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
CYBER RISK
M A R CH 2 0 1 5 PM40069240
Moving Target BY ANGELA STELMAKOWICH
Oily Concerns BY THOMAS PTACEK & GEORGE BOIRE
Fleet Tracker BY CRAIG HARRIS
BE PREPARED WITH GUY CARPENTER G-CAT速 CANADA FLOOD MODEL April 2015 Please contact your local Guy Carpenter representative or e-mail canada.flood@guycarp.com for more information.
guycarp.com
A RCH 2 0 1 5
40069240
CANADIAN UNDERWRITER
VOL. 82, NO. 3, March 2015 Canada’s Insurance and Risk Magazine. Published by newcom business media inc.
www.canadianunderwriter.ca
Cover Story
Moving Target
CYBER RISK
38
Despite recent high-profile attacks meant to disparage, disrupt and produce fear, a true picture of cyber risk and potential exposure involves more than targeted events. Risk managers must be ready to absorb information that helps them set an accurate sight on what has proved a moving target. By Angela Stelmakowich
features
18
50 Fleet Safety
Greater oil traffic activity has upped environmental risks at ports and terminals, but having a solid understanding of conditions can help to identify insurance needs.
Brokers are moving the needle on telematics for commercial auto insurance. New data tools could allow fleet owners to keep tabs on vehicles for discounts and safety.
By Thomas Ptacek & george boire
By Craig Harris
58
54 Underinsurance
Given the accelerating ascent of concerns over cyber risk, what might be the value in taking a “think-tank” approach to addressing risk exposures?
A Quebec ruling reiterates that a damage insurance broker has a duty to provide clients with sound advice and direct them to resources to help them obtain suitable insurance coverage.
By Thomas Varney
Ports & Terminals
26
22 Risk Barometer
By Nathalie Durocher &
30 Commercial Customer Satisfaction
André Legrand
A new J.D. Power study of risk professionals and risk management team members shows that insurers and brokers must work together BY ANGELA STELMAKOWICH to meet the changing needs of commercial customers. Oily Concerns
62 Health Care Risk
TimothyBOIRE Bebout BY THOMAS PTACEK &ByGEORGE
By Polly Stevens & Lois Hales
Fleet Tracker 34 Sistership Exclusion
64 Flood Modelling
Moving Target
Ethics Series
Winter Storms
Having accepted an invitation from a broker to go to a junior hockey game, what should the branch manager do when he is led to expensive NHL seats?
Does the p&c insurance industry in Canada have enough information about winter storms to accurately quantify the related risk?
Are the courts ready to reassess application of the “sistership” exclusion in commercial general liability policies? A recent case offers a plain reading review of the exclusion and potential expