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
JULY 2 0 1 3 A Business Information Group Publication #40069240
Big Deal BY CRAIG HARRIS
Tax on Demand BY J. BRIAN REEVE
Muddied Waters BY ANGELA STELMAKOWICH
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VOL. 80, NO. 7, JULY 2013 CANADA’S INSURANCE AND RISK MAGAZINE. PUBLISHED BY BUSINESS INFORMATION GROUP
www.canadianunderwriter.ca
COVER STORY
Big Deal
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Market access and capital allocation drive mergers and acquisitions activity, both of which seemed to be in play with Travelers’ acquisition of The Dominion in June. But analysts say there is room for far more consolidation in the Canadian property and casualty insurance industry, affecting everyone from reinsurers to brokers. BY CRAIG HARRIS
FEATURES
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HST/Party Reinsurance
Nat Cat Preparedness
Pinning down HST and related party reinsurance may seem like chasing a moving target. The tax exposure of Canadian insurers for HST/GST retroactive to 2005 is thought to be as much as $800 million.
Zurich Insurance’s survey of 170 executives around the world shows that companies recognize that nat cats pose risks, but that does not mean they have sufficient mitigation processes in place.
BY J. BRIAN REEVE
BY LESZEK BIALY
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20
16 Underestimated Risks
40 Restoration Contractors
A survey of Allianz experts shows that businesses take some risks very seriously, but widely underestimate others, including power outages and cyber crime.
Restoration contractors are facing challenges ranging from margins getting squeezed as costs outpace revenues from insurance claims, to increased competition from general contractors.
BY THOMAS VARNEY
BY GREG MECKBACH
24 Limitation Periods Ontario’s appeal court finds that a clear one-year limitation period may be included in a multi-peril policy where the policy is for a “business.” However, the two-year limit will apply for homeowner policies. BY MICHAEL S. TEITELBAUM & ALEXANDER WILKINSON
46 HST-Exempt Status for IMEs Ottawa’s 2013 budget is meant to remove the HST-exempt status on supplies by providers of independent medical evaluations or independent assessments. That said, the amendment language could open the door to a challenge. BY SEAN AYLWARD
Alberta Floods
Backwater Valves
If very early estimates are correct, the devastating floods in Alberta could be among Canada’s largest catastrophe losses. Of course, that will all depend on what is covered and what is not.
Sewer back-up claims after urban flooding can produce considerable insured damages. But this high toll can be reduced through building and plumbing code interpretation. BY DAN SANDINK
BY ANGELA STELMAKOWICH
July 2013 Canadian Underwriter
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VOL. 80, NO. 7, JULY 2013
PROFILE
Editor Angela Stelmakowich astelmakowich@canadianunderwriter.ca (416) 510-6793 Associate Editor Greg Meckbach gmeckbach@canadianunderwriter.ca (416) 510-6796
10 Members Wanted Marie Gallagher is set to take the helm of the Canadian Independent Adjusters’ Association (CIAA) in September. Gallagher’s many goals will include persuading more adjusters to join CIAA and encouraging more people to pursue careers in insurance. BY GREG MECKBACH
SPECIAL FOCUS
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EDITORIAL
Ocean of Concern
The dynamic duo of ocean warming and climate change has the potential to threaten the insurability of catastrophic risk in some areas, demanding a shift from historic to predictive risk assessment. Angela Stelmakowich, Editor astelmakowich@ canadianunderwriter.ca
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Canadian Underwriter July 2013
Ask what is at the root of the increase in severe weather and be prepared for a barrage of opinions, some diametrically opposed. Naysayer or true believer, though, there is little disagreement on one central point: changes abound. Ask The Geneva Association’s Climate Risks and Insurance working group and its collective finger is likely to point in every direction to the oceans around the world. So suggests the report, Warming of the Oceans and Implications for the (Re)insurance Industry. Its conclusion? The dynamic duo of ocean warming and climate change has the potential to threaten the insurability of catastrophe risk in some areas, demanding a shift from historic to predictive risk assessment. A warmer atmosphere has more water and more energy, supporting the potential for greater intensity of extreme events and precipitation that can increase loss potential, the report says. “Understanding the changes of ocean dynamics and the complex interactions between the ocean and the atmosphere is the key to understanding current changes in the distribution, frequency and intensity of global extreme events relevant to the insurance industry, such as tropical cyclones, flash floods and extra-tropical winter storms.” Insurers are advised to adopt as best practice dynamic modelling approaches to estimate time-dependent, mediumterm outlooks in combination with a reasonably wide range of hypothetical, but scientifi-
cally justifiable scenarios. Absent this, ambiguity will rule. And ambiguity is far from welcome in a market already facing the stress of upward trends in absolute disaster loss, the report suggests. It further notes the most significant driver to rising insured costs is socio-economic factors, including the increasing wealth of individuals and the higher concentrations of development in coastal areas and on flood plains. The Geneva Association reports sea levels are up about 20 centimetres over the last century. Higher levels increase the risk of flooding or the potential impact of storm surges, thereby decreasing the protective lifespan of coastal infrastructure and increasing the damage potential from geophysical events because the risk of inundation is greater, the report adds. It is a lesson that New York and New Jersey, among other states and countries, learned devastatingly well in the wake of Superstorm Sandy. New York City recently unveiled more than 250 recommendations, the collective goal of which is to protect the city from the effects of climate change — not just storms, but also heat waves, downpours and rising sea levels. An analysis from the Special Initiative for Rebuilding and Resiliency shows that Sandy totalled $19 billion in damage and economic loss; in 2025, that cost grows to $35 billion and by 2055, $90 billion. A similar caution, although
from a far different place, is being delivered by the Australian Business Roundtable for Disaster Resilience & Safer Communities. The roundtable projects the cost of natural disasters in the country will rise from the current $6.3 billion a year (Australian dollars) to about $23 billion annually in 2050 as population density increases and the severity and frequency of storms, floods, cyclones and bushfires grow. And here at home, within days of what may be the worst flooding ever in southern Alberta, the provincial government approved $1 billion in emergency recovery and reconstruction funding. Margareta Wahlström, head of the UN Office for Disaster Risk Reduction, recently predicted 2013 will be a turning point in how governments around the world view the threat of floods in a new age of extreme weather events. Wahlström cited Canada as among the many countries to experience huge losses in the last two months as a result of intense precipitation that produced extreme flooding which affected the well-being and livelihoods of millions of people. “Flood management systems need to be designed so that even if they are overwhelmed by flood waters, the failure is not catastrophic.” Whatever side of the fence one falls on, these events demonstrate the need for a concerted effort by everyone from reinsures to insurers, government and policyholders — sooner rather than later.
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MARKETPLACE Sign up to receive Canadian Underwriter’s free Insurance Headline News Email Alert: http://bit.ly/cuenews
Regulation REGULATORS WORKING ON RULES FOR ONLINE INSURANCE SALES Many of Canada’s insurance regulations pre-date electronic commerce, so the Canadian Council of Insurance Regulators (CCIR) is inviting stakeholder recommendations to help bring those rules into the 21st century. Regulators published the recommendations for online insurance sales in May as part of the position paper, Electronic Commerce in Insurance Products. CCIR is seeking feedback by July 26. Among other things, the council’s electronic commerce committee (ECC) recommends that “comparison shopping” websites be prohibited from providing advice or posting insurance applications unless they are operated by properly licensed companies. Websites that compare “available coverage options” should be held “to the same obligations” as other insurance entities. Other recommendations in the paper include that online insurance providers be required to provide a link to the website of their corresponding regulator; and that, if implemented, online insurance providers be required to “draw to the consumer’s attention” seven categories of information in “clear and simple language.” These include the type of consumer for whom the product is intended; the product’s main characteristics;
8 Canadian Underwriter July 2013
options and coverage; exclusions and limitations; total premium and other charges, such as taxes; the consumer’s right to cancel, as well as the duration of the cancellation period and the procedure for cancellation; and any time limit on the validity of the information provided. Comments will be reviewed by the ECC, with final recommendations submitted to CCIR. “Each jurisdiction will consider the recommendations and evaluate the circumstances in its own jurisdiction to determine what changes, if any, are necessary to implement them.”
ONTARIO REGULATORY CHANGES NOW IN FORCE Amendments to Ontario auto insurance requirements came into force June 1, including changes to the Unfair or Deceptive Practices Regulation and the Statutory Accident Benefits Schedule. Ontario Regulation 7/00, under the Unfair or Deceptive Practices Act, makes it illegal to request, require or permit an insurance claimant to sign an incomplete claim form. The change is one of a number published in the February 9 issue of the Ontario Gazette. Changes to Ontario Regulation 34/10, which relates to the Statutory Accident Benefits Schedule, mean that carriers must now send a notice within 10 days of receiving a treatment and assessment plan. Until now, when denying claims, carriers had to include in their notices
to claimants, “the medical and any other reasons why the insurer considers any goods, services, assessments and examinations, or the proposed costs of them, not to be reasonable or necessary.” The word “any” has been changed to “all” as of June 1, 2013. As such, carriers denying claims must now tell claimants the medical reasons and “all of the other reasons why the insurer considers any goods, services, assessments and examinations, or the proposed costs of them, not to be reasonable and necessary.” Also among the changes, insurance carriers have the right to request confirmation in writing that goods or services were provided to the insured person, and to ask for a statutory declaration as to the circumstances that gave rise to the invoice.
TWO DEMERITS FOR DRIVERS USING HAND-HELD DEVICES Come August 1, demerits will be assessed to drivers caught using their hand-held electronic devices, says justice minister Andrew Swan, minister responsible for Manitoba Public Insurance (MPI). “A distracted driver is a serious danger to public safety. Applying demerits for texting or using a cellphone while driving is one more tool to keep our roads safe,” Swan says in a statement. Currently, eight other Canadian jurisdictions apply demerits for associated convictions. Drivers in Manitoba caught using a hand-held device now receive a $200
fine, but the new demerits will impact a driver’s position on MPI’s driver safety rating (DSR). Demerits will trigger downward movement on the DSR scale and affect the insurance premiums payable on the driver’s licence, in addition to premium discounts on registered vehicles.
Canadian Market NEED FOR INSURANCE INDUSTRY TO GROW CYBER LIABILITY MARKET TOGETHER Insurance companies and their clients should focus on cyber liability risk, executives suggested during the Canadian Commercial Insurance Summit (CCIS) in Muskoka Lakes, Ontario in June, produced by MSA Research Inc. “This is a market that we collectively have to grow,” Andrew Hollenberg, president of ACE Canada, said during a panel discussion. Clients are “going to get in trouble” if they do not buy cyber liability insurance, Hollenberg noted. “We’ve got to pay attention to cyber risk,” agreed copanelist Lynn Oldfield, president and CEO of American International Group Inc.’s Canadian subsidiary. “This is about prevention. This is about putting some loss control around it. This is also about putting the entire IT team in to walk them through what some of the latest and greatest technology innovations are,” Oldfield pointed out.
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MARKETPLACE
CANADIANS NOT CHECKING TO ENSURE THEY ARE PROPERLY INSURED More than half of Canadians are not taking the time to make sure they are properly insured by asking questions about their policies, note results from a TD Insurance survey released in June. While 55% of those surveyed reported they review their insurance policies at least once a year, 52% said they would not ask their insurance provider to clarify details that they did not understand in their policy, notes a statement from TD, which commissioned Environics Research Group to conduct the survey. Of those who would not ask for clarification, 31% said they think it is too complicated and another 31% said they do not have time. Almost a quarter of respondents, 23%, said they are too embarrassed by their lack of knowledge, while 19% said they simply are not interested.
Technology MEETING CONSUMER DEMAND ONLINE BLURS BROKER, INSURER ROLES The line between insurers and independent brokers may be unintentionally blurred in the online world as the property and casualty insurance industry works to keep pace with consumer demands, Brenda Rose, a vice president of FCA Insurance Brokers in
Toronto, suggested during an industry event in June. “We are, in fact, on opposite sides of the same ravine,” Rose said of brokers and insurers during an event held by the Property and Casualty Underwriters Club. “We have different — not incompatible — objectives,” Rose said. But as consumer behaviour changes and the demand for more information at a faster pace increases, even wellintentioned insurers may be crossing that ravine into broker territory. “There’s an alarming increase in the number of broker distribution insurers seeking to communicate directly with clients online.” When insurers reach out directly to clients, they are blurring what Rose called a “previously clear delineation of customer, broker and insurer roles.” That said, “brokers have to step up to the challenge,” she told attendees. “We have to ensure that when a consumer wants to obtain information or communicate in an electronic form, that we deliver on the ability.”
ALMOST HALF OF STATES ALLOW ELECTRONIC PROOF OF AUTO INSURANCE There are now 24 states that allow some form of electronic proof of coverage at traffic stops, the Property Casualty Insurance Association of America (PCIAA) noted in June. Seventeen states have passed laws this year, as of June 6, allowing drivers to show proof of auto coverage using a smartphone.
“In just two years, policymakers in nearly half the country have changed their laws to enable consumers to use their smartphone to show they have insurance instead of keeping that little piece of paper in the glove compartment,” says Alex Hageli, PCIAA director of personal lines policy. “It makes good sense to allow consumers and insurers to use increasingly ubiquitous technology to comply with the law.” In Canada, insurers are still reluctant to “make the first move” on electronic proof of coverage, although it still seems “inevitable” that it will become the norm in Canadian insurance, consultant Willie Handler suggested in an article in the May 2013 issue of Canadian Underwriter.
Risk BETTER FLOOD RISK INFORMATION NEEDED Insurance executives recently called on governments to provide better information to the Canadian industry in the wake of the devastating flooding in Alberta. “This is going to be very catastrophic,” Patrick Lundy, president and CEO of Zurich Canada, said during a panel discussion at CCIS in Muskoka Lakes, Ontario in June. “When you evacuate 100,000 people from a city, you are going to have business interruption, you’re going to have flood” claims, Lundy said. “We have to be thinking
more about flood resilience, climate change, more than ever,” he told conference attendees. “There’s got to be government involvement — not in insuring — but in better research and development and also better information,” Lundy emphasized. Published reports quoted Alberta Premier Alison Redford as saying losses could be worse than the 2011 fires in Slave Lake, which caused approximately $700 million in insured losses.
Reinsurance PIPELINE COMPANIES MUST HAVE $1 BILLION FOR DAMAGE RESPONSE The federal government has announced new requirements for companies operating major crude oil pipelines, including having a $1 billion capability to respond to spills or other damage. Companies must also appoint an “accountable senior officer whose duty is to ensure their management system and programs are in compliance” with the environmental laws, natural resources minister Joe Oliver announced in late June. Other measures include new fines, ranging from $25,000 to a maximum of $100,000, that will “soon come into force”; ensuring companies’ emergency and environmental plans are transparent and easily available to the public; and enshrining the “polluter pays” principle explicitly in law.
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PROFILE
Members Wanted Greg Meckbach Associate Editor
Marie Gallagher, who takes the helm of the Canadian Independent Adjusters’ Association (CIAA), in September, has many goals. These include persuading more adjusters to join CIAA and encouraging more people to pursue adjusting careers. Marie Gallagher, like many insurance professionals of the baby boom generation, did not originally plan to carve out a career in the insurance business. But the incoming president of the Canadian Independent Adjusters’ Association (CIAA) has no regrets about becoming an adjuster, and would like to do her part to alleviate a looming skills shortage by encouraging people to consider making insurance their career choice as well. “Like most people in our industry today who are my age, I ended up in the industry quite by chance,” says Gallagher, a 30-year veteran scheduled to replace CIAA president John
10 Canadian Underwriter July 2013
Seyler at the association’s annual general meeting on September 14 in Banff, Alberta. Currently first vice-president, she previously served as president of the Ontario Insurance Adjusters Association (OIAA), which is not affiliated with CIAA, in 2006-2007. Gallagher cut her teeth in insurance in January 1983, while working at the Markham, Ontario office of Cosburn Griffiths and Brandham, the brokerage now known as CG&B Group Inc. A friend of her husband at the time was a CG&B partner. “They needed somebody to come in and help them out for one week to fill in a vacation spot in administrative duties,” she says. By the end of that week, CG&B Group had hired her for a permanent position. Three years later, Gallagher left CG&B Group to join her current employer, Granite Claims Solutions, known at the time as Ponton Coleshill Edwards & Associates and, later, as McLarens Canada. Today, she is a multi-lines adjuster managing the Granite Claims branch in her hometown of St. Catharines, Ontario. Gallagher supervises the branch’s employees, and also works on occupiers’ liability claims, including those from the gambling casinos in Niagara Falls, about 20 kilometres away. More than 20 years ago, Gallagher was encouraged by
Granite Claims founders Stewart Ponton (CIAA’s president in 1981-1982) and Bryan Coleshill (a former OIAA president) to get involved with industry associations. In 1990, Ponton and Coleshill encouraged her to attend the CIAA’s AGM. “Stewart and Bryan said, ‘Why don’t you go and represent our company?’ They had been doing so themselves, but they were passing the baton to me,” she recalls. In addition to devoting a considerable amount of her spare time to CIAA, Gallagher is also involved in the Insurance Institute of Canada’s Career Connections program, aimed at young people and those changing careers. “Recognizing that we’re going to have more than 25% of our people retiring in the next five to 10 years, they are taking a proactive approach by seeking volunteers, such as myself and the other ambassadors throughout Canada, to volunteer their time to go into the schools and inspire others by just talking about our jobs,” she says. “I really like to inspire people to come into this industry because it’s been such a good industry for me to be in.” In fact, insurance now runs in Gallagher’s family. Her husband, Ian Gallagher, is a Granite Claims adjuster in St. Catharines, specializing in aviation, and is currently secretary of OIAA. Her sister, Lori Ryther (along with her
husband Craig Lyther) run Claridge Insurance Adjusters Inc. in Barrie, Ontario. And Gallagher’s son-in-law also changed careers and now works as an adjuster.
“Stewart and Bryan said, ‘Why don’t you go and represent our company?’ They had been doing so themselves, but they were passing the baton to me.” GOAL DRIVEN Beyond encouraging more people to join the industry, Gallagher has a slew of goals as incoming CIAA president, including to encourage carriers to use the services of independent adjusters. “Call us not just when you have a catastrophe,” she says. “Call us during the year so we have enough work to help train the new generation. This is a big issue in the industry, not just claims, but the insurance industry as a whole,” she adds. CIAA is trying to persuade more independent adjusting firms to join the association, and last February, Cunningham Lindsey announced it rejoined CIAA. “Expense plays such an important part of the bottom line that some of our large national firms question the
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value of membership,” says Gallagher. “But we worked with those firms at kind of jigging our membership fees so that it made it affordable.” Still, Gallagher says it “floors” her that some independent adjusting firms across the country are not CIAA members — something she would dearly like changed before she retires. CIAA’s accomplishments help more than just its member firms, Gallagher suggests, citing as an example to when the federal government passed the Personal Information Protection and Electronic Documents Act (PIPEDA) in 2004. CIAA advocated to get “investigative body status” for adjusters, she reports. In essence, PIPEDA stipulates that companies, for the most part, cannot disclose personal information about people without their knowledge or consent. One exception is for organizations designated by the federal government as “investigative bodies,” which includes licensed adjusters and members of professional associations that represent adjusters. These bodies may, in some cases, disclose information on people without their knowledge when there are grounds to believe the information relates to a breach of an agreement or the law. “Had we not done that, certain rights that we have today, we would not have had,” she says.
CIAA is also trying to make it easier for adjusters to work in multiple provinces. “Each insurance adjuster in Canada is licensed by their own province,” she reports. “If you need to send an Ontario adjuster to Alberta to help out with the recent Calgary storm claims, there is paperwork and bureaucracy and red tape that the adjuster and their company have to go through to get them there. Through the CIAA’s efforts, that has been greatly diminished and is making now for an easier flow to send people across the country.” Since each province has different licensing requirements for adjusters, though, getting all provinces to use the same rules will take a long time, Gallagher suggests. “That will be ongoing probably past the time I’m retired,” she quips. Another challenge relates to the demands imposed by new technologies, which may be discouraging some younger adjusters from getting active with their associations. “The biggest challenge professional associations have today is the young people are being torn in so many different directions, with technology as it is... the fact that we’re always on, 24 hours a day, seven days a week, 365 days a year,” she says. Gallagher is happy to have become involved in associations. She credits her desire to take on the role of CIAA presi-
Photo: Simon Cheung
PROFILE
dent to the continuing support of several past presidents, including Patti Kernaghan, Jim Eso and Fred Plant. “These are people who are still giving time and energy to our association,” she says. “If it was not for those people, I would not feel confident in stepping up to the role as president of CIAA. I know that they’re there for me if I have questions or if I need any help.” As the incoming president,
Gallagher says that her roles will include acting as a spokesperson, attending industry events and responding to government initiatives that could affect adjusters. “Some issue might come up this year and so I will be the captain of the ship that will be required to help steer the ship,” she says. “We need every independent adjuster in Canada to be on board, to be part of their association, to help have input.”
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Tax on Demand
Partner, Cassels Brock & Blackwell LLP
One of the most significant tax issues to affect Canadian insurers in many years is the position recently taken by Canadian Revenue Agency (CRA) that HST (or GST depending upon the province) is applicable to a portion of reinsurance premiums paid to related unlicensed reinsurers. The tax exposure of Canadian insurers for HST/GST is retroactive to 2005, and has been estimated to be as high as $800 million. HST/GST is a tax on a supply of goods or services. Under the current HST/GST regime, financial services (including insurance) are
12 Canadian Underwriter July 2013
considered to be exempt from HST/GST. One important aspect of the current regime is that it requires a Canadian resident to self-assess the amount of HST/GST for the value of goods or services that have been provided to it by most non-residents.
THE STATE FARM CASE The roots of the current HST/GST issue can be found in the State Farm case that was decided by the Tax Court of Canada in 2003. The Canadian branch of State Farm had paid management fees for various administrative services to its head office in the United States without self-assessing GST on them. The Tax Court found that the head office services provided by State Farm to its Canadian branch were an exempt supply of financial services and, as a result, it was not necessary for a self-assessment of GST to be made. The GST statute included a provision intended to treat the branch as a separate person, but the Tax Court found it was ineffective. The State Farm case was never appealed by CRA and most insurers assumed the issue of the payment of GST on head office management
Illustration by RĂŠmy Simard/i2iart.com
J. Brian Reeve
When it comes to HST and related party reinsurance, it may seem like chasing a moving target. But the target is substantial, with the tax exposure of Canadian insurers for HST/GST retroactive to 2005 estimated as being as high as $800 million.
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charges was conclusively settled. However, on November 17, 2005, the federal Department of Finance introduced proposed legislative changes that were intended to reverse the effect of the State Farm case. The changes were intended to be effective from the date of the press release. Unfortunately, the press release lacked sufficient detail about the changes and draft legislation was not released until 2007. The legislation was finally included in the 2010 federal budget and was subsequently passed. It appeared at the time that CRA was simply trying to impose a level playing field with respect to the providing of management services. If a management service was provided by a Canadian resident, it would be clearly subject to HST/GST. However, if the same management service was provided by the head office of a foreign insurer, it would not be subject to HST/GST, based upon on the State Farm case. It appears that CRA wanted to discourage Canadian insurers from providing management services from their head offices to their Canadian branches without payment of HST/GST. Unfortunately, the 2010 legislation was drafted in such a manner that it (possibly inadvertently) opened the door to the assessment of HST/GST on related party unlicensed reinsurance as well.
THE CONCEPT OF LOADING The Canadian insurance industry received a big surprise late in 2012 when CRA began to reassess certain insurers for HST/GST on the “loading” portion of the reinsurance premiums paid to related unlicensed reinsurers retroactive to 2005.The position taken by CRA was that the loading under a related party unlicensed reinsurance agreement was similar to a head office management service and should be subject to HST/GST. Until these reassessments began, most insurers had assumed that the 2010 legislative changes were only intended to ensure that HST/GST was paid on head office management charges, and not to charges between separate entities.
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The definition of “loading” refers to the portion of the reinsurance premium that may be attributed to a number of different items, including administrative expenses, profit margin, claims-handling costs, management fees, operating expenses, processing costs and other types of costs or expenses incurred by the reinsurer. It is necessary to divide a reinsurance premium between the risk
transfer charge (basically the expected loss ratio) and the loading. The risk transfer charge portion of a reinsurance premium is clearly a financial service and is exempt from HST/GST. The loading charge is taxable.
FAIRNESS ISSUES Under Canadian law, there is no legal distinction between an insurance premium and a reinsurance premium. A reinsurance premium is simply considered to be an insurance premium paid by an insurer to a reinsurer. It is arguable a reinsurance premium (regardless of to whom it is paid) should still be considered to be an insurance premium and, as a financial service, should be totally exempt from HST/GST. CRA takes the position that the premium can be unbundled into a true premium (exempt) and an administrative service (taxable). There are also potential issues of
double taxation since head office management services are subject to HST/GST. Some of the same services may have also been part of the loading under related party unlicensed reinsurance agreements. It is important to note that CRA has taken the position that HST/GST is only applicable to the loading on related party unlicensed reinsurance and not on related party licensed reinsurance or any type of unrelated third party reinsurance. This would appear to create an inconsistent result since the reinsurance premium paid to a non-related unlicensed reinsurer would not be subject to HST whereas an identical insurance premium to a related unlicensed reinsurer would be subject to it. One reason why CRA may have singled out related party unlicensed reinsurance transactions is due to concerns about transfer pricing. However, an approval from the Office of the Superintendent of Financial Institutions (OSFI) must be obtained for any related party unlicensed reinsurance agreement. One of the requirements of this approval is that evidence must be provided to OSFI that the reinsurance agreement has been entered into on fair market terms and conditions. As a result, it is much more difficult for a Canadian insurer to transfer profits to a related party using a reinsurance agreement.
LOBBYING EFFORTS Once Canadian insurers realized CRA was serious about imposing the HST/GST on a retroactive basis, significant lobbying efforts began.The Insurance Bureau of Canada, as well as other industry groups, began to actively lobby CRA and the Department of Finance. Some of these lobbying efforts appear to have partially paid off. CRA has recently agreed that ceding commissions and the margin for risk transfer on quota share reinsurance agreements will not be considered to be loading. However, CRA has not yet set out its position on excess of loss and stop loss reinsurance agreements.The confirmation that a ceding commission on a quota share
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reinsurance agreement is not loading is a significant concession by CRA since it can represent a fairly large portion of the premium and is intended to cover the acquisition costs of the business that has been ceded.
A MOVING TARGET It is still not clear how the HST/GST payable on related party unlicensed reinsurance issue will ultimately be resolved. The only real remedy for the current situation may be a test case challenging the 2010 legislation in the courts. It would be necessary for an insurer that had been reassessed by CRA with respect to the HST/GST to challenge the reassessment in the Tax Court (and likely in higher courts on appeal by the unsuccessful party). It is likely that it will be many months, or possibly even years, before total certainty is obtained regarding this issue. Until CRA provides a final interpretation of what it considers to be “loading” under a reinsurance premium, it will not be possible for a definitive assessment of the retroactive tax liability to be determined. It was necessary for the 2012 audited financial statements of all Canadian insurers with a potential HST/GST exposure to include a tax provision that ordered to reflect the tax liability on a retroactive basis back to 2005. Most Canadian insurers have included this tax provision in their audited financial statements, but have not yet actually begun to remit HST. It is clear that the tax liability of Canadian reinsurers with respect to HST/GST for related party unlicensed reinsurance is still a moving target. Until the HST/GST issue is resolved, Canadian insurers should carefully evaluate their use of related party unlicensed reinsurance to determine whether or not it still makes sense, assuming that GST/HST may be payable on the loading component of the reinsurance premium. In summary, the position taken by CRA with respect to related party unlicensed reinsurance can be criticized
based on the following factors: 1. the retroactive application back to 2005; 2. confusion over whether the legislative amendments were intended to apply to related party unlicensed reinsurance or just to head office management charges; 3. a lack of clarity over the definition of “loading”; 4. difficulties in calculating the com-
ponents of a reinsurance premium (eg., the amount that covers the risk transfer); and 5. basic principles of fairness (the applicability of HST/GST to a financial service, as well as to only certain types of reinsurance agreements). This is clearly an evolving issue for the Canadian insurance industry and the final resolution of it will be both interesting and important.
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Consideration for
All
Thomas Varney
Head of Risk Consulting, Americas, Allianz Global Corporate & Specialty
A recent survey of Allianz experts around the globe shows that businesses take some risks very seriously, but widely underestimate others. Among the latter are the risks of power outages and cyber crime.
The Allianz Risk Barometer, carried out towards the end of each year, gathers opinions from risk management and underwriting experts at Allianz Global Corporate & Specialty (AGCS) throughout the world, forming an outlook for the coming year. The survey identified economic risks as the most pressing concern in 2011, while a year later, respondents identified business interruption, natural catastrophes and fire risks as the most worrying risks. Another interesting aspect, though, is looking at the most underestimated risks. For 2013, the most underestimated risks by business worldwide included cyber risks, as well as power
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outages. These also applied to North America and, in particular, to Canada: only 8% of the 166 responses in the United States and Canada considered power blackouts and technological innovations a major risk to large companies.
OFF THE RADAR Allianz experts report that businesses take some risks very seriously, but widely underestimate others. For example, IT failures — whether selfinflicted by human error or the result of cyber crime — can entail high economic losses in an increasingly digitized economy. Nonetheless, only a few of the Allianz experts globally report that their clients are really aware of this risk. Similarly, the risk of supra-regional power blackouts features on the risk radar of few companies. “Reliability of power supply will decrease in the future due to aging infrastructure and the lack of substantial investments,” explains Larry Hunter, risk consultant at AGCS Americas. If a blackout occurs, the impact is much higher today than 10 to 15 years ago due to the high dependence on information and communication technologies and the lack of preparedness on the part of businesses. Blackouts are on the rise worldwide. Countries such as China are investing in more grids as
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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. Š 2013 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. CP-8416 Rev. 5-13
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they are acutely aware that taking down their grid can substantially weaken them. In the U.S., most of the power grids and power plants were built in the 1950s, meaning the infrastructure is aging to say the least. Power still mainly comes from old coal fire plants, and transformers are 60 years old on average. Most of them were designed to last for approximately 20 years. In order to mitigate this risk, it is important to build in redundancy in the power supply, usually using at least two feeds. For instance, during the most recent Super Bowl in February, only half of the stadium went dark when the power went out. That is because even though the stadium in New Orleans is fairly old, it was fed from two power sources. The cameras were certainly critical loads, as was emergency lighting like exit signs, which are usually powered by local batteries. Many companies in the Americas generally underestimate the risk of supra-regional power blackouts with high economic losses. Consider that the Northeast blackout of 2003 affected an estimated 10 million people in Ontario alone. It will be necessary to expand and link decentralized sources of power generation — especially renewable energies
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— and to enable cross-border trading of power and grid services. Smart grids with metering, communication and control technologies and new storage and transport capacities are needed to handle the growth of renewable energies. Canadian companies are currently exploring emerging wind and solar technologies, as well as tidal and thermal energy technologies. As of today, Canada already generates a lot of its electricity from hydroelectric sources (mostly through dams) and is one of the fastest-growing wind energy markets worldwide.
UNDERESTIMATING CYBER CRIME Despite being taken seriously in the information and communication technology (ICT) sector, the risk of cyber crime seems to be underestimated in many other areas. Insurance policies covering property and liability often provide no cover for cyber risks, while the percentage of companies that do take out specific cyber cover remains low. While ICT companies are used to being under the constant threat of hacker and malware attacks, industrial companies should not underestimate the risks. The Stuxnet attacks — a computer worm used to attack Iran’s nuclear facilities to damage the country’s nuclear program — have moved IT systems of
The Most Underestimated Business Risks for 2013
industrial facilities, production lines and power plants into the spotlight. Security experts watched with concern as Internet connections for data transfers were added to previously isolated SCADA systems used to control industrial facilities. “This theoretically opens the door for hackers, especially as SCADA systems’ security functions lag far behind those of commercial IT systems,” comments Jose Fidalgo, an IT expert at AGCS.
ENVIRONMENTAL RISKS IN CANADA Beyond IT, there are also a number of other risks rated as low importance across all industries, such as environmental changes and terrorism. The environmental risk is one that should be taken particularly seriously across Canadian businesses, where the environment is one of the country’s largest assets. For instance, the exploration of oil sands and oil exploration has been under public scrutiny. However, as Doug Pope, aToronto-based mining and power generation expert and risk consultant, explains: “Another factor that needs to be considered is the fact that the energy efficiency is higher with oil sands than with regular wells.” Oil sands, which are often also called unconventional oil reserves, refer to a different extraction technique than the traditional drilling of oil wells. There is no question that these new exploration techniques bring with them new and increased risks. In the future, it will be important for the insurance industry, together with their energy partners, to continue monitoring oil sands mining techniques closely.
DIFFERENT INDUSTRIES, DIFFERENT RISKS
The risks shown were identified by Allianz experts as most underestimated by businesses. All of these risks recieved less than 10 percent or even less then 5 percent of the overall responses
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Source: Allianz Global Corporate and Specialty
The most recent top three risks — business interruption, natural catastrophes and fire — rank consistently highly across the majority of industries, with only a few exceptions. Fire and explosion is a far less important risk for industries with little or no production sites, such as professional services or
telecommunications and IT. A clear risk profile can be identified for a number of industries: • Consolidation in the aerospace, defence and aviation industries sees intensified competition named as major risk, ahead of market fluctuations. • For pharmaceuticals and chemicals, changes in legislation can heavily affect their businesses. Fire and explosion is another major risk in these industries that often process highly inflammable substances. • For financial services, the top risk is Eurozone breakdown, closely followed by natural catastrophes and regulatory changes. • For marine and shipping, theft, fraud and corruption was identified as the number one risk.
CARGO THEFT A RISING CONCERN Concern around cargo theft is increasing, both globally and in Canada.
Theft, in particular, has long been a problem for cargo insurers. Both the number of incidents and the amount of losses have substantially increased every year since 2006, reports Freight Watch International. In the European Union alone, the Transported Asset Protection Association notes that the cost to businesses is estimated to be 8.2 billion Euros a year. Emerging markets such as Mexico, Brazil and South Africa currently rank highest in terms of cargo theft. But Canada has seen an increasing amount of cargo theft as well. Every year more than US$5 million worth of cargo is stolen in Canada, and this is becoming a huge issue for the Canadian trucking industry. This is why AGCS announced at the end of 2012 an agreement with Verisk Crime Analytics that helps reduce cargo theft and the theft of heavy equipment in Canada. Clients receive a deductible
Ja n ua r y 2 9 t h , 9 : 2 2 a . m .
QuICK InsIGhts LEaD tO LOnG-tErm OPPOrtunItIEs I n a n I n s ta n t, KATE MORLEY UNLOCKED A NEW LEVEL OF SUCCESS
waiver if they are members of CargoNet or the National Equipment Register. “Cargo theft is a low incident/highimpact event that usually has a major effect on our clients’ supply chain. We work closely with the companies and their transport providers to put deterrents in place to minimize theft and hijacking exposures. In Canada, this is especially important near the cargo hubs in Ontario and Quebec, but also increasingly in Atlantic Canada,” says Phil Best, head of marine at AGCS in Canada. “We have seen many policyholders getting engaged with the program and thefts getting reported to CargoNet and the National Equipment Register immediately,” Best adds. There are a substantial number of risks that are currently underestimated both globally, but also within Canada. As risk professionals, it is necessary to look outside of the well-known risks and explore what else is out there.
Thirty minutes was all the time Kate had to spend with her CNA Underwriter, Phil Samms. And in that instant, Phil helped Kate unlock the code to a deeper understanding of her clients’ business insurance needs. Kate was able to deliver the products and expertise her clients depend on to work the bugs out of their exposures. Way to go, Kate. To learn more about our comprehensive portfolio of insurance products and services, and the industries we serve, visit www.cnacanada.ca.
Construction • Manufacturing • Oil & Gas • Life Sciences • Renewable Energy
CNA is a registered trademark of CNA Financial Corporation. Copyright © 2013 Continental Casualty Company. All rights reserved.
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Angela Stelmakowich Editor
It is too early to put firm numbers to the hard reality delivered by heavy rain that produced what some suggest is the worst flooding ever in southern Alberta. The lack of numbers, though, has not dampened calls over the need to make changes. Cost estimates for the flooding in Alberta are starting to trickle in — a stark contrast to the deluge unleashed on the southern part of the province from June 19 to 21.An unusual “blocked” jet stream pattern developed across western North America before that stream trapped a strong area of low pressure over southern Alberta and that system pulled a moist channel of air from the Gulf of Mexico northward, colliding with the Rocky Mountains,Tim Doggett, senior principal scientist for catastrophe modelling firm AIR Worldwide, explains in a statement.
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“As the air mass was pushed higher and higher, the air cooled and condensed, creating a large amount of precipitation (up to 200 millimetres of rain fell in some areas),” Doggett reports. “A similar pattern of the jet stream in Europe has been the cause of the large floods in Germany just two weeks before and the results were similar in terms of the impact on densely populated areas,” notes an email response from Munich Re. “There has been a trend in the last decades to larger movements of the jet stream and a higher duration of such patterns, which means intensification of longitudinal air transport (arctic air to the south; subtropical air to the north) and longer durations of the specific weather (intense precipitation in the troughs represents heat waves/droughts in the ridges),” Munich Re adds. In Alberta, “this disaster is entirely unique in its speed, its scale and its scope in the number of people and communities that it impacted,” Premier Alison Redford said in a statement. The government has already approved $1 billion in emergency recovery and reconstruction funding. The Canadian government has paid out more than US$2 billion since 1970 in post-disaster as-
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sistance to help the provinces and territories restore infrastructure and personal property to pre-disaster condition, notes Sharon Ludlow, president and CEO of Swiss Re Canada. “But the price tag keeps rising as disasters become more frequent and severe. On average, nine payouts were made annually in the previous decade, but in 2011, there were 26.” Steve Kee, director of media relations for the Insurance Bureau of Canada (IBC), said in early July that no specific claims numbers were available, although a preliminary estimate was expected in a couple of weeks. “The 2005 flooding (in Calgary) resulted in $300 million in insured damages. This will be worse.” One preliminary cost estimate put expected insured losses in the range of $1 billion to $3.75 billion, A.M Best notes in its Best’s Briefing for July 1. If so, those numbers would put the floods among Canada’s largest catastrophe losses: the 1998 ice storm had insured losses of about $1.5 billion in inflation-adjusted dollars; the Slave Lake wildfires in 2011 produced approximately $700 million in claims; and flooding along the Red River in Manitoba in 1997 cost insurers about $500 million. Wayne Ross, vice president of national property claims for Aviva Canada, expects “the covered damages will likely pass what we experienced in Slave Lake.” A.M. Best reports business interruption claims will be a major driver of insured losses in the wake of the severe flooding in Alberta. For optional flood coverage in commercial lines, it expects there is about a 75% take-up rate, senior financial analyst Jacqalene Lentz noted in a video from the company. In downtown Calgary, the business district “was inaccessible for several days due to water damage, as well as a lack of electricity,” notes a weekly cat report, issued by Aon Benfield on June 28. “The early indication is an obvious lower frequency (more based on exposure), but a higher loss due to the severity of damage incurred by business customers,” says Ross. “Commercial claims also tend to have a greater delay, as the assessment takes more time. Business
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interruption coverage also factors in to the overall severity of commercial claims.” Ross points out that “many commercial customers locate heavy mechanical equipment in the basement, which is expensive to replace and affects their ability to conduct business.” Based on news coverage and “reports suggesting $3.6 billion+ in insured losses, I would suggest much of the loss will come from personal lines (including automobiles), smaller commercial
enterprises and infrastructure,” Josie Pachis, vice president of claims for Zurich Canada noted in early July. A.M. Best reports “in personal lines, automobile insurers likely face exposure from claims on comprehensive policies.” Of the significant number of calls Intact Financial Corporation received from customers by the end of June, these “relate to overland flooding, sewer backup and coverage for cars which were damaged by water.” Adds Ross, “Sewer back-up in residential is most prevalent.” Not all flooding damage is covered. “Overland flooding resulting in water overflowing onto dry land and causing damage is not covered in home insurance policies in Canada,” IBC reports. Some damage may be the result of sewer back-up, coverage for which is available, but must be purchased as an add-on to a home insurance policy. It may be that the scarcity of property coverage for flooding in Canada will keep claims well below total economic loss.
“A.M. Best believes that the industry currently is well-positioned from a riskadjusted capital perspective to absorb the estimated insured losses, and underlying performance trends remain favourable.”
URBAN LANDSCAPE “These floods have been particularly severe because the ground was already saturated, as the spring in southern Alberta has been unusually wet,” notes Doggett. “In some locations, soils just 50 centimetres below the surface had not yet thawed, forcing the rainfall to flow downhill and enter rivers and streams rather than soaking into the ground.” The urban landscape may have made matters worse. “Increased urbanization (more pavement, etc.) and concentration of insured values in Canada’s cities alone (such as the huge condo building boom in Toronto) is leading to increases in damage when even just an average event occurs,” says Glenn McGillivray, managing director of the Institute for Catastrophic Loss Reduction. “However, when you factor in degradation of infrastructure and climate change, these become multiplicative — not just additive — to the problem,” McGillivray notes. His advice? “First and foremost is to stay off the flood plain, particularly the 1100 year and lower flood plain,” he says. “The (Alberta) flooding came from a huge rainfall event, and many are shocked at the outcome. But should they be?” he asks. “Municipal governments — and that’s where the rubber hits the road — must be far more stringent as to what they allow to be built, where they allow things to be built, and how they allow things to be built,” McGillivray says. “That new tower, subdivision or strip mall is great for adding tax revenue and allowing cities to reach their provincial government-mandated density goals, but it’s all for naught when you have to spend millions or billions rebuilding after a loss,” he comments. “One of two things needs to happen,” Ross says. “Either building in flood-prone areas needs to stop, or steps to increase the municipality’s infrastructure/ability to deal with larger amounts of water.”
MORE FREQUENT “Global climate change predictions indicate we will see more frequent and severe climatic events. The problem is how they unfold on a global basis.Those types of events such as annual hurricanes are much easier to predict and model then 1 in 100 flood events such as the Alberta floods,” Pachis points out. “Existing infrastructure can never guarantee complete safety or avoid losses associated with severe weather events,” Munich Re notes. “Flood protection works (and many other parts of the infrastructure) are designed to cope with ‘normal’ extremes, i.e. those that have a 0.5% to 1% chance of happening in any given year (100-200-year events). Extreme weather events overwhelm such infrastructure and damage or destroy it.” Munich Re reports that, worldwide, large floods have been relevant for reinsurance, which applies to commercial risks. “The losses of the (2011) Thailand flood had reached a level of a major hurricane landfall and the case will likely be similar in Calgary, given the scope of commercial risks which will be impacted. Reinsurance will play an important role in responding to losses where flood coverage was purchased and flooding caused the loss or damage, since many of the insurance companies providing such coverage would face enormous financial stress if reinsurance wasn’t available to backstop their losses.” Intact reports its reinsurance coverage starts once damage reaches $100 million (pre-tax). RSA Canada, for its part, reported in July that it expects gross claims from the flooding to be above reinsurance retentions of $75 million, though it added a complete assessment will not be available for some time. “Primary companies are becoming increasingly sophisticated in their risk management, but reinsurers have models and expertise that make us an ideal partner for primary companies,” Ludlow says. “We believe that lessening the effects of severe flooding and preparing for future events in the province — whether that means investing in infrastructure, operationalizing practical,
meaningful and cost-effective adaptation solutions or other prudent, preventative and protective measures, such as adapting land use planning practices — will be a point of discussion for government officials,” Intact notes. “There’s got to be government involvement — not in insuring — but in better research and development and also better information,” Patrick Lundy, president and CEO of Zurich Canada, said of
the Alberta flooding during the Canadian Commercial Insurance Summit in June. “Swiss Re was recently involved in an extensive study with New York City which was aimed at identifying ways it could increase its resilience to climate change and severe weather events,” says Ludlow. “Collaborative projects like this, bringing in many stakeholders, are a great way to identify areas that need improvement and the ways to do so.”
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Limitation Periods May Differ Michael S. Teitelbaum
Partner, Hughes Amys LLP
The Court of Appeal for Ontario finds that where the policy is for a “business,” a clear one-year limitation period may be included in a multi-peril policy. However, it appears that for homeowner policies, the longer two-year limit period will apply. On May 8, 2013, the Court of Appeal for Ontario reversed a decision by Justice Michael Quigley of the Superior Court of Justice that the two-year limitation period in the province’s Limitations Act,2002 applied to a claim under a business insurance policy that included multi-peril property coverage.
BACKGROUND AND PROCEDURAL HISTORY
Alexander B. Wilkinson
Associate, Hughes Amys LLP
By way of background,The Co-operators General Insurance denied the property loss claim of Thomas and Marilyn Boyce on the basis that the smell from their fashion boutique had been caused by a skunk, which was not covered under their policy. More than a year after the incident, the Boyces issued their statement of claim. The
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Co-operators brought a motion for summary judgment, arguing that the claim was prescribed by the one-year limitation period set out in the contract of insurance. Justice Quigley dismissed The Co-operators’ motion on the basis that the fire statutory conditions did not apply to a multi-peril policy.The motions judge also concluded the policy could not be considered a “business agreement” because it did not meet the requisite criteria of such an agreement. On appeal, The Co-operators did not challenge that the one-year limitation in the fire statutory conditions had no application, essentially conceding it was not applicable to multi-peril policies. However, the insurer disputed Justice Quigley’s decision that the contract of insurance did not contain an enforceable one-year limitation period.
ANALYSIS Ontario’s Court of Appeal considered three questions on appeal: 1. Is there a term in the contract of insurance that provides for a one-year limitation period? 2. If there is a term in the contract imposing a one-year time limit on claims, is that term capable of overriding the otherwise applicable two-year limitation period set out in the Limitations Act, 2002?
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The Court of Appeal for Ontario held that the only requirement provided for in section 22 of the province’s Limitations Act, 2002 was found in the definition of “business agreement.”
3. Is the contract a “business agreement” as defined in section 22(6) of the Limitations Act, 2002? On the first question, the Court of Appeal held that the contract of insurance provided for a one-year limitation period in “clear and unambiguous” language.The Co-operators included all of the statutory conditions contained in section 148 of Ontario’s Insurance Act, including statutory condition 14, which sets out a one-year limitation period. The court found that the policy language used closely tracked the wording used in the insurance contract considered in its 2002 decision, International Movie Conversions Ltd. v. ITT Hartford Canada, where it held that the policy was “clear” and did not require any reference to a statute for clarification. The language that the court held is clear states as follows: “The Statutory Conditions apply to the peril of fire and as modified or supplemented by forms or endorsements attached apply as Policy Conditions to all other perils insured by this policy.” The Court of Appeal answered the second question in the affirmative. In its reasoning, the court disagreed with the four requirements that Justice Quigley imposed on parties attempting to contract out of the statutory limitation period. Rather, the Court of Appeal held that the only requirement provided for in section 22 of the Limitations Act, 2002, was found in the definition of “business agreement.” At paragraph 16, the court emphasized that: “No other limitation appears, expressly or by implication, and certainly no content-related requirements appear in s. 22(5).” Furthermore, at paragraph 20, the
Court of Appeal provided the following direction to courts dealing with parties that attempt to contract out of the statutory limitation period: “A court faced with a contractual term that purports to shorten a statutory limitation period must consider whether that provision in ‘clear language’ describes a limitation period, identifies the scope of the application of that limitation period, and excludes the operation of other limitation periods. A term in a contract which meets those requirements will be sufficient for s. 22 purposes, assuming, of course, it meets any of the other requirements specifically identified in s. 22.” Last, the Court of Appeal determined that the insurance contract constituted a “business agreement.” This determination, the court held, could be made solely by reference to the definition of “consumer” in the Consumer Protection Act, 2002.The act provides that a “consumer” is “an individual acting for personal, family or household purposes, and does not include a person who is acting for business purposes.” Accordingly, since the policy in question was related to the operation of the Boyces’ business, the contract of insurance could be considered a “business agreement” under s. 22 of the Limitations Act, 2002. In the first instance, Justice Quigley reasoned that the policy in question was not a “business agreement” because it was a “peace of mind” contract and that insurance contracts were not covered by the Consumer Protection Act, 2002 .
The Court of Appeal concluded this reasoning was not relevant as the issues are simply whether the contract is a “business agreement” and whether any of the parties to the contract is a “consumer” for the purposes of this determination.
COMMENT In light of the Court of Appeal’s decision that the Boyces’ property loss claim was statute-barred, a few important considerations deserve mention. Given its reasoning, including its finding that the incorporation into the policy of the one-year limitation was clear and unambiguous, the appeal court, unlike the court at first instance, did not need to address whether or not a multiperil policy, as opposed to a fire policy, can rely on the one-year limitation in the fire statutory conditions. Consequently, it appears that when dealing with business, as opposed to homeowner, policies, a one-year limitation may be included as long as it is clearly worded. In other words, because of section 22 of Ontario's Limitations Act, 2002, insurers may continue to incorporate statutory conditions into policies as contractual terms, whether or not the policy covers more than the peril of fire. On the other hand, where the contract of insurance relates to “personal, family or household purposes,” the two-year limitation period will apply. Note: Hughes Amys LLP is a member of the ARC Group. See the March 2013 issue of Canadian Underwriter, Beyond Limits, which addresses the Boyce decision by Ontario’s Superior Court of Justice.
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Big Deal Travelers Companies, Inc.’s acquisition of The Dominion of Canada General Insurance Company in early June put an abrupt end to a relatively quiet period for insurance company mergers and acquisitions activity. Analysts say there is room for far more consolidation in the Canadian property and casualty insurance industry, although the pace will be uneven and the targets unpredictable. A growing concentration of larger players dominating the market will affect parties ranging from reinsurers to brokers. CRAIG HARRIS
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W
hen it comes to mergers and acquisitions, two factors tend to drive activity — market access (or market share) and capital allocation. In the case of Travelers’ announcement June 10 that it was acquiring one of Canada’s oldest insurers in The Dominion for $1.25 billion, both elements were in play. The deal gave Travelers access to The Dominion’s hefty domestic personal lines book and a small-mid-market commercial segment to augment the former’s focus on surety, management liability and commercial mid-market products, vaulting Travelers into the top 10 in Canadian p&c industry market share. “The Dominion is a great franchise, and this is a very good opportunity for Travelers to significantly improve its market position and scale in a meaningful market,” said Jay Fishman, chairman and chief executive officer of Travelers. The acquisition was also a good example of a major U.S. insurance company that recovered from the financial crisis with an eagerness to deploy its capital for business growth.
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COVER STORY
Big Deal
BUY OPPORTUNITIES “Many U.S. and foreign insurance companies have recapitalized over the last several years and have begun to return some of the excess capital to shareholders through stock buybacks and, to a lesser extent, through dividend increases,” PwC pointed out in a spring 2012 report on M&A activity in Canada. “Insurers will be evaluating whether to continue returning their excess capital to shareholders or to put their capital to use by expanding their core business through M&A,” it added. Increasingly, well-capitalized insurers are scouring the market for buy opportunities, seeking to grow market share through acquisition or looking to turn around underperforming books of business. The competition for buyout targets is enhanced by a renewed interest in the insurance industry from private equity firms and hedge fund managers.
POSITIVE, LESS POSITIVE The reaction from brokers on Travelers putting its capital “to use” in acquiring The Dominion was largely positive. “From a broker perspective, I don’t want to see a market leave my office, and that didn’t happen with this acquisition,” says Randy Carroll, CEO of the Insurance Brokers Association of Ontario (IBAO). “This is a good example of strategic partners that complement each other. There are lots of opportunities there, and also, I’m sure, some challenges when it comes to branding and operations,” Carroll notes. “We have a new player in the market, and it will be interesting to see Travelers plans and how they hit the ground running. I’m sure they didn’t invest more than $1 billion to wade in quietly.” Reinsurance companies, which have seen larger p&c carriers upping their retentions and moving steadily away from pro rata to excess of loss treaties, tend to be less positive about potential spikes in M&A activity, particularly with the absorption of a Canadian insurer with a substantial reinsurance program. “It does make the pie smaller from a reinsurance perspective,” says Cam MacDonald, vice president of Transatlantic Re. 28 Canadian Underwriter July 2013
“Reinsurers will lose premium from Dominion’s program, which was significant. They will get some back for the Travelers’ program, particularly on the cat layers, but it will not be a one-to-one equation.”
“You have to develop the expertise and be prepared to jump in when opportunities arise,” he says. “It is a matter of being fully committed to the market.” Another reality for reinsurers and insurers in a consolidating market may be rate increases for reinsurance programs. “This will be driven by results, profitability and ROE of individual programs, but reinsurers are facing declining premium volume — rate increases may become a reality,” MacDonald says. “I have no doubt that we will see more M&A activity at the primary company level.”
LEVERAGING SIZE AND ANALYTICS
Increasingly, well-capitalized insurers are scouring the market for buy opportunities, seeking to grow market share through acquisition or looking to turn around underperforming books of business. The competition for buyout targets is enhanced by a renewed interest in the insurance industry from private equity firms and hedge fund managers. This smaller pie comes at a time of intensified competition in reinsurance, with more new entrants moving into a relatively small, but stable, Canadian market. To address these challenges, reinsurers are looking at diversifying product lines into specialist areas, such as accident and health, crop insurance, fidelity, errors and omissions (E&O) and directors and officers (D&O), MacDonald reports.
For primary insurers, there are factors other than market access and capital allocation that spur M&A movement. In the case of Travelers (and other acquisitors in the primary insurance market), one emerging strategy is whether or not it can apply scale and analytics to improve The Dominion’s so-so financial performance over the past several years, suggests BMO analyst Charles Sebaski. “Travelers anticipates being able to use its considerable resources in systems and data analytics to improve the underlying combined ratios of Dominion, which has been operating at an underwriting loss for the last several years,” Sebaski wrote in an analyst note. “Travelers believes it can transition this operation to an underwriting profit, as is consistent with (its) overall business philosophy,” he added. This leveraging of size and analytics is a trend that industry observers see taking place with M&A activity. “I think there is more of a case for economies of scale when you look at developments like big data,” says Doug McPhie, a partner in the financial services group of Ernst & Young. “This is a huge opportunity for the p&c industry. If you get more clients, you get more underwriting and claims experience, you can better understand patterns and this will lead to better pricing on products, more targeted products and improved claims experience.”
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Achieving economies of scale to realize better underwriting results is particularly attractive in today’s sluggish market of soft pricing and weak investment returns, suggests Allan Buitendag, leader of PwC’s national insurance consulting practice. PwC points out that the number of M&As has climbed consistently in the Canadian p&c industry over the past several years, with 12 announced deals in 2009, 21 in 2010 and 29 in 2011. It notes that these only represent a proportion of transactions, as not all deals are disclosed. “Some companies are looking at growth through acquisition to drive additional scale,” Buitendag says. “That means they are leveraging back-office platforms to gain efficiency and cost savings in operations, underwriting and claims. There is much more of an emphasis today on underwriting profitability,” he notes. Intact Financial president and chief operating officer Louis Gagnon echoes this assessment. “The industry has become increasingly sophisticated in the areas of underwriting and pricing, as well as infrastructure and technology to contend with changing consumer expectations and behaviours,” Gagnon says. “The profitability of the industry will increasingly rely on underwriting performance as interest rates remain low. This increased sophistication enables better customer service and puts pressure on the lower performing insurers,” he adds.
CONSOLIDATION GREEN LIGHT Industry sources say the Canadian p&c insurance environment is conducive to consolidation, as it has nowhere near the concentration of dominant players as the other financial services pillars, such as life insurance and banking. The top five p&c carriers represent just 43% of the market, versus the bank and life insurance companies, which are closer to 65% to 75% of their respective markets. “The Canadian p&c insurance industry, which currently operates in a slow economic growth environment, is ma30 Canadian Underwriter July 2013
ture, competitive and fragmented,” notes Gagnon. “Despite the recent consolidation over the last few years, the industry remains highly fragmented as the top 10 p&c insurers make up 65% of the market, and there are a large number of insurers/reinsurers operating in Canada to service a population of approximately 35 million,” he adds.
ity at this stage,” Intact Financial CEO Charles Brindamour said on a conference call to investors in February. Gagnon, who estimates a 15 to 20 point trade in market share over the next five years, also observes that ongoing changes in regulation around capital requirements could put a strain on some insurers. “The uneven performance of individual Canadian p&c insurers has an impact on the allocation of capital,” Gagnon notes. “Generally speaking, industry profitability is relatively low with capital pressure from abroad. In recent years, capital requirements have been trending upwards and there is greater regulation around solvency and capital risk,” he adds.
