America and Munich Re America. Wells Fargo’s Rural Community Insurance Co. was the largest approved provider of crop insurance in 2011 with $1.79 billion in policy sales, notes National Association of Insurance Commissioners data compiled by Standard & Poor’s (S&P). Zurich-based ACE was second largest, with $1.67 billion in sales, followed by QBE Insurance Group Ltd.

STUNTED HARVEST The largest 12 crop insurers had total direct premium written in 2011 of $12.4 billion, of which $5.8 billion is in the top 12 drought states, notes the S&P report released in August, Drought Will Hurt U.S. Crop Insurers, But Won’t Dry Them Up Completely. The states most affected by the drought include Arkansas, Georgia, Illinois, Indiana, Iowa, Kansas, Mississippi, Nebraska, Oklahoma, South Dakota, Tennessee and Wyoming. “Farmers in the most affected states 38 Canadian Underwriter September 2012

are expecting one of their worst harvests since the drought in 1988,” the report states. “As a result, crop insurance books of business will see some of the worst underwriting results since 1988. Primary insurance companies will share crop losses with the federal government and private reinsurance companies, making the underwriting losses easier to take,” S&P adds.

While the extremely dry conditions have drastically cut production in key crops, agricultural groups are hedging their bets until the harvest is complete in the fall. When the dust settles, (re)insurers are expected to face their first crop insurance underwriting loss since 2002. “Underwriting losses will be a drag on earnings, but by themselves, will likely not affect the capital of most insurers that we rate,” says S&P credit analyst Jason Porter. “Consequently, we do not expect to take any rating actions solely because of crop insurance losses at this time.”

Estimates of total insured losses from the U.S. drought vary from $4 billion (University of Illinois agricultural economists) to more than $5 billion (S&P).

ROCKIES TO VALLEYS The facts of the 2012 drought are staggering. Drought covered more than 60% of the contiguous 48 states as of mid-August 2012, reports the U.S. National Weather Service’s Climate Prediction Center. Almost a quarter of the country was experiencing extreme to exceptional drought, primarily in a large swath generally extending from the central Rockies eastward through the Mississippi and Ohio River valleys. The U.S. Department of Agriculture (USDA) reports that 51% of the corn crop was in poor or very poor condition across the 18 primary corn-producing states, as were 38% of soybeans (18 states). For the contiguous 48 states as a whole, 59% of pastures and rangelands were in poor or very poor condition. The USDA has declared natural disasters in more than 1,800 counties in 35 states, more than half of the country’s total, mostly because of dry conditions. The department twice has slashed its forecast for this year’s corn and soybean output because of the drought and now expects the nation to produce 10.8 billion bushels, the lowest amount since 2006. Corn and soybean production, which together account for more than half of total annual U.S. agricultural production, are the top exports for farmers south of the border. The United States accounts for almost 40% of world corn production and 35% of world soybean production. The USDA predicted in late July that the drought is expected to result in price increases of 4% to 5% for corn and beef and poultry this year. In Canada, the growing season for farmers has been much more variable. Statistics Canada reports that while Ontario experienced its driest summer in 47 years, the Prairies are anticipating record canola production in 2012, as well as increases in wheat and barley.

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COVER STORY

Crop Dust

In its latest crop estimate issued in late August, the agency says that Prairie farmers anticipate a record 15.2 million metric tonnes of canola — surpassing the record of 14 million tonnes set in 2011. Total wheat production on the Prairies is expected to reach 24.8 million tonnes in 2012, up 9.7% from 22.6 million tonnes in 2011, while barley production is anticipated to rise 23.8% to nine million tonnes. Ontario and Quebec represent a different story. For most regions of these provinces, record low rainfalls have had a negative impact on crop production and livestock feed. In particular, the two crops most adversely affected by this summer’s lack of rain have been corn and hay. Other crops hit with the variable moisture have been soybeans, canola and grain. Ontario’s apple growers are also reporting an estimated 30% drop in harvest. Pastures, too — critical to grazing livestock — have all but dried up in several regions, putting livestock farmers in critical need of water and food for their animals, notes the Ontario Federation of Agriculture. There have been just over 7,500 damage reports in the province as of August 23, says Gail Simkus, manager of product management and industry relations for Agricorp, Ontario’s Crown corporation responsible for agricultural insurance. “We expect more damage reports to roll in. In 2011, we paid $82 million in claims and, at this point, we are looking at more than that this year. However, we won’t know final claims numbers until the harvest,” Simkus says. Roughly 15,000 farmers covering 5 million acres purchase production insurance from Agricorp, although there are other types of insurance programs offered by the corporation. For production insurance, farmers typically pay 40% of the total premium cost, while the federal and provincial governments contribute the other 60%. The arrangement is similar in every province in Canada, with agricultural insurance delivered provincially by a Crown corporation or branch of the provincial agricultural department in conjunction with Agriculture and Agri-Food Canada. 40 Canadian Underwriter September 2012

REINSURANCE BACKSTOP There is no private property and casualty insurer involvement in agricultural insurance in Canada, except through reinsurance contracts. Agricorp deals with approximately 30 multinational reinsurers with expertise in the agricultural sector, Simkus reports, and generally purchases excess of loss reinsurance with a contingent layer. “With sound rates, prudent fund management, and backstopped by reinsur-

Of the 10 costliest disasters to hit Canada, six of these were droughts. The drought of 2001-2002, for example, drained more than $5.8 billion in gross domestic product from the Canadian economy. ance, we are confident that we will be able to address this season’s potentially higher claims than in recent years.” Unlike Canada, the U.S. system of agricultural insurance is a public-private partnership. Under the Federal Crop Insurance Program, 15 private insurance companies are authorized by the Risk Management Agency in Washington to write multiple peril crop insurance, notes information from National Crop Insurance Services. This crop insurance is sold though private

insurance companies, but a portion of the premium and the expenses of the private companies is subsidized by the federal government. Private insurers sell and administer the coverage; in return, the federal government backstops the firms with payments and reinsurance. More than 80% of cultivated farmland in the U.S. is covered by the federal multi-peril crop insurance program (MCIP). The USDA’s Risk Management Agency reports that crop insurers have paid $948.6 million in claims this year through August 13, although it adds that it is still too early to estimate what industry losses will be for the season. In a report released in mid-August, Moody’s Investor Services states consolidation has taken place in the crop insurance market since the 1990s. The top five crop insurers — all national underwriters — now account for approximately two-thirds of direct premiums written. “Over time, the government has reduced expense reimbursements to [Multiple Peril Crop Insurance] crop insurers, which in turn has contributed to consolidation, offering competitive advantages to larger, diversified insurers,” Moody’s notes in the report. The rating agency also cautions that smaller insurers focused on agriculture or with businesses concentrated in loss-affected areas “appear considerably more vulnerable on a direct basis than their more diversified industry peers.”

