Canadian Underwriter November 2014 by Annex Business Media

C A N A D A’ S I N S U R A N C E A N D R I S K M A G A Z I N E . C A N A D I A N U N D E R W R I T E R . C A

NO V E M B E R 2 0 1 4 A Business Information Group Publication #40069240

Remnants of Change 2015 REINSURANCE MARKET OUTLOOK

All Fired Up BY PAUL KOVACS & GLENN McGILLIVRAY

Crisis? What Crisis BY NATHAN SPITSE & DAVE ROBINSON

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CANADIAN UNDERWRITER

VOL. 81, NO. 11, November 2014 Canadaâ&#x20AC;&#x2122;s Insurance and Risk Magazine. Published by Business Information Group

www.canadianunderwriter.ca

Cover Story

2015 Reinsurance Market Outlook

The catastrophe splash of 2013 has given way to a decidedly more muted experience in 2014. For the reinsurance market, what are the remnants of change? Can the existing pieces be patched together to construct even greater strength or do emerging pressures make for threadbare cover?

features

50 18 Wildland Fires Several Canadian communities have started incorporating land use planning tools, such as development permits, into their wildland fire EM BE R 20 14 management strategies.

ess Information Group Publication #40069240 By Paul Kovacs & Glenn McGillivray

22 Trade, Credit and Political Risk Civil unrest around the world has raised awareness in Canadian C-suites about the need for robust credit and political risk insurance. By Marvin Azzopardi

Earthquake Preparedness Why are people not getting prepared for the big quake, which will be felt by everyone from governments to reinsurers, that experts agree is coming to Canada?

Remnants of Change

By Michael Teitelbaum

BY PAUL KOVACS & GLENN McGILLIVRAY

34 National Insurance Conference of Canada Crisis? What Crisis Players in BY NATHAN SPITSE & DAVE ROBINSON

Ethics: Vulnerable Clients

Energy Risks

A broker feels uneasy after an elderly client, relying on her daughter, seems confused about policy changes made. What should a broker do?

While the energy business in Canada has historically been quite profitable, risk selection and placement position must be taken into account.

BY The CIP Society

By Dan Fitzpatrick & Gord Kerr

Major disasters can damage both the immediate and future assets and operations of a business. A major crisis serves as a moment of truth that tests business readiness, resilience and character. By Nathan Spitse & Dave Robinson

30 Pollution Exclusions

A recent ruling by the Court of Appeal for Ontario includes some interesting observations with regard to how the pollution exclusion in a property policy should By Mary Lou Oâ&#x20AC;&#x2122;Reilly 2015 REINSURANCE MARKET OUTLOOK be interpreted.

All Fired Up

54 Crisis Management

60 Bitcoin With thousands of firms now using bitcoin, what are some of the risks related to ensuring the best security for the storage and transfer of funds? And are these risks insurable? By Greg Meckbach

62 IBAO Conference

the Canadian insurance and reinsurance markets need to consider conditions at both home and abroad to ensure they have a complete picture.

Dealing with the challenges of today as well as keeping an eye on future developments is key to ensuring brokers continue to be viewed as trusted advisors.

By Greg Meckbach, Harmeet Singh

By angela stelmakowich &

& Angela Stelmakowich

greg meckbach

November 2014 Canadian Underwriter 3

VOL. 81, NO. 2, FEBRUARY 2014 VOL. 81, NO. 2, FEBRUARY 2014 VOL. 81, NO. 11, November 2014 PROFILE PROFILE

Editor Angela Editor Stelmakowich Editor astelmakowich@canadianunderwriter.ca Angela Stelmakowich Angela Stelmakowich (416) 510-6793 astelmakowich@canadianunderwriter.ca astelmakowich@canadianunderwriter.ca (416) (416)510-6793 510-6793

profile

Associate Editor

James Cameron, president of Cameron & Associates Cameron &Consultants Associates Limited, Insurance Insurance Consultants Limited, was 16recognized Art Formby the CIP was recognized the CIPits Society when heby received With one of life’s turns, Society when he received Established Leader Award.its Philomena Comerford, Established Leader Award. BY ANGELA STELMAKOWICH who will become president BY ANGELA STELMAKOWICH of the Toronto Insurance Conference this March, went from thinking she would be a visual artist to having a 40-year career SPECIAL as anFOCUS insurance broker. SPECIAL FOCUS By Greg Meckbach

6 Editorial 6 Editorial 8 Marketplace 8 special Marketplace focus 56 Moves & Views 5612 Moves & Views Editorial 58 Gallery 5814 Marketplace Gallery 66 Moves & Views 68 Gallery

(416) 510-6796 Online OnlineEditor Editor Harmeet Singh Online Editor Harmeet Singh hsingh@canadianunderwriter.ca hsingh@canadianunderwriter.ca Harmeet Singh Twitter: @CU_Harmeet Twitter: @CU_Harmeet hsingh@canadianunderwriter.ca (416) 442-5600, Ext. 3652 (416) 442-5600 ext. 3652 Twitter: @CU_Harmeet

Photo: Patrick Thompson

14 Leading by Example 14 Leading by Example James Cameron, president of

Thompson Photo:Photo: PatrickPatrick Thompson

Associate Editor Associate Editor Greg Meckbach Greg Meckbach gmeckbach@canadianunderwriter.ca Greg Meckbach gmeckbach@canadianunderwriter.ca Twitter: @CU_Greg gmeckbach@canadianunderwriter.ca Twitter: @CU_Greg (416) 510-6796 Twitter: @CU_Greg (416) 510-6796

Associate Publisher (416)Aquino 442-5600 ext. 3652 Paul Associate Publisher paul@canadianunderwriter.ca Associate Publisher Paul Aquino Twitter: @InsuranceCanuk paul@canadianunderwriter.ca Paul510-6788 Aquino (416)

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Account Manager (416) 510-6788 Twitter: @InsuranceCanuk Michael Wells (416) 510-6788 michael@canadianunderwriter.ca Account Manager (416) 510-5122

Account Manager Michael Wells

Account Manager michael@canadianunderwriter.ca Michael Wells Christine Giovis (416) 510-5122 michael@canadianunderwriter.ca christine@canadianunderwriter.ca (416) 510-5122 (416) 510-5114 Account Manager

AccountFord Manager Elliot Account Manager Elliot eford@canadianunderwriter.ca ElliotFord Ford eford@canadianunderwriter.ca (416) 510-5117 eford@canadianunderwriter.ca (416) (416)510-5117 510-5117 Connect with Canadian Underwriter Connect with Canadian Underwriter twitter.com/CdnUnderwriter

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editorial

Water Worries

Changing weather risk patterns necessitate an adjusted perception of risk and bespoke reinsurance protection. Angela Stelmakowich Editor Canadian Underwriter astelmakowich@ canadianunderwriter.ca

12 Canadian Underwriter November 2014

It has been a little slow this year, catastrophe-wise, but it would be foolish to believe what happens in one year will necessarily follow in the next. Clearly, there is no shortage of perils to elicit concern and produce costs for all: governments, insurers, reinsurers and policyholders. But perhaps no other peril is so top of mind in this country as flooding and waterrelated damage, what with the steady stream of reminders. 2013 was a year in which severe storms resulted in flooding that propelled Canada’s insurance sector to record insured losses. That is beyond the hefty tab for governments left to clean up. The year was such that the events in Canada — globally seen as a bit of a lightweight, catastrophe-wise — were enough to catch the attention of report writers usually focused elsewhere. Concern over the damage that water can do is not new, but that concern has a certain ebb and flow that sometimes feels a bit too languid to have any hope of successfully negotiating the inevitable wave of damage that is coming and will not wait for yet more discussion. Waiting seems not to be an option if one considers findings of a new study from the Union of Concerned Scientists. The study looked at east and Gulf Coast communities in the United States, based on an analysis of 52 National Oceanic and Atmospheric Administration tide gauges using moderate

sea level rise projections. The report revealed that in the next 15 years, most of the towns included in the analysis could see a tripling in the number of high-tide floods each year and in 30 years, a 10-fold increase, compared to historic levels. Among other things, it recommends municipalities — with state and federal help — prioritize and incentivize flood-proofing of homes, neighbourhoods and key infrastructure; curtail development in areas subject to tidal flooding; and consider the risks and benefits of adaptation measures. Very much in that vein are more recommendations, again from the U.S., that include using market-based mechanisms to more directly match insurance coverage to relative risk and adopting prudent, hazard-specific land use measures and strong codes and standards for new and existing buildings. These are recommendations that often have also been made in Canada, with talk of resilience gaining profile and attracting more supporters. Some good work is being done, but, certainly, more is needed... and quickly. Munich Re reported the number of weather-related natural catastrophes worldwide that resulted in losses increased roughly threefold from 1980 to 2013. “Changing weather risk patterns necessitate an adjusted perception of risk and bespoke reinsurance protection. We need a better understanding of hazards and

potential accumulation risks, and we need to analyze the risk locations in this regard,” said Ludger Arnoldussen, a member of Munich Re’s Board of Management. Information, handled correctly, can never be a bad thing. For example, a new study out of the University of California, Irvine found that data from NASA satellites — which can provide a means to observe monthly variations in total water storage within large river basins based on measurements of tiny changes in Earth’s gravitational field — can greatly improve predictions of how likely a river basin is to overflow months before it does. The information “could result in earlier flood warnings, potentially saving lives and property,” notes the research, published online in the journal, Nature Geoscience. Many insurers are taking positive steps in terms of climate modelling and analysis, notes a report released in October by Ceres. In many instances, insurers are using climate-informed catastrophe models to better quantify climate-related risks from more frequent and intense weather catastrophes, it states. Improving climate change scenarios and impact assessments can help in fine-tuning insurer product offerings and pricing, the report adds. “This is not a partisan issue, it’s a financial solvency issue and a consumer protection issue,” Washington Insurance commissioner Mike Kreidler wrote in the report forward.

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Reinsurance TERRORISM, CYBER ATTACKS AMONG MAIN EMERGING RISKS IN REINSURANCE Cyber attacks and terrorism are among the main emerging risks currently facing the reinsurance sector, notes a new report from Guy Carpenter & Company. Emerging risks are divided into three categories: technological (those that are genuinely new, emerging from new technologies and processes); crystallizing (those that are not novel, but whose implications are evolving) and aggravating (those that are well-known, but whose impacts are becoming potentially more serious). “Whatever the category of emerging risk, the main challenge lies in modelling and quantifying the potential impacts,” says Morley Speed, managing director of GC Securities. “Only in this way can insurers leverage their key capability, which is the creation of value by risk management,” Speed adds.

QUIET Q3 FOR CAT BOND ISSUANCE: PCS Although no property and casualty catastrophe bond issuance activity occurred in 2014 Q3, a new report from Property Claim Services (PCS) suggests 2014 could still be “record-setting.” 2014 Q3 was decidedly different than 2013 Q3, when sponsors raised $1.5 billion, well above the 10-year average of $680 million. 14 Canadian Underwriter November 2014

That said, “the fourth quarter tends to be busy, with sponsors using catastrophe bonds as part of a broader risk and capital management plan ahead of the January 1 renewals,” PCS notes. “A repeat of fourth-quarter 2013 issuance levels would put full-year 2014 issuance far ahead of last year’s.” In the first nine months of 2014, insurers and reinsurers have issued about $5.7 billion in cat bonds, up roughly 6% over 2013. Issuance for cat bonds with some North American exposure also increased from $4.3 billion in the first nine months of 2013 to $4.8 billion in the same period in 2014. As well, “for the first nine months of 2013, the average catastrophe bond size was $216 million. For the same period this year, it’s $317 million,” the report notes.

NEED FOR INNOVATION to be KEY: lloyd’s BEALE Using the over supply of capital entering the insurance market to cover new and emerging risks, including in developed markets, will be key to staying competitive in today’s challenging pricing environment. Relationships remain crucial for the Lloyd’s market, but its coverholders, brokers and underwriters must continue to innovate as low interest rates and more capital put pressure on pricing, Inga Beale, chief executive officer of Lloyd’s, said at a recent event in Toronto. “I don’t want Lloyd’s to get drawn into a race to the

bottom on pricing,” Beale said. There are opportunities for growth even in core products in developed areas, including in well-covered countries like Canada. Uptake of earthquake coverage in Canada is still relatively low, Beale said. Sean Murphy, president of Lloyd’s in Canada, added that cyber insurance is an area with potential for growth, but businesses need help to understand their risks.

INSURers CAUTIONED TO BE PREPAREd FOR QUAKE IN EASTERN CANADA Speakers at a recent event cautioned that while talk around earthquake risk in Canada has centred on British Columbia, insurers would be well-advised to also consider their ability to respond to a tremor in Quebec or eastern Ontario. “I don’t think we spend enough time in Canada looking at the impact of an eastern Canada quake,” Carol Jardine, an independent insurance consultant, said at an earthquake response seminar in Toronto, held by Catastrophe Response Unit. “Montreal and Ottawa are both at significant risk of ground shaking,” said Kristy Tiampo, a professor at the University of Western Ontario, who also works with the Institute for Catastrophic Loss Reduction. Both cities have had quakes measuring about 6 on the Richter scale. Said Tiampo, “What happens if we start to look at earthquakes that occur a little bit more frequently? They might

be a little bit smaller, but they still have a significant likelihood of occurrence.”

Regulation ONTARIO’S RATE REDUCTION MAY NEGATIVELY IMPACT PROFITABILITY: OSFI The Ontario-mandated directive for the property and casualty sector to reduce auto insurance rates by an average of 15% could have a negative impact on profitability, the Office of the Superintendent of Financial Institutions notes in its annual report. The target reductions “may negatively impact Ontario personal auto insurance underwriting profitability if the additional claims-related measures introduced in the 2013 Ontario budget are delayed in implementation.” Net income of $2.4 billion for the industry fell 37.5% over the previous year’s net income of $3.9 billion, while return on equity dropped to 7.4%, from 11.4% a year earlier, the report notes.

INCREASED auto ACCIDENT BENEFITS in PEI Benefits for auto accident victims in Prince Edward Island have increased for accidents occurring October 1 onward, regardless of when the policy was purchased. New provisions include changes to the minor personal injury definition, and an increase on the cap on court awards for such injuries, rising from $2,500 to $7,500.

marketplace

There are also increases for medical and rehabilitation expenses, funeral expenses, death benefits, loss of income, and the principal unpaid housekeeper. The loss of income age limitations also have been removed.

FEEDBACK SOUGHT ON SAFE DRIVER DISCOUNT INSURANCE PROGRAM: SGI SGI is seeking public feedback on its Safe Driver Recognition program, which allows those with a good driving record to be in the “safety zone” on the insurer’s safety rating scale and earn a discount on basic vehicle insurance. Customers are being asked, among other things, to consider increasing the financial penalty per demerit point (currently $25/point); increasing the threshold for an at-fault crash to garner demerit points (now damage costs of $305 or more); and assigning demerit points to regular speeding tickets.

Risk MINING-RELATED SPILLS SHOW POTENTIAL FOR BLACK SWAN EVENTS Clean-up costs alone of major spills in certain areas — such as British Columbia or Alberta — could be in the tens of millions of dollars, demanding that mining companies have in place appropriate coverages, suggests a recent report from Marsh. Since October 2013, there have been four high-profile environmental incidents in

North American’s mining sector. “These events highlight the fact that catastrophic ‘black swan’ events can occur regardless of the quality and thoroughness of on-site engineering and environmental management controls.” Marsh contends these incidents “can impair a company’s ability to meet its financial obligations if not managed and planned for.”

phones often used BEHIND THE WHEEL IN TRAFFIC, AT RED LIGHTS A survey by Leger for Allstate Canada shows that traffic delays and being stopped at red lights are common times polled Canadian drivers use their cellphones. In all, 40% of respondents reported checking their phones when stopped in traffic because of delays, and 34% said they check their phones and 18% texted when stopped at a red light. Just a third of surveyed drivers said a fine or ticket would be enough to have them stop using their phones while driving. However, 57% noted they would be in favour of having technology installed in their cars to prevent them from using their phone while their car was running.

Canadian Market COMMERCIAL LINES PRICES IN 2014 Q2 RISE Commercial insurance prices increased 3% across all lines

in 2014 Q2, notes a recent survey from Towers Watson. Based on data from seven Canadian insurers and groups, representing about 20% of the Canadian commercial insurance market, it shows price changes for all lines were in the low-single digits. The largest price increase was reported for the general/ products liability lines, followed by commercial auto and property lines.

in insured losses for the first nine months of 2014, Property Claim Services (PCS) reported in mid-October. PCS has designated 26 catastrophe events for the first three quarters of the year in the United States. Insured losses of US$13.6 billion are 13% higher year-over-year. In Canada, “insured losses from four catastrophe events reached only $700 million, down almost 80% from last year’s record,” the company notes of the quietest Cat year since at least 2009.

SGI CANADA ENTERS B.C. P&C MARKET SGI Canada has received a licence that allows the insurer to compete in British Columbia’s property and casualty insurance market, and expects to begin doing so in the summer of 2015. “B.C. is a province with strong growth potential and, with SGI Canada’s experience writing insurance for the mining and oil and gas industries, moving further west is a good fit,” says Andrew Cartmell, SGI’s president and chief executive officer. “This move also allows us to further spread our risk, meaning losses due to events like catastrophic storms in one region are offset by profits in other regions. This benefits customers in all regions by assisting with rate stability.”

Claims CAT LOSSES US$14 BILLION FOR FIRST NINE MONTHS North American catastrophe activity has resulted in slightly more than US$14 billion

Technology AERIAL DRONES CAN HELP INSURERS MEET CUSTOMER EXPECTATIONS QUICKLY Boston-based Strategy Meets Action is predicting increased momentum in the use by insurers of unmanned aerial vehicles, or drones. Nearly 51% of insurers plan on investing in drones/ aerial imagery over the next three years, writes Denise Garth, partner and chief digital officer at SMA. Garth notes “use of drones and aerial imagery can assess a property, particularly a roof, during the underwriting process, providing relevant information to assess the risk.” In addition, “it provides a picture of the property prior to any loss, helping to avoid fraudulent claims.” The report is based on a study of nine technology areas, with participation from 88 insurance companies and 20 firms outside the industry.

November 2014 Canadian Underwriter

Profile

Art Form Greg Meckbach Associate Editor

With one of life’s turns, Philomena Comerford, incoming president of the Toronto Insurance Conference, went from thinking she would be a visual artist to having a 40-year career in insurance. Philomena Comerford, current vice president of the Toronto Insurance Conference (TIC), has seen some major changes in the risk landscape over her 40 years as a broker. “There are new risks emerging,” says Comerford, president and chief executive officer of Baird MacGregor Insurance Brokers LP and its affiliate, Hargraft Schofield LP. “When I first started my career, nobody talked about privacy or cyber liability. They talked about protecting a customer against (liability) for libel, slander, defamation and those sorts of things, but not privacy breaches.” Today, Comerford says, “you can’t open up the paper without reading about some sort of cyber or privacy beach.” Another emerging risk is the rise in weather-related losses, suggests Comerford, who is scheduled to replace 16 Canadian Underwriter November 2014

Brooke Hunter next March as president of TIC, a networking and advocacy organization for commercial brokers that currently has 21 full members and three associate members, with about 2,000 licensed brokers. “In the early days, everyone was worried about fire,” Comerford says. “Was a building properly sprinklered? Was it protected? Now, we are worried about water and weather. They were not issues 20 or 30 years ago, but these things are now front of mind and are worrying underwriters and brokers.” The TIC is well-known for its social events — such as its annual black tie dinner every November and its golf tournament every June — says Comerford, but the conference also does “important work on behalf of commercial brokers and we also communicate with the insurance companies.” As an example, she points out that TIC liaises with organizations such as Insurance Bureau of Canada (IBC), the Registered Insurance Brokers of Ontario, the Insurance Brokers Association of Ontario (IBAO) and the Insurance Brokers Association of Canada (IBAC) on issues affecting commercial brokers. TIC, which is a member of IBAC, also continues its work to encourage insurance carriers in Canada to include a declaration of emergency endorsement, approved

by IBC in 2009, to all commercial property and casualty policies. The aim is to ensure clients have coverage if insurers, brokers or policyholders are unable to conduct normal business as a result of a declared emergency (say, if there is no phone or Internet service). Noting that the initiative continues to be a priority of TIC, Comerford reports “the intent is to try to get the insurers to globally adopt that endorsement.” TIC also aims to keep members informed of issues affecting the industry, such as floodplain data, municipal infrastructure and coverage not currently available from Canadian-licensed insurers. The conference tries to keep track of related products that are not available from Canadian insurers, she says, “so that if an argument needs to be made that this product simply wasn’t available in Canada, then they can seek assistance from (TIC’s) tax committee” to determine if a domestic coverage placement would be exempt from excise tax because of its lack of availability from Canadian-licensed insurers. In addition to her current role at TIC, Comerford also represents TIC on both IBAC’s Broker Identity Program committee and its telematics committee. “The subject of automobile insurance has been a political football for decades and I know the use of telematics is

something we hope will be a tool to deliver deserved rate reductions to people who actually drive correctly.” Comerford notes that Baird MacGregor Insurance Brokers has partnered with the IBAO subsidiary, Independent Broker Resources Inc., on a telematics service for the brokerage’s commercial customers. “We think that telematics technology is an important risk management

Today, Comerford says, “you can’t open up the paper without reading about some sort of cyber or privacy breach.” tool because it provides our fleet clients with a sophisticated loss control instrument to help them manage their risks better,” she says.

Commercial art Before becoming a commercial broker, Comerford studied visual arts at The Ontario College of Art and Design University (then known as the Ontario College of Art) in Toronto during the early 1970s. “From a young age, I was (originally) going to be an artist,” she says. “I decided I would take a little bit of a turn. I was offered a job, one thing led to another and I started working in the claims

Photo: Patrick Thompson

Profile

department” at the brokerage Tomenson Saunders. That was where her mother, Rose, now 90, worked at the time. “She ultimately followed me (to Baird MacGregor) later and she became our vice president of claims,” Comerford points out, adding that “she retired at the young age of 80.” Two of Comerford’s co-workers at Tomenson Saunders — Jack Baird and Harry MacGregor — left the brokerage in 1979 to start their own business. They hired Comerford the following year as a senior commercial

account executive. She was appointed president of Baird MacGregor Insurance Brokers in 1990. In 2000, she became a shareholder and with the retirement of its founders in 2007, partnered with then Newport Partners Income Fund — which had purchased the majority of Hargraft Schofield in 2006 — to buy Baird’s and MacGregor’s interests in the brokerage they had founded. Then in 2009, officials with Newport Partners approached Comerford to “help them take over the management of

Hargraft,” she recounts. Two years later, Comerford bought Newport’s share of both Hargraft Schofield and Baird MacGregor Insurance Brokers. Today, both firms are based in the same location in Toronto. Clients include transportation, hospitality, realty, manufacturing, wholesale and construction companies. While Comerford’s career in insurance was unfolding, her voluntary work was proving active as well, including serving as the first female chair of the Insurance Institute of Canada in 1994-1995. In 2009, she decided to join the TIC board. “Because of the fact that Hargraft was a (TIC) member, I felt that it was the right thing to do, and I feel (TIC does) important work,” she says.

Attracting young people Some of that work includes a scholarship program, launched by TIC last year and administered by the John E. Lowes Foundation. TIC offers as many as three $5,000 scholarships — to relatives of TIC brokers, partners and staff — for students entering second year of a full-time Canadian university undergraduate degree program with a concentration in business, finance or insurance. “We believe that it is very important to try and entice young people into the industry,” Comerford says.

“There are a lot of senior brokers who are reaching retirement age and we want to make sure we have a fresh crop of bright young people coming into the industry so that we can bring them along and have the more senior brokers mentor the younger people coming in.” Since Comerford was attracted to the insurance business, some things have changed for commercial brokers. “Canada is becoming a more litigious place than it was 10 or 20 years ago, so we are seeing a plethora of bodily injury claims in various classes of business — real estate, hospitality and anything with wheels,” she comments. “Those claims... take a long time to settle,” she adds. Another change is electronic transactions, especially as Canada Post phases out home delivery. “I would like to explore how (TIC’s) technology committee could help us develop best practices protocols surrounding banking and customer data security considering the plethora of cyber threats and the movement to increased electronic transmission of data and funds with the phasing out of mail delivery.” Adds Comerford: “What advice do we give to our clients to protect themselves as they face this impending change? You have to think about what could be our problem tomorrow.” November 2014 Canadian Underwriter

Paul Kovacs

Executive Director, Institute for Catastrophic Loss Reduction

Glenn McGillivray

Managing Director, Institute for Catastrophic Loss Reduction

Development

Several Canadian communities have started incorporating land use planning tools, such as development permits, into their wildland fire management strategies. The idea is that these permits, which can be used to combine management of zoning and site planning, can help reduce potential future losses associated with wildfires. Land use planning is a tool that many local governments around the world use to reduce the risk of flood damage. Now, several Canadian communities have begun to incorporate planning tools, such as development permits, into comprehensive community wildland fire management strategies. Development permits are planning tools that local governments can use to manage development, protect the environment and address local health and safety issues. These permits can be used to combine management of zoning, site planning and minor variants into a single process.

18 Canadian Underwriter November 2014

As of late, more than a dozen communities in British Columbia and Alberta have started using development permits to control the extent, nature and location of new residential development in the wildland-urban interface â&#x20AC;&#x201D; or WUI â&#x20AC;&#x201D; essentially those places where housing and vegetation abut or comingle. It appears the growing use of local government planning tools to address wildfire exposure in western Canada is poised to spread across the country. Indeed, this past June, a revised Provincial Policy Statement now requires that local governments in Ontario use their planning powers to address both flood and, now, wildland fire.

FIRE ON THE LANDSCAPE Fire is an essential agent for ecological renewal and health in forests and grasslands. However, fire also has the potential to destroy homes, disrupt communities and threaten health and safety. Loss and damage from fire in the WUI has been growing and is expected to increase significantly over the coming decades unless current practices change. In particular, the rising number of people who live in the WUI, coupled with the impact of climate change on expected area burned, are two factors that will drive fire losses in Canada higher absent action being taken. For almost one hundred years, fire specialists have managed the risk of loss and damage from wildfire in Canada with little involvement from individual property owners and communities located in or near wildlands. Historically, most fires were identified soon after they began, and were suppressed quickly. For many decades, there were few wildfire fatalities and relatively little damage to property.

Illustration by Dave Whamond

Under

Since the 1990s, however, there has been a trend of rising costs of fighting wildland fire and fire damage. These costs have been growing in Canada and have increased at an unsustainable rate in some other countries, including the United States and Australia. The most damaging wildfires in Canadian history, in terms of the value of property destroyed, were relatively recent events in 2003 (Kelowna, British Columbia and nearby communities) and 2011 (Slave Lake, Alberta). There is widespread agreement that the current approach to fire management in Canada needs to evolve. Emerging fire management best practices are complex and seek to involve many stakeholders, including all levels of government, land managers, fire management and suppression agencies, homeowners and insurers. Fire specialists continue to address fires when they ignite. There are also efforts to reduce the risk of large, uncontrolled fire through prescribed burning, thinning of forests and creation of fire breaks. Beyond the forests, efforts are under way to involve property owners in managing the risk of fire damage. National programs such as FireSmart seek to educate property owners and community leaders about the role of fire in the ecosystem and actions Canadians can take to reduce the risk that fire enters a community. New wildfire management tools are frequently identified and tested in this changing environment. Of interest here, however, is the emerging role of local government planning officials. Over many decades, planners have provided important tools to address other hazards, most commonly the risk of loss from riverine flood. However, some progressive communities have recently begun using established tools, like development permits, to address the risk of damage from wildfire. In June 2014, for example, the Province of Ontario included wildland fire in its planning statement for the first time. Prior to this change, only British Columbia included wildfire in its provincial planning policy statement. 20 Canadian Underwriter November 2014

PERMITS AS WILDLAND FIREFIGHTING TOOLS Several local governments now include covenants in the development permit system requiring fire-resilient building materials for new homes. Conditions for approving a development permit may include fire-retardant roofing, exterior walls sheathed with fire-resistive materials, windows with tempered or double-glazed glass, decks built with fire-resistant materials, screens on all eaves, attics and roof vents and chimney spark arrestors.

new residential developments are designed with measures to defend against the risk of wildland fire blowing or burning into the community. Most significantly, development permits provide local governments with the authority to control and even prohibit residential development in zones of high fire risk. There has been rapid growth in the number of people who live in or near wildlands across Canada, including more permanent residences and seasonal homes. Evidence from the United States, Australia and emerging in Canada shows that growth in the number of people living in areas at risk is a critical factor that has been increasing loss and damage in the WUI. Development permits give local governments the authority and responsibility to control residential development in interface zones with high risk of fire.

LOOKING FORWARD

Provincial and territorial governments do not currently include provisions addressing the risk of damage from wildland fires in their respective building codes; fortunately, these public safety measures are now emerging in local government development permit requirements. The development permit system can also address landscaping and site considerations to reduce the risk that wildland fire will enter and spread through a community. This may include a requirement for defensible space of at least 10 metres around each home free of combustible materials, thinned plantings and reduced combustibles in a zone extending at least 30 metres around each home, underground servicing for hydro, considerations to address the additional risk to structures on a slope, fire breaks and other community safety measures. The overall objective is to ensure that

Land use planning is a tool that local governments around the world use to reduce the risk of damage from riverine flooding. This is true in Canada as well, as many jurisdictions across the country have endeavoured to keep developers from constructing homes in floodplains and on floodways (some, as has recently been witnessed, with better success than others). Now, it is emerging several communities have similarly begun to use planning tools, such as development permits, to forge comprehensive community wildland fire management strategies. The growing population living in the WUI and projections of increasing areas burned by wildfire due to climate change suggests these tools are likely to spread in the years ahead and, eventually, will be used by a number of local governments across the country. Local planning decisions can provide an important contribution within a comprehensive community wildland-urban interface fire management strategy. Establishing development permits looks to be an emerging policy instrument for local governments to address the risk of loss from wildland fire and will play a significant role in ensuring that communities located in the WUI are safe places to live, work and play.

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CanadiansG International Marvin Azzopardi

Senior Underwriter, Trade, Credit & Political Risk, Zurich North America

Civil unrest in various regions has raised awareness in Canadian C-suites about the need for robust credit and political risk insurance protection. It is vital that Canadian corporations with an international footprint fully understand the full spectrum of risk associated with pursuing opportunities in these regions. In an era of rapid European expansion, some of the most dominant British and French enterprises of the 17th century ruled the fur trade via negotiated treaties with Canadian First Nations communities. But beaver scarcity caused northward migration from Iroquois communities into the more fur-rich areas occupied by the Hurons, resulting in The Iroquois Wars and leading to trade slowdowns within the Canadian fur industry.

22 Canadian Underwriter November 2014

Today, the location of raw materials has caused many companies to venture into politically unstable regions of the world, as commodity dependency and increasing global demand from emerging markets have made it lucrative for companies to take on additional risk. Canadaâ&#x20AC;&#x2122;s mining companies are no exception, seeking exploration opportunities in challenging geographies to increase revenues and profits. Statistics Canada reports that about 67% of the $225 billion worth of assets owned by Canadian mining companies are located in foreign jurisdictions where political risks can potentially threaten the viability of operations, especially in regions that pose considerable geopolitical instability. Corporations must address the wide array of threats that may negatively affect their balance sheets. Types of risks can range from seizure of assets, licence cancellations, regulatory changes, tax increases, forced sales, bribery, currency restrictions, labour disputes, riots, war and acts of terrorism. Unlike other industries that have the flexibility to decide where a project is domiciled, mining companies must go to where the resources are situated and mitigate the risks inherent to that part of the world. Although not all of these risks

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are insurable, an increasing number of these companies are seeing credit and political risk insurance as key tools to help mitigate some of the more catastrophic and unpredictable hazards. POLITICAL RISKS TODAY One risk that has become increasingly prevalent is resource nationalism, in which foreign governments change the deal to which foreign natural resource companies sign up, often through increased taxation and royalties, or reduced foreign ownership percentages after the investment is made. Sometimes, these acts reach the extreme of expropriation, an insurable risk wherein the host government takes an investment and does not compensate the investor. Resource nationalism can originate from different sources in different countries, but some contributing factors can include countries with troubled colonial histories, economic recession or income disparity, negative past experiences with foreign investors, or deep cultural beliefs surrounding the resources themselves. This risk is often more prominent in emerging markets or regions of the world where mining revenues often account for a relatively higher proportion of gross domestic product. Democratic Republic of the Congo Consider, for instance, that Canadianowned mining companies are responsible for two-thirds of copper and cobalt output within the Democratic Republic of the Congo, where mining accounts for approximately 50% of gross domestic product. However, in its 2013 annual ranking of 96 political jurisdictions for mining investment, the Fraser Institute puts the Democratic Republic of the Congo at 87 for “uncertainty concerning disputed land claims,” 90 for “legal system” and 90 for “political stability,” demonstrating a jurisdiction with an extreme level of political risk. Middle East and North Africa Acts of political violence pose another 24 Canadian Underwriter November 2014

serious risk to Canadian corporations with operations in developing regions. Political violence in the Middle East and North African (MENA) region has created chronic challenges for businesses engaged there, including severe disruptions to production and supply chains resulting from damage to assets, and the threat to worker safety and security. China The 2013 trade figures between Canada and China — which last year became the world’s largest trading nation — lie in the range of $70 billion, positioning China as Canada’s largest trading partner after the United States. Although China represents a large and potentially lucrative market for export-

Sensitive issues ranging from local land rights to social, labour and environmental considerations can quickly lead to protests that impact production, cash flows or, in extreme circumstances, the viability of a project altogether. ers, its economy is slowing and there remains a great deal of uncertainty with regard to regulatory risk and a still-evolving judicial system. Intermittent protests throughout the country, most recently in Hong Kong, could create still more uncertainty moving forward. Moreover, although credit information services are available to exporters, the degree of information quality can vary significantly. In the current Chinese regulatory environment, it is important that exporters know their clients well, keep terms and conditions in documents of sale simple and easy to understand, and select collection agencies based on past performance. Exporters also need to consider

that Chinese law will govern legal outcomes since Canadian court orders cannot be enforced in China. Social unrest can fuel business interruption Operations in a foreign country are also often affected by disruptions aimed at a specific project and a company’s lack of awareness and engagement with the surrounding community. Sensitive issues ranging from local land rights to social, labour and environmental considerations can quickly lead to protests that impact production, cash flows or, in extreme circumstances, the viability of a project altogether. A project that operates in a challenging political or security environment is far more likely to be successful if it has implemented local hiring programs and social investment programs that ensure benefits accrue to the local community. As an October 10 analysis article from Reuters noted, “Measuring political risk in emerging markets,” street protests, ethnic violence and labour unrest “are factors that have increased chances of business disruption in emerging markets by 20% over the past three months.”

INSURANCE AWARENESS Beyond just a developing awareness for political risks in the mining sector, ongoing conflicts such as those in Russia, Ukraine, Syria and Iraq have contributed significantly to increased political risk awareness among risk managers, chief financial officers and chief executive officers, prompting corporations to seek ways to further manage investment risk for their international business. With this in mind, it is vital for Canadian corporations with an international footprint to fully understand the entire spectrum of risk associated with pursuing opportunities in a foreign country. This can often be addressed through prudent and responsible country risk management, which should entail consultation with the Canadian government, including its local export credit agency, Export Development Canada, as well as with the private credit and po-

litical risk market in Canada. Still, unforeseen political shifts can leave even the most well-informed corporations vulnerable to political threats. Political risk insurance is one way for Canadian firms to grow with a safety net against some of the worst risks they face in emerging markets. No sectors face these risks more frequently than energy and mining. These companies need to carefully consider appropriate trade credit and political risk insurance coverage to ensure their assets are protected and their lending secured, while at the same time making it easier to attract investors and lenders to complex projects. â&#x20AC;˘ Expropriation coverage offers protection in the event of confiscation, expropriation, nationalization and other acts by a host government that deprive the company of its fundamental rights to its venture, mined material, equipment or other assets. â&#x20AC;˘ Political violence coverage offers pro-

tection against the damage or destruction of assets resulting from events such as war, revolution, insurrection, civil unrest, terrorism and sabotage. Coverage for business interruption is readily available in Canada, as well as the forced abandonment of a project due to political violence. â&#x20AC;˘ Currency inconvertibility and nontransferability coverage helps protect against the inability to convert local proceeds to hard currency and repatriate the currency and is particularly useful against government decrees that force companies to bring trade revenues back onshore to local accounts. Political risk insurance policies can include any combination of relevant political risk coverages on a single policy with the ability to manuscript to meet the specific needs of each company. Having coverage terms for 15 years or longer will be important for companies that are undertaking a long-term venture and that want to make sure their assets are pro-

tected for the duration of the investment. It is also important to note that some providers of political risk coverage offer non-cancellable terms where the premium rates may be fixed for the duration of the coverage. This will allow a company to lock in coverage for the entire length of its investment. During the fur trade, great conflicts came with the extraordinary profits. Corporations have learned much about investing abroad since then, but are still confronted with the challenges of dealing with new, growing markets with great uncertainty. With prudent country risk management, firms can plan for and prevent many of these risks from derailing a project. However, recent history has shown that the emerging markets will occasionally present foreign investors with unforeseen challenges, and credit and political risk insurance are useful tools to have in place should some of the worst events unfold.

Who Decides?

The CIP Society Insurance Institute of Canada

The CIP Society represents more than 17,000 graduates of the Insurance Institute of Canada’s Fellow Chartered Insurance Professional (FCIP) and Chartered Insurance Professional (CIP) Programs.The CIP Society, through articles such as this, is working to bring ethical issues to the forefront and provide learning opportunities that enhance the professional ethics of all insurance An elderly client of a brokerage in a small town professionals. contacted her insurance broker to make some changes to her homeowner’s policy. The client indicated that she preferred to deal in-person and, thus, made an appointment to visit the brokerage. The owner of the brokerage knew the client rather well, as he too grew up in the community. In fact, when his father owned the brokerage before him, the woman was then a client as well. The client arrived on schedule and was joined by her middle-aged daughter. The daughter ap-

26 Canadian Underwriter November 2014

peared to be agitated and annoyed with her mother during the visit, constantly raising her voice when her mother did not seem to understand what was being said. Occasionally, this behaviour bordered on abuse, and the broker was upset and uncomfortable. Although the client did not appear to fully understand what was being explained to her, she agreed to accept the changes because her daughter said she must. The elderly client did not have a power of attorney in place, but seemed to rely on her daughter a fair bit. The broker was deeply unhappy about this encounter and felt that he should take some kind of action. But what should (or could) he do? Sharon Lillico, BSc, CIP Assistant Vice President, Insurance Services LMS PROLINK Ltd. The challenge presented in this scenario is that the broker does not want to get in the middle of the client and daughter relationship, and possibly risk overstepping his bounds. However, the

Illustration by Dave Whamond

The CIP Society Ethics Series

A broker is left feeling uneasy after a visit from an elderly client and the client’s daughter. Relying heavily on the daughter, who appears to be annoyed, the client comes across as confused and seems to be acquiescing to the daughter’s advice about changes to her homeowner’s policy, although there is no power of attorney. What should the broker do to ensure the client understands the changes and is protected?

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broker is presented with a person who may not be competent to make decisions (the client) and a questionable advisor with no power of attorney (the daughter). Certainly, considerations around the broker’s duty of care arise! The broker in this small town would most likely know the daughter. He can call her and ease into a conversation about the visit, saying that he noticed it was stressful for her and that he understands the difficulties she must be facing supporting her mother at this stage in her life. The broker can take the opportunity to share the names of various community services that provide support in the care of elderly persons, as well as give some contact phone numbers. This offer of assistance should be welcomed by the daughter and demonstrates the broker’s proactive support. At the same time, the broker should phone the client directly to arrange to reassess any changes on the homeowner’s policy made during the appointment. He could then offer to visit the home to review these changes once they have been completed. At the time of the visit, and in general conversations with the client, the broker should get a fair idea of the client’s situation. The broker should then follow up with written recommendations according to his usual professional standard. In this way, the broker is supporting both the client and her daughter, getting help for the both of them, while alleviating his concerns about duty of care. Scott Maskell, B.A., CIP Vice President, Glenny Insurance Broker Limited & P.Tomlinson Insurance Broker Inc. The local brokerage, with its deep community roots and long-term clientele, must be prepared for such experiences as described in the scenario, as an aging population relies heavily on others to aid them in decisions. Unfortunately, occasionally, children of the aging clientele can be impatient, frustrated and behave poorly in such circumstances. It is important for the broker to en28 Canadian Underwriter November 2014

sure that the client — the elderly lady — is the one making the decisions and, if she is not capable, that the broker receives proper documentation before allowing others to direct or take over the decision-making process. Here are a few actions that the broker could take in response to the encounter: 1. Ask the client to return for another visit without her daughter.

Ultimately, the broker in this situation must speak with the client to fully explain and document the options, including the broker’s opinion on best course of action. The client must have access to all information to properly make a decision and should not do so under duress. 2. Recommend the client return with a different family member or trusted individual. 3. Suggest a follow-up meeting with the client to ensure that she has understood the information presented to her. Instead of simply asking a “yes” or

“no” question, ask the client whether or not she can recall the changes that were made to her policy and to articulate those changes. 4. Depending on the severity of the daughter’s actions towards her mother, the situation could warrant a report of elder abuse. Despite the poor encounter, the elderly client and daughter did attend the meeting together, and there is a distinct possibility that the broker will need to interact with both in the future. As a broker, he should ensure he is a professional and does not become emotionally engaged in the situation because of the daughter’s actions. It is important to be mindful of that in order to effectively advise the client in the future. Miriam Weerasooriya, BBA, FCIP, CRM Independent Consultant Brokers often ask clients what keeps them up at night; we rarely turn the tables on ourselves to see how our actions, or lack thereof, might do the same to us. Canada is an aging society with seniors over the age of 65 accounting for 14.4% of the current population, representing the fastest-growing sector, Employment and Social Development Canada reports in its 2011 population survey statistics. Estimates show that this group will double in the next 25 years, so the situation described will undoubtedly arise more frequently in our industry. As insurance brokers, our first obligation is to our client. We are there to ensure our client’s property is maintained at the highest level possible, and to explain the options available to achieve that end goal. In this case, the broker represents the elderly mother and it is her best interest he is bound to preserve. Practically, the daughter may be heir to the property, but until such time as either power of attorney or other transfers are affected, the broker’s duty is to the mother. And that means doing the uncomfortable thing if the daughter is contravening the mother’s best interests. Having aging parents myself, I can appreciate how awkward it would be for the broker to insinuate a caregiver

might not be acting aboveboard. The alternative is worse — hiring a professional broker to give advice only to have it put aside because an unqualified relative simply demanded it. Ultimately, the broker in this situation must speak with the client to fully explain and document the options, including the broker’s opinion on best course of action. The client must have access to all information to properly make a decision and should not do so under duress, as appears to be the case in the scenario described. Once documented, the client is then free to do as she wishes. If the broker is still troubled by the daughter’s behaviour toward the mother, a call to a provincial seniors abuse support line, the RCMP division, or one of the many elder abuse services available through the Canadian Network for the Prevention of Elder Abuse should be considered. There are many things out of our control to keep us awake at night, but acting with integrity for a client should not be one of them.

THE LAST WORD While it can be helpful to have a family member present when discussing policy changes with an elderly client, the pushy daughter described in the scenario appears to have made decisions on behalf of her mother without power of attorney, and the situation needs to be addressed by the broker. The broker has to investigate to determine if the client was coerced by the daughter. While the broker may not want to involve himself in the family’s situation, he should follow up with the client to ask her to confirm that she understands the changes to her policy and that she is comfortable with the decisions that were made during the appointment. The broker should give her information regarding her rights and stress that only she has the decision-making power over her policy. The broker can also provide contact information for individuals or agencies that can assist the client if she believes the daughter was acting improperly as attorney. Alternatively, if the broker suspects that the client is unable to assess the situation on her own, he may contact the local Office of the Public Guardian and/or Trustee, which serves to protect the interests of the most vulnerable persons. The office will conduct an investigation and determine the most accommodating way to co-ordinate legal steps to help the client manage her affairs. While assessing the client’s comprehension level during a meeting is always important, it becomes even more so when vulnerable persons are involved. It is the broker’s ethical responsibility to ensure that the client understands what is being discussed, and to act accordingly if he or she suspects that family members are taking advantage of the client. November 2014 Canadian Underwriter

Interpreting Exclusion

Michael Teitelbaum

Partner, Hughes Amys LLP Hughes Amys is a member of The ARC Group of Canada, a network of independent insurance law firms across Canada.

A recent ruling by the Court of Appeal for Ontario includes some interesting observations with regard to how to address what constitutes a multi-causal loss and how the pollution exclusion in a property policy should be interpreted. In O’Byrne v. Farmers’ Mutual Insurance Co., a ruling issued by the Court of Appeal for Ontario this past July, the court held that a property insurer could not rely on the failure to deliver a proof of loss, or the mechanical breakdown or pollution exclusions to support its refusal to indemnify its insureds. In the course of the court’s reasoning, it made some interesting observations on how interpretation of the pollution exclusion might differ between liability and property policies. It also had some helpful comments on how to address multi-causal losses.

30 Canadian Underwriter November 2014

BACKGROUND FACTS The appellant, Farmers’ Mutual Insurance Co., insured the respondent’s two-storey, multi-use commercial building in accordance with an “allrisks” insurance policy. Two residential apartments, one of which contained an oil-fired furnace, existed on the second floor of the building. On March 11 or 12, 2005, a tenant of the apartment with the furnace placed a piece of cardboard into its main control in the middle of two sets of contacts. This was apparently done in an effort to bypass the thermostat and to keep the furnace in “hot” operation while the tenant was away. While the tenant was away from the unit on March 13, 2005, a major spill occurred of heating oil from the furnace. The cause of the spill was determined to be the tenant’s actions with respect to the placement of the cardboard. The oil spilled onto the floor of the unit, leaked through the floorboards and into the main floor beam of the property’s lower commercial units. By bypassing the thermostat, the furnace temperature would not fall below 200 degrees. The furnace technician who testified at trial

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The Court of Appeal agreed with the trial judge’s finding that the adjuster’s letter stating it was unnecessary for the respondents to deliver a proof of loss was binding on the appellant so the pre-condition of filing a proof of loss was not necessary. This was supported by evidence of the fact that the appellant did not disavow this letter, and even referred to it specifically when conversing with counsel for the respondent.

opined that making the furnace almost continually run at such a high temperature would result in the failure of the ignition component. When this happened the oil continued to pump out, but because the oil was not burned, it overflowed. The furnace had been maintained annually and the trial judge found that the damage was a result of the tenant’s actions. The respondents reported the damage to the insurer the day that it was discovered, but did not deliver a proof of loss. The insurer, for its part, had appointed an independent adjuster to deal with the claim. The insureds were informed by the adjuster in a letter dated March 28, 2005 that their loss was not covered due to a pollution exclusion in the policy. The adjuster’s letter implied that a proof of loss form would not be required. At no later point did the insurer advise to the contrary.

ISSUES The insurer argued three grounds on the appeal. First, it contended the trial judge erred in refusing to dismiss the action on the basis that the insureds did not deliver a proof of loss; second, the insurer argued that the trial judge made a mistake in failing to apply the “mechani32 Canadian Underwriter November 2014

cal breakdown or derangement” exclusion to the policy; and third, it submitted that the trial judge erred in not applying the pollution exclusion. Failure to provide a proof of loss The insureds stated in their claim that they did not file a proof of loss form because they were not asked to do so. Of note, the insurer’s original defence made no reference to the insureds’ failure to file this form. In an amended defence, the insurer did argue the insureds were prohibited from bringing their claim due to this failure. The Court of Appeal agreed with the trial judge’s finding that the adjuster’s letter stating it was unnecessary for the respondents to deliver a proof of loss was binding on the appellant so the pre-condition of filing a proof of loss was not necessary. This was supported by evidence of the fact that the appellant did not disavow this letter, and even referred to it specifically when conversing with counsel for the respondent. The appeal court found that under Rule 26 of the Rules of Civil Procedure, there is nothing that prohibits a court from granting leave to amend pleadings on its own volition. Emphasis was given to substance over form, with the court refusing to accept the insurer’s argument that the waiver issue should not have

been entertained as the insureds did not request leave to amend their pleading. As further support for its ruling on this issue, the court relied on Section 129 of Ontario’s Insurance Act, which permits the court to grant relief from forfeiture where an insured imperfectly complies with a statutory condition regarding the provision of a proof of loss. Failure to apply the “mechanical breakdown or derangement” exclusion to the policy The insurer submitted the mechanical breakdown exclusion should apply because the damage caused by the oil spill “was caused indirectly,” “resulted from,” “was contributed to” or “was aggravated by” the ignition failing to reignite. The insurer argued this failure was one in the operation of the furnace as a result of a mechanical defect or derangement. The insurer relied on Derksen v. 539938 Ontario Ltd., a 2001 decision by the Supreme Court of Canada, in support of the argument that an exclusion may be worded to apply to a loss resulting from multiple causes even if only one of the causes is considered by the exclusion. Interestingly, the insurer argued that the mechanical breakdown exclusion should apply because while the loss was caused in part by the tenant’s conduct (not considered by this exclusion), it

was also caused, in part, by the furnace’s ignition failure (which was considered by this exclusion). Thus, the insurer argued that the exclusion should apply and coverage should be denied. The Court of Appeal disagreed with the insurer’s reliance on Derksen in the case at bar. Namely, it was incorrect for the appellant to try to characterize the loss as a multi-causal one. The court held that what happened was a chain of events set in motion by the tenant’s actions with respect to the placement of the cardboard. What the tenant did resulted in bypassing the thermostat, leading the furnace to run at too high a temperature, which led to the ignition failure and the oil being pumped without being burned. In this analysis, the court relied on the 2008 Court of Appeal for Ontario ruling, Caneast Foods Ltd. v. Lombard General Insurance Co. of Canada, and how the court there considered a “mechanical breakdown or derangement” to refer to a problem or defect in the equipment internally. The court pointed out that a failure of a component of the furnace to operate is not sufficient to engage application of the mechanical breakdown exclusion, explaining that it is not enough to determine that some type of mechanical or electrical breakdown or derangement occurred. The cause of that happening must also be considered. In the case at bar, Ontario’s appeal court held that the failure of the mechanical element of the furnace was not an additional cause of the loss, but merely something that happened only after the tenant interfered with the usual operation of the furnace. The loss resulted from an external interference, the tenant’s actions, and not an actual defect in the furnace. The court indicated that for the mechanical breakdown exclusion to apply, there must be a problem or defect internal to the machine. Failure to apply the pollution exclusion to the policy The court agreed with the trial judge’s finding that the pollution exclusion did

not apply to exclude the insureds’ claims, but for different reasons. The court then proceeded to provide some useful guidance as to how the pollution exclusion is to be interpreted. First, the court held the exclusion is to be read in light of the policy as a whole. In the case at bar, the policy was an “all-risks” property insurance policy. Usually these policies insure against any loss or damage resulting from any event except ones that are excluded. Second, the court determined that each of the words in the pollution exclusion are to be considered. In this case, the first part of the policy was worded broadly and the policy

Ontario’s appeal court held that the failure of the mechanical element of the furnace was not an additional cause of the loss, but merely something that happened only after the tenant interfered with the usual operation of the furnace. The loss resulted from an external interference, the tenant’s actions, and not an actual defect in the furnace. defined a “pollutant” to include any liquid contaminant. There was then an exception to the exclusion, stating that the exclusion does not apply “if the discharge… of pollutants is the direct result of a peril not otherwise excluded under this policy.” Through the application of a plain reading of the policy, the court interpreted the policy as requiring another operative exclusion to apply before the application of the pollution exclusion. The court noted that counsel for the insurer acknowledged the pollution exclusion would apply here only if the

mechanical breakdown exclusion also applies. As the court had previously ruled out the application of the mechanical breakdown exclusion earlier in its decision, there was nothing left to support the application of the pollution exclusion. Offering further guidance for future legal interpretation, the court pointed out that the pollution exclusion in the case at bar related to an “all risks” property insurance policy. This is different than the policy up for interpretation in Zurich v. 686234 Ontario Ltd., a 2002 decision by Ontario’s appeal court, which was a standard absolute pollution exclusion in a comprehensive general liability policy, and which the trial judge had relied on to find the exclusion did not apply. The Court of Appeal for Ontario referred with approval to Corbould v. BCAA Insurance Corp., released by the Superior Court of British Columbia in 2010. In that case, the court noted that there was a “material distinction” between the two policies. As a result, the court did not consider the principles set out in Zurich as being directly relevant to interpreting the pollution exclusion here. The court held that, logically, the extent to which the insurance policy provides coverage for pollution damage is dependent on the pollution exclusion itself being read together with the indemnity and exclusion provisions.

COMMENT This decision is significant both for how it addresses what constitutes a multicausal loss and how the pollution exclusion in a property policy should be interpreted. On the latter point, insurers will wish to take note that depending on how the pollution exclusion in a property policy is worded, it may have little or no effect where, as here, the peril is covered and another exclusion does not apply. Many thanks to Ashley Peacock, student-at-law in Hughes Amys LLP’s Toronto office, for her excellent assistance in the preparation of this article. November 2014 Canadian Underwriter

8th Annual National Insurance Conference of Canada Ottawa

Greg Meckbach

Associate Editor

Harmeet Singh

Online Editor

Angela Stelmakowich Editor

Still Movement

As always, things are changing on both the insurance and reinsurance fronts. Players in the Canadian market need to consider conditions at home and abroad to get a complete picture of things that remain the same and those poised to change.

Those attending the 8th Annual National Insurance Conference of Canada, September 21-23 in Ottawa, had their choice of sessions ranging from the future of distribution to evolving reinsurance models and the prospect of insurancelined securities in Canada.

ILS NOT A REPLACEMENT FOR REINSURANCE Canada is a “nice fit” for alternative sources of capital, including insurance-linked securities (ILS), Michael Stahel, a partner with LGT Insurance-Linked

34 Canadian Underwriter November 2014

Strategies at LGT Capital Management, said during a panel discussion at the National Insurance Conference of Canada (NICC), produced by MSA Research and held in downtown Ottawa. “Canada would be a very nice fit in order to transfer more of this risk into the capital market,” Stahel told attendees of the session. “Should you do all your reinsurance purchase directly with us? No. That is not the way to go,” he advised. “You should try to transfer some of your risk directly to the capital market. It will give you some leverage in your negotiations with your reinsurance (provider) because there is a second option,” he opined. Michael Brisebois, chief financial officer for TD Insurance’s life and general insurance business, suggested that ILS has some advantages over traditional reinsurance. “We can diversify the counterparties that we deal with, and have options as it relates to our reinsurance coverage, which obviously becomes particularly useful when there is a bad Cat year, either domestically or internationally,” Brisebois said of catastrophe bonds. By the end of June 2014, there was more than US$20 billion worth of catastrophe bonds outstanding, James Lee, director of debt and solutions coverage for Deutsche Bank Securities Inc., pointed out. “Barring any event, the amount outstanding will continue to increase,” Lee reported.

“I personally don’t view this as replacement for traditional reinsurance,” Brisebois said of ILS. “It is something that supplements and complements traditional reinsurance,” he suggested, emphasizing this is especially important for reinstatements, following an event that triggers cat bond coverage.

LESSONS FROM FUKUSHIMA The operator of Canada’s largest nuclear power plant has simulated the effect of flooding or a tornado hitting the facility, a move meant to show how external events can influence operations, a lesson made clear with the disaster at Japan’s Fukushima Daiichi nuclear power plant. “One of the areas where we hadn’t looked as strongly was external events on reactors and Fukushima focused our attention on that,” Frank Saunders, vice president of nuclear oversight and regulatory affairs at Bruce Power, said during a session at the National Insurance Conference of Canada. Saunders noted Bruce Power, which operates a nuclear power plant on the shores of Lake Huron, has simulated the effects of flooding, a large wave coming from the lake and a tornado similar to the August 2011 twister that hit Goderich, about 50 kilometres away. “It was what you call a very low probability event,” he said of the disaster caused when a tsunami hit the Japanese power plant following the Tohoku earthquake on March 11, 2011. “Generally, we talk about frequencies that are in the range of one in 100,000 years to one in 10 million years as being the range of likelihood of occurrence of these things,” Saunders reported. The challenge for Bruce Power officials “was to go look at our own events and decide whether there was something like that that could happen in Ontario that might cause our systems to fail in a way that we didn’t expect,” he added. Bruce Power aims to protect its plant against “highly unlikely events which have a significant consequence to them,” Saunders said, adding the scenario considered involved two feet of rain falling over a six-hour period.

“We assumed that all the ditches and all the culverts and everything were plugged, and assumed a huge wash off the lake with something in the order of 10-metre waves coming in off Lake Huron, to do this analysis,” he relayed. Insurance for nuclear power was also discussed. Bill C-22, the Energy Safety and Security Act, was tabled September 15 for third reading in the House of Commons.

Dave McCauley, director of the uranium and radioactive waste division at Natural Resources Canada, noted during the session that the bill proposes creating a new law, the Nuclear Liability and Compensation Act, which if passed without amendments, will increase absolute liability for nuclear operators to $650 million upon Royal Assent. After that, the limit will be increased over a period of three years, to $1 billion, McCauley said.

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NO STRENGTH IN BEING ONE-TRICK PONY Being solely a natural catastrophe player or an alternative capital player is unlikely to prove a sustainable model, Eric Smith, president and chief executive officer of Swiss Re America, commented during the National Insurance Conference of Canada in Ottawa. “If you are just a nat Cat player or you are just an alternative capital player, and that is all you are going to do, we don’t see that as a sustainable long-term model,” Smith said during a panel discussion. “Being able to take traditional solutions and being able to pair it up with alternative capital or ILS sometimes make the best sense,” he noted. “The winds are going to blow, the floods are going to come, the earth is going to shake.” Business models in reinsurance that are not just capacity providers, but more, are really able to cope and to deal with the challenges of today, suggested copanelist Peter Röder, a member of Munich Re’s board of management. “It means being a partner for innovation with our clients. It means also to develop tailor-made solutions for our client in terms of capital relief for adverse loss development covers,” Röder said. “If you are smaller player, more single line, it’s going to be hard to compete in the future,” Smith suggested. “It would be good for the world if some of the capital would also move into some of those areas that are presently uninsured,” Röder noted. “The capital is not moving there because they are mostly unmodelled risks,” he said. “That is certainly something we need to work on.”

NEED FOR HARMONIZATION There is a need for harmonization across the country to ensure consistency in provincial regulation of “incidental” sellers of insurance, attendees heard during a session at the recent National Insurance Conference of Canada. These incidental sellers include freight forwarders, deposit-taking institutions and vehicle and equipment dealers. “I think it would be wonderful to 36 Canadian Underwriter November 2014

have some harmonization across Canada,” Gordon Goodman, a partner with Cassels Brock & Blackwell LLP, said during a panel discussion. Saskatchewan and Alberta allow certain categories of companies — such as auto dealers, deposit-taking institutions and travel agents — to get restricted insurance agent licences. In essence, this allows those agents to sell only certain types of coverage under certain conditions. A recently passed regulation in Manitoba, which takes effect next year, will allow some restricted agents to sell, among other things, cargo, creditor’s life and loss of employment, mortgage, funeral expense, portable electronics and some coverages with rented vehicles. Manitoba, as is the case with Saskatchewan and Alberta, will have restrictions on what types of businesses could apply for restricted agent licences. Provincial law will prohibit restricted agents from making available their goods and services “conditional upon” the consumer buying insurance from them. “It’s nice to have the regulation,” Goodman said of the restricted agent regulations, adding he supports having “some harmonization across Canada.”

MANDATED AUTO RATE DECREASE NOT DOABLE The Ontario government’s mandated target to reduce auto insurance rates an average of 15% reduction is absolutely not doable, Barbara Sulzenko-Laurie, vice president of policy development for the Insurance Bureau of Canada, said during the National Insurance Conference of Canada. Taking part in a panel discussion, Sulzenko-Laurie responded “absolutely not,” when asked whether or not the reduction is achievable. The mandated rate decreases are already proving unsustainable, Bob Tisdale, president and chief operating officer for Pembridge Insurance Company, argued during the same panel. “Our three companies took some of the largest rate decreases in the industry in Ontario, as the Ontario government

tries to reach its 15% rate reduction,” Tisdale told attendees. Five months later, though, (the Financial Services Commission of Ontario) “has approved rate increases for two of our three companies,” he reported, referring to increases that were to take effect in October 2014. Sulzenko-Laurie noted recent figures from the General Insurance Statistical

Manitoba, as is the case with Saskatchewan and Alberta, will have restrictions on what types of businesses could apply for restricted agent licences. Provincial law will prohibit restricted agents from making available their goods and services “conditional upon” the consumer buying insurance from them. Agency show cost-per-vehicle increases across almost all sub-coverages in Ontario auto. “The point that we’re trying to make to (the government) is that as politically embarrassing as it may be to not meet the 15% target, it’s going to be a lot more politically embarrassing if they have to oversee rising premiums during their time in office,” she told session attendees.

BROKERS MUST REINVENT THEIR BUSINESSES As technology such as telematics and driverless vehicles become more widely commercially available, brokers will come under increased pressure to provide value or risk losing ground, attendees heard during a session at the National Insurance Conference of Canada. It does not mean there is no longer room for other (often brick-and-mortar) choices, but businesses will need to adapt,

suggested Doug Stephens, a Canadian retail industry futurist. Stephens suggested two models are poised for success in the coming years: the high-fidelity model, which provides consumers a very rich, hands-on and service-oriented experience curated to their needs; and a high-utility model, which offers a plug-and-play, 24/7 experience that requires no hand-holding for customers. â&#x20AC;&#x153;What is dying is everything else in the middle,â&#x20AC;? Stephens argued. As such, to remain competitive, brokers need to offer a specialized experience and expertise for consumers. As options for insurance become more abundant, Stephens noted that brokers can act as specialists who can help sift through the abundance of choices available and find what is best for a customer.

IMPACT OF COMBINING INSURANCE, OTHER PRODUCTS Combining property and casualty insurance products, through distribution, with other products helps improve both customer retention and margins, speakers suggested at the National Insurance Conference of Canada. Stephane Morency, senior vice president of development and commercial lines at Desjardins General Insurance Group, said that combining different products is â&#x20AC;&#x153;something that is good for retention, itâ&#x20AC;&#x2122;s good for the margins, itâ&#x20AC;&#x2122;s good for the customer because he has a one-stop shop.â&#x20AC;? George Cooke, president of Martello Associates Consulting and panel moderator, asked panelists about the combination of p&c insurance with other financial products. Combining p&c with other financial products can be a â&#x20AC;&#x153;win-winâ&#x20AC;? for both consumers and for those selling insurance, suggested Vincent Vandendael, director of international markets at Lloydâ&#x20AC;&#x2122;s of London. â&#x20AC;&#x153;Insurers do know that the more products they have with the same customer, the higher the retention rate is,â&#x20AC;? Vandendael said.

The Â Wawanesa Â Mutual Â Insurance Â Company Â announces Â the Â following Â recent Â appointments: Â Â Â Â Â Â Keith Â Hartry, Â FCIP, Â MBA

Keith Â Hartry, Â FCIP, Â MBA, Â as Â Vice Â President, Â Regional Â Insurance Â Operations. Â In Â his Â new Â role Â Mr. Â Hartry, Â will Â be Â responsible Â for Â providing Â oversight Â of Â all Â Canadian Â insurance Â operations Â excluding Â marketing, Â business Â development Â and Â broker Â relations.

Mr. Â Hartry Â joined Â Wawanesa Â in Â the Â Prairie Â Region Â in Â 1988 Â as Â Over Â the Â next Â several Â years, Â he Â has Â held Â roles Â in Â claims Â and Â underwriting Â in Â Regina Â and Â in Â Wawanesa, Â Manitoba. Â In Â 1995, Â Mr. Â Hartry Â relocated Â to Â Winnipeg Â as Â an Â Underwriting Â of Â increasing Â responsibility, Â including Â Manager, Â Habitational Â & Â Farm Â Underwriting Â in Â 1999, Â Manager, Â Property Â Underwriting Â in Â 2005 Â and Â Manager, Â Property Â Products Â in Â 2008. Â In Â 2010, Â Mr. Â Hartry Â relocated Â to Â Edmonton Â after Â being Â appointed Â Â Vice Â President, Â Northern Â Alberta Â Region. Â Mr. Â Hartry Â holds Â a Â Bachelor Â of Â Arts Â degree Â from Â the Â University Â of Â Winnipeg. Â In Â 1994, Â he Â earned Â the Â Fellow Â Chartered Â Insurance Â Professional Â (FCIP) Â designation Â and Â in Â 2006, Â earned Â a Â Master Â of Â Business Â Administration Â (MBA) Â degree Â from Â Athabasca Â University. Â Mr. Â Hartry Â was Â a Â participant Â in Â Wawanesaâ&#x20AC;&#x2122;s Â Career Â Enrichment Â Program Â in Â 1999. Â Â

Â Â Â Â Â Â Brenda Â MacKenzie, Â CIP Â Â Â Â

Brenda Â MacKenzie, Â CIP, Â as Â Vice Â President, Â Northern Â Alberta Â Region. Â In Â her Â new Â role, Â Ms. Â MacKenzie Â will Â be Â responsible Â for Â oversight Â of Â insurance Â operations Â for Â the Â Northern Â Alberta Â Region. Â Ms. Â MacKenzie Â joined Â Wawanesa Â in Â the Â Maritime Â Region Â in Â 1997 Â as Â a Â Section Â B Â Claims Â Adjuster, Â bringing Â with Â her Â many Â years Â of Â claims Â adjusting Â experience. Â Over Â the Â years, Â she Â has Â held Â roles Â of Â increasing Â responsibility Â including Â Underwriting Â Manager, Â Automobile, Â a Â position Â she Â was Â appointed Â to Â in Â 2004. Â In Â 2008, Â Ms. Â MacKenzie Â was Â appointed Â Vice Â President, Â Maritime Â Region. Â Ms. Â MacKenzie Â earned Â her Â Chartered Â Insurance Â Professional Â (CIP) Â designation Â in Â 1996 Â and Â was Â a Â participant Â in Â Wawanesaâ&#x20AC;&#x2122;s Â Career Â Enrichment Â Program Â in Â 2001. Â Â

Â Â Â Â Â Â Paul Â Faubert, Â BSc, Â BBA, Â CIP Â Â Â

Paul Â Faubert, Â BSc, Â BBA, Â CIP, Â as Â Vice Â President, Â Maritime Â Region. Â Mr. Â Faubert Â joined Â Wawanesa Â in Â 2002 Â as Â a Â Claims Â Examiner Â bringing Â with Â him Â several Â years Â of Â claims Â experience Â gained Â with Â another Â major Â insurer. Â In Â 2008, Â he Â was Â appointed Â Automobile Â Underwriting Â Manager Â and Â in Â 2013, Â due Â to Â a Â restructuring Â of Â the Â Underwriting Â Department, Â was Â appointed Â Personal Â Lines Â Underwriting Â Manager. Â Mr. Â Faubert Â holds Â a Â Bachelor Â of Â Science Â degree Â from Â McGill Â University Â and Â a Â Bachelor Â of Â Business Â Administration Â from Â the Â University Â of Â New Â Brunswick. Â He Â earned Â his Â Chartered Â Insurance Â Professional Â designation Â in Â 1998 Â and Â in Â 2011, Â was Â a Â participant Â in Â the Â Wawanesaâ&#x20AC;&#x2122;s Â Career Â Enrichment Â Program. The Wawanesa Mutual Insurance Company is a Canadian-owned leader in the insurance industry. Established in 1896, Wawanesa conducts business throughout Canada, California and Oregon and has combined assets of over $8 billion with annual premiums exceeding $2 billion. November 2014 Canadian Underwriter

Remnants of Change The catastrophe splash of 2013 has given way to a decidedly more muted experience in 2014. For the reinsurance market, what are the remnants of change? Can the existing pieces be patched together to construct even greater strength or do emerging pressures threaten to produce threadbare cover?

38 Canadian Underwriter November 2014

s always, the reinsurance market here in Canada and around the world remains in a state of change, with reinsurance companies constantly working to reinvent themselves by holding firm to what has worked in past, but also innovating to address what may become part of the future landscape. Central to this mix of old and new, undoubtedly, will be how reinsurers maintain, and perhaps build on, existing relationships with clients. While the natural catastrophe experience to date in 2014 has not packed the obvious punch of 2013 — a year in which Canada witnessed its largest-ever tally of insured losses — it has not been without its hits. And there is no guarantee a year of relative calm will be followed by another. It is in this seemingly quiet environment that relationships will be tested. Beyond ongoing challenges — among these, declining rates, the low interest rate environment, the influx of alternative capital, abundant capacity, regulatory change and broader terms and conditions — there is an increasing demand for innovative solutions. How will reinsurers need to respond (and what will they need to offer) to maintain existing relationships with clients? What will be the effect of insurers retaining more risk? Will things change with a big catastrophe or a string of benign catastrophe years? Canadian Underwriter asked senior executives of reinsurance companies operating in Canada what they see ahead for 2015. What effect will all this change have on the look of the reinsurance market here at home?

November 2014 Canadian Underwriter 39

COVER STORY

Remnants of Change

Donald P. Callahan President & Chief Executive Officer

Although 2013 may have been an unlucky year, the gods were smiling on reinsurers and the industry for 2014. And one is left to ponder the following questions: How much more would the Airdrie hailstorm in Alberta have cost if it had hit just 30 kilometres south? How much more would the Burlington, Ontario storm and sewer back-up have cost if it had hit just 30 kilometres northeast? Major events will keep happening in Canada, so the industry must continue to engage stakeholders in prevention. And insurers and reinsurers must also remember to expect the unexpected! Introducing actual cash value (ACV) on roofs in Alberta is great, until the next severe hailstorm hits Montreal or the Greater Toronto Area. How many of those roofs will be at ACV? Capacity will be available for Canadian programs this renewal season. Between this capacity and a quiet catastrophe year, pricing will generally be coming down, regardless of the latest wind peril model change. Advances in prevention and mitigation, as well as changes to policy wordings, may just help keep those price reductions permanent. Other lines of business will also come under pricing pressure. Capacity is chasing a decreasing pool of premium, thanks to industry consolidation. Over the coming years, however, consolidation will not be restricted to the primary side. Ceding companies will be welladvised to select reinsurance partners with superior ratings and that are committed to the Canadian marketplace.

Guy Carpenter Canada

In 2001, the planet was reeling from the terrorist attack on the World Trade Center. At the time, it appeared that the reinsurance market would harden and that Canada was not immune to global forces. That view was meant to alert buyers to what could be forthcoming. Circumstances could not be more different today. The global market has not suffered a noteworthy catastrophe since 2011 and is drowning in capital. Traditional writers boast an all-time capital high of more than $300 billion and three times that amount is available in insurance-linked investments amidst the more than $30 trillion in global pension funds. Risk-free yields are artificially depressed and deferred in a financial world that has yet to emerge from quantitative easing. Investors are scrounging for acceptable returns and have discovered reinsurance. The GC global cat rate index is down by 17% this year and by more than 40% since its post-KRW (Katrina-RitaWilma) peak of 2006. Furthermore, the 16 licensed reinsurers in this country are all suffering from a lack of scale and towering minimum capital test (MCT) ratios. Distribution in Canada, which was essentially down to two major reinsurance intermediaries, is perking up as the second tier curiously invests. It is a fascinating and unprecedented period for everyone in the Canadian reinsurance business and it should deliver incredible opportunities to astute buyers. 2015 should bring rate reductions, multi-year deals, quota shares, and new underlying layers like never before. Buyers will be enticed and invited to buy more cover for less premium. The net cost of reinsurance (premium less recoveries) will likely be dipping to neutral or negative. Let the games begin! 40 Canadian Underwriter November 2014

2015 should bring rate reductions, multi-year deals, quota shares, and new underlying layers like never before. Buyers will be enticed and invited to buy more cover for less premium. The net cost of reinsurance (premium less recoveries) will likely be dipping to neutral or negative.

Pierre Dionne Senior Vice President & Chief Agent

Caisse Centrale de Réassurance – Canada

At this time last year, reinsurers were all lamenting the dreary year being handed to us by Mother Nature. Things definitively look brighter this year, regardless of a poor start of the year with a brutal winter and rapid thaw. Summer storms avoided heavily populated areas, and losses mostly avoided reinsurance layers.