FINDING A NICHE
“Despite the recent consolidation over the last few years, the industry remains highly fragmented as the top 10 p&c insurers make up 65% of the market, and there are a large number of insurers/reinsurers operating in Canada to service a population of approximately 35 million,” says Intact’s Louis Gagnon. Intact Financial has made clear its intentions to grow through acquisitions when the right opportunities emerge in the marketplace. “I do think that this is an environment that will present (acquisition) opportunities within a reasonable period of time, and on that basis, there is no (share) buyback activ-
The pressure of soft market conditions, low investment returns and more stringent capital/regulatory requirements may create a more willing group of sellers — something that has been at times lacking in predictions of increased M&A activity in Canada. “I think there are more sellers today,” says McPhie. “A lot of European insurers with subsidiaries are facing pressures when it comes to capital and risk management. When you combine that with the economic slowdown in Europe and the low interest rates across the financial markets, you could see some of these global companies looking at carving out non-core operations.” In addition to this potential acquisition target, McPhie adds other potential companies for sale may involve midsized insurers with unfocused business strategies or indistinct client segments. “I think the other sellers may be those companies that are small to mid-sized and don’t have a defined niche or specialty,” he notes. In a market report released earlier this year, Aon Benfield made similar observations about this target group. “Many small and mid-cap insurers have been managing through very tough multi-year underwriting conditions in the hope that a market hardening will
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compensate for many ills of the past,” Aon Benfield noted. “Absent a more rapid hardening in the market, midto-smaller insurers are likely to merge with competitors in an effort to extract synergies and benefit from economies of scale.” For Gagnon, consolidation really comes down to the business case. “Ultimately, M&A activity and consolidation is driven by a company’s business and growth strategy,” he says. “In our case, the recent acquisitions have allowed us to strengthen and broaden our product offering, improve our capability to support brokers, expand our distribution platform, reinforce competencies in risk selection and enhance our competitive position,” he reports. Protecting the distribution channel, especially independent brokers, is a variable that could spike M&A activity, Buitendag suggests. “The independent broker channel is increasingly being consolidated and companies are seeing some of their business at risk,” he notes. “So there are more insurers buying into brokers or buying brokers outright to protect their business or buy into geographic areas they don’t currently operate in,” he adds. Buitendag cites Desjardins Financial’s acquisition of Western Financial Group as an example of such a strategy. “For Desjardins to grow that business organically would have been much more difficult,” he suggests.
BROKER FOCUS While insurance companies are investing in brokerages for full or partial control, the distribution channel itself has been the most active area of M&A in the p&c insurance industry to date. The number of mergers or acquisitions in the United States and Canada hit an all-time high in 2012, with 291 transactions, reports OPTIS Partners, a financial consulting firm specializing in the insurance industry. That number was up from 279 deals in 2011. Advisen’s MAINsheet monthly column, which tracks mergers and acquisitions in the U.S. p&c insurance industry, 32 Canadian Underwriter July 2013
has already reported 167 transactions to June 2013, mainly involving brokers and MGAs. This activity has continued into 2013 in Canada as well, with many consolidators such as Hub Group, Western Financial, CG&B Group Inc. and National Brokers announcing deals this year.
The pressure of soft market conditions, low investment returns and more stringent capital/regulatory requirements may create a more willing group of sellers — something that has been at times lacking in predictions of increased M&A activity in Canada. “I think there are more sellers today,” says Ernst & Young’s Doug McPhie. Mergers and acquisitions in this space have been steady in spite of what many observe are record valuations for brokers’ books of business. Some analysts have reported that average purchase prices for brokerages are three times commission income — a doubling over the past three decades.
“There is strong demand for good business, whether from companies, direct writers or MGAs,” says Philip Heywood, a director with PwC’s advisory and deals practice. “Even with the higher valuations, there is a large volume of M&A activity. Whether we will see a tipping point where the supply outstrips demand, I don’t know. But I expect to see this activity continue for at least the next two years,” Heywood comments. The demographics of the broker distribution channel means that more aging brokers are looking for an exit strategy, Buitendag says. “There are a lot of brokers who have yet to retire, and the traditional plan of selling the brokerage within the family is less and less popular,” he adds. “So brokers can sell to other brokers/ MGAs, broker-distribution companies or direct writers. While brokers are proud of their independence, they will sell their own business for the best price.” Gagnon also notes that for brokers it is a “seller’s market due to favourable economic conditions.” He suggests that now is the time for brokers to evaluate their options and choose the long-term solution that fits their needs. “As the broker owner population is aging, a fair number of deals these days are succession-related transactions,” Gagnon says. “For brokers who would like to participate in market consolidation, there remains a need to team up with a strong strategic partner. In fact, that need will most likely increase with time as brokers are more proactive than ever in their search for long-term partnerships with carriers.” Even with all this consolidation, IBAO’s Randy Carroll observes that brokers have virtually maintained the number of locations across Ontario. “When you look at consolidation from our association perspective, we had 683 main locations (brokerage entities) at the end of 2010 and that number has gone down to 630 as of May 2013,” he notes. “However, the number of total office locations has only gone down by 10 over that period, from 1,289 to 1,279. That means that brokers have kept their locations to serve consumers.
NAVIGATE YOUR WAY TO VICTORIA BC ON OCT 6–9 2013 TO DISCOVER THE FUTURE OF RISK MANAGEMENT. The BC Chapter is excited to invite you to a city proud of its rich heritage, historic downtown, gorgeous gardens and parks, and scenic Inner Harbour. It’s the perfect backdrop for this voyage of discovery, chart your course for 2013 RIMS Canada Conference in Victoria, BC. The organizing committee has its sails fully furled as it navigates past the buoys marking the final months. Our program committee is putting together an exciting nautical map with ports of call at ERM, Claims, Legal and Insurance, with 25 concurrent sessions over 6 blocks. Our exhibit hall is already 75% full; be sure to meet your friends and colleagues on the exhibit hall floor starting on Sunday. Tuesday night’s first port of call is our Rose Compass Reception followed by the Discovery Regatta. The Convention Centre is connected to the historical Fairmont Hotel overlooking the pictureseque Victoria Inner Harbour. There are six conference hotels, Fairmont Empress Hotel, Marriott Inner Harbour, Hotel Grand Pacific, Executive House, Inn at Laurel Point, Chateau Victoria Hotel & Suites; all accommodations are within walking distance. Look to our website www.rimscanadaconference.ca for all the latest information. The local organizing committee and all our volunteers look forward to seeing all delegates and industry partners.
Join other risk and insurance professionals on a voyage of Discovery at the 39th Annual RIMS Canada Conference.
OCTOBER 6–9, 2013 The Victoria Conference Centre
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“There is strong demand for good business, whether from companies, direct writers or MGAs,” says PwC’s Philip Heywood. “Even with the higher valuations, there is a large volume of M&A activity. Whether we will see a tipping point where the supply outstrips demand, I don’t know. But I expect to see this activity continue for at least the next two years.” Carroll says that he has seen recent signs of a slowdown, or at least a more cautious approach to M&A activity. This is particularly true for books of business heavy in Ontario auto, given the uncertainty around the promised 15% rate decrease by the provincial government. “The sellers may want to get out of the market quite quickly, but the buyers are looking at terms and conditions, and safeguards they can put in place to ensure they are not overpaying,” Carroll says. “The numbers are being looked at six times, instead of three times. We have talked to several brokers who were nearing agreement on a sale and have taken a step back,” he reports.
DEMAND AND SUPPLY In this sense, the M&A status quo for brokers is reflective of the situation for primary insurers, where there is an ongoing search for the right intersection between the buyer’s demand and the seller’s supply. “I think brokers and carriers are being much more selective in terms of the mix of business they are looking for, whether geographically or product-wise,” says Buitendag. “If there is a book heavy 34 Canadian Underwriter July 2013
in Ontario personal lines auto, many are saying, ‘What is the risk of gaining more of that business?’ If someone had a beautiful book of mid-size commercial business, there would be a lot of people beating down that door. But good luck finding that right now.” In M&A activity, there is commonly a discrepancy between what the seller expects and what the buyer is prepared to pay, McPhie points out. There is also an increasing complexity to the negotiation of transactions, which involve tax considerations, multiple lines of business, subsidiaries, restructuring, due diligence and regulatory approvals. However, McPhie adds that issues sometimes arise in negotiations that can become sticking points. “For example, a company may have a defined benefits pension plan and that represents a significant cost and a risk to the buyer,” he says. “These kinds of things can hold up a transaction.” Ironically, it is often brokers and insurers that can structure M&A negotiations through transactional risk solutions, such as warranty and indemnity insurance. Demand for transactional risk insurance
grew by 41% globally in 2012 “as firms increasingly turned to the insurance market to protect large deals and crossborder acquisitions or sales,” Marsh noted in a press release in March.
A CLEANER TRANSACTION McPhie says that some solutions may involve transferring certain items off balance sheet so that a transaction can proceed. “Insurers can, in fact, act as a ‘lubricant’ by transferring these types of things off balance sheet and separating them from the deal for a cleaner transaction,” he explains. “You are seeing more interest in this kind of approach,” McPhie adds. While the gradual consolidation of the Canadian p&c market is a discernible trend that is expected to continue in the next five years, it is difficult, if not impossible, to predict the timing and players involved. “I hear more rumours about companies being sold than I come into the office each week,” says Carroll. “The Travelers’ announcement brought The Dominion rumours to an end. So which one is next?”
URBAN/ BASEMENT FLOODING Symposium
September 19, 2013
Toronto Board of Trade Presented by the Institute for Catastrophic Loss Reduction (ICLR) Basement flooding is one of the biggest challenges facing homeowners, municipal governments and personal property insurers across the country. All industry stakeholders are invited to join the Institute for Catastrophic Loss Reduction (ICLR) at a comprehensive full-day event, as we discuss the issue of basement flooding in depth. Symposium discussions will focus on basement flooding causes and mitigative best practices. Presentations will discuss application of household-level measures and infrastructure measures to reduce risk in new and existing homes and subdivisions, as well as innovative Low-Impact Development programs and the impacts of climate change on urban sewer infrastructure.
Contact: Tracy Waddington 416 364 8677 or twaddington@iclr.org for both attendee registration and event sponsorship opportunities. For more info see www.iclr.org
Presenters at this one-day symposium will include: * Municipal water and wastewater experts and managers * Researchers * Authorities on innovative stormwater management measures Cost: $295 per person (includes HST)
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A Going (Growing) Concern Results from a survey sponsored by Zurich Insurance confirms that companies around the world recognize that natural catastrophes pose potential risks, but that has not necessarily translated into having sufficient mitigation processes in place.
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in place. The results raise pertinent questions for risk consultants in Canada about determining the depth of risk management that an organization needs, as well as the impact of not sufficiently investigating their customer and supplier preparations.
QUESTIONS AND ANSWERS How to do more with less? The role of the risk manager So how do Canadian organizations respond? Not an easy question given that the response has to be considered within the broader context of business-critical functions and balanced against corporate expense challenges as a result of fiscal constraints. While the survey respondents indicated that business disruptions from a natural catastrophe encompass multiple aspects of their enterprise — such as communications with customers, employee performance and the ability to protect sensitive data from theft or loss — the most severe threats were identified as coming from continuity of IT support, business-critical functions and supply chain logistics.
Illustration by Remy Simard/i2iart.com
How can Canadian executives consider and respond to the growing concern around more frequent and severe natural catastrophes? Do these natural events impact their businesses and, if so, how can they address this within the complexity of day-to-day business? In early May, Zurich Insurance released the findings of a research poll of 170 executives from medium-sized and large companies around Leszek Bialy the world.The study, conducted in January by Vice President and the Economist Intelligence Unit and sponsored Head of Customer & by Zurich, continues Zurich’s research into betDistribution Management, ter understanding and mitigating risks. Zurich Global The survey found there is a growing concern Corporate Canada among organizations that natural catastrophes are becoming both more frequent and more severe, with 44% of respondents agreeing in each case.The poll looked into how well-informed organizations are about the growing risk of natural catastrophes, how well-prepared and exposed they are, and what mitigation or management processes they have in place. The survey confirmed that companies recognize the potential risks posed by natural catastrophes, yet have insufficient mitigation plans
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The survey found there is significant room for improvement in company planning and business continuity endeavours. Consider that fewer than half of respondents (45%) noted that they use some form of scenario analysis to assess the risks of natural catastrophes. One of the challenges facing Canadian organizations today is that the country’s risk management landscape is shrinking. As Canadian organizations strive to remain competitive on a global scale while delivering shareholder value, they are feeling the squeeze of expense pressures. The risk manager role, unfortunately, is one of the areas within organizations that has been adversely affected. This means that C-Suite executives lose the internal resource capability to effectively manage business risk, let alone a natural catastrophe. As a result, there is less technical know-how and resource(s) to address the ever-increasing natural catastrophe risk. Without this core resource, an organization can fail to develop and implement appropriate risk management processes. Brokers and insurers can assist, but cannot replace the risk manager role that offers in-depth knowledge and understanding of business-critical functions, suppliers and customers, among other things.To prepare, an organization needs to prioritize and quantify its business and natural catastrophe risk, and then build a business case for risk management plans. The global survey identified continuity of IT support as facing the most severe disruption (46%), followed by businesscritical functions and supply-chain logistics (both 44%). Supply-chain logistics are difficult to address in the event of a natural catastrophe, as they are generally outside of an organization’s immediate control and often affect a variety of critical infrastructure. This reinforces the importance of preparation and truly understanding the company’s exposures. Taken together, these findings indicate there is plenty of room for improvement. One hopeful finding is that security of
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sensitive data is associated with a lower perceived risk of disruption. This may be a sign that companies are taking steps to protect their core IT assets even in the face of natural disasters. About two-thirds (66%) of survey respondents reported that their companies have adopted at least one of three hardware-oriented strategies for mitigating threats to IT systems in the event of a natural disaster.
Integrated approaches to risk management Efforts to address the interconnectivity of risk through integrated risk management remain incomplete, as the survey confirmed that only a minority of businesses has developed a comprehensive risk profile for senior management. Just 39% of respondents agreed that a single senior executive “owns” the overall risk management function, and less than
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July 2013 Canadian Underwriter
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one-third (31%) said that their company’s risk management strategy explicitly addresses the interconnectedness of different risk clusters. A company should clearly explain to its insurance broker how the business works and the suppliers on which it is dependent. Only in this way can a broker work in conjunction with a client to ensure that risk management opportunities/threats are identified and planned for, and approaches to risk management, coupled with an insurance policy, are implemented and integrated. These would include the following:
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• undertake the development of a business continuity plan by thinking beyond “just in time” and, instead, considering “just in case,” and creating a joint back-up plan; • when selecting a supplier, key in on critical and single-source suppliers, follow the supply chain through all pinch points, assess the vulnerabilities
1. Scenario analysis A scenario analysis or crisis management program can assist Canadian firms better understand their exposures and the impact of these types of exposures before then working with a customer to consider and build in a contingency plan and alternative sources of supplies. 2. Enterprise-wide risk management programs A key element of enterprise-wide risk management programs is a full integration of threats from natural catastrophes into an organization’s systems for identifying, assessing and controlling risks. The survey found that although approximately two-fifths (39%) have adopted enterprise-wide risk management, the analysis concluded that considerably more effort is required before the risks of natural catastrophes are adequately controlled. • invest in a deep risk assessment of each supplier to understand real and potential exposures by identifying your supplier and their suppliers, determining which suppliers are more critical to the company’s ability to deliver, and understanding the bottlenecks and interdependencies for both your company and its suppliers; • choose the right suppliers by considering both the risk and cost of selecting suppliers, knowing where your company stands in your suppliers’ priorities, and identifying and monitoring specific risks of each supplier;
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Efforts to address the interconnectivity of risk through integrated risk management is incomplete. A minority of companies has developed a comprehensive risk profile for senior management, and just 31% reported the risk management strategy explicitly addresses the interconnectedness of different risk clusters. and reach an understanding of customers’ suppliers and their suppliers; • use the collected data to quantify the risk exposure, which includes quantifying the suppliers’ exposures, quantifying the supply chain transportation exposure and developing a total profile of risk to the specified supply/supplier; and • develop loss scenarios based on the
supply chain exposure by considering the potential for a single area to expose all supplies/suppliers (e.g. shipping port), looking beyond physical triggers (e.g. strike), and understanding how supply chain movement can intertwine.