LOSSES PROJECTED A report by Milliman released in late July estimates that crop insurer underwriting losses for 12 major corn- and soybean-producing states could top $2.8 billion. The report, authored by Carl Ashenbrenner, covers the states of Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin. The report arrives at its loss estimate by projecting premiums collected in the 12 states along with the federal MCIP loss ratio for 2012. It projects a 147 loss ratio in 2012 for the states,

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COVER STORY

Crop Dust

while acknowledging “a considerable amount of uncertainty to these projected underwriting losses.” However, Ashenbrenner adds, “forecasts by the National Weather Service’s Climate Prediction Team are not showing improving drought conditions through September 30, 2012, which could further lower crop yield and increase crop insurance indemnities.” Another study by agricultural economists at the University of Illinois estimates the drought will trigger gross indemnities of roughly $30 billion this year, with an underwriting loss of about $18 billion. Of that, the U.S. government is expected to assume approximately $14 billion, while private sector insurers are likely to face a loss of $4 billion, the university states. In late August, catastrophe modelling firm AIR Worldwide put projected losses resulting from farmers claims related to the crop insurance industry at $13 billion, with an upward potential of $20 billion. “AIR’s current estimate for this year’s crop insurance losses point to a gross loss ratio for the whole industry of 120% to 180%,” says Gerhard Zuba, senior principal scientist at AIR Worldwide. “After government recoveries, which are available through the standard reinsurance agreement between crop insurers and the government, the total responsibility for the insurance companies and their private reinsurers, net after accounting for premiums collected, will be about $1 billion to $3 billion.”

INCIDENCE CONSEQUENCE While the short-term effects of the 2012 drought will lead to substantial (re)insurance losses and push up food prices, the longer-term trends of drier conditions linked to climate change pose several potential risks for insurers, government and society. In a “Climate Challenge List” released by Lloyd’s in mid-June prior to the Rio + 20 conference, it states “the incidence, onset and severity of drought is increasing across Europe, the southwest U.S. and West Africa, with mounting 42 Canadian Underwriter September 2012

economic and human costs. A 2011 European Commission study estimates droughts in Europe had cost their economies $100 billion over the last 30 years.” In Canada, of the 10 costliest disasters to have hit the country, six of these were droughts, notes information from the Blue Economy Initiative. The drought of 2001-2002, for example, drained more

down or “knock-on” effects of drought. Drought may have an impact on other climate-related risks, such as wildfires, dust storms and land subsidence. Although farmers may be covered by insurance, it is important to note other losses and damages (both insurable and non-insurable) related to droughts may be far-reaching. Drought can be a contributor to extreme wildfire events. Munich Re reports that drought conditions in Texas in 2011 caused $1 billion in insured losses. The persistent drought resulted in the worst wildfire year on record in the state.

WAVE OF HEAT

Europe is currently witnessing a dramatic increase in property damage as a result of soil subsidence. Climate change could magnify those risks, as prolonged dry spells can cause the ground to sink by so much that cracks appear in the earth, tearing apart the foundations of houses, bridges, factories and other structures. than $5.8 billion in gross domestic product from the Canadian economy, the initiative reports. Aside from crop insurance, drought may be thought of as uninsured risk as it is unlikely that the dry conditions will spur a wave of personal/commercial property or business interruption claims. However, there can be trickle

Droughts and heat waves accounted for two of the deadliest natural disasters in the world since 1980, including a 2010 heat wave in Russia that caused 56,000 deaths and almost $2 billion in economic losses, states a 2011 report by Munich Re. A 2003 heat wave and drought in Europe resulted in 70,000 fatalities and $13.8 billion in overall losses. The major parts of the direct economic losses of heat waves are secondary effects such as drought, subsidence and wildfires, Munich Re notes. Extreme dry conditions can also lead to more powerful dust storms, particularly in the southern U.S. “Drought can exacerbate dust storms, with the southwest U.S. experiencing an ever-increasing number,” according to Lloyd’s. “Last July 2011, a dust storm in Phoenix closed the airport and cut off power for 10,000 people.” While these storms are a regular phenomenon in Arizona, New Mexico and Texas each summer, Thomas E. Gill, an associate professor of geological sciences and environmental science and engineering at the University of Texas at El Paso, told Lloyd’s that “there have been more-than-typical (and dramatic) amounts of dust with these storms, however, due to the extreme drought which the region has been experiencing. That’s caused the desert soil to be extremely dry and didn’t allow for

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COVER STORY

Crop Dust

Droughts of this year’s length and severity will be commonplace through the end of the century unless human-induced carbon emissions are significantly reduced. Assuming business as usual, each of the next 80 years in the U.S. West is expected to see less rainfall than the average of the five years of the drought that hit the region from 2000-2004.

enough vegetation to grow to hold down the soil from the wind.” Another risk of drought is land subsidence. The Claims Journal reports that the U.S. drought is already affecting buildings and homes in Iowa and Missouri, causing cracks in foundations. The Des Moines Register, for its part, has noted that the drought caused the ground surrounding homes to pull away from their foundations, leading to widening cracks in walls, sticking windows and doors and nails to pop. The Claims Journal adds that the average repair cost is $3,000 to 5,000 and can exceed $30,000 — typically not covered by homeowners insurance. A 2011 study by Swiss Re explains that Europe is witnessing a dramatic increase in property damage as a result of soil subsidence. Climate change could magnify those risks, as prolonged dry spells can cause the ground to sink by so much that cracks appear in the earth, tearing apart the foundations of houses, bridges, factories and other structures, states the report, The hidden risks of climate change: An increase in property damage from drought and soil subsidence in Europe. A new loss model developed by Swiss Re and the Swiss Federal Institute of Technology (ETH Zurich) suggests that soil subsidence will worsen and spread in Europe, with some areas seeing a 44 Canadian Underwriter September 2012

more than 50% increase in future losses. In France alone, subsidence-related losses have risen by more than 50% in the last two decades, costing affected regions an average of €340 million ($422 million) per year. “As our climate continues to change, the risk of property damage from soil subsidence is not only increasing, but also spreading to new regions in Europe,” comments Matt Weber, head of property and specialty underwriting for Swiss Re. European property insurers face major potential losses from drought-induced soil subsidence, Weber suggests.

COMMON AS DIRT Many climate experts say the risks of drought and its associated side effects are expected to increase in the long term because of climate change. “Future precipitation trends, based on climate model projections for the coming fifth assessment from the Intergovernmental Panel on Climate Change, indicate that droughts of this (2012) length and severity will be commonplace through the end of the century unless human-induced carbon emissions are significantly reduced,” note Christopher Schwalm, Christopher Williams and Kevin Schaeffer in a recent article published in the New York

Times Sunday Review, Hundred-Year Forecast: Drought. “Indeed, assuming business as usual, each of the next 80 years in the American West is expected to see less rainfall than the average of the five years of the drought that hit the region from 2000-2004.” In the near term, insurers and reinsurers will have their answers in the next few months as harvest figures become available in the late fall. Many are bracing for a significant loss and anticipating the exposure. However, some are optimistic that not only will (re)insurers weather the dry spell, but the 2012 drought may create greater interest in agricultural insurance across the globe. Industry estimates indicate that only about 20% to 25% of the world’s agricultural production has so far been insured against natural disasters. But some expect that the drought in the United States could stimulate insurance development in major agricultural countries in South America and countries such as Russia and Ukraine. Karl Murr, director of the agricultural insurance division of Munich Re, sees business opportunities out of the huge loss. “The (market) potential is still large,” Murr told Xinhua news agency. “The drought shows we need such an insurance system.”