Tim Fisher Canadian Branch Manager XL Group – Reinsurance

With the first of the submissions for the January 1 renewal season starting to appear in reinsurers’ inboxes, a review of current insurance and reinsurance market conditions may help provide context for what is likely to unfold in the Canadian market for 2015.

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AIG Insurance Company of Canada is the licensed underwriter of AIG property casualty insurance products in Canada. Coverage may not be available in all provinces and territories and is subject to actual policy language. Non-insurance products and services may be provided by independent third parties. © American International Group, Inc. All rights reserved.

COVER STORY

Remnants of Change 1. underwriting performance remains weak — the average combined ratio over the last five years for Canadian domestic insurers is 101.9% and 95% for reinsurers; 2. yield on “new” money has reduced — recent volatility in financial markets has weakened investment income, reinforcing the need for disciplined underwriting in both primary and reinsurance markets; 3. competition is intense — in the primary market, margin has been lost due to reduction in Ontario auto rates, the increased application of predictive analytics is benefiting companies able to leverage their data advantage while reducing margin retained within the market and outside personal lines, and the “small” in the small and medium enterprises segment rate levels appear stagnant; 4. capital markets influence — it appears that no domestic Canadian insurers have accessed this alternate source of capacity, but it seems likely larger buyers compare the economics relative to existing structures; 5. broker changes — as significant individuals move from one reinsurance broker to another, the short-term impact on broker margins is likely to be muted, but in the longer term, as incumbents defend and competitors seek to win business, the cost brokers charge for very similar services will likely be a key factor in client decisions; and 6. Canadian reinsurers — the average net underwriting profit generated by local units of global reinsurers during the last five years was $75 million annually, meaning the contribution to their respective shareholders is modest, but the volatility assumed is significant. Overall, all segments of the insurance and reinsurance market face significant challenges in 2015. The weak combined ratio of primary markets will not be changed significantly as a result of changes to reinsurance pricing, with increases in original rates likely the key ingredient required to reduce ratios to the low to mid-90%s. 42 Canadian Underwriter November 2014

The weak combined ratio of primary markets will not be changed significantly as a result of changes to reinsurance pricing, with increases in original rates likely the key ingredient required to reduce ratios to the low to mid-90%s. This, combined with lack of investment income, points to the necessity for disciplined underwriting and a resultant stable market for 2015.

Caroline Kane Senior Vice President &

Chief Agent – Canada Toa Reinsurance Company of America

Having endured one of the worst years on record in 2013, reinsurance industry results for the first half-year 2014 reflect a marked improvement. While many parts of Canada endured a severe winter, which dampened primary industry results, most of these smaller catastrophe losses did not breach reinsurance attachment points. Nevertheless, the increase in frequency of weather-related losses, coupled with aging infrastructure, population density and concentration of high values is straining the re/insurance industry.

Mitigation of catastrophe losses will require further calibration between various levels of government and the industry. Reinsurers will need to work with their clients (cedants) to better understand changes in underlying portfolios that affect both modelled and un-modelled risks. Capacity within the Canadian marketplace is plentiful and there are several issues that will pose a challenge to reinsurers going into the 2015 renewal session and beyond. Firstly, structural changes to certain reinsurance programs — a shift from domestic to global placements, plus the use of alternative forms of capital — will continue to erode the premium base in Canada. Secondly, primary insurers are likely to continue to retain more risk. However, this trend may well reverse should, for example, the industry see inflation increase, thus influencing claims costs on medium to long tail business. Thirdly, there will likely be a slight erosion of reinsurers’ profit margins due to competitive pressures. However, inflation and/or an unexpected jump in loss costs and/ or a significant event, either catastrophic or systemic, would stabilize price adequacy. Pressures on pricing, terms and conditions will always be part of the underwriting cycle. However, preservation of capital is paramount. It is critical that reinsurers manage the cycle while exercising underwriting discipline in obtaining adequate pricing for the risk return.

Henry Klecan President & Chief Executive Officer SCOR Canada Reinsurance Company

Much time has been expended in the last several months discussing, reviewing and analyzing the state of the reinsurance market both domestically and globally, including the impact of alternative capital solutions entering the marketplace.

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COVER STORY

Remnants of Change Suffice it to say the reinsurance market is in good health with ample capacity to meet the needs of its cedants. But, is that enough? What do cedants expect of their reinsurance partners? With a continuing consolidation of reinsurance programs, the role of the reinsurer is changing along with the world of risk. Sophisticated cedants are increasingly interested in selectively choosing their reinsurance partners and limiting their number in order to minimize their counterparty risks, including related monitoring costs — i.e. tiering. Why? There are several drivers: reinsurance is more than just a risk transfer mechanism; it is now being viewed as a longterm risk and capital management tool. Corporate governance is pushing this change with increased centralization and the involvement of senior management, including boards, in choosing their counterparty partners. Quantitative tools are being utilized to assess the needs and assist in the decision-making process through sensitivity analysis. Streamlined and agile organizations that can react quickly to a changing risk environment and take advantage of available analytical tools in assessing risk will be ahead of the curve and bring value to the cedant/reinsurer relationship. The risk of global pandemics, cyber threats, terrorism and climate change are very real. However, solutions to these growing risks are not exclusive to the insurance/reinsurance sectors. The Canadian insurance/reinsurance industry is encouraged to proactively continue existing dialogue with all levels of government and consumer groups to improve the understanding of the inherent risks associated with the evolution of risk per se. The 2013 floods in Alberta certainly underscored the poor preparedness for such catastrophic events. Let us also not forget about the potential for a severe earthquake on the Canadian west coast and the enormous 44 Canadian Underwriter November 2014

Mitigation of catastrophe losses will require further calibration between various levels of government and the industry. Reinsurers need to work with their clients (cedants) to better understand changes in underlying portfolios that affect both modelled and un-modelled risks. financial impact that such an event will have on the Canadian economy and individual lives.

Patrick Li Vice President – Canada PartnerRe

The year 2015 is shaping up to be a challenging one for reinsurers. Market dynamics are unlikely to change in the foreseeable future with pricing softness as a result of excess capital, abundant capacity and competition among reinsurers looking to diversify their portfolios away from catastrophe perils zones. There is also a push in the Canadian market towards catastrophe bonds (insurance-linked securities, ILS). This product has grown tremendously over the years, especially in the United States and it is very likely that large na-

tional companies will buy some form of ILS in the very near future — thus increasing competition for reinsurers from the non-traditional market. Reinsurers also expect the primary market to consolidate further through mergers and acquisitions. This will impact the reinsurance market, which will continue to shrink as reinsurance programs become consolidated either locally or globally. The 17 reinsurers that have local offices in Canada will be battling for their share of a shrinking market. In spite of this tough environment, cedants are still looking to partner with reinsurers that can leverage their specialist expertise and in-depth understanding of their markets to come up with innovative risk solutions. Unlike the alternative capital providers, reinsurers remain uniquely positioned to do this. Weather, for example, will remain a top issue for insurers in 2015. There is some concern about affordability of homeowners insurance in Alberta following years of weather-related losses, as rates have increased significantly and coverage is being narrowed. Reinsurers that understand this market and are responsive to the needs of their clients will be well-positioned to support the local market with a customized product for hail and wind losses. Overall, it is a tough market for reinsurers, but there remains a unique role for reinsurers that are able to effectively partner with their clients to provide appropriate risk management solutions.

Cam MacDonald Senior Vice President & Chief Agent – Canada Transatlantic Reinsurance Company

Reinsurers can expect another challenging year ahead with continued downward pressure on terms and conditions, higher retentions, less pro rata reinsurance purchased and another round of mergers and acquisitions activity. The reinsurance marketplace is a very mature and competitive environment and it will take all of reinsurers’

COVER STORY

Remnants of Change technical ability and considerable business acumen to navigate through these difficult times. There is very little (if any) profit margin left on some accounts, and with interest rates at historically low levels, there is (or should be) increased demand on underwriting profit. Reinsurers must be willing to walk away from unprofitable business or suffer the consequences. Building stronger local and global relationships, identifying client needs and providing product line diversification beyond traditional reinsurance arrangements is a must for reinsurers if they wish to remain relevant. New opportunities may include flood coverage on personal property, cyber coverage and nuclear liability, while regulatory changes relating to capital adequacy may require some companies to purchase higher property catastrophe limits. Water-related catastrophe losses are appearing with greater regularity and there is every reason to believe this trend will continue throughout 2015 and beyond. On a positive note, the market is actively addressing the water damage issue and has made significant strides in mitigating future loss from waterrelated claims. There has been considerable chatter in the marketplace about seemingly endless capacity from “capital markets” and while this at times naïve capacity may in the short term add another layer of pressure on pricing, traditional reinsurers and their clients still value local, long-term relationships — and for good reason. The most enduring reinsurance partnerships are built on trust and longevity, not opportunism.

Frank Rückert Senior Vice President Canadian Treaty Department Hannover Re

The January 1 renewal is expected to be a difficult one as a result of the worldwide soft market, significant capacity and 46 Canadian Underwriter November 2014

Reinsurers must be willing to walk away from unprofitable business or suffer the consequences. Building stronger local and global relationships, identifying client needs and providing product line diversification beyond traditional reinsurance arrangements is a must for reinsurers if they wish to remain relevant. capacity that continues to flow in the direction of Canada. The flooding in southern Alberta and in and around Toronto in 2013 were handled, more or less successfully, at January 1, 2014 renewals. Losses so far this year, including the hailstorm in Airdrie, are not expected to have a proper reflection in the rates. As such, there is a lot of pressure on pricing and companies are still thinking about increasing retentions. With the insurance-linked securities (ILS) capacity coming into the market, it will continue to be important for reinsurers to differentiate themselves from those capital markets.

While smaller reinsurers that mainly play on catastrophe programs only might be more easily replaceable by the alternative capital, reinsurers who can play across all lines must demonstrate that they are not looking for payback in a year or two, can see the bigger picture and can emphasize the approach in long-term customer relationships. ILS markets are not likely to go away. Reinsurers must respond by being very clear in their selling proposition that there is more they can offer than purely the capital. Reinsurers did not overdo it last year when they were asking for rate increases and it will be interesting going forward to see how clients will react, that they continue to partner with reinsurers despite capacity being available from markets that did not sustain losses flowing from events last year. But the strong relationship in Canada between cedants and the reinsurers — which is different than many other markets, especially the U.S. market — makes clients less opportunistic, seeming to value and support the long-term relationship.

Steve Smith President & Chief Executive Officer

Farm Mutual Reinsurance Plan

As reinsurers head towards the end of 2014 and start looking forward to 2015, the outlook for the upcoming renewal season is guardedly optimistic. The catastrophe activity during the year was relatively moderate, led by the extreme wet weather in western Canada, resulting in a further barrage of water losses. Insurers and reinsurers across Canada continue to be faced with the challenge of addressing flood losses and a way to develop a flood-mapping strategy, provide adequate cover and charge an appropriate premium. The insurance community will rally to develop the solution, as the onslaught of water losses will clearly continue to affect the industry in the future.

The Ontario automobile scenario for 2015 remains volatile and concerning for reinsurers as reduced primary premiums are now earning and reinsurance rates will follow. The results, driven by the loss severity facing reinsurers, will no doubt be under strain as the new bill introduced to reduce claims costs address frequency and fraud, not severity. With respect to the investment climate, the volatility continues. Through August 2014, the equity returns were stellar, but September and October brought significant correction. Fixed income portfolios face great interest rate risk and force shorter duration with poorer returns. The emphasis on underwriting results must be paramount. All in all, the reinsurance capacity continues to grow, driving expansion into new lines and new markets as reinsurers strengthen their diversification and spread of risk. There is also an abundance of new capacity that has entered the market, whether through conventional markets or insurance-linked securities, placing further pressure on pricing across the board. The efforts to deploy capital will maintain a competitive, but stable renewal season as reinsurers strive to maintain and possibly gain market share.

ERIC STEEN E xecutive Vice President – Reinsurance JLT Re

ALAIN PERREAULT

xecutive Vice President – E Reinsurance JLT Re

The competitive pricing and tone in the reinsurance space remains that of a buyers’ market. The remainder of 2014 and likely into 2015 will be that of fierce competition for the premium that comes from those who are reinsured in Canada. The lone caveat is natural catastrophe aggregation and how much reinsurers can manage to hold without jeopardizing their position from a regulatory or modelled peril standpoint.

this allows for the best to be creative, client-focused and look at ways to add value for the products they provide.

Capitalization continues to be extremely strong and indications from the latest figures would expect that this trend will continue for the remainder of 2014. For primary insurers, there is no shortage of existing capacity. The reinsurers range from the extremely well-established, multi-billion-dollar participants to the relatively newer and smaller-sized entrants who want to take a piece out of the ever-shrinking Canadian ceded pie. Capital markets with an appetite for Cat bonds present a new threat to any possible stabilization in market terms or pricing. The absence of a meaningful size natural catastrophe domestically or globally will keep the renewal market very competitive. There is, and will be, an over-capacity for catastrophe coverage for the foreseeable future. It will take a catastrophe event at a scale like no other the industry has ever seen before to occur for this continued competitive environment to change. The casualty business represents new growth opportunities for many reinsurers. However, with their entry into this space, it will create competitive pressures to further market softening. The financial position of Canada’s insurance and reinsurance industry is extremely strong and though competition may look to be coming from everywhere,

JONATHAN TURNER Chief Financial Officer Swiss Re Canada

Recent events in Canada, North America and around the world have emphasized that a significant gap often remains between the insured losses and the economic losses following a catastrophic loss event. In Canada, the southern Alberta floods in June 2013 are estimated to have caused $5 billion of total damage, with only $2 billion or so of that being insured/reinsured. Similarly, the Greater Toronto Area thunderstorm barely two weeks later led to economic damages that are 1.5 times the insured losses. Last year’s study on earthquake losses by AIR Worldwide resulted in an even more sobering view — a magnitude 9.0 earthquake would be expected to cause $75 billion of economic losses, with only $20 billion being covered by insurance; a magnitude 6.1 earthquake in Quebec City could cause a $61 billion hit to the economy. The public and private sectors have a shared responsibility to mitigate the risk of wind, water, fire and quake. On the private side, insurance helps home and business owners rebuild and recover from a disaster, while on the public side, governments need to protect their investments in public works, infrastructure, emergency response and social services — which can be compromised, or even worse, obliterated, by wind, flood, fire and tremor. Other nations are beginning to recognize that is not necessary to ask taxpayers to foot the entire bill or sacrifice other important programs to rebuild roads, bridges and levees and restore emergency response services. Mexico, for example, is tapping the risk diversification capabilities of the insurance and capital markets to reduce the financial impact of these events. November 2014 Canadian Underwriter 47

COVER STORY

Remnants of Change By selling some of the risk to private investors, governments reduce their unexpected financial risk. These solutions also give government decision-makers, for the first time, an independent market-based estimate of a nation’s climate and weather risk. By putting a price tag on unmitigated risk, a government can make more educated decisions in how to allocate its financial and human resources towards risk prevention.

PHILIPP WASSENBERG President & Chief Executive Officer Munich Reinsurance Company of Canada

For the upcoming January 2015 treaty renewals in Canada, the economic environment is dominated by strong competition, mostly fuelled by extremely low interest rates and the perceived lack of higher yield returns in other investment areas. However, this attraction will prove short term because reinsurers who are too hasty to compete aggressively for commoditized business and market share will pay a high price later. Risk adequate pricing remains key for those who want to be around in the long term. While pricing is tough, a prosperous future for the reinsurance market is still anticipated. Overall, at least a moderate rise in demand for property and casualty reinsurance is expected in the medium term, prompted both by increasing insurance penetration and rising values of material assets. There also appear to be new opportunities for long-term profitable growth in emerging risks from technological or societal trends, and increasing environmental and weather risks. These will require inspired and innovative insurance solutions. The lack of flood insurance in Canada is one example; earthquake is another. Only a high market penetration will provide the economic capacity to recover quickly after such disasters. 48 Canadian Underwriter November 2014

Reinsurers must ask themselves whether or not the current situation is “just” another cycle, as has been seen before, and whether or not the industry should just ride it out, as it has done before. Or have these changes now become permanent, requiring a radical change in strategy? Many aspects of life are becoming increasingly uncertain, which is especially worrisome for insurers who want to provide foreseeable and stable results to their shareholders. This would seem to be the perfect rationale for outsourcing unforeseeable events, unaccounted for accumulation scenarios, result volatility or merely the increasing burden of capital cost, to global reinsurers with much more diversified portfolios. Such uncertainty creates opportunities for those with superior analytics, resources and creativity. Reinsurance, in particular, has to reinvent itself in order not to be marginalized as a pure commodity provider in the end.

MATT WOLFE Senior Vice President & Managing Director Beach and Associates

Reinsurers need to realize the challenges they are facing right now are largely cyclical problems, and the really troubling news is that structural changes are emerging that will likely permanently alter their marketplace.

The cyclical challenges are evident to all: cedants are electing to retain more business net and/or placing consolidated reinsurance programs at the group level to reduce spend. Consolidation continues to see smaller insurers, who relied heavily on reinsurance, acquired. This reduction in demand for reinsurance, particularly for non-propertycatastrophe covers, has had the expected result on pricing, terms and conditions. Reinsurers’ overall ceded premium volumes have continued to shrink, in spite of increased demand for property catastrophe limits due to regulatory requirements and changes in modelling outputs. The structural change that is slowly coming to the Canadian reinsurance market is already well under way in the United States reinsurance market. Alternative sources of capital, primarily from hedge funds and pension funds, have decided that property catastrophe reinsurance is an asset class in which they wish to invest as these events do not correlate to financial events. The improvement in data quality and the commercial availability of analytical tools that facilitate pricing in recent years has essentially commoditized property-catastrophe reinsurance pricing, allowing these markets to enter the space and compete competently with traditional reinsurers. If property-catastrophe reinsurance has become a commodity, and alternative vendors are prepared to sell it at returns that reinsurers may not find viable over the long term, what should reinsurers do? They need to identify areas where data is limited or imperfect and where analytical (pricing) tools are not easily available for purchase. Emerging risks such as flood, cyber, nanotechnology or even the commercial use of drones cannot yet easily be priced by a computer model; it takes intelligent underwriters who are prepared to make decisions and take calculated risks. This is where the reinsurance industry can generate strong returns and provide a valuable service to the overall economy.