3. IT planning Particularly important progress has been achieved in the area of IT risk mitigation strategies. Almost 80% of survey respondents said that their organization has adopted at least one hardware-oriented and at least one employee-oriented IT risk management strategy related to natural catastrophes. And nearly 60% reported that these initiatives have been largely successful. Consider the importance of locating IT infrastructure away from high-risk regions such as those prone to earthquake, flood or windstorm — be they in Canada or globally.This goes for both in-house IT infrastructure and outsourced IT support. Other responses to managing IT continuity may include employee-focused strategies during emergencies, such as working from home or alternative locations, using social media or mobile devices and bringing your own device policies. No doubt using either an IT infrastructure-based solution or an employee-focused solution — or combination of the two — depends on the nature of the organization’s business.
BUSINESS RISK PREPAREDNESS IN A NEW WORLD In today’s reality, natural catastrophes are becoming more frequent and severe, putting additional strain on Canadian employers. And for Canadian organizations with a global footprint of operations, suppliers and customers, natural catastrophes may have an even greater impact on their operations. Companies must choose to understand and strive to manage these risks — or simply hope that they have adequate redundancy built into their operational model. Of course, having a solid insurance program in place will help to mitigate the risk.
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The Guarantee Company of North America Donates $10,000 to the Canadian Red Cross in Support of the Lac-Mégantic Explosions by The Guarantee Company of North America – Jul 9
ClaimsPro’s Emergency Response Teams Assembled for Influx of Claims After Flash Flooding in Toronto by SCM Insurance Services – Jul 9
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To Read the Full Story for Each Press Release visit insPRESS.ca
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Restoration Contractors Organization of Canada 1st Annual AGM and Supplier Exposition (Niagara Falls)
Greg Meckbach Associate Editor
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In Need of Restoration Restoration contractors are dealing with changing times: margins are getting squeezed as costs outpace revenues from insurance claims, a review is in the works to get a fix on using software to estimate project costs, and some contractors are facing increased competition from general contractors. The Restoration Contractors Organization of Canada (RCOC) held its inaugural Annual General Meeting and Supplier Exposition at the Sheraton on the Falls Hotel in Niagara Falls, Ontario on June 17-18. RCOC was formed two years ago by eight contractors — Winmar, Canadian Disaster Restoration Group (CDRG), DKI Canada (then Disaster Kleenup Canada Ltd.), BELFOR, FirstOnSite Restoration, Service Master of Canada, First General Services Ltd. and Paul Davis Systems — to represent contractors in matters such as safety and regulatory affairs. As of midJune, RCOC had 35 members.
40 Canadian Underwriter July 2013
RESTORATION FACING SOME OF SAME CHALLENGES AS AUTO REPAIR The margins of restoration contractors are being squeezed. Contractors are seeing revenues from insurance claims climb more slowly than costs, all while their relationship with carriers are facing some challenges, RCOC president Kyle Urech told an audience of executives from restoration contractors at RCOC’s exposition and AGM. Urech suggested contractors specializing in repairing and cleaning up damaged properties are starting to encounter problems similar to those of auto repair shops when dealing with insurance carriers. Many auto body shops have gone out of business because they are either losing money or their margins are too low, the former adjuster said. “They are dictated to by the insurers,” he added. “For a lot of them, they can’t even go out and buy their own parts and materials. They have to go to the insurance company portal and order it that way. The insurance company makes the margin on those parts, not the auto body repair facility. The repair shop makes a 6% handling fee. What has resulted? There’s a very adversarial relationship with insurance companies.” The resulting tension can make claimants feel as though they are in a “tug of war” between the collision repair centre and the insurance carrier when they get their cars repaired, he said. “It kind
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of sounds familiar, doesn’t it?” Urech said. “It sounds like what the restoration industry is going through right now.” Beyond strained relations, Urech added that many restoration contractors are facing rising costs — in some cases above the rate of inflation — while revenues are either flat or not rising as quickly as the cost of materials. During the AGM, one member asked Urech how some costs are calculated. “Part of how industry pricing’s arrived at is they phone contractors who don’t do insurance work, but do the same type of work in order to come up with pricing,” he responded. “But those contractors don’t necessarily have a latemodel, $40,000 van with $70,000 worth of equipment packed into it, and they’re not on the road at 3:00 in the morning with highly trained workers to go and mitigate some damages.” There are increasingly more contractors who do not specialize in restoration, Urech noted, but who still want to compete with restoration contractors for insured jobs. “There is additional complexity in the restoration industry that the auto repair industry doesn’t face,” he said. “You’re still compared to ‘Chuck in the truck,’ who has no health and safety protocol, no health and safety plan, probably no workers’ compensation and probably no insurance.”
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tainable business model,” Urech added. To help answer these questions, RCOC has commissioned Deloitte Canada to take an up-close look at how insurers are using Xactimate. The plan is for the Deloitte team to examine as many as 75 different products used in estimating restoration project costs in four different regions in Canada, Michael Parent, senior manager for consulting and strategy at Deloitte Canada, said during RCOC’s AGM.The review is expected to be complete by late August, at which time Deloitte will issue a report to RCOC’s Board of Directors. “Deloitte will point us in the right direction of how to correct that and what the strategy will be,” Urech said in an interview after the AGM. “It may involve insurance companies. It may not.”
The Deloitte team plans to examine as many as 75 different products used in estimating restoration project costs in four different regions of Canada. But he noted during the AGM that some RCOC members are “worried about their survival in the industry.”
MISMATCH FOR WORKERS’ COMP GETTING A FIX ON PRICING Attendees of the RCOC event also heard on June 18 that questions are being raised about the prices generated when insurance carriers or adjusters use the Xactimate software to estimate the cost of property claims. RCOC tracked 18 common items on the estimate of a project to repair a damaged property over three years in eight Canadian cities and found that almost all costs increased, reported RCOC president Kyle Urech. At the same time, though, Urech pointed out the change was “relatively flat” over time when using Xactimate to track those costs. “What’s happening is, your costs are going up, your revenue isn’t going up at the same rate, so the ship is sinking,” he said. “This is a recipe for an unsus-
Restoration contractors who are concerned about their survival in the industry are also being hit by rising workers’ compensation premiums in Ontario, RCOC president Kyle Urech suggested during the AGM in mid-June. Showing members slides listing the workers’ compensation premiums by province and by industry, Urech noted that renovation contractors in Ontario could expect to pay $7.33 per $100 of payroll, while the province’s Workplace Safety and Insurance Board (WSIB) lists the new home construction rate at $8.88 per $100 payroll and the commercial contracting premium at $4.44 per $100 payroll. “We do have an issue, within our industry around workers’ compensation, and that is, the assumption is your safety record is far better
than new homebuilders, and yet a vast majority of you are paying new homebuilder premiums because there is no alternative,” Urech explained. Burlington, Ontario-based Organizational Solutions Inc. is gathering information about WSIB claims to “create a fact base” on restoration contractors, he reported. The idea is to provide hard numbers to argue for a reduction in the rates that RCOC members have to pay.
A MATTER OF ASBESTOS PROTOCOL Contractors specializing in cleaning and repairing damaged properties face competition from general contractors who tout their expertise in asbestos remediation — even though restoration specialists may have the requisite qualifications, RCOC president Kyle Urech noted during the association’s first exposition and AGM June 18. “There are contractors out there who are telling your customers that you shouldn’t be doing asbestos work,” Urech said. “They know that you’re qualified. They know that you’re trained. They know that you’re insured to do the work, but there’s no national asbestos protocol.” RCOC has responded by working on its own national protocol, he reported, one that will be copyrighted and available exclusively to RCOC members. Urech suggested that restoration contractors need a guide, which takes into account all provincial regulations, on how to handle restoration projects involving asbestos. As it stands, some general contractors are marketing their own asbestos protocols to prospective clients to secure those jobs and prevent restoration contractors from doing so, he said. Before 1985, Urech said in an interview, “there was quite a bit of asbestos” used in building materials, so a “large proportion” of restoration contractors’ work is on these older buildings. Health Canada reports asbestos was used “widely” in insulation board, floor and ceiling tiles, and drywall joint cement, meaning there is a risk to workers exposed to older buildings undergoing renovation or demolition. Health risks of exposure include asbestosis, mesothelioma and several cancers.
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Open to Interpretation Sewer back-up claims following urban flooding, a growing problem across the country, can produce considerable insured damages. However, this high toll can be reduced through provincial building and plumbing code interpretation. Urban flood damages are a recurrent and growing issue for municipalities, insurers and Manager, homeowners across Canada.The frequency of Resilient Communities severe rainfall resulting in urban floods across and Research, Institute for Catastrophic the country last year — including events in Manitoba, Ontario and Quebec — prompted Loss Reduction Environment Canada to label 2012, “The Year of the Urban Flood.” The year proved expensive in terms of insured damages. For example, the toll for a storm system that affected Thunder Bay, Ontario before moving through to Montreal was $260 million, while the Insurance Bureau of Canada reports that damages were $90 million for another event that hit several neighbourhoods in Hamilton and Ottawa. Many municipalities and local authorities recommend or require backwater valves — frequently using education and subsidy programs to encourage valve retrofits in at-risk homes — as a household-level measure to reduce the risk of sewer back-up in new and existing homes. However, retrofit programs have only been partially effective in encouraging installation after homes have been flooded or when homeowners live in flood-prone neighbourhoods. The retrofits often total in the thousands of dollars, serving as an additional barrier to installation.
42 Canadian Underwriter July 2013
CODE INTERPRETATION Provincial code wordings may hold the key to requiring that backwater valves be installed in new homes. Language in the National Plumbing Code of Canada 2010 related to backwater valve installation, which is applied in provincial building and plumbing codes across the country, states that when a sewer connection “... may be subject to backflow, a... backwater valve shall be installed on every fixture drain connected to them when the fixture is located below the level of the adjoining street.” Discussions with local code officials across Canada suggest the sentence is somewhat vague and subject to interpretation. The lack of clarity revolves around deciding when a new home’s sewer connections “may” be subject to backflow. The sentence can be interpreted in several ways, including the following: • Homes may be subject to backflow if they are constructed as infill development in areas with histories of sewer back-up or if they are built in new developments connected to older sewer systems with histories of sewer back-up. Interpreted in this manner, the valves would be installed in new homes only in rare or specific circumstances (such as when connected into
Illustration by Rémy Simard/i2iart.com
Dan Sandink
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older systems with histories of sewer back-up). • Any home with sewer connections below the adjoining street may be subject to backflow.When interpreted this way, backwater valves are required in essentially all new homes that are serviced by public, underground sewer systems — even in new, greenfield developments where there is no history of sewer back-up. • The code may be interpreted such that installations are not required in any circumstances, and provides the authority to install backwater valves only when requested by developers or homebuyers. Given the considerable uncertainties around sewer back-up events — associated with infiltration and inflow into sanitary and storm sewer systems, construction errors, homeowner behaviour and extreme rainfall events — local authorities should consider any home connected to an underground sewer system to be exposed to sewer back-up risk. As such, authorities should require backwater valves in all new homes serviced by public sewer systems. The impacts of climate change will only serve to increase the unpredictability of widespread sewer back-up events. Experience in Canada has been that regional back-up events can occur in many developments, regardless of their age and how serviced. One need look no further than southern Ontario’s extreme rainfall event in August 2005, when many neighbourhoods that experienced regional sewer back-up events were serviced by modern, separated sewer systems. Advantages of installing valves in new homes include significantly reduced installation cost and protection of all properties, regardless of the historical occurrence of sewer back-up (see Table 1). The cost of installing a backwater valve in a new home is about $150 to $250, while the cost of retrofitting a valve ranges from $1,000 to $2,000, if not more. Several municipalities have implemented programs to help homeowners offset retrofitting costs, sometimes with
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programs offering $500 to $3,000 to help homeowners install backwater valves and associated risk reduction measures. But Institute for Catastrophic Loss Reduction (ICLR) research, released this year, shows that education and subsidy programs have inspired low uptake rates, ranging from 10% to 50% of eligible households. This indicates retrofit programs alone will not be adequate to address the rising cost of urban flood events.
INTERPRETATION AS INFLUENCER Over the summer and fall of 2012, ICLR surveyed more than 240 local officials from British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick and Nova Scotia, who represented 160 local authorities and munic-
ipalities responsible for building and plumbing code implementation. The idea was to see how officials interpret code wordings related to backwater valves, and how these interpretations affected the frequency of installation in new homes. Provided with a copy of the National Plumbing Code sentence, respondents were asked if it was interpreted in their jurisdictions as requiring backwater valves in all or most circumstances, in rare or specific circumstances, or under no circumstances.The majority of respondents from Alberta, Saskatchewan, Manitoba and New Brunswick and Nova Scotia noted the sentence was interpreted in a way that required backwater valves in all or most new homes, while in British Columbia and Ontario, the
Table 1: Benefits and Drawbacks of Requiring Backwater Valves in New Homes vs. Homes with Histories of Sewer Back-up Application Type •
Retrofit
Installation in New Homes
Drawbacks
Benefits known risk areas, identified through historical sewer back-up occurrence, can be targeted with retrofit programs
•
significantly lower installation costs
•
provides protection to all homes regardless of sewer back-up history
•
accounts for uncertainties created by climate change and infiltration/inflow
•
shifts liability of installation costs (e.g., retrofit program cost) away from municipality
difficult to encourage homeowners to retrofit valves • valve retrofits are expensive • reactive, post-event approach to risk reduction • valves must be maintained over time to remain functional •
•
possibility for displacement of other methods of reducing sewer back-up risk (i.e., improved infrastructure)
•
valves must be maintained over time to remain functional
•
possibility for displacement of other methods of reducing sewer back-up risk (i.e., improved infrastructure, pre-development risk assessments)
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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 Crawford & Company (Canada) Inc. Enhancing the customer experience, every day. www.crawfordandcompany.com Cunningham Lindsey International independent claims services. www.cunninghamlindsey.com Granite Claims Solutions Global Adjusters and Marine Surveyors www.graniteclaims.com
PCA Adjusters Limited Adjusting to Meet your needs™ www.pca-adj.com Quelmec Loss Adjusters Identifying, Investigating, Resolving... for over a quarter century! www.quelmec.ca
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
ENGINEERING SERVICES Giffin Koerth Forensic Engineering and Science Investigate Understand Communicate www.giffinkoerth.com
GRAPHIC COMMUNICATIONS Informco Inc. Integrated Graphic Communications Specialists. www.informco.com
INSURANCE COMPANIES
INSURANCE LAW
Aviva Canada Inc. Home Auto and Business Assurance. www.avivacanada.com
The ARC Group Canada Inc. Your Partner in Insurance Law & Risk Management. www.thearcgroup.ca
Catlin Canada Underwriting Ambition. www.catlincanada.com FM Global The leader in property loss prevention. www.fmglobal.com National Bank Insurance Auto | Home Home and Auto Insurance in Quebec. www.nbc-insurance.ca 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
REINSURANCE Guy Carpenter & Company The world’s leading reinsurance intermediary. www.guycarp.com Swiss Reinsurance Company Canada The leading P&C reinsurer in Canada. www.swissre.com Transatlantic Reinsurance Company For all your reinsurance needs. www.transre.com
RESTORATION SERVICES Winmar Property Restoration Specialists Coming Through For You! www.winmar.on.ca
RISK MANAGEMENT The ARC Group Canada Inc. Your Partner in Insurance Law and Risk Management. www.thearcgroup.ca
Wawanesa Insurance Earning your trust since 1896. www.wawanesa.com
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Canadian Underwriter July 2013
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Figure 1: Summary of Results British Columbia1
19%
Manitoba4
73%
72%
28%
All, most 2
Alberta
81%
None, Rare N/A
19%
Saskatchewan3
86%
Ontario5
26%
63%
New Brunswick/ Nova Scotia6
58%
14%
majority of local authorities represented in the survey interpreted the section as requiring valves only in rare circumstances (see Figure 1). When local code enforcement officers are encouraged to consider any drain that is connected to a public sewer system below the level of the adjoining street to be at risk of sewer back-up — as is the case in Alberta — new homes are required to have backwater valves. The survey also revealed the manner in which code wordings are interpreted had a significant influence on the reported frequency of valve installation in new homes. Municipalities that interpreted the code such that valves are required in all or most new homes were far more likely to report that more than 51% of homes built in their jurisdictions since 2005 had sewer backwater valves (see Figure 2). In Ontario, several municipalities, including the cities of Toronto and Windsor, now interpret Ontario’s Building Code as requiring installation of valves in all or most new homes. For example, a City of Windsor report to council in 2011 noted that “... despite all reasonable precautions, the city’s sewer system could be overwhelmed, and building drains may be subject to backflow....”
1
n=41, 2n=21, 3n=7*, 4n=25, 5n=58, 6n=7 *Saskatchewan respondents largely represented Regional Health Authorities, which interpret the provincial plumbing code for a large number of municipalities within their jurisdictions.
Figure 2: Code Interpretation and Installation Frequency*
F
60% 50% 40% 30% 20% 10% 10% 0% Valves required in all or most new homes 51-100% of homes built since 2005 have sanitary sewer backwater valves *n=120
Valves required in rare or no circumstances 0-50% of homes built since 2005 have sanitary sewer backwater valves
A number of survey respondents commented on the ambiguous nature of the code sentence related to backwater valves, including from Ontario municipalities that expressed a level of frustration with related code wordings. For example, one respondent noted “the code states that a backwater valve shall be installed on drains that ‘may’ be flooded. Any drain ‘may’ flood, but there is little political will to force residents to spend money” on backwater valve installations. Recently, the Town of Collingwood in Ontario adopted a code interpretation to require backwater valves in all new homes. Collingwood’s chief building officer pointed out that adopting a code interpretation to require backwater valves was an easier process than developing a by-law to require valves in new homes, and has also quoted as saying developers are now using backwater valves as a selling feature for new homes. Requiring backwater valves in new homes offers some assurance given the uncertainties associated with infiltration and inflow in separated municipal sewer systems and the occurrence of unpredictable, extreme precipitation events that frequently lead to regional sewer back-up events.
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HST on IMEs:
Case Closed? The federal government’s 2013 budget removes the HST-exempt status on supplies by providers of independent medical evaluations or independent assessments. However, language contained in amendments could provide a basis to challenge removal of exempt status.
Sean Aylward Partner, Taxation, Osler, Hoskin & Harcourt LLP
The most recent federal budget in March 2013 included an amendment to remove the HSTexempt status from various types of supplies by a provider of independent medical evaluations (IMEs) or independent assessments, as well as corresponding reports made to its clients where they are provided solely for non-health care purposes. This budget amendment was in response to the 2001 decision of the Tax Court of Canada and the 2002 ruling by the Federal Court of Appeal in Riverfront Medical Evaluations Ltd. v. R., which, in the view of the Department of Finance, expanded the scope of the exemption for medical and health care services beyond the policy intent. However, the proposed legislation may still leave room for creative interpretation should an insurer or other IME client decide to challenge it. Under Canada’s Excise Tax Act, HST is generally payable on a “taxable supply” made in Canada. However, subsection 123(1) of the act notes that HST does not apply to an “exempt supply.” In addition, medical and health care services are generally included as “exempt supplies” under Part II of Schedule V.
THE RIVERFRONT LITIGATION Prior to the Riverfront litigation in 2001, the Canada Revenue Agency’s (CRA) administrative policy was to deny an HST exemption to IMEs
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that were related to claims, such as those provided to an insurer or lawyer for use in connection with insurance claims or litigation. This was perhaps based on the misguided view that an IME was in the nature of a medico-legal report and that what was being supplied was a “service of providing an opinion on a legal issue of a medical nature” — as described in then Policy Statement P-080, replaced by P-248 in 2006 — rather than a professional medical opinion. At issue in Riverfront was whether, as a factual matter, IMEs supplied by Riverfront Medical Evaluations Ltd. to insurance companies and lawyers constituted an exempt supply of “institutional health care services” rendered by the operator of a “health care facility” to a “patient” of the facility. The Tax Court determined the supply was an “institutional health care service” on the basis that it involved several elements of its definition, such as diagnostic services, use of case rooms including necessary equipment or supplies, and physicians who received remuneration for the services from the operator of the facility. Further, the supply was made by the operator of a “health care facility,” because “medical care” was provided in the facility and the purpose of the facility was to provide such medical care. In this regard, the Tax Court relied on the 1999 ruling, d’Abrumenil v. Commissioners of Customs &
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Excise, in the United Kingdom, in which the U.K. authority stated that: …It is particularly hard to see an invasive procedure requiring to be carried out by a doctor (or someone with appropriate medical qualifications) as not being the provision of care because of the reason why the procedure is undergone (emphasis added). The Tax Court also determined that the institutional health care service was provided to a patient of the health care facility since in usage, a patient of a physician practising in a clinic is regarded as a patient of the clinic and such usage extended to a health care facility such as Riverfront. The Tax Court of Canada found the supply of IMEs by Riverfront was an exempt supply. The Federal Court of Appeal affirmed the Tax Court judgment.
POST-RIVERFRONT LITIGATION On September 21, 2006, CRA issued Policy Statement P-248, effective June 8, 2001 (the date of the Tax Court decision in Riverfront), and reversed its prior policy. This confirmed the supply of an IME to an insurer generally will be HST-exempt, subject to certain important exceptions. CRA agreed that IMEs provided to IME clients in the following situations were exempt supplies: (i) A facility specializes in the examination of injured individuals and subcontracts solely with physicians for the services. An insurance company sends an individual, who becomes registered as a patient of the facility. A physician examines the individual in the facility and prepares an IME. The operator of the facility remunerates the physician and supplies the IME to the insurance company. (ii) A facility specializes in the examination of injured individuals and subcontracts solely with physicians for the services. An insurance company contacts the operator of the facility for the supply of an IME and the operator contacts the individual, who becomes
registered as a patient of the facility.The operator acquires and pays for the services of physician A, an independent contractor, to examine the individual and prepare the IME at a location that is not the facility. Physician B “reviews” the IME prepared by physician A in the facility.The operator remunerates physician B and supplies the IME to the insurance company. (iii) A multi-disciplinary facility supplies IMEs and independent assessments of injured individuals by subcontracting physicians and other health care professionals. An insurance company sends an individual for a psychological assessment.The operator of the facility acquires the services of a psychologist, an independent contractor, for interview and assessment of the individual and preparation of a report. The independent assessment of the psychologist is provided to an independent contractor physician for a review. Both the psychologist’s and the physician’s services take place in the facility. The operator remunerates them and supplies the independent assessment to the insurance company. It is interesting to note that CRA would have challenged the exempt supply treatment of all of the IMEs or independent assessments provided in the above situations under its prior policy because they were provided to insurance companies.
2013 BUDGET In the 2013 budget, the federal government introduced draft legislation that has been interpreted to exclude IMEs from the medical and health care services exemption. In particular, the budget proposes to add a new section 1.2 in Part II of Schedule V as follows: For the purposes of this Part, other than sections 9 and 11 to 14, a supply that is not a qualifying health care supply is deemed not to be included in this Part. The term “qualifying health care supply,” in turn, is proposed to be defined as the
following: a supply of property or a service that is made for the purpose of (a) maintaining health; (b) preventing disease; (c) treating, relieving or remediating an injury, illness, disaster or disability; (d) assisting (other than financially) an individual in coping with an injury, illness, disorder or disability; or (e) providing palliative health care. Although the government’s restrictive intention is clear from the supplemen-
Although the government’s restrictive intention is clear from the supplementary information accompanying the 2013 budget, the language of the proposed legislation is sufficiently broad to allow reasonable arguments that IMEs supplied in the foregoing circumstances are not excluded from the exemption. tary information accompanying the 2013 budget, the language of the proposed legislation is sufficiently broad to allow reasonable arguments that IMEs supplied in the foregoing circumstances are not excluded from the exemption due to the proposed section 1.2 because they are qualifying health care supplies. In particular, for example, the words “treating” or “remediating” noted in (c) above are not limited in their application to conventional doctor/patient relationships. Indeed, some of the key factual findings in Riverfront (based, in part, on testimony of the deputy registrar of the College of Physicians and Surgeons of Ontario) were that a doctor/patient relationship did exist in the course of an IME and that medical care, including diagnosis and treatment recommendations, were undertaken. A plucky insurer could well find a basis to challenge the budget amendments at Tax Court again.
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MOVES & VIEWS
UPCOMING EVENTS: FOR A COMPLETE LIST VISIT
www.canadianunderwriter.ca
AND CLICK ‘MY EVENTS CALENDAR” ON THE HOME PAGE
1
Crawford & Company (Canada) Inc. recently announced that Pat Van Bakel [1a] is its new CEO, replacing John Sharoun [1b]. Van Bakel, a claims adjuster who was appointed Crawford Canada’s chief operating officer (COO) in 2012, has been with the company for more than 20 years. Before being named COO, he was senior vice president of operations, insurer markets. Van Bakel is a Chartered Insurance Professional and incoming deputy president of the Governing Council of the Insurance Institute of Ontario. Sharoun, for his part, has been named CEO of specialty markets for the Americas at Crawford & Company. Its specialty markets include energy, marine, aviation, forensic accounting and mining specialty services.
2
Shawn DeSantis [2] was recently appointed president and chief executive officer of Jones DesLauriers Insurance Management Inc., a Torontobased independent brokerage. DeSantis had been executive vice president of RSA Insurance. While at RSA Canada, DeSantis led a number of major acquisitions for the company. RSA Canada has divided the responsibilities for personal lines, small medium enterprise and global specialty
48 Canadian Underwriter July 2013
lines. Effective July 1, Donna Ince is senior vice president of personal and commercial insurance and Martin Thompson is senior vice president of global specialty lines.
3
Chicago-based Hub International Ltd. announced in July that it has acquired The Dorsey Group Inc. of Brantford, Ontario and Southeastern Insurance Services Ltd. of Steinbach, Manitoba. Hub reports its acquisition of Dorsey Group “will expand Hub’s footprint” by adding new offices in Brantford and Simcoe in southern Ontario. President Paula Dorsey [3], a daughter of the brokerage’s founders, will become vice president of Hub Ontario. Her brother, Gary Dorsey, “will continue to work with the business in the same consulting/ mentoring capacity as he has for the past couple of years,” says a spokesperson for Hub. Southeastern Insurance’s operations will become part of Hub Horizon in Manitoba. Jack Rempel, son of Southeastern founder Arnold Rempel, has retired as president.
4
Three Canadian property and casualty insurance carriers are now offering eDocs capability to their broker partners. Economical Insurance of
1a
1b
5a
5b
Waterloo, Ontario has made eDocs an option for its broker partners across Canada that are using the Deltek, Epic, Power Broker, sigXP, The Agency Manager (TAM) and The Broker’s Workstation (TBW) broker management systems (BMSs). Brokers can choose to receive electronic copies of declarations in the Centre for Study of Insurance Operations’ (CSIO) XML format in their daily download. Portage Mutual Insurance of Portage La Prairie, Manitoba is offering eDocs to brokers using PowerBroker, SigXP, TAM and TBW. Its brokers can fully automate the retrieval of home and auto electronic declaration pages, eliminating the need to fax, scan or courier the documents.
CSIO XML eDocs are also available for Aviva Canada’s broker partners using Keal Technology’s sigXP BMS. Aviva broker partners can now automate the retrieval and download of personal lines electronic declaration pages, Keal reports. The system Keal built for Aviva creates a historical record for each eDocs transaction against which brokers can search, report or audit, meaning there is no need to gather policy documents from a carrier website or receive physical paper from an insurance company.
5
Burns & Wilcox Canada has welcomed former Jones Brown Inc. executive Alex Boyd [5a] to
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3
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lead its Calgary office. A former vice president at Marsh Canada, Boyd has more than 20 years of commercial insurance industry experience specializing in mid-market oil and gas exploration, well control and executive risk coverage. Formerly, he was a senior account executive at Jones Brown and a vice president of Willis Group. Also at Burns & Wilcox Canada, Maia Espejo [5b] has been hired as a senior professional liability manager working out of Toronto. Espejo is a former senior underwriter for management liability at Creechurch International Underwriters, and has also worked as an underwriter at Travelers Insurance Company of Canada.
6
CARSTAR Collision & Glass Centres’ charitable car wash campaigns have raised $2 million for Cystic Fibrosis Canada in the last decade. “I am incredibly proud to see what started as a small grassroots campaign, grow to become a 10-year, $2-million fundraising success story,” says company COO Michael Macaluso [6]. “Finding a cure for Cystic Fibrosis (CF) is a mission for CARSTAR and I am so proud of our franchise partners, vendor sponsors, volunteers and Canadians who have contributed,” Macaluso adds. The campaign began after Victoria Whitaker, a granddaughter of a CARSTAR franchise owner, was diagnosed with CF.
Stephen Scullion [7] is Granite Claims Solutions’ new senior adjuster and manager of its branch in Kitchener-Waterloo, Ontario. Formerly director of professional development at Crawford & Company (Canada) Inc., Scullion has more than 27 years of insurance experience, “having held both adjusting and leadership roles with national, independent adjusting firms,” Granite Claims notes in a statement. His areas of expertise include commercial property, liability, business interruption and professional claims training.
devices, including Apple Inc.’s iPad and iPhone, and smartphones and tablets using both Windows and Google Inc.’s Android operating system.
8
Crawford & Company (Canada) Inc. announced that the management and adjusting team of Horizon Adjusters Ltd., based in Grande Prairie, Alberta, will join Crawford Canada, effective August 1. “Horizon’s president, Bea Boutcher, brings with her a team of five all-lines adjusters and a knowledgeable support staff team,” notes a press release from Crawford Canada. “This move is in line with our growth strategy in Western Canada and helps to complete our coverage and network in the region,” says Crawford Canada CEO Pat Van Bakel.
Insurance wholesaler Affiliated Brokers Exchange Ltd. (ABEX) has teamed up with Insurance Technology Solutions Inc. (ITS) to offer a new policy administration system that allows for, among other things, paperless policy issuance. The system enables brokers to provide “real-time quotes in minutes,” for both personal and commercial lines clients, notes ABEX, a managing general agent in Waterloo, Ontario that provides niche products and insurance offerings. A secure web portal allows brokers to make coverage changes, update policy information and fill out new applications for coverage using ITS’s BindEasy Solution. Brokers can also use the system on mobile
9
Perry Hughes has joined Catlin Canada as head of multi-lines. Hughes has held various management roles with “some of Canada’s largest insurance carriers,” notes Catlin Canada. The company is comprised of the Canadian operations of Bermuda-based commercial carrier Catlin Group Ltd.
10
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The Edmonton Pond of the Honorable Order of the Blue Goose, International recently raised $34,000 at their annual charity gala. The beneficiary of this year’s event is YOUCAN Youth Services. Almost 300 people attended the gala, held April 27 at the Edmonton Marriott at River Cree Resort. Local television personality, CTV’s Graham Neil, was the MC for
the evening, which featured both silent and live auctions. Renowned artist Lewis Lavoie created a painting that was auctioned off at the end of the evening. The event was well supported by the Edmonton insurance community, with the objective being to raise sufficient funds to purchase a Jeep for YOUCAN Youth Services. States Gala Committee Chair Chris Miller, “This Jeep is not simply a vehicle to drive around city streets, it is a vehicle by which YOUCAN’s Relentless Youth Workers hope to change the lives of at-risk youth in Edmonton through engagement, positive influence, life skills, and lasting change.” The Edmonton Pond’s annual charity events have now raised more than $160,000.
BSI Insurance Brokers along with Red River Mutual donated $5,000 to Elmdale School for the purchase of new playground equipment in regards to the Friends of Elmdale Playground Renewal Project. This donation was done on May 31, in part of BSI Insurance’s “Because We Care” program. Jackie Wall, CSR at BSI Insurance Brokers of Steinbach along with Dave Dueck, Senior Claims Specialist at Red
River Mutual, presented a $5,000 cheque to Garry Giesbrecht, Principal at Elmdale School and Melissa Friesen, Co-Chair of the Friends of Elmdale Playground Renewal Project. In 2013, BSI Insurance Brokers will be expanding the “Because We Care” program, aimed at supporting local community initiatives. This program will see donations distributed between the communities and surrounding areas of its 15 branches.
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The Insurance Brokers of Toronto Region (IBTR) held its annual Friendship Night at Le Parc in Thornhill, Ontario on May 9. The “Hollywood� themed event hosted the annual mix-andmingle for brokers, CSRs, TSRs, producers, support staff, insurers, underwriters, claims adjusters and a spectrum of industry vendors and suppliers.
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The Ontario Insurance Adjusters Association (OIAA) held its 2013 Provincial Claims Conference hosted by OIAA Niagara Chapter on May 9 and 10 in Niagara Falls at the Niagara Fallsview Casino. The event hosted 112 exhibitors at the trade show portion as well as six seminars. The lunch speaker on May 9 was David Chilton, author of The Wealthy Barber and The Wealthy Barber Returns.
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Aviva Canada’s National Special Risk Casualty division hosted an Afternoon Tea Event at the Windsor Arms Hotel in Toronto on May 10. Since 1927, Tea at the Windsor Arms has been synonymous with elegant, afternoon indulgence. Aviva guests relaxed in majestic purple tea room with its original working fireplace and indulged in dainty sandwiches and other delicacies as well as a selection of pastries and sweets, each exquisitely hand-crafted on site.
Raymond Davidson Cameron MacDonald, Senior Vice President & Chief Agent of Transatlantic Reinsurance Company (Canada), is pleased to announce the appointment of Raymond Davidson as Regional Vice President Treaty Underwriting effective March 12, 2013. In his new role, Mr. Davidson will be responsible for developing and managing TransRe’s casualty treaty portfolio in Canada. Having started his career with Aetna Casualty in Montreal in 1977, Mr. Davidson brings several years of management and underwriting experience to TransRe and most recently held the position of Assistant Vice President, Casualty for a major international reinsurance organization. Raymond is fluently bilingual and a member of the Professional Liability Underwriting Society (PLUS). About TransRe TransRe has been offering innovative reinsurance solutions to the Canadian marketplace since 1980. Rated “A+” by Standard & Poor’s and “A” by A.M. Best Company our strong financial position and technical expertise have made TransRe one of Canada’s leading reinsurance organizations. Additional information about TransRe can be found on our website at www.transre.com.
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Canada’s insurance community raised $246,204 for Starlight Children’s Foundation Canada at the 19th Annual Starlight Insurance Gala – “Venetian Renaissance Ball” held May 11 at the Carlu in Toronto. Starlight Children’s Foundation Canada is dedicated to helping seriously ill children and their families cope with their pain, fear and isolation through entertainment, education and family activities. Starlight’s programs are designed to distract children from their pain, help them better understand and manage their illnesses and connect families
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facing similar challenges so that no one feels alone. According to 2013 Starlight Insurance Charity Gala co-chairs, Alison Porter and Sara Runnalls, in the Starlight Insurance Gala’s first 18 years (not including proceeds from this year’s gala), the event has donated more than $3 million to Starlight Children’s Foundation Canada; fulfilled over 884 wishes; placed 75 fun centres in pediatric wards across Ontario; and brought thousands of smiles to the faces of seriously ill children. The 20th Annual Starlight Insurance Gala will be held May 10, 2014.
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Risk managers from across Ontario gathered on May 15 for the Annual General Meeting of the Ontario Chapter of the Risk and Insurance Management Society (ORIMS). The AGM was held at The Hockey Hall of Fame in Toronto. During the event, ORIMS 2012-13 president David Beal passed the cup to ORIMS 2013-14 president Suzanne Barrett.
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CSN Collision and Glass held its 7th annual Golf Tournament on June 5 at Piper’s Heath Golf Club in Milton, Ontario. Guests enjoyed a fabulous day on the links where they were able to participate in a variety of on-thecourse contests through the purchase of a MakeA-Wish package. The evening concluded with dinner and prizes, with CSN donating $10,000 to the Make-A-Wish Foundation, a charity that makes real difference in the lives of children and their families.
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APPOINTMENT
GALLERY See all photos from this event at www.canadianunderwriter.ca/gallery
The Centre for Study of Insurance Operations (CSIO) is working to build on the progress it has made over the past year to transform its vision to improve broker
channel efficiencies and deliver leading-edge technology standards from words to concrete action, CSIO chairman Steve Whitelaw suggested during
the CSIO’s annual general meeting at the Fairmont Royal York Hotel in Toronto on May 14. Read the full news item at: http://bit.ly/csioagm13
Pierre Dionne
Stéphane Pallez, Chairman and Chief Executive Officer of CCR is pleased to announce the appointment of Pierre Dionne, F.C.I.A., F.C.A.S., to Senior Vice President and Chief Agent for CCR’s Canadian Branch Operations. In this role, Mr. Dionne will continue developing CCR’s portfolio in Canada, while providing leadership to a staff of highly seasoned professionals. Mr. Dionne has been a key member of CCR’s Canadian Branch for the last 11 years as Vice President and Chief Actuary. Prior to joining CCR, Mr. Dionne held position of increasing seniority with various Canadian insurance companies, and at an international consulting firm. Mr. Dionne holds a B.Sc. in Actuarial Mathematics from Concordia University. CCR was founded in 1946. It is one of France’s largest and oldest reinsurers and is rated AA+ by Standard and Poor’s, and A++ by A.M. Best.
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A record turnout of 200+ industry representatives attended the 54th Annual Reception of the Quarter Century Club on May 23 at the Albany Club in Toronto. The event was a roast for claims industry veteran James Giffen, owner/ director of Malik, Giffen & Burnett (MGB) Claims Consultants Inc. James has been a loss adjuster since 1987 and was previously the Director of Technical Services Canada for Crawford & Company in Toronto. In May 2010, (along with partners Shawn Malik and Shawn Burnett) he launched MGB Claims Consultants Inc.
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ADVERTISERS’ INDEX ACE INA Insurance
2 (IFC)
Aviva Canada Inc.
68 (OBC)
Burns & Wilcox Canada
31
Caisse Centrale De Reassurance (CCR)
59
CNA Canada
19
Crawford and Company (Canada) Inc.
61
The Economical Insurance Group
21
The Guarantee Company of North America
15
Guy Carpenter
29
ICLR Urban/Basement Flooding Symposium
35
Insurance Internet Directory insPRESS.ca
44 39, 67
Insurance Institute of Canada
5
The Insurance Marketer - InsuranceMarketer.com
23
i-hire.ca
37
RIMS Canada Conference 2013 – Victoria
33
RSA – Royal & Sun Alliance Insurance Company of Canada
7
TOA Re
13
TransRe - Transatlantic Reinsurance Company (Canada)
53
Travelers
17
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Friends, colleagues and guests gathered on May 29 within Toronto’s historic Distillery District (once the renowned Gooderham & Worts whiskey distillery) to celebrate ServiceMaster’s 60th Anniversary in Canada. Held at Archeo Restaurant, one and all gathered together to celebrate the six decades of restoration excellence by enjoying an evening of wine, food and good conversation.
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Pat Van Bakel
John Sharoun
Named President and Chief Executive Officer of Crawford & Company (Canada) Inc.
Named Chief Executive Officer of Specialty Markets for the Americas
Pat Van Bakel has been promoted to the position of president and chief executive officer (CEO), Crawford & Company (Canada) Inc., succeeding John Sharoun. Sharoun has been named as chief CEO of Specialty Markets for the Americas and will continue to be based in Crawford’s Toronto office and will remain on the Canadian Board of Directors.
John Sharoun has been named as chief executive officer (CEO) of Specialty Markets for the Americas. Specialty Markets focuses on highly technical losses in sectors such as energy, marine, aviation, mining, international adjusting, forensic accounting, Lloyd’s and London Markets. Sharoun will continue to be based in Crawford’s Toronto office and will remain on the Canadian Board of Directors. He will be succeeded as CEO of Crawford & Company (Canada) Inc. by Pat Van Bakel.
“Pat has been an essential member of our senior executive team for many years as he has moved steadily up through several key roles in the company. He is dedicated to our mission and strategy, and I am certain Crawford Canada will benefit from his proven capabilities in his new role” said Kevin B. Frawley, executive vice president and chief executive officer, Property & Casualty - Americas. Van Bakel has been with the company for more than 20 years and most recently served as chief operating officer (COO) since 2012. Prior to his COO position he was senior vice president, Operations, Insurer Markets. In his new role, he is responsible for all facets of the Canadian organization, including all services supplied to the Canadian property and casualty insurance market.
“John has been instrumental in expanding the capabilities of our Canadian organization and we’re grateful for his hard work and dedication. He now brings that same passion for success to his new role leading Specialty Markets for the Americas, and we are confident it will thrive under his leadership,” said Kevin B. Frawley, executive vice president and chief executive officer, Property & Casualty - Americas. He noted that the transition to Van Bakel was based on a well-structured succession plan that has been ongoing under Sharoun’s leadership for the last few years. John Sharoun has over 35 years experience in the Canadian insurance industry. He has been with Crawford since 1998 and has held several key roles within the company. He was appointed CEO.
Crawford & Company (Canada) Inc. is a wholly owned subsidiary of Crawford & Company. Based in Atlanta, Ga., Crawford & Company is the world’s largest independent provider of claims management solutions to the risk management and insurance industry as well as self-insured entities, with an expansive global network serving clients in more than 70 countries. The Company’s shares are traded on the NYSE under the symbols CRDA and CRDB.
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CCR’s 12th Annual Blues Night was held at Fionn MacCool’s in downtown Toronto on May 21. Guests were treated to an evening of great food and a musical performance by the blues band “Fathead”. The evening was also cause for further celebration as it honoured Andre Fredette and his retirement from CCR as Senior VP and Chief Agent, a position he held for over 12 years. Congratulations Andre!
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The GTA Fellows and their guests gathered for the CIP Society’s Annual Fellows’ Golf Tournament on June 10 at ClubLink’s Wyndance Golf Club in Uxbridge, Ontario. Everyone had a fabulous time despite the rain. The day was capped off by cocktails, dinner and prizes. Thanks to the attendees of the tournament, a $2,560 donation was made to the John E. Lowes Insurance Education Fund.
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