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Angela Stelmakowich Editor

Today’s preoccupation with what’s new and newer, fuelled by a seemingly endless supply of technological gadgetry, has brought about an unfortunate byproduct: distraction. That this may occur while at the wheel is cause for concern. Captivate Network, a digital media company south of the border, recently released its Office Pulse report on white-collar office worker behaviour. The poll of 619 workers in 14 metropolitan centres in the United States and Canada identified differing opinions — broken down along the familiar lines of age, gender and professional status — regarding what constituted acceptable and distracting workplace attire. No surprise that cleavage, bare legs and tattoos received a chilly reception from some. The consequences of a tattoo sighting at the office, however, pale in comparison to the poten-

46 Canadian Underwriter September 2012

tial outcome should that distraction take place while driving. It is a caution being voiced by groups ranging from insurers to safety advocates, researchers and legislators.The first concern is safety; without that follows the collisions, the accident benefits, other costs and the effect on premiums. The weak link may be drivers, many of whom agree that distraction carries risks, but often fail to alter potentially harmful behaviour. “Available research generally estimates that driver distraction is a factor in 20% to 30% of road crashes,” Robyn Robertson, president and CEO of the Traffic Injury Research Foundation, said in a statement last February. “Self-reported data from our survey showed that more than a quarter of all survey respondents had to brake or steer to avoid being in a collision because they were distracted by something inside or outside their vehicle in the last month,” Robertson said at the time. “Taking your eyes and attention off the road for even a few seconds can increase crash risk.” Speeding and distracted driving have also been identified as a continuing source of near-misses

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in the “cone zone,” notes the Work Zone Safety Alliance, a group that consists of WorkSafeBC, the British Columbia Automobile Association, B.C.’s Ministry of Transportation and Infrastructure and 18 other partners. Just ask Pat Miller, an equipment operator for Mainroad Lower Mainland Contracting, about distracted drivers. Miller was carrying out road repairs on Highway 1 last spring when a five-ton delivery truck hit the crew’s one-ton buffer truck parked on the shoulder inside the work zone. The delivery truck narrowly missed Miller, who was forced to dive for cover into a ditch. Despite warning signage, cones and flashing vehicle lights, the truck driver was distracted and had closed his eyes for a moment.“We see more texting than talking with the driver’s eyes focused on the phone and not the road. Even at the scene of an accident, we see people taking video or pictures when they should be paying attention to the road,” Miller says in a statement issued by the alliance. Over the past 10 years, WorkSafeBC reports that the board has received 386 claims from roadside workers who were struck by motor vehicles. Of these claims, 46% were classified as serious injuries and 3% resulted in the death of the worker. “The ability to connect with anyone at anytime through our mobile phones has led to a serious problem on our roads,” Shirley Bond, British Columbia’s justice minister and attorney general, says in a statement from the Insurance Corporation of British Columbia (ICBC). “Driving is a complex task that requires our full attention.” Dr. Lloyd Oppel, an emergency physician and chair of the B.C. Medical Association’s Council on Health Promotion, would agree. “Placing lives at risk so that we can enjoy a convenience is simply not worth it,” Oppel says. That most provinces prohibit use of hand-held devices while driving seems not to have had their intended effect. In August, an Ipsos Reid survey conducted for the ICBC revealed that 44% of respondents believe driving is a com-

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plex task and yet 40% of those who own cellphones admit they have used their devices while driving. “The reality is, distracted driving is now the third leading cause of fatal car crashes in B.C.,” ICBC reports. That message, however, may not be getting through to everyone. “More education and conversations need to occur so teens understand that no one can handle driving distracted,” says Chris Mullen, director of technology research at State Farm.

The survey revealed 44% of respondents believe driving is a complex task and yet 40% of those who own cellphones admit they have used the devices while driving. Mullen made the comments following the release of a State Farm/Harris Interactive telephone poll that found almost 80% teenagers surveyed in the United States say stronger fines and law enforcement would help deter texting while driving. The survey involved 650 teenagers, aged 14 to 18. While a passenger in a car, 78% of respondents pointed out a driver’s distracted behaviour. But although polled teens may take an active role in discouraging texting and driving, 34% indi-

cated they had done so themselves. Courts seem to be taking distraction seriously. A recent ruling by the Ontario Court of Appeal found that even holding a phone violates provincial laws banning the use of hand-held devices while driving. Section 78 of the Ontario Highway Traffic Act notes that “no person shall drive a motor vehicle on a highway while holding or using a hand-held wireless communication device or other prescribed device that is capable of receiving or transmitting telephone communications, electronic data, mail or text messages.” Still, study results released by the Massachusetts Institute of Technology earlier this year indicate that banning cellphones does not necessarily stop risky behaviour by drivers. Those drivers who opt to use cellphones may also drive faster, change lanes more often and engage in more hard-braking and rapid accelerating. And matters are not helped by the ever-increasing availability of devices. In-car technology is being touted as a means of enhancing connectivity options, including mobile device connection to the internet, navigation systems, emergency response systems and driver habit monitoring devices. That said,a recent poll of 2,634 adults in the U.S. indicates 76% report that they believe in-car connectivity technologies are too distracting and even dangerous to have. In fact, more than half, 55%, report that automakers have taken technology for road use too far. “The fear of technology distraction seems to outweigh the other perceived benefits of having in-car connectivity options,” says Mike Chadsey, vice president, automotive solutions for Harris Interactive. Poll results also indicated that 41% of respondents believe their insurance rates could increase because of what in-car technology reveals about their particular driving habits. It is likely that the answer to distraction-related collisions and associated insurance costs seems to demand a mix of prohibitions, enforcement and personal responsibility.

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The Bus ness Case for Opinion/Analysis

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Risk Your insureds know more about risk than you do. What steps should be taken to understand clients’ and prospects’ risks, speak their language and distinguish yourself as their trusted risk advisor?

Having been in the insurance industry for more than 20 years, I have viewed risk from various perspectives: loss control, claims, underwriting, brokering and risk management. However, the transition six years ago from working in the insurance industry to launching a software company provided more lessons about risk than two decades in insurance ever could. It may be that adopting a wider view of risk — essential when running a business — can avoid the development of tunnel vision.When a career is spent thinking of risk in a negative way, it has

50 Canadian Underwriter September 2012

to colour your view. We call a piece of business a risk, a chance of something going wrong a risk, and we talk about cost of risk. Risk is a chance that something will go wrong. Should this occur, it may mean a higher loss ratio and higher premiums, possibly lost business. Invariably thinking of risk as “bad” ignores the upside and the possible benefits.