WICC Announces a New National Sponsor at the Platinum Level

www.wicc.ca

WICC is delighted to announce a recent addition at the Platinum Level to its National Sponsorship Program.

On Side Restoration has been a big supporter and volunteer of WICC for 10+ years, specifically with the BC and Alberta Chapters. Now having expanded operations with offices in Ontario and Newfoundland, we felt it was fitting to expand our support of this worthy cause to a national level. “WICC is a unique organization that does such a great job of connecting different groups that are associated with the insurance sector. Being able to

network, entertain and all the while contribute to the eradication of Cancer is an amazing opportunity. On Side Restoration is proud to be a long standing contributor and proud of our association with a group that does so much good for building awareness and contributing much needed funding for Cancer Research and those affected by cancer,” stated Mike Sully, VP and Chief Marketing Officer On Side Restoration Services Ltd.

On Side Restoration is now a part of a very special group of WICC National Sponsors at the Platinum Level. WICC is extremely thankful to this group of organizations which share the vision and desire to put an end to cancer! WICC National Sponsors at the Platinum Level also include:

Design compliments of

Mary Lou O’Reilly

Senior Vice President, Issues Management and Communications, Insurance Bureau of Canada

Canada is known to be prone to earthquakes, and yet survey results unveiled at a recent earthquake symposium in Vancouver hosted by the Insurance Bureau of Canada (IBC) make clear that Canadians are not ready for the big one. The survey — combined with an IBC-commissioned earthquake impact study last year — show that Canada is headed for a catastrophe if decisive and immediate action is not taken to get ready for an earthquake. Furthermore, multi-stakeholder collaboration is critical to achieving readiness. These were among the key lessons from the IBC symposium, which brought together 160 experts and thought leaders from business, academia, government and emergency management. “Each of us — within our own disciplines and areas of expertise — already understands what a major quake means,” Don Forgeron, IBC’s president and chief executive officer, told attendees “Today is about connecting the dots and sharing that expertise with each other. That sharing, that conversation, is crucial to preparing Canada for the reality of a major earthquake in a densely populated area. We can only reduce that risk when we understand it in all its dimensions.”

50 Canadian Underwriter November 2014

THE LOOMING THREAT: 9.0 EQUALS $75 BILLION In October 2013, IBC released the results of a significant study from AIR Worldwide, global experts in catastrophe modelling, calculating the impact of a 9.0-magnitude earthquake off the west coast of Canada and a 7.1-magnitude earthquake near Quebec City. AIR Worldwide found that overall economic losses from the British Columbia scenario would total almost $75 billion and those from the Quebec scenario would total almost $61 billion. There would be a domino effect on the economy all across Canada triggered by property damage, supply chain interruption, loss of services, infrastructure failure and business interruption.

SURVEY RESULTS: OVER-CONFIDENT, UNDER-PREPARED Against that backdrop, results of an IBC-commissioned telephone survey by Pollara this spring are concerning. More than 2,000 people took part in the survey, which has a margin of error of plus or minus 2.2%, 19 times out of 20. So what exactly did polled residents in the high-

Illustration by Dave Whamond

Quake Stakes

Experts agree a big earthquake is coming to Canada. So why are people not getting prepared? Exactly where and when the “big one” will hit can only be surmised, but preparedness has been lackluster for an event that will undoubtedly prove costly for everyone from governments to consumers, insurers and reinsurers.

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risk zones of B.C. and Quebec say about their earthquake preparedness? In a nutshell, the main findings are as follows: • people do not think an earthquake is going to happen soon; • respondents think they are covered, but they are not; and • those polled overestimate their physical and financial preparedness. People do not think an earthquake is imminent Seismologists warn an earthquake could strike anytime, but many residents in the high-risk, high-population zones are not buying it. In Quebec, an overwhelming majority of respondents think the risk of an earthquake is practically non-existent. In B.C., most residents do consider an earthquake to be a possibility, but for most, it is an event that is 50 years away. This poses a challenge: it is hard to convince people to prepare for something they doubt will happen anytime soon. This was confirmed by survey responses. Of the sizeable group of respondents who indicated that they would never consider buying earthquake insurance, almost half in B.C. and three-quarters in Quebec say the main reason is they do not think a quake is going to happen. They overestimate their financial readiness A lack of belief that an earthquake will happen is a major reason why people do not buy earthquake insurance. In fact, only 31% of all respondents report having earthquake insurance. Despite this low take-up, two-thirds of B.C. and Quebec respondents say they feel very or somewhat confident that they would be financially prepared if an earthquake hit. One reason for this, perhaps, is they mistakenly believe regular home insurance will cover them: 71% of respondents say they would rely on insurance to cover rebuilding and replacement costs. Again, this is despite more than twothirds admitting that they do not have earthquake insurance. Many respondents are counting on another source, with almost 40% reporting that they would rely on government financial assistance. 52 Canadian Underwriter November 2014

But with the destruction wrought by an earthquake, the enormous costs and the strain on the country’s resources, the reality is that governments may not be in a position to pick up the tab. They overestimate their physical readiness Beyond financial preparedness, respondents were asked about physical preparedness. Close to two-thirds of those polled

Despite low take-up, two-thirds of B.C. and Quebec respondents say they feel very or somewhat confident that they would be financially prepared if an earthquake hit. in B.C. and 40% in Quebec say they would have a good or excellent idea of what to do should an earthquake hit. Those percentages fell, however, when asked about specifics, such as planning, practising an evacuation, having an emergency kit and quake-proofing the home. In all, 38% of British Columbians report that they have an emergency kit and supplies at the ready, but for most of the specific measures, fewer than 10% had done them. And more than 30% of respondents say they had done nothing at all; in Quebec, 60% had done nothing at all.

THE GOOD NEWS: THE NEXT GENERATION There are, however, some silver linings to the earthquake readiness story. For instance, about a third of respondents admit that they have not done enough to prepare for an earthquake. This acknowledgement is good because it means they are ripe for earthquake education. Looking at the demographics of this group — those who recognize their unpreparedness tend to be younger, less affluent and more likely to be renters. They are also more likely to believe that an earthquake will strike. The younger generation represents a prime opportunity to move the needle on earthquake preparedness. Another piece of good news concerns the growing amount of earthquake information available to people. In 2012, IBC did a similar survey and asked if there was enough information available about how to prepare for an earthquake. At that time, 61% of respondents in B.C. and 33% in Quebec replied “yes.” The most recent survey shows those numbers are up. In B.C. the number went up 15%, and in Quebec, there was an increase of 20%. This means education messages are being heard.

MAINTAINING THE MOMENTUM The insurance industry is good at advancing consumer awareness and has a long history of identifying emerging risks and leading the charge to address them. It is again taking the lead on the critical conversation about quake preparedness. Progress is already being seen. For example, Steven Blaney, Canada’s public safety and emergency preparedness minister, told attendees of the earthquake symposium he is committed to partnering with the insurance industry and other stakeholders to prepare the country for a major earthquake. This affirms the critical message that partnership is key. “No one industry can solve the problem in isolation. This is about finding the right solution for Canada. It’s about working together to find a solution that works for government, insurers and consumers,” Forgeron said at the symposium.

Recent Insurance Press Releases featured on insPRESS.ca WINMAR Appoints Sean Hobson as VP National Programs by WINMAR – Nov 3

Rochon Engineering Welcomes Jessica Reid P. Eng. as Forensic Engineer, Civil/Structural Division by SCM Insurance Services – Oct 28

Mark Lockwood appointed as Director of Sales for Able Translations and Able Transport by Able Translations Ltd. – Nov 3

Giffin Koerth Welcomes Pierre Maheux as Principal, Environmental Group by Giffin Koerth Forensic Engineering – Oct 27

You’re Invited to the Annual WICC Ontario Breakfast for Cancer, November 13th in Toronto – Featuring Guest Speaker Libby Znaimer by CRU - Catastrophe Response Unit – Sep 30

Innovate your payment solutions with First InSite from FIRST Canada by FIRST Insurance Funding of Canada – Oct 27

Three Appointed At Elliott Special Risks by WICC Ontario – Nov 1 Young Insurance Professionals of Toronto (YIPT) is Celebrating its One-year Anniversary and You’re Invited! by Young Insurance Professionals of Toronto (YIPT) – Oct 31 Is Your Company Prepared for a Privacy Breach? Gore Mutual Insurance Commercial Policyholders to Receive Proactive and Reactive Breach Services with a New Cyber Risk Management Services Product by IDT911 – Oct 31 ENCON Group Inc. Announces New Excess E&O Coverage by Encon Group Inc. – Oct 29

NIAC Nuclear Insurance Expert Colleen DeMerchant Says Increase in Liability Coverage and Nuclear Exclusion in Property and Casualty Creates Big New Opportunity for Canadian Underwriters by NIAC (Nuclear Insurance Association of Canada) – Oct 17 Cira Medical Services Challenges Employers to Build Workplace Resiliency by SCM Insurance Services – Oct 10 North Waterloo Farmers Mutual Insurance Company Celebrates 140th Anniversary by North Waterloo Farmers Mutual Insurance Company – Oct 8 Anthony Tuson promoted to Director of Business Development with On Side Restoration Services Ltd. by On Side Restoration Services Ltd. – Oct 7

To Read the Full Story for Each Press Release visit insPRESS.ca

Calming

Influence

Nathan Spitse

Senior Manager, Crisis Management, Deloitte

Dave Robinson Senior Manager, Business Insurance Consulting Practice, Deloitte

Major disasters — natural or man-made — can damage both the immediate assets and operations of a business, as well as those far beyond. A major crisis serves as a moment of truth that tests the readiness, resilience and character of a business.

2013 was an unusually bad year in Canada: the flood in southern Alberta, the train explosion in Lac-Mégantic, Quebec and the ice storm in Toronto and southern Ontario. Aside from the loss of life, such major events can cause significant damage to large swaths of properties and businesses. The repercussions can be felt for months afterwards, affecting customers, suppliers and the marketplace in general. These three events alone resulted in insured losses of $1.7 billion, $683 million and $200 million, respectively. And they were just three of the approximately 300 natural and environmental disasters that took place around the world last year. Major natural and environmental events are not the only threat to the financial, operational and reputational health of an organization, of course.

54 Canadian Underwriter November 2014

Economic, political and technical crises are also growing in severity and frequency. Financial crime and cyber attacks, for example, are an increasing threat across industry and the public sectors. In 2013, more than 700 companies suffered from at least one type of financial fraud, notes Kroll’s Global Fraud Report, 2013-2014, a survey released in October that involved 901 senior executives around the world from a wide range of industries. For its part, Ponemon Institute’s survey, Exposing the Cybersecurity Cracks: A Global Perspective, found that cyber crime affected more than a third (36%) of polled Canadian businesses. A minor crisis, such as a fire in a warehouse, crop up all the time; it is part of doing business. But a major crisis is a moment of truth that tests the readiness, resilience and character of a business — or even of a community, city or country. Good preparation can make the difference between surviving a crisis or not. And the right insurance coverage is a key component of the survival plan.

WHAT COULD POSSIBLY GO WRONG? Major disasters can have multiple financial and operational impacts on a company. These include

lost revenue, fines and loss of supply chain. A company can mitigate both property damage and temporary loss of profit-making through insurance, but a commercial insurance policy alone may not cover the entire impact. Consider this scenario: A major flood washes over a town. A local manufacturer gets its operations up and running again after a short delay, and does not anticipate a financial hit because its property and temporary business interruption is covered by its commercial insurance. However, because of the damage caused by the flood over a wide area, the manufacturer finds it cannot source materials or ship goods to its national distributors, at least for a while. How will it continue operations without alternative locations, partners or suppliers in place? Did the owners ever consider diversifying suppliers and partners, or were higher premiums worth the trade-off? If the company manages to survive until all the businesses and infrastructure upon which it depends are functioning again, would it be motivated to do a better job of preparing for the next disaster it faces? Beyond property and operations, reputation cannot be insured, but it can be adversely affected by major events — and that can have repercussions with shareholders. In fact, Exploring Strategic Risk, a survey of 300 C-level executives, board members and specialized risk executives in five major industries — conducted by Forbes Insights on behalf of Deloitte — found reputation is the top strategic risk facing companies today. Preparation and response is particularly vital, as it can determine the extent and duration of reputational damage. Consider the way two companies responded to major crises involving loss of life and how each has fared: Maple Leaf Foods’ listeria outbreak and Montreal, Maine and Atlantic Railway’s runaway train explosion in Lac-Mégantic. Hits to reputation, however, may take many other forms. An increasingly like-

ly scenario is this: Criminals hack into a retail company’s data systems and take large amounts of customer and payment data, putting the privacy and financial information of customers at grave risk of both identity theft and financial theft. Home Depot is the most recent example, with a breach of its payment data systems at its stores in Canada and the

Every decision made during a major crisis can affect stakeholder value: reputational risks destroy value more quickly than operational risks. The worst response is to ignore or downplay a major threat; the best is to get out in front. United States jeopardizing the credit and debit card information of 56 million people. The company acknowledged the breach and offered a year of free credit monitoring to all affected customers.

PLAN FOR THE WORST From fatal factory fires overseas to severe winter storms, stolen credit-card data and damaged passenger baggage, the list of crises that have befallen companies, institutions and government agencies over the years seems to be growing longer every decade. And, still, many organizations fail to plan adequately for such major events. How could a business get started? Mitigating the impact of a crisis involves monitoring, preparation and rehearsal well before such an event transpires. There are three parts to an effective strategy: • Readiness. Do not wait until a crisis hits to start planning, and that includes choosing the right coverage. Start by identifying the most likely crises (for example, due to physical location, industry, etc.) and the key people to tap from among the stakeholder groups. Prepare for multiple scenarios and

rehearse the implementation of crisis plans, which are the most effective ways to get ready. Monitor for early signs of an impending event to stay on top of developments — or even avert potential disaster. • Response. Respond within minutes, not hours or days. Teams on the ground need to take control, lead with flexibility, make decisions based on incomplete information, communicate with internal and external constituents, and inspire confidence. Every decision made during a major crisis can affect stakeholder value: reputational risks destroy value more quickly than operational risks. The worst response is to ignore or downplay a major threat; the best is to get out in front. • Recovery. The crisis work continues after the immediate threat has subsided. The way a company captures and manages data, logs decisions, manages finances, handles insurance claims and meets legal requirements can determine how well it recovers. Returning to normal need not be the best a company can plan for. A business can, in fact, emerge stronger by looking for the opportunities that almost every crisis creates. And it is not a question of if a crisis happens, but when. Canada will likely continue to experience severe weather events, which can create significant crises for cities and their infrastructure. Cyber crime will likely only increase as everyone becomes more and more dependent on technology in both their professional and personal lives. Businesses can mitigate insurance losses by ensuring they are aware of the necessity of planning for crises. Potential financial loss resulting from business interruptions, lawsuits and brand attacks on social media, for example, can be better controlled if they are following a good strategy put in place well before an event — and, in some cases, rapid response and some innovative thinking could avert a crisis altogether. As the old saying goes, an ounce of prevention is worth a pound of cure.

November 2014 Canadian Underwriter

Taming Risk

Vice President, Allied World North America

Gord Kerr

Senior Vice President & Canadian Branch Manager, Allied World North America

From a business point of view, very little looks attractive in the current large risk general property insurance market. Recently, and partially to compensate for restricted revenue, a number of markets have commenced underwriting onshore energy in the Canadian property market. Given current soft market conditions, what were the reasons and challenges that make this compelling?

ENERGY MARKET The energy property market is quite diverse and not all insurers define it in the same way. The occupancies generally include Onshore Oil and Gas, Petrochemical, Pipelines, Power Generation,

56 Canadian Underwriter November 2014

Pulp and Paper, and Mining. Insurers may include some of these occupancies in their general property portfolio. Risk-managed business The Canadian economy is predominantly resource-based and, therefore, a large segment of risk-managed business is tied to this sector. Energy business in Canada has historically been quite profitable. That said, company results can be volatile depending on risk selection, placement and size of accounts and, as such, risk selection and placement position is critical in this area. Large energy risks have significant assets, some well in excess of $50 billion in value. Considering the large loss potential, they also have a substantial need for coverage with limits of liability, in excess of $1 billion. Many risks have been forced to use unlicensed participation from international insurers in order to achieve adequate coverage. International insurers have a distinct disadvantage with high excise and premium taxes, particularly in Alberta where a tax of 50% for unlicensed insurance is applicable. Volatility is substantial The energy market is volatile, exposures are substantial and losses, although infrequent, can be considerable. The key for successfully underwrit-

Illustration by Dave Whamond

Dan Fitzpatrick

A number of markets have recently commenced underwriting onshore energy in the Canadian property market. While the energy business in Canada has historically been quite profitable, current conditions make risk selection and placement position critically important.

insBlogs ing this risk is collaboration. Project engineers and underwriters need to work together to understand current engineering information and market conditions to properly evaluate risk. This allows the insurer to deploy capacity in the most effective and informed manner. The size and type of loss potential varies by industry. Oil, gas and petrochemical risks have sizeable fire and explosion potential; power generation has sophisticated turbines that are finely tuned and, therefore, can be subject to breakdown and considerable loss. Effectively, all targeted occupancies have much more potential loss from machinery breakdown when compared to the general property exposures. Understanding property and boiler and machinery coverage, pricing and potential issues are necessary. Underwriting energy risks requires a concentration on key elements. There is a heavy emphasis on hard physical protection such as separation, construction, fireproofing, fire protection and water supply, but most of all, management of risk. This includes process safety management (PSM) procedures, which have many elements and are designed to reduce operational risks and attritional losses.

CANADA VERSUS ELSEWHERE The Canadian energy market differs from the rest of the world in a few key areas. Not only is the exposure to catastrophic loss considerably reduced compared to other markets, Canadian oil and gas occupancies are concentrated in Western Canada as opposed to worldwide risks located in areas exposed to wind, flood and earthquake. This provides a distinct advantage by reducing the frequency and severity of loss activity. Much of the premium attributed to Canadian energy is related to the upstream market in the oil sands. An upgrader differs substantially from a refinery in that it takes bitumen and produces crude, whereas a refinery’s supply is crude oil. Recognizing that refinery margins are limited, this results in significantly more

business interruption profits and, thus, there should be no attritional losses. much more exposure from an event. Premiums are required for the rare large Since worldwide insurance capacity volatile loss, and applicable deductibles is inadequate to assume this degree of need to be appropriate to successfully loss, many Canadian clients co-insure underwrite this class of risk. their risk by capping their business Large Canadian oil and gas clients have interruption with a “maximum dollar recently been trending to participate in per barrel produced” or a “maximum the OIL captive. The captive provides for throughput” indemnification. property loss only, with limits for inInsurance hostedisby Canadian Underwriter Of note for the energyBlogs business that dividual companies recently increased

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Insurance Blogs hosted by Canadian Underwriter A cyber attack on our infrastructure – sci-fi or inevitable? by Carol Kreiling – October 21 Ontario’s Auto Insurance Rate Reduction Strategy Likely To Fall Short by Willie Handler – October 20 The state of flood mapping in Canada by Glenn McGillivray – October 16 Search Engine Optimization – A Moving Target by Catherine Smola – October 16 Demutualization: No way to make everybody happy by Peter Morris – October 14 The Shifting Competitive Landscape: A New Breed of Industry Challengers by Denise Garth – October 6 Are insurance agents prepared for the digital age? by Christian Bieck – October 6 Uber Toronto Battles Regulators Over Its Ride-Sharing Service by Willie Handler – September 19

November 2014 Canadian Underwriter

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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 Dedicated to fellowship and charity. 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

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Aviva Canada Inc. Home Auto and Business Assurance. www.avivacanada.com Catlin Canada Underwriting Ambition. www.catlincanada.com

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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

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

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from $250 million to $300 million, and increasing to $400 million in the near future.

Trends in deductibles With many Canadian energy clients having fractional interests in production facilities, the property deductible may be multiples of the captive insurance and equate to multiples for the site deductible. This may mean property deductibles in excess of $1 billion. Another recent trend with respect to deductibles has been an increase in the waiting period applicable to business interruption. Upstream operations have been increasing well in excess of 90 days. These deductibles then translate to attachment points for insurers increasing by multiples from historic levels. While the aforementioned have increased, business interruption interdependency exposures have been reduced as a result of the considerable construction activities prior to 2008. There are now options for sending or receiving product by pipeline to other facilities should an individual insuredâ&#x20AC;&#x2122;s risk be idled. However, this increases potential contingent business interruption exposures as insureds become more dependent upon one another. One of the key concerns for an energy underwriter is accumulations. Considering contingent business interruption and fractional working interests, a loss

at one location can result in multiple claims from different insureds. Underwriters need to closely monitor individual locations to avoid overexposing their companies to losses in excess of those anticipated.

The key for successfully underwriting this risk is collaboration. Project engineers and the underwriters need to work together to understand current engineering information and market conditions to properly evaluate risk. THE CHALLENGES The market in energy is not much different than general property. Certainly, occupancies such as utility, pulp and paper have many similarities with general property participating on the same accounts in many cases. New capacity is entering this area, coming from both domestic and foreign insurers, and also from additional capacity from incumbent, existing markets. Capacity is abundant, although somewhat less than general property.

New and existing markets are offering incentives for increasing lines or writing new lines, which can include larger participations, multi-year deals and variable claims bonus arrangements. These features have historically been provided for smaller, less volatile property business where attritional losses are expected and loss ratios can be considerably more predictable. The underwriting focus should be on profitability for the insurer so that the industry can absorb these inevitable large loss scenarios when they occur. The potential market for Canadian energy can be profitable when written correctly. The most important component is an insurer that is focused on bottom line profitability. With that â&#x20AC;&#x201D; and the support of an educated team that concentrates on risk selection â&#x20AC;&#x201D; terms and conditions, accumulations, potential exposures and adequate premiums for individual risk are critical. Writing this type of business demands understanding there are significant premiums that have to be balanced with knowledge of the real exposures involved. Top line premium growth goals must be tempered with a heavy emphasis on profitability and the need to be viable over the long term. A sustained commitment to this industry should be understood as a requirement for long-term success in these industries. November 2014 Canadian Underwriter

Virtual

Coin

Bitcoin is not a recognized currency and is not backed by any principal authority. Still, thousands of firms use the payment system launched in 2009, opening the door to discussions about how clients using bitcoin should best provide security for the storage and transfer of funds. Greg Meckbach Associate Editor

Dell Inc. and TigerDirect.ca are among the reported 63,000 merchants who allow customers to use bitcoin to pay for goods. The payment system exists despite a lack of regulation and the feeling, at least for some, that insurers may be reluctant to cover some risks associated with bitcoin. Questions arise around risks related to malware attacks on computer systems that store bitcoins and the need for financial institutions to develop and/or update risk governance and internal controls to account for the payment system. Coupled with those challenges, though, is the potential opportunity for insurers who are considering offering coverage related to offline storage of bitcoins. “Underwriters should be interested in knowing whether clients are involved in bitcoin, and should certainly be posing such questions to any clients who transact business over the Internet,” suggests Terri Mason, head of professional indemnity for Allianz Global Corporate & Specialty (AGCS) in Canada. Crime, technology and cyber policies “which contain hacker theft, e-theft or similar coverages would likely pick up” some risks associated with bitcoin — if those risks are not “otherwise specifically excluded,” Mason explains. “This is something which underwriters, brokers and insurance buyers should all be aware of and looking to clarify in such policies,” she adds.

60 Canadian Underwriter November 2014

“Bitcoin is not officially recognized by the Canadian government as a currency, stock or any type of good that has value,” Canadian Virtual Exchange (CAVIRTEX), a bitcoin exchange, notes on its website. Bitcoin exchanges allow users to buy and sell bitcoins using fiat currencies, Zilvinas Bareisis, a senior analyst with Celent’s banking group in London, notes in the report, The Disruptive Potential of Bitcoin: Why Everyone in Financial Services Should Care. As of August, about 63,000 businesses accepted bitcoin as payment, Bareisis reports. “Unlike more traditional currencies, there is no principal authority backing bitcoin,” the Deloitte Center for Financial Services, notes in the report, Bitcoin: The New Gold Rush? The report was written by Val Srinivas, research leader, banking and securities, Dennis Dillon, senior market insights analyst, and Ryan Zagone, lead market insights analyst, at Deloitte. “It’s not clear whether (bitcoin is) money,” Ethan Wilding, project member for the Ethereum computer programming language and resident philosopher at Bitcoin Decentral, whose services include a bitcoin ATM machine in Toronto, said during a presentation at the Annual Engineering Insurance Conference (AEIC) in Toronto in October. “Ultimately, it’s its own new asset class and we’re trying to figure out how to conceptualize it, at least in terms of the regulations,” Wilding

told conference attendees. Unlike other payment methods, bitcoin does not go through a bank or a central processing system, he explained. “Many of the risks involved are possible to insure under various types of insurance policies,” such as technology errors and omissions, crime and cyber risk, says Mason. “However given the relative newness of bitcoin, the lack of regulation and anonymity associated with it, and the myriad of issues surrounding it in the past couple of years, many insurers may be reluctant to offer such coverages,” she suggests, alluding to the recent collapse of the Moolah bitcoin exchange. In order to store and transfer bitcoins, a user needs a “wallet,” explains Kyle Kemper, vice president of business development at CAVIRTEX. But in the context of bitcoin, a wallet is not literally a case in which to hold money and identification. Rather, bitcoin wallets take different forms — such as apps on wireless devices, software on desktop computers or web services — and typically display a bitcoin balance, Bareisis notes in the Celent report. Users can also “create paper wallets or wallets on computers that are offline,” says Wilding. “Insofar as they are doing that, there is no way for them to be hacked, except for someone physically stealing that device. Because once it’s connected to the Internet, you will always have that risk, however small, that some hacker is going to get into your computer.” The cyber risks for users sending or receiving bitcoin payments “would be similar to those of any depository institution,” Mason explains. “Systems can be breached and funds stolen, and they are huge targets for hacker theft. These sorts of risks are likely more pronounced with bitcoin given the lack of centralization and regulation,” she says. Mason adds that underwriters who determine their clients are involved in bitcoin “should then be looking at the frequency and value of bitcoin transactions, the type of wallet being used to store bitcoins, and as best as possible, analyze the security surrounding the storage and

transfers.” In addition, she notes, the policyholder’s “level of experience with and understanding of bitcoin should also be investigated where possible.” Wilding notes that bitcoins are transferred from one wallet to another using a “peer-to-peer network,” over the public Internet, which is why there is “no centralized point of control.” A peer-to-peer network “allows for the creation of decentralized, dynamic and anonymous logical networks for information exchange over the public Internet,” Cisco Systems Inc. notes in the white paper, Managing Peer-To-Peer Traffic With Cisco Service Control Technology.

“Many of the risks involved are possible to insure under various types of insurance policies,” such as technology errors and omissions, crime and cyber risk. Bareisis notes that bitcoin is the first system to rely on peer-to-peer network decentralization to avoid double spending. “Every bitcoin transaction ever made within the network is recorded on the public ledger called the blockchain.” Adds Kemper, “Once a transaction is logged in the blockchain, it can never be removed or altered. All these transactions are recorded, but there is no upfront personal information associated with any of the transactions.” The fact that personally identifiable information is not stored is one advantage of bitcoin, Mason suggests, because this offers “more protection from identify theft than traditional depository institutions.” That said, the security of the transactions depend, in part, on the “private keys” that the bitcoin protocol uses for authentication, Bareisis cautions. “It is helpful to think of public keys as your bank account number and the private key as the signing authority on that bank

account. Public keys can be given to payers so that they could deposit money into your ‘account,’ but private keys have to be kept secret so only you can authorize payments,” he explains. As such, users can “lose access” to their bitcoin holdings if their private keys are lost or stolen, Bareisis warns, adding that private keys could potentially be stolen “as a result of malware attacks either on their own ‘hot storage’ wallets or bitcoin balances held in custody at the exchanges.” Cold storage is actually “the ideal storage solution for long-term storage of bitcoins because they are offline and, thus, cannot be hacked,” Kemper says. “All known major bitcoin breaches to date were on coins stored on a ‘hot’ wallet or unencrypted back-ups stored on a ‘hot’ computer,” Bareisis reports. “In contrast, ‘cold’ wallets private keys are created on the offline computer and never leave it; transactions are signed offline,” the report adds. In order to steal the bitcoin from a cold wallet, a thief needs to have “physical access, extremely advanced USB viruses, or a user accidentally installing malicious software,” he writes. This theft risk is something insurers can cover, Wilding told attendees of AEIC, part of the Canadian Boiler & Machinery Underwriters Association. Insurance carriers covering bitcoin risk would “typically ensure that there are proper security practices on the bitcoin cold storage,” he said. This is something those working in the insurance industry “might want to consider” covering. Another risk arising from bitcoin is compliance for financial institutions. Bitcoin raises many concerns from a compliance and risk perspective, the Deloitte paper notes, including adequately safeguarding against cyber threats and properly assessing counterparty risk when a new or existing customer begins using cryptocurrencies. “Risk governance and internal controls may need to be developed or updated to account for bitcoin and other cryptocurrencies,” the paper adds.

November 2014 Canadian Underwriter

Insurance Brokers Association of Ontario 94th Annual Convention Ottawa

Angela Stelmakowich Editor

Greg Meckbach

Associate Editor

Readying for the

Future

Dealing with the challenges of today, but always keeping an eye to future developments, is critically important to ensure that independent brokers not only maintain, but hopefully improve, their positions as trusted advisors. Those attending the 94th Annual Convention of the Insurance Brokers Association of Ontario in Ottawa from October 22-24 had a chance to network, take part in educational sessions and hear from industry experts. Highlighting educational events was the annual CEO Panel, where participating senior insurance executives discussed topics ranging from technology to flooding, telematics, distribution and the role of the broker in today’s ever-changing environment.

HOME INSURANCE POLICY CHANGES pose CHALLENGE to brokers Changes to home insurance policies in the wake of record insurable losses in 2013 — much of this because of water-related damage — demanded that brokers adapt to the new reality, it was sug-

62 Canadian Underwriter November 2014

gested during the CEO Panel at the Insurance Brokers Association of Ontario’s (IBAO) recent convention in Ottawa. “We know last year was a tough year with weather-related losses and we had to adapt the property product with rates, deductibles and sublimits,” Jean-Francois Blais, president of Intact Insurance, told attendees of the session. “It’s a tough time to be a broker because, everybody has been used to auto insurance prices and dealing with that, and now we are heading into a situation where we have coverage and price issues on property as well,” said Brigid Murphy, president and chief executive officer of Travelers Canada. “I think if the consumer understands that from a loss prevention standpoint, there are lots of things they can do, then they can do their own cost benefit analysis as to whether or not it’s worth it,” suggested Bob Tisdale, president and chief operating officer of Pembridge Insurance Company. “Is it worth it to not have that finished basement because maybe I don’t want to pay the sewer back-up coverage for it?” Tisdale asked. “Do I want to install a (backwater) valve? Do I want to do different things to protect my house? I think those are all things that are incumbent upon the consumer,” he said. Tisdale cited as an example the hailstorm in and around Airdrie, Alberta in August, which Verisk Analytics Inc.’s Property Claim Services (PCS) unit

has estimated resulted in $450 million in insured losses. “Those houses are being fixed with the same vinyl siding that got damaged in the storm,” he said of some of the damaged properties. “We really need to get the consumer to understand that if they do that again, there is going to be a cost to it, so it’s better to look at it from a longer-term strategy,” he said, explaining “either they are going to pay it in premium or they are going to pay it in a self-retention, which is a higher deductible.” Last year’s floods in southern Alberta and in and around Toronto provided some lessons, Greg Somerville, president and chief executive officer of Aviva Canada, suggested. “One of the things they taught us is we likely could have done a better job, collectively, in explaining how the policy works and what is covered and what is not covered,” Somerville noted.

REPLACEMENT COST MUST BE PART OF EQUATION Replacement cost must be considered as part of any discussion relating to the promise of smart home technology and what effect it could have on losses, it was suggested at the recent Insurance Brokers Association of Ontario’s 94th Annual Convention in Ottawa. Smart home technology looks to be a positive from a frequency of loss standpoint, Bob Tisdale, president and chief operating officer of Pembridge Insurance Company, said during the CEO Panel. But as houses become smarter, Tisdale emphasized that replacement cost must be carefully considered. Although there will be fewer losses, when a loss does occur, “it will be more expensive because that technology has also got to be replaced,” he said. “We need to think of that as we bring technologies in, but certainly they will be tremendously beneficial in getting the number of losses down (in homes),” Tisdale added. “If we think that installing an alarm reduces the exposure, what about installing technology that tells you before your

water heater is going to burst, tells you when your heating system went down or that somebody should go home before the pipes freeze,” asked Greg Somerville, president and chief executive officer of Aviva Canada. “Clearly, those kinds of solutions are going to reduce exposures and should have an impact on pricing, no different than some of the things that exist today,”

Somerville told panel attendees. “We talk about the smart house; we talk about telematics. Consumers are actually getting more and more into the driver’s seat about how much risk they’re actually presenting,” Brigid Murphy, president and chief executive officer of Travelers Canada, pointed out. Karen Gavan, president and chief executive officer of Economical Insurance,

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noted that there is a behavioural element that must be taken into account. “Just because the technology’s in the house doesn’t necessarily mean it’s going to be used effectively. So, technology only goes so far because it’s still human behaviour that impacts into the process,” Gavan emphasized.

VALUE BEYOND PRICE Having a clear understanding of how consumers want to be serviced will prove important for brokers and insurers alike, Greg Somerville, president and chief executive officer of Aviva Canada, suggested during the CEO Panel at the recent Insurance Brokers Association of Ontario convention. If one considers why consumers might be inclined to look elsewhere, “price, ease of doing business and self-service is our view of what drives them,” Somerville said. “We can decide how we want business to be done, but the 9 million drivers in Ontario are going to decide how they want to be serviced. If we don’t understand how they want to be serviced, how they want to buy their products and tailor solutions to meet their needs, somebody will do that,” he warned. That said, “I still believe there is a large segment of the consumer base that really values advice and really needs advice. If the broker channel is only competing on the basis of price, well that’s going to be mechanized and digitized away,” argued Karen Gavan, president and chief executive officer of Economical Insurance. Bob Tisdale, president and chief operating officer of Pembridge Insurance Company, cited surveys out of both the United States and Canada showing that while the majority of respondents were price-conscious, they would pay more in premium if they could get customized policies and advice. How does what customers are receiving “relate to my needs, my lifestyle, my wants and then how much are you going to charge me,” Tisdale told attendees. “The cookie-cutter approach doesn’t work for these consumers and it’s certainly a big segment that we really need to be aware of,” he argued.

BUSINESS MODEL ADJUSTMENT URGED The traditional business model for Ontario brokers will likely need to change since their competitors today will not be the same as those five years from now, Chris Floyd, president of the Insurance Brokers Association of Ontario (IBAO), suggested during IBAO’s 94th Annual Convention in Ottawa. “Our competitors are ramping up their game and we need to move quicker and remain extremely nimble,” Floyd said. “Those sorts of statements aren’t meant to be doom and gloom. It really is meant to make us realize that our traditional business model will need to change as an industry,” he emphasized.

“Just because the technology’s in the house doesn’t necessarily mean it’s going to be used effectively. So, technology only goes so far because it’s still human behaviour that impacts the process.” “Are we doing the simple things that the competition is doing? Are we providing online quoting, online chat, extended hours of operation?” Floyd asked. If brokers do not simplify things and provide customers with the relevant products and services they want, “somebody will,” he cautioned. “We have traditional means of delivering our services that need to change. If we are going to differentiate ourselves, we’re going to need to simplify our business,” Floyd said. Big data, analytics and being customer-centric are all very “relevant to what our business is today and where our business is going.”