ENTREPRENEURIAL BENT That may be at odds with the view of an entrepreneur, for whom insurable risks are unlikely to be the types of risks uppermost in his or her mind. Those who start and run businesses, in fact, commonly see risk as an opportunity: taking a calculated risk carries with it a possible payoff. Understand that perspective and learn to speak the same risk language as clients and prospects, and the result can move beyond helping protect customers from some of their risks to helping them use risk to their advantage. Achieving that can prove a huge advantage in the marketplace. Against enormous odds, people who launch and run businesses take on substantial risk through investing their money, personally securing debt and selling assets, among other things. In a bid to transform concept to reality, the fo-

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Executives, electronics, excavators and employment practices are just a few examples of why our specialty insurance is hard to top. We specialize in more categories and coverages than you might imagine. And that doesnâ&#x20AC;&#x2122;t just go for E. From A to Z, our strength of specialization allows us to serve you in letter-perfect fashion. Contact our Underwriting & Servicing Offices: Executive Liability: 416.368.8200 x 12 Property & Inland Marine: 905.831.9037 Great American Insurance Group I Scotia Plaza, Suite 2100 I 40 King Street West I Toronto, Canada M5H 3C2

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Risk optimization does not mean simply purchasing insurance; risk optimization means assessing an opportunity, evaluating the associated risks and benefits, and pursuing a course of action that strikes the best balance between upside and downside.

cus is sharply on all business risks — for example, cash flow, employee recruitment and retention, intellectual property, data security, reputation, market risk and competition — before risk related to insurance. Most brokers talk about only insurance, which is only one of many ways to control risk. Rather than risk control, optimization of risk should be the goal. Risk optimization does not mean simply purchasing insurance; risk optimization means assessing an opportunity, evaluating the associated risks and benefits, and pursuing a course of action that strikes the best balance between upside and downside. In recent years, many brokers have started calling themselves risk management advisors. Whether or not they are doing things much differently than in the past is up for debate. However, central to rebranding themselves as trusted is the need to change the conversation. Being a trusted advisor is not about being all-knowing and able to provide each and every solution; it is about being able to understand a client’s risk and talk about it differently so that it speaks to their specific needs and circumstances.

DIFFERENT LANGUAGE How to talk differently about risk: 1.The nature of business is to take risk, something about which customers are

52 Canadian Underwriter September 2012

well-aware. Build relationships by talking to customers about what is going on in their industry and/or their companies. 2. All businesses manage risk, although they may not define it as risk management and formal processes may not be in place. Occupational health and safety is a form of risk management; same goes for quality control and all other practices and procedures that have evolved over time to reduce employee downtime, increase customer satisfaction, reduce litigation, etc. Look more closely and ask the right questions to unlock the wealth of information that customers likely already have about risk management. 3. Understand the different kinds of risk; for insurance, these mostly deal with hazard risk and operational risk.To get business people to pay some attention to insurance risk — rather than just day-to-day financial and strategic risks — it is necessary to be able to differentiate and provide examples. As a guide, hazard risks include such things as fire, weather and products liability; operational risks cover things such as loss of key employees, occupational health and safety and supply chain disruption; financial risks encompass such things as liquidity/cash, interest rate fluctuations and fuel prices; and strategic risks include company/brand repu-

tation, new competition and mergers and acquisitions. 4. Get to know your customers’ opportunities and concerns. Help them to see the opportunities in risk and what services and assistance you can provide. Risk management fosters opportunity. By clearly demonstrating to clients ways in which to mitigate risk, they may be able to capitalize on that risk and create opportunities. 5.Think beyond insurance. Rather than providing only insurance terms, offer the client a prioritized risk management plan, itemizing all identified risks, and clearly differentiating between what is already being adequately addressed and the areas for improvement. Go the extra mile to show the client the return on investment of treating those risks.

COMPETITIVE ADVANTAGE Helping clients understand risk and the value of risk management will aid them to reduce losses, become safer, increase efficiency, chase opportunities and make them more profitable. Better clients make for long-term clients with lower loss ratios. By learning clients’ perception of risk, speaking their language and becoming a trusted risk advisor, the competitive advantage gained will help attract and retain business.

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in the effective yield of a portfolio could theoretically produce an over $1.1 billion change in before-tax investment income,” he observed. “To offset each 1% change in yield would therefore require a 2.4% change to the approximately 100% combined ratio of the last two years (2011 and 2010).” Ernst & Young made a similar observation in its report on the Canadian property and casualty industry in January.

BOOK YIELDS TAKE HIT “The consequences of a sustained lowinterest rate environment are of great concern to p&c insurers,” the consulting firm noted. “If current conditions prevail through the next three years, companies’ book yields may decline by approximately 30 basis points, putting pressure on their earnings and premium rates.” Canadian property and casualty insurers place about 80 to 85% of their assets in fixed income investments such as bonds, most of which are government and investment-grade corporate bonds. The returns of these investment vehicles have been in a “downward spiral” with “no short-term likelihood of reversing as bonds roll over into lower yielding instruments,” Seeger noted in the MSA quarterly outlook. Other industry observers have pointed to similar trends in investments. Moreover, low interest rates have tied insurers’ hands even tighter as companies are supposed to set loss reserves based on investment yields. “(Historic low interest rates) have hurt profitability for Canadian p&c insurers through lower investment earnings and lower reinvestment rates, but also through negative impact on underwriting results as the Canadian insurers are required to set loss reserve discount rates based on the investment market yields,” Standard & Poor’s observed in its overview of the industry last December. In early September, Bank of Canada Governor Mark Carney announced he would hold off on any increase in interest rates to head off a burst of consumer price inflation and to counter a “slowing of activity across advanced 56 Canadian Underwriter September 2012

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and emerging economies.”There are no plans in the near future for a change in the benchmark rate.

RISKY INVESTMENTS So, what are the insurer strategies for coping with chronically low interest rates? One tactic for companies is to look at boosting returns through potentially riskier investment vehicles. According to a recent survey of chief investment officers (CIOs) by Goldman Sachs Asset Management (GSAM), some are doing just that. The poll of CIOs of 152 global insurers representing $3.8 trillion in assets found that the current environment is “challenging,” with yields resulting in lower investment returns. GSAM calls the near-term outlook “bleak” as insurers expect investment opportunities to deteriorate or hold steady.

Standard & Poor’s also observed a willingness among insurers for greater investment risk. “The relative appetite for investment risk returned and insurers are considering strategies to boost their investment income,” the rating company reported. “The results of our survey suggest that while insurers are concerned about the environment, they are seeking to enhance returns,” GSAM noted in the report, Seeking Return in an Adverse Environment. “Insurers are migrating down the corporate credit quality spectrum via increasing allocations to high yield, bank loans and mezzanine debt. In addition, insurers intend to increase their allocations to such asset classes as real estate, emerging market debt and private equity.” In the survey, 26% of insurers expect to increase overall investment risk, while 14% expect to decrease risk. Respondents cited the sovereign debt crisis in Europe as the main macroeconomic risk, while the prolonged low-

yield environment posed the greatest investment risk to their portfolios. Standard & Poor’s also observed a willingness among insurers for greater investment risk. “The relative appetite for investment risk returned and insurers are considering strategies to boost their investment income,” the rating company reported. “As a result, we observe some increase in relative allocation to preferred shares, common equities, and other alternate investments. Also, within the bond portfolio, we notice a marginal shift toward lower-rated bonds. Standard & Poor’s believes a further shift toward higher-risk assets will continue as insurers seek to improve yields.” Another tactic for insurance companies involves stricter asset-liability matching processes. “Asset liability management (ALM) — managing the matching of assets and liabilities — is more challenging in a declining yield environment,” stated Ernst & Young. “P&C insurers thus need to develop more sophisticated ALM approaches, which can reduce variability in their surplus positions — for example, increasing the asset duration by investing in longer-term assets offers the potential for additional yield, as well as more proper asset/liability matching as the liability durations extend.”

ASSETS AS BACK-UP A recent survey of 16 equity analysts by Towers Watson also discovered that the property and casualty insurance industry should take a careful review of assetliability matching. In its report, Investment Unwrapped for the P&C Insurer, “the nature of the liabilities and the solvency position are the two main factors that should influence the level of investment risk,” Towers Watson noted. “The nature of the liabilities was the most popular response (from analysts), backing up the overarching view that the assets should be there to back the liabilities and underwriting activities, and not act as the primary driver of return,” the report stated. “The greater the uncertainty in the liabilities, then the lower the level of investment risk.” In terms of asset allocation, Towers Watson added that “there is strong

92 Annual Convention nd

Wednesday, October 17 — Friday, October 19, 2012

The Fairmont Royal York Hotel, Toronto, Ontario Thursday, October 18, 2012

IBAO’s Annual Convention is the biggest and most exciting insurance broker event on the Canadian insurance industry calendar.

There is simply no other event quite like it!

KEYNOTE SPEAKER:

Peter Sheahan, CEO, ChangeLabs™

FL!P: Creative Strategies for Turning Challenge into Opportunity, and Change into Competitive Advantage Are you looking to give your leaders a more cutting-edge perspective on the world? Are you looking to exploit the opportunity that change brings? Peter Sheahan’s “FL!P” presentation will help you to: • Embrace change and break free from thinking that made you successful in the past, but could undermine your success in the future • Re-think competitive advantage; leverage intangibles to manufacture tangible points of difference in the market • Improve your margins by driving non-sexy innovation and finding new and better ways to do what you do • Turn chaos into opportunity by leading the market in response to new regulation, customer expectations and technology • Be inspired to take the intelligent risks required to innovate and drive change

CSR SEMINAR: Creating Amazing Customer Experiences

Lisa Leitch, CSP, Teneo Results (RIBO CE - 3 Personal Skills Hours)

MEMBER’S SEMINAR: CEO PANEL (RIBO CE - 3 Management Hours) We have secured five high-profile company executives to participate in this year’s CEO Panel. This year’s line-up includes Alister Campbell, CEO, The Guarantee; George Cooke, President and CEO, The Dominion; Jean-Francois Blais, President of Intact Insurance; Karen Gavan, President and CEO, The Economical Insurance Group; and Maurice Tulloch, President and CEO, Aviva Canada. And, we’ve brought back two-time Gemini Award winning journalist, Evan Solomon to moderate the CEO Panel!

Friday, October 19, 2012 EDUCATION SEMINARS:

The 2012 IBAO Annual Convention is a tweet-friendly event and we are encouraging attendees to tweetaway!! The hashtag for the event is #IBAOConvention12. For complete program details and to register online, visit our website: ibao.org and click on Events.

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• Demystifying Social Media and Online Marketing Dan Belhassen, Neovation (RIBO CE - 3 Management Hours)

• Negotiation Preparation – What You Need to Know Now Linda Kern, CSP, Teneo Results (RIBO CE - 3 Personal Skills Hours)

• You’re Worth More Than You Think… the Biggest Mistake an Insurance Producer Can Make! Linda Kern, CSP, Teneo Results (RIBO CE - 3 Personal Skills Hours)

• Customer Connections – Are You Connected or Engaged? Bill Morris, BA, Navicom Inc. and Bryan Yetman, CIP, CRM, First Durham Insurance and Financial (RIBO CE - 3 Management Hours)

• Creating a Winning Sales Culture – Are You Managing or Leading Your Teams? Lisa Leitch, CSP, Teneo Results (RIBO CE - 3 Management Hours)

5th Annual Awards of Excellence Gala featuring entertainment performance by: Montreal Rhapsody Orchestra IBAO will be hosting its 5th Annual Awards of Excellence Gala where we acknowledge brokers for their contributions to the industry and community. Categories are: • Broker of the Year • Brokerage of the Year • Young Broker of the Year • Affiliate Achievement This is the only “official” function recognizing the merits and qualities of general insurance brokers, brokerages and affiliates. Be one of more than 400 guests who will be on hand to support the nominees, cheer for the winners and celebrate their peers!

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support for making the assets match the liabilities as far as possible, and for diversifying the investments across asset classes and geographically.” Interestingly, Seeger of MSA Research observed that “relatively few CFOs we have spoken to claim to be closely matching asset durations to those of their liabilities.”

SOLID PREPARATION The goal for insurance companies in asset-liability matching and investment asset selection should be a strong risk management and capital program, Ernst & Young recommends. “The magnitude and implications of low interest rates highlight the need to improve risk management and capital programs, and better prepare for the impact of extreme events,” the organization noted. “A sound risk management program is one in which the risk appetite is defined, the appropriate risk tolerances are established and relevant

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stress tests are identified to measure financial exposures.” Of course, declining investment returns from low interest rates and bond yields may portend a more disciplined approach to underwriting and pricing on the business side for property and

A sound risk management program is one in which the risk appetite is defined, the appropriate risk tolerances are established and relevant stress tests are identified to measure financial exposures. casualty insurers. How this plays out in the next year or two should be of interest to buyers and sellers of insurance alike. “We believe investment earnings will remain under pressure because low interest rates could persist,” Standard & Poor’s stated. “We also believe that in-

surers face reinvestment risk as maturing assets get reinvested at lower interest rates. Therefore, in our view, the insurers should renew their focus on underwriting with a more disciplined approach to pricing,” S&P added. “The trade-offs between maximizing yield and preserving capital, while at the same time juggling capital rules and tax efficiency, are difficult, particularly when several key determinants, such as equity portfolio capital weightings and actuarial accounting rules are in flux,” Seeger concluded. “And all that is before insurers take a position on market and rate direction. We are not naïve enough to assume that this stark information will cause changes in underwriting discipline, but the reality is that, without such discipline, insurers will not justify their cost of capital and, indeed, put their capital at risk. A situation that is not good for insurers, their brokers or the policyholder they serve.”