AVIVA canada COMMITS TO TELMATICS SOLUTION Aviva Canada has committed to using the telematics solution from Quindell and Independent Broker Resources Inc. (IBRI), the for-profit arm of the Insurance Bro-

kers Association of Ontario (IBAO), to execute its telematics offerings. Aviva Canada — one of the country’s largest property and casualty insurance companies, with more than three million customers, 1,700 brokers and a 9% market share of the Canadian automobile insurance market — has selected Quindell as its telematics technology provider on an exclusive basis for the next five years, IBAO reported in a statement in advance of the association’s 94th Annual Convention. IBAO president Chris Floyd explains that the IBRI/Quindell solution allows broker access to interpret clients’ risk profiles and adequately advise them on the most appropriate insurance product available to match their needs. “We firmly believe that telematics and usage-based insurance solutions will benefit our customers as we are able to customize their insurance based on individual driver experience — and reward safe driving behaviour with lower premiums,” notes Greg Somerville, chief executive officer of Aviva Canada. Quindell, a global provider of professional services and digital solutions, notes in a separate statement that the five-year contract offers a one-stop solution through the provision of devices, network connectivity, product platform, systems integration, logistics, mobile applications, data analytics and consumer-facing applications, including the use of the Himex Virtual World technology. Over an initial period of five years, subject to achieving key milestones, the insurer is looking to meet the goal of 120,000 telematics customers, Quindell reports. The technology is to be used for personal and commercial lines and includes working in conjunction with IBRI with its Quindell broker-based telematics distribution model, the statement adds. Quindell chairman Robert Terry goes on to say that the company model “will continue to positively disrupt the Canadian insurance market, where telematics take-up of 20%-30% plus on new business is proven for the right market proposition.” November 2014 Canadian Underwriter

MOVES & VIEWS

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Brian Parsons [1], former national practice leader of mining at Marsh Canada Limited, is now chief executive officer of Willis Canada. Parsons, who has spent 22 years with Willis Canada, will report to Willis North America CEO Todd Jones, notes a statement from Willis North America. “The challenges facing the Canadian business community today are global in scope and organizations demand innovative solutions,” Parsons says. “With its global platform, advanced analytics capabilities and deep industry specializations, Willis stands ready to deliver innovative risk management strategies and solutions so that our clients have the greatest opportunity for success.” Willis Canada has more than 250 insurance professionals in offices in Toronto, Montreal, Vancouver and Calgary.

Ironshore International has appointed Paul Primiani, former executive vice president of GCAN Insurance Company, as chairman of Ironshore Canada Ltd. Primiani has held executive positions with ACE Ltd., Reliance and American International Group Inc. (AIG). “This is an exciting opportu-

66 Canadian Underwriter November 2014

nity to elevate recognition of Ironshore’s suite of specialty products, addressing the heightened coverage demand from companies operating in Canada and expanding into global markets,” he says.

Quebec insurance brokerages EssOR Assurances, Pratte Morrissette Inc. and Assuraction Inc. have signed an agreement in principle to create a new firm called EGR. Specializing in risk management, insurance and surety bonds, EGR will group together insurance brokerage services for medium and large businesses, including specialized lines. Louis Bélanger [3a], now chief executive officer of Pratte Morrissette, will serve as EGR president; Richard Drouin [3b], now president of Assuraction, will be executive vice president; and Simon Marchand-Fortier [3c], now vice president of Pratte Morrissette, will be vice president of operations. EGR will have nine offices and employ 150-plus people, including specialized brokers assigned to risk marketing, safety practitioners, legal experts and adjusters, while EssOR will continue its personal lines and small business damage

insurance brokerage activities. Michel Duval [3d] will remain as EssOR’s president, and will serve as chair of EGR’s board. The transaction is expected to be finalized by year’s end.

Cunningham Lindsey Canada Claims Services announced in October the launch of its new global third-party administration (TPA) service, called inTrust, which the company reports “ensures centrally controlled loss reporting and claims handling in addition to the collection of crossborder portfolio data which can be accessed through a self-service portal.” Though the company already provides local TPA services, inTrust “means Cunningham Lindsey clients will now have a single entry point to a service where claims are centrally managed across multiple territories and classes of business.”

Ellen Moore [5], president and chief executive officer of Chubb Insurance Company of Canada, is among the recipients of this year’s Catalyst Canada Honours, which recognizes leadership and commitment to advancing women. Three years ago, Moore was a recipient of the Women’s Executive Network’s 2011 Canada’s Most Powerful Women: Top 100 Awards, which recognize Canada’s highest achieving female leaders in the private, public and not-for-profit sectors, and in 2006, she received a McGill Management

MOVES&&VIEWS VIEWS MOVES

of Calgary; Gordon Adams; Robert Cartwright, Jr.; Al Gorski; Leslie Lamb; John Phelps; Michael Phillipus; Frederick Savage; and Lori Seidenberg.

9 positions have included general adjuster, branch manager, vice president of operations and Lloyd’s Division leader.

Macdonald Chisholm Achievement Award. As well TraskCatalyst Insurance (MCT) as Moore, Canada announced in early honourees this year include January that it will propDean Johnson, pastjoin president erty and casualty brokerage and chief executive officer of BrokerLink. The Ltd.; termsSharon of the Sodexo Canada transaction werepresident not dis- of MacLeod, vice closed, notes statement personal care,a North America from BrokerLink. BrokerLink for Unilever; Zabeen Hirji, companies, chief humansubsidiaries resources of Intact Corp., officerFinancial for the Royal Bank include 84 offices serving of Canada; and Howard clients in chair Atlantic Wetston, andCanada, chief exAlberta Ontario. ecutive and officer of theDating Ontario back more than 60 years, Securities Commission. MCT has more than 110 insurance professionals in 18 offices.Ontario Michaelbrokerage Brien, who has ledCornerstone MCT over the last 12 Insurance years, joins BrokerLink as Brokers Ltd., whose head of its Atlantic operations. existing locations are in

Woodbridge, Markham and Barrie, has closed the purchase of Hartwell Thayer 10 Insurance and Financial Services Limited. “We are Snow will lookingCarolyn to expand our [7] footprint lead RIMS as president in the marketplace and this for the 2014 term, acquisition positions us well which took effect January 1. in a thriving community,” Snow, who has been on the says Wendy DaSilva, chief RIMS Board of Directors for executive officer of Cornerstone seven years, is currently diInsurance Brokers. rector of risk management for Humana Inc. She previously servedEconomical as RIMS’s treasurer, Insurance secretary and director of announced in October external affairs. The RIMS that Dan Fortin [7], forboard for 2014 mer president ofalso IBMincludes Canada vice president Ltd., has been Richard named to the Roberts, Board Jr.; treasurer Julie insurer’s of Directors. Pemberton; corporate secreFortin fills the vacancy left by tary Nowell Seaman, director Scott Carson, who retired in of global risk management for February after 14 years on the PotashFortin Corporation of board. had worked at Saskatchewan IBM Canada forInc.; moreGloria than 35 Brosius; SteveasPottle, director years, retiring its president of July. risk management services in “Dan’s appointment at York strengthens University; Jennifer further our Santiago; Janet Stein, direcboard as part of our ongoing tor of risk management and renewal process,” says board insurance at the University chair Gerald Hooper.

As of January 8, Toronto insurance broker Jones DesLauriers Insurance Management Inc. (JDIMI) had acquired Whitley Insurance and Financial Services. Whitley Insurance has 3d in Belleville, Ontario offices and the nearby communities of Trenton, Deseronto and Stirling. “The acquisition is The Centre for expected to build a solid Study of Insurance presence for JDIMI(CSIO) in Eastern Operations Ontario and position announced in Octoberthe thefirm to better service their clients, launch of CSIO eXchange, an with strengthened online forum for itscommermembers. cial and personal insurance CSIO eXchange seeks to build offerings inand theengagement region and a awareness new financialmembers services diviby providing with sion,” notes statement from online forumsa and discussion JDIMI. that President andopen CEO groups promote Shawn DeSantis will lead dialogue, networking and the teams from both companies. exchange of ideas. It has Loris Clarke [8]one hasforum, been to launched with named successor Paul allow members to to discuss Whitley, president of Whitley topics such as workflow and Insurance, who remain technology pain will points for induring a brokers, transition period. surance and plans to

introduce forums for standards and forms working groups. Ken Rayner [9] has joined Anderson McTague Associates Xchanging&plc of Ltd. asLondon, its director of busiEngland, ness development, Central along with ProFormance Region.Insurance “Ken brings a wealth Group Solutions of experience to our Ontario, com(PGIS) of Pickering, pany,jointly havingdeveloped held various have and senior management positions launched a third-party with insurers and other MGAs,” administrative service. The

says Chuck McTague, president of Anderson McTague & Associates, a familyowned MGA based in New Brunswick. In January, Anderson McTague & Associates announced report it was that expanding, companies the adding an office in Toronto to service is “specifically service the brokers Ontario tailored to meet theofneeds of and Canadian Manitoba.market Rayner’s the when appointment confirms the processing London market company’s The “commitment business.” service willto the Ontario/Manitoba include bordereaux marketplace, and to the building of transformation services, a local support team to assist which “remove complex tasks brokers with their surplus and requirements around lines and difficult place mapping, cleaningto and business,”risk, McTague adds. validating premium and claim bordereaux.” Other services include dedicated Thetraining Guarantee auditing teams, Company programs and adjustersoffrom Northfirms America various Canadian “to has announced that Tara ensure the most qualified Wishart [10] became adjuster is used to suitvice an president of claimsneeds.” for the individual client’s insurer’s Toronto branch on December 2, 2013. Having 21 years ofCARSTAR experience in The Guarantee’sAutomotive claims department,Canada Wishart willhas be Inc. responsible for the operations appointed Bill Goodwin as its of the Toronto Branch Claims. director of business developShe first joined has Theheld Guaranment. Goodwin tee in 1995 as an adjuster senior management positions and has roles increaswith PHHheld Arval andofBelron ing seniority the comCanada. Withwith 20-plus years pany, including, most in the auto and fleet managerecently, claims manager ment industries, his back-for specialty lines. Wishart is a ground is well in line with member of both Surety the expansion of the CARSTAR’s Association of Canada and glass and retail services, the the Canadian Association of company reports. Women in Construction.

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November 2014 Canadian Underwriter 67 57 February 2014 Canadian Underwriter

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The insurance industry showed up in full force in support of JDRF Ride for Diabetes Research on September 19, at the Metro Toronto Convention Centre. As part of the JDRF Insurance Challenge, several teams of five participated in a stationary bike-a-thon, where each team member rode for seven minutes in an effort to raise funds for diabetes research. With participation from a number of different industry stakeholders, the event was a huge a success. The JDRF Ride is a high-energy and fun event: attendees can truly feel the enthusiasm emanating from wall-to-wall as teams work hard to complete their rides.

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Jeff Somerville, President of Strategic Underwriting Managers Inc. (SUM) is pleased to announce that Connie Lastoria has joined the Company as Senior Underwriter, Toronto. Connie brings 30 years of casualty underwriting experience to SUM from a competitor. Connie holds extensive market contacts enabling her to solve the most challenging placements. She will join our growing Primary General Liability practice in Toronto with an interest in Construction business. SUM Insurance is an independent and 100% Canadian Managing General Agent. Serving Canada coast to coast with offices in Toronto and Montreal, SUM Insurance works collaboratively with first class insurers and reinsurers to design, underwrite and deliver commercial insurance products to its customers - insurance brokers. For information about SUM please see www.suminsurance.ca

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The eighth annual National Insurance Conference of Canada (NICC) was held in Ottawa from September 21-23, featuring numerous speakers on various panels as part of the conferenceâ&#x20AC;&#x2122;s concurrent sessions. Amanda Lang, Senior Business Consultant for CBC News, served as emcee for 2014 NICC, while the keynote speaker was Diane Francis, an awardwinning columnist and bestselling author. The conference raised $17,700 through donations made in lieu of speaker gifts, a silent auction and a raffle for WICC, the 2014 NICC charity of choice. More than $120,000 has been raised for WICC at NICC since 2008. [Photos courtesy of NICC].

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Liberty International Underwriters hosted a broker reception at Mohawk Racetrack on September 18. Attendees were treated to a night of fun and excitement, as they were able to place their wagers on various “trots” and “paces” over the course of the evening. The event kicked off with trackside cocktails and was followed by dinner as the races got under way.

Jeff Somerville, President of Strategic Underwriting Managers Inc. (SUM) is pleased to announce that Connie Peplinskie, CIP, has joined the Company as Assistant Vice President, Toronto. Prior to joining SUM, Connie was the Vice President and CGL Department Manager for a major Canadian specialty carrier. Connie has over 20 years underwriting experience in Casualty underwriting mostly for a major Canadian MGA. Connie holds her Chartered Insurance Professional designation and will join our growing Primary General Liability practice in Toronto which includes General Liability, Security & Protection and Lifescience products. SUM Insurance is an independent and 100% Canadian Managing General Agent. Serving Canada coast to coast with offices in Toronto and Montreal, SUM Insurance works collaboratively with first class insurers and reinsurers to design, underwrite and deliver commercial insurance products to its customers - insurance brokers. For information about SUM please see www.suminsurance.ca

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The Insurance Brokers Association of Canada (IBAC) moved westward for its 93rd Annual General Meeting on September 18-20, held in friendly Saskatoon at the historic Delta Bessborough, nestled on the banks of the South Saskatchewan River. Beyond networking and meetings, attendees enjoyed a bit of local flavour in the city of bridges, with musical guests, canoeing and a river cruise. StĂŠphan Bernatchez, who becomes IBAC president this January, emphasized that while independent brokers in various parts of the country have similar issues, although perhaps different priorities, their similarities and differences can come together to help build an even stronger channel. IBAC also presented its first-ever Dale Rempel Award of Excellence, honouring the associationâ&#x20AC;&#x2122;s highly regarded former president who passed away in 2012, to Rodney Hancock, CEO of McFarlan Rowlands Insurance Brokers in London, Ontario. The award recognizes excellence in broker education and will be presented to an individual who has made a significant difference in the professional development of insurance brokers.

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LBC International hosted its annual Cocktail Reception on September 29 at the CN Tower Horizons Restaurant. Industry associates enjoyed a spectacular evening of live music, cocktails and hor dâ&#x20AC;&#x2122;oeuvres at the top of one of Canadaâ&#x20AC;&#x2122;s most renowned landmarks. A brief presentation was made by LBC International in appreciation of its guests as attendees mingled well into the evening.

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The Association of Certified Fraud Examiners (Toronto Chapter) and the Canadian Association of Special Investigations Unit (Trillium Chapter) held the Annual Fraud Forum on September 23. The event held at Le Parc Conference Centre in Thornhill, Ontario featured a mix of both general and insurance fraud seminars, in addition to a busy tradeshow.

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The ARC Group Canada held its 2014 Annual Seminar and Cocktail Reception at the St. Andrews Club and Conference Centre in downtown Toronto on October 2. This year’s seminar saw experts offer their views and insight as part of the panel, Catastrophic Loss – Fires, Floods, Explosions – What’s Next, Locusts? Panelists included Dr. Blair Feltmate, a professor at the University of Waterloo’s School of Environment, Enterprise and Development (SEED); Paul Kovacs, founder and executive director of the Institute for Catastrophic Loss Reduction (ICLR); Greg Larochelle, head of reinsurance placements and administration for RBC Insurance; and Martha Turnbull, RBC Insurance’s head of home, travel and property claims. Attendees had the chance to network and discuss the activities of the day at a cocktail reception following the event. See coverage of speaker comments at: http://bit.ly/arcseminar14

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November 2014 Canadian Underwriter 77

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Cunningham Lindsey held a cocktail reception with its Major Loss Services, Public Entities Division and EFI Global Canada at Hyâ&#x20AC;&#x2122;s Steakhouse Cocktail Bar in Toronto on October 3. Clients and industry partners joined Cunningham Lindsey staff for the chance to interact and catch up, all while enjoying cocktails and hors dâ&#x20AC;&#x2122;oeuvres.

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Catastrophe Response Unit (CRU) hosted the final segment of its 2014 series of Earthquake Response Seminars for property and casualty insurance executives at the Trump Hotel Toronto on October 6. Speakers included industry executive Carol Jardine and Dr. Kristy Tiampo of the Institute of Catastrophic Loss Reduction. Eastern Ontario and Quebec earthquake risk were examined, along with the significant damages that can be caused by even mediumsized earthquake events.

Get the job. Done. TM

FOUND MY JOB AT

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LM Temperature Control and LM Commercial Drying hosted an open house and grand opening party on October 9. The “LM Family Circus” event was appropriately titled, as guests enjoyed an over-the-top circus theme, carnival-inspired food, cigar and scotch bar, ribboncutting ceremony as they mingled and networked with the staff.

Philipp Wassenberg The Boards of Directors of Munich Reinsurance Company of Canada (MRoC) and Temple Insurance Company (Temple) are pleased to announce the appointment of Philipp Wassenberg as President and Chief Executive Officer of both MRoC and Temple. Philipp is a lawyer with a PhD in public international and European law. He joined Munich Reinsurance Company, in Munich, in 2000 as a General Liability and D&O underwriter for various European and North American markets where he gained a wealth of experience in positions of increasing responsibility. When he transferred to Canada, Philipp had been the Head of Casualty Treaty in the Global Clients / North America division of Munich Re, responsible for world-wide business for the past six years. In his new role, Philipp will be responsible for the operation of all of Munich Reinsurance Company’s non-life business in Canada. He has also been appointed to the Board of Directors for MRoC and Temple. Philipp is an advocate for building strong client partnerships. He is well-prepared to meet the challenges facing the Canadian reinsurance and insurance industry and is confident that there are many avenues still to be explored to create new business opportunities for both. Philipp will also be making strategic use of the wide ranging expertise offered within the global reach of Munich Reinsurance Company to provide the best possible service and support to our Canadian clients. Munich Re stands for exceptional solutionbased expertise, consistent risk management, financial stability and client proximity. This is how Munich Re creates value for clients, shareholders and staff. In the financial year 2013, the Group – which combines primary insurance and reinsurance under one roof – achieved a profit of €3.3bn on premium income of over €51bn. It operates in all lines of insurance, with almost 45,000 employees throughout the world. With premium income of around €28bn from reinsurance alone, it is one of the world’s leading reinsurers.

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The Property Loss Restoration Expo (PLR Expo) held Canadaâ&#x20AC;&#x2122;s largest restoration confe rence in Toronto at the International Plaza Hotel on September 30-October 2. The event featured a tradeshow and seminars covering a wide array of timely restoration industry topics. More than 60 exhibitors filled the exhibit hall and the tradeshow floor bustled with delegates from across Canada. Attendees were also delighted to hear renowned futurist and keynote speaker Jim Carroll.

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