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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 PROedge Seminars: Toronto – Leading Insurance Coverage & Liability Cases . . . . . . . October 11 Edmonton –Advanced Business Interruption . . . . . . . . . . . . . . . . October 17 Hamilton – Solar Power Risks: A Panel Forum . . . . . . . . . . . . . . . October 30 Equipment Breakdown Insurance presented by BI&I Edmonton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 3 Nanaimo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 5 Ottawa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 25 London . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 25 Toronto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 14

Advanced Investigation of Slips, Trip & Falls and Personal Injury Claims presented by Giffin Koerth Kitchener . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 4 London . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 11 Durham . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 17 Ottawa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 29 Events: Calgary – Roller Disco Boogie Night . . . . . . . . . . . . . . . . . . . . . . . . October 9 Toronto – Wine and Cheese . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 6 Toronto – Lowes Fund Breakfast with Alison Griffiths . . . . . . . . . October 22

Keeping you at the forefront of the P&C industry. The CIP Society. MEMBERS BENEFIT. www.insuranceinstitute.ca/cipsociety

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Digitally Altered The confluence of two technology trends — the massive adoption of personal technologies and the pervasive rise of social networking — is having an enormous impact on consumer behaviour. And the insurance industry is by no means immune to the effects of these shifting dynamics.

Partner, Insurance IBM Global Business Services

This empowerment is serving to change behaviours and expectations about how, when and where to engage with companies. Whatever method they choose — be that call centres, online, via smartphones or in person with agents and branches — customers want a seamless, secure, consistent interaction, and have increasingly high expectations for quality of service, price and delivery.

START TO FINISH In this environment, establishing a relationship with insurance customers is becoming increasingly difficult. Thirty years ago, agents, brokers and to a lesser degree conventional mail were the only insurance communication channels used to search for and sell insurance. Not so today. There are many different interaction points that consumers prefer. Often, a business exchange starts in one mode (for example, online) and finishes in another (for example, in a call centre conversation). Today’s insurance customers prefer choice when it comes to ways to interact with insurers. IBM Global Business Services research from 2008 — involving 4,400 consumers surveyed in Europe and the Americas — shows that only

September 2012 Canadian Underwriter 61

Illustration by Sandy Nichols/www.threeinabox.com

James Hogg

While insurance providers may recognize that consumer behaviour is shifting, many continue to grapple with how best to respond. Understanding and meeting customer needs takes on new meaning in this digital age, and getting closer to the customer is essential. Just how to get there likely revolves around positioning the customer at the centre of the value chain, and using customer data as the vehicle. Consumers have more power than ever before, again a byproduct of the proliferation of digital devices and the reality that information is now everywhere. A mind-boggling number of digital devices — computers, tablets and smartphones among these — are currently in use. In concert with that, social networks are fast becoming a key medium by which people and businesses communicate. There are more than 900 million active users on Facebook; every day, 340 million Tweets are sent. These channels enable consumers to communicate with each other and to share experiences, both good and bad.They have the ability to make or break brands with a few keystrokes. With near-unlimited access to information and ample channels to share it with the world, consumers are becoming more and more empowered.

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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

PCA Adjusters Limited Adjusting to Meet your needs™ www.pca-adj.com

GRAPHIC COMMUNICATIONS Quelmec Loss Adjusters Identifying, Investigating, Resolving... for over a quarter century! www.quelmec.ca

Cameron & Associates Insurance Consultants Ltd. Insurance & Risk Management Consultants. 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

DAMAGE COST CONSULTANTS SPECS Ltd. (Specialized Property Evaluation Control Services) Providing Innovative Solutions to Control Property Claim Costs www.specs.ca

EMPLOYMENT ONLINE I-HIRE.CA Canada's Insurance Career Destination. www.i-hire.ca

Cunningham Lindsey International independent claims services. www.cunninghamlindsey.com

ENGINEERING SERVICES

McLarens Canada International Loss Adjusters and Surveyors. www.mclarens.ca

Informco Inc. Integrated Graphic Communications Specialists. www.informco.com

INSURANCE SOFTWARE APPLICATIONS Kanetix Ltd. - SAAS Division We provide corporate clients with fast & reliable insurance quoting systems, web services, web systems and hosting. www.kanetix.ca/about_dev_services

INSURANCE COMPANIES CONSULTING FIRMS

CRU Adjusters Calm in the face of a storm. www.cruadjusters.com

Kernaghan Adjusters Doing What Is Right®. www.kernaghan.com

complex engineering incidents. www.waltersforensic.com

Giffin Koerth Forensic Engineering and Science Investigate Understand Communicate www.giffinkoerth.com Rochon Engineering Inc. Forensic Consulting Engineers & Code Consultants. www.rochons.com Walters Forensic Engineering Inc. Providing scientific answers to

Canadian Underwriter September 2012

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 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 The Guarantee Company of North America “Specialized insurance products...professional service” www.gcna.com

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

Wawanesa Insurance Earning your trust since 1896. www.wawanesa.com

The ARC Group Canada Inc. Your Partner in Insurance Law and Risk Management. www.thearcgroup.ca

INSURANCE LAW

SPECIALTY INSURANCE

The ARC Group Canada Inc. Your Partner in Insurance Law & Risk Management. www.thearcgroup.ca

William J. Sutton & Co. Ltd. Insuring Special Risks since 1978 www.wjsutton.com

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about 20% of consumers use a single point of interaction to search for insurance, while another 20% of respondents report using as many as four or more interaction points while doing so. The upshot of this is that providers today face some tough marketing challenges: engaging the right consumer at the right time and place, via that consumer’s preferred media, with an offer targeting his or her personal needs; maintaining multiple products and services; and synchronizing all of these efforts across multiple distribution channels. To address this, insurers need to take a different approach to segmenting their customers — one based on attitudes, interests and lifestyles, rather than on demographics. Customers are becoming harder to satisfy and to maintain, and generally, they still do not trust the insurance industry. This may help explain why only 31% of surveyed consumers maintain coverage for all their needs with one insurer — down from 42% just two years ago. And while there is no comparable substitute for insurance itself, consumers can and will switch insurers if preferred interaction points are not available. The good news is insurance is still a product that relies on personal trust — people want to buy from people who can demonstrate they know their customers and their preferences.

DEEPER UNDERSTANDING This new approach to customer segmentation requires that insurers have a much deeper understanding than in the past about who is being targeted through marketing and selling efforts. The payoff is obvious: more compelling sales conversations; and clients who feel more valued, feel they have a closer relationship with the insurer, are more loyal, and view business dealings with the insurer as easy. The path to getting there may be less obvious. The answer lies in using data analysis to put the insurance customer at the centre of the value chain. Making better use of the wealth of insight and knowledge that customer data analysis can generate can help insurers demon-

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strate that they do, in fact, know their customers. To foster a closer relationship with customers, insurers should consider the following approaches: • Increase the number of available interaction points: As consumers want to use multiple touch points to search for and purchase insurance, insurers should make their products and services accessible via non-traditional channels — internet, mobile, etc. — and adopt the practice of courting customers using mobile phone and social networking sites. These interactions should be branded

demanding good advice, a wide range of customized products and offerings, and fast and efficient service. To boost customer loyalty, insurers must focus on perfecting their interaction quality so consumers will be transformed into true advocates of their businesses. Unimaginable just a decade ago, the rise of the internet, mobile phones and social networking is changing how consumers shop for and purchase insurance. Insurers must work that much harder to both build and sustain customer relationships.

SELLING OPPORTUNITIES

While there is no comparable substitute for insurance itself, consumers can and will switch insurers if preferred interaction points are not available. consistently, present identical information and allow users to switch interaction points without losing any information provided at other contact points. • Follow customers and invest in analytics: Insurers should study the data around consumer search and purchase decisions to help deliver better services and engender loyalty. Consumers should be engaged to share data about their preferences so that providers can develop personalized recommendations and offerings. A technology investment in analytics can reveal valuable behavioural data that will allow insurers to match interaction point offerings to the preferred mix of targeted customers. • Improve interaction quality: Customers are

When done properly, the outcome for insurance providers is improved time to market new products, reduced training time for new agents and enhanced call centre efficiency and information access, making it easier to cross-sell and up-sell. One Canadian provider, for example, implemented a system that determined what information should be diverted to the agent based on the task at hand, such as requesting a quote or offering a new product to an existing policyholder. The system acts as a virtual senior agent, collecting customer information and training junior agents by sending contact-sensitive messages, prompts and data directly to their desktops in real time during customer interactions. Providing flawless customer service across customer interactions requires capturing the wealth of customer information in a central system, analyzing it and sharing it with front-line people across the business when they need it. This approach helps to anticipate customer behaviour, as well as to develop targeted and personalized offerings. Flexibility and the smart use of analytics are central to succeeding in all of the aforementioned areas. The world has never been as complex and full of constant and rapid change as today — and the evolving preferences of tomorrow’s consumers are part of an increasingly competitive environment. The insurer who employs insights derived from data to put the customer at the centre of the value chain will secure a strong competitive advantage.

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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

George Cooke [1] announced in August that he would be retiring as president of The Dominion, formerly The Dominion of Canada General Insurance. Cooke began his distinguished career with the company 20 years ago as president and CEO. He will remain as CEO until December 31, 2012, will continue as executive vice president of E-L Financial until June 30, 2013, and will stay on as director. “Mr. Cooke’s leadership and counsel will be invaluable to The Dominion and to E-L Financial during this period of transition and thereafter,” the company notes in a message to brokers. Cooke is succeeded by Brigid Murphy, who has assumed immediate responsibilities as president and director. As of Jan. 1, 2013, Murphy will begin as CEO of The Dominion and executive vice president of E-L Financial. She joined the company in 2003 and has held a number of increasingly senior management roles, most recently as chief operating officer (COO). The COO’s office will not be filled at this time.

Jon Schubert [2], CEO of the Insurance Corporation of British Columbia, has announced to staff that he will be leaving his position, effective November 15. Calling the move a mutual decision reached with the ICBC’s board, Schubert noted

in a message to employees: “I am very proud and feel privileged to have served as CEO of ICBC. This is an outstanding organization with a solid executive and committed employees focused on serving the needs of our customers.” Schubert will stay on in a consulting capacity until June.

Craig Smith recently took on duties as vice president of sales and marketing for ISB Canada, a one-stop supplier of source documents to the insurance industry. With almost 30 years in the insurance business, Smith has held various senior positions at a principle insurer, as well as sales and marketing roles within the insurance vendor market. “ISB Canada is looking to expand in Ontario and across Canada and we are excited to have Craig on board to be an integral part of our growth strategy,” says ISB Canada CEO Gino Fiorucci.

XL Group’s reinsurance operations recently announced the appointment of Tim Fisher as senior vice president and Canadian branch manager. Fisher brings more than 25 years of experience in the reinsurance industry to his new duties to lead XL’s Toronto-based reinsurance underwriting team. Fisher has served as senior vice president and underwriter

64 Canadian Underwriter September 2012

1 in XL’s Bermuda reinsurance operations, and was instrumental in helping to grow the reinsurance book of business, which includes U.S. and international property catastrophe and specialty risks. Prior to joining XL in 2000, he held progressively senior roles in claims and underwriting in the London market.

H. Ross Totten [5a], president and CEO of Totten Insurance Group Inc./Groupe Gestionnaire D’Assurances Totten Ltée. since its founding in October 2002, assumes the role of chairman and chief sales officer, effective September 1, 2012. Totten will focus on business development, both through organic growth internally with the development of new products and programs, and through external acquisitions, Hub International reports. Heather Masterson [5b] moves from Hub HKMB Ontario to become president and CEO of Totten Insurance Group, also effective September 1. Masterson comes to this role from her responsibili-

2 ties for managing insurance company relationships, and maintaining presence in the Worldwide Broker Network. Her experience includes being a broker in the family brokerage, setting up and managing the commercial division of Newfoundland’s Colonial Fire and General Insurance Company, spending a number of years at AIG in various roles, and establishing and running the Canadian operations for AIG WorldSource.

Michael Taillon will take on responsibilities as Aon Risk Solutions Canada’s new national practice leader of energy. Having worked with both insurers and brokers, Taillon has gained international experience across a diverse range of sectors, including energy, mining, construction, manufacturing and technology. He will use his three decades of experience in risk management and insurance to lead business development and provide oversight to Aon’s energy practice, notes a company statement. Alison Miller has

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5a been named Aon Risk Solutions’ practice leader of national power and utilities in Canada. A 12-year veteran of the company, Miller has managed large and technically complex risks in the utility, mining and energy sectors. She will lead Aon’s team of experts to design and implement risk management strategies for power transmission and distribution companies, as well as drive the development of proprietary insurance programs and collaborate with the global power practice.

FirstOnSite Restoration has named Sean Hobson [7] as senior vice president of sales for the company. Hobson’s extensive background in insurance, construction and restoration industry sales nationally and internationally will assist him in his duties to lead FirstOnSite’s sales teams across the country to ensure consistent service at the national and branch levels. Hobson has prior experience as Granite Claims Solutions’ vice president of sales for Canada

5b and the United Kingdom, and has held a number of other sales and marketing roles.

The CG&B Group Inc. has acquired F. Wallace Clancy & Son Limited, an Ontario insurance brokerage that has been in business for more than 100 years. Mike Clancy, the brokerage’s current president, will transition into retirement and his son Paul will assume the role. The Clancys and their staff will continue to operate the brokerage under the F. Wallace Clancy & Son name. “They have a very strong business with terrific assets and we look forward to working with Mike, Paul and the team, and giving them access to the skills and expertise within CG&B Group to grow and expand,” says Larry Later, president and CEO of CG&B Group. The acquisition is CG&B’s 15th in 13 years.

Beyond Insurance Brokers Inc. has opened a new office in Thunder Bay, Ontario, which operates

eBusiness B2B team and we look forward to a continued partnership with brokers, vendors and the CSIO in enhancing broker efficiency,” says Steve Knoch, senior vice president of IT and eBusiness for RSA. “Direct electronic document download to a broker’s BMS provides increased efficiencies, improves the speed at which a broker copy of documents is available for a broker to review and satisfies our regulatory requirements,” says Rick Orr, president of IBAO.

7 under the name Beyond Insurance (Superior) Inc. The company’s insurance services — for personal home, auto and commercial, including risk management — will be available to the northern parts of Ontario under the management of Trish Krawec. Krawec has more than 20 years of experience in insurance, including as a director for the Insurance Brokers Association of Ontario (IBAO) and as a current council member for the Registered Insurance Brokers of Ontario.

RSA Canada has chosen Brovada’s NexCenter to provide single-sign-on capability to its EZ-Docs self-service tool for brokers. Brokers who are registered for EZ-Docs can now access their online documents directly from within their broker management system (BMS). Brokers using RSA’s EZ-Docs tool will be able to have eligible documents automatically downloaded daily via the Centre for Study of Insurance Operations’ CSIOnet. “This has been a major priority for RSA’s

Intact Insurance and Keal Technology recently completed the development of an electronic document (E-doc) solution that will allow brokers to download policy information of their personal lines clients insured by Intact Insurance directly to their Keal BMS, sigXP. The solution allows brokers to download customers’ policy declarations, payment information and many more documents directly from Intact systems into BMSs. Initial discussions with users show almost “80% intend to download all the documents made available by Intact Insurance,” says Pat Durepos, president of Keal Technology. The solution’s functionalities are based on the CSIO XML standard.

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September 2012 Canadian Underwriter 65

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The Canadian Independent Adjusters’ Association (CIAA) held its 28th Annual General Meeting and Conference “under the Aurora” at the Explorer Hotel in Yellowknife Northwest Territories from Aug. 23-26. With Yellowknife being the hometown of CIAA president Greg Merrithew, more than 60 attendees joined together for a trade show, a day of education, social events and the member meeting.

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Cont’d on pg 68…

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At the 28th Annual Canadian Independent Adjusters’ Association (CIAA) General Meeting and Conference, the President’s Banquet & Ball was held at the Department of National Defence building. John Seyler took over the reins as president of CIAA for the 2012-13 year. He succeeds outgoing president Greg Merrithew.

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-HII .RSDV Murray Goertzen, Vice President Insurance Operations of The Sovereign General Insurance Company is pleased to announce the appointment of Jeff Kopas as AVP National Commercial Underwriting Resources. Jeff has worked in the commercial Property and Casualty industry for almost 20 years. Starting as a Commercial Property & Casualty underwriter, Jeff moved into Commercial Manager and Branch Manager roles with large insurers in Canada. He joined Sovereign in 2009 as a Head Office Specialist where he developed Sovereignâ&#x20AC;&#x2122;s International underwriting strategy. The Sovereign General Insurance Company is a Canadian owned and operated property and casualty insurer founded in 1953. Headquartered in Calgary, this leading insurance company operates across Canada emphasizing on innovative and complex insurance needs. Sovereign General also has an A â&#x20AC;&#x201C; rating by A.M. Best.

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Cameron & Associates held its 7th Annual Huntingtonâ&#x20AC;&#x2122;s Benefit Golf Tournament on Aug. 22, 2012 at the Deer Creek Golf and Banquet Facility in Ajax, Ontario. The annual tournament to fund the search for a cure and better understanding/research for Huntingtonâ&#x20AC;&#x2122;s Disease saw insurance industry foursomes enjoy a beautiful day on the links while raising $30,000 for the Huntington Society of Canada.

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More than 220 guests boarded the Yankee Lady III on Aug. 23 for the 4th Annual WINMAR Toronto/Brampton Boat Cruise. This year the fundraiser saw more than $5,000 donated to the Lions Foundation of Canada Dog Guides. From guiding their

handlers through their daily lives to getting help when it’s needed most, Dog Guides play a crucial role in the lives of Canadians with disabilities, with dog specialties: Canine Vision; Hearing Ear; Autism Assistance; Special Skils (medical/physical); and Seizure Response.

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%ULDQ ' .LQJ SURPRWHG E\ *UDQLWH *OREDO 6ROXWLRQV Ryan Clark, Chairman of the Board, and Murray Wallace, CEO of Granite Global Solutions are pleased to announce the appointment of Brian D. King, Chair of CKR Global to an expanded role in the group. In order to increase the prominence of the CKR Global brand in the Canadian marketplace and to guide the Board of GGS in the development of Enterprise Risk Management for the group of companies, Brian King is being appointed as Chairman of CKR Global with an emphasis on markets and external audiences and as a Special Advisor to the Board of GGS on risk matters. Rob Burns will continue as CEO of CKR Global and focus his efforts on the internal management of the business, Brian as Chair of CKR Global as well as Rob will continue to collaborate on key decisions that are naturally shared by a CEO and a Chairman including strategy development and execution, organizational design, and top level hiring decisions In addition to his CKR Global role, Brian will act as an advisor to the Board of Directors of GGS on risk matters more broadly.“One of the most important aspects of any organization today is to ensure that the activities we engage in fit the risk appetite of the group. This is particularly important for a company like GGS with its various business divisions that have responsibilities to customers, regulators, shareholders and other stakeholders.” said Mr. Clark.“We have an acknowledged global expert in Brian King – so this is a key opportunity for us going forward.”. “I am really looking forward to this new opportunity to take CKR Global to the next level in marketplace awareness and to assist the GGS Board with Enterprise Risk Management. In addition, I will remain available to guide and assist key clients on specific matters where my experience has been proven useful to them in the past”, said Mr. King. www.graniteglobalsolutions.com

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$OLVWHU &DPSEHOO The Board of The Guarantee Company of North America is pleased to announce the appointment of Alister Campbell as CEO of The Guarantee effective September 4, 2012. As CEO, Alister is accountable for driving The Guarantee’s continued profitable growth, and overall strategy and operations in Canada and the United States. Over the past 27 years he has held senior executive positions in a range of capacities within the life and property-casualty insurance industries including general management, marketing, brokerage distribution strategy, financial services and e-commerce. Prior to his appointment at The Guarantee, he was CEO of the Canadian branch of a major global insurance company. Alister has previously served as Chair of the Board of Directors of the Property & Casualty Insurance Compensation Corporation (PACICC) and as Deputy Chair of the Board of the Insurance Bureau of Canada (IBC). Currently, he is a member of the Board of Directors of the Global Risk Institute in Financial Services and a proud Member of the United Way of Greater Toronto Campaign Cabinet. Alister holds degrees from the University of Toronto, the London School of Economics and the Wharton Graduate School of Business. Since 1872, The Guarantee Company of North America (The Guarantee) has been a leader in specialty insurance within the North American marketplace and has earned a prominent reputation for providing specialized insurance products, supported by a depth of knowledge and expertise in niche segments including contract and commercial surety and customized personal insurance through Guarantee GOLD®. 2012 marks the 140th anniversary of The Guarantee, a testament to the company’s long term dedication to product expertise, industry knowledge and strong partner relationships.

74 Canadian Underwriter September 2012

A.M. Best Company’s 2012 Insurance Market Briefing Canada was held in Toronto on Sept. 6. More than 250 insurance executives attended to hear A.M. Best rating analysts discuss the impact of current economic conditions and rating trends on members of the insurance industry in Canada. Attendees heard panelists discuss Canadian life, property and casualty and reinsurance.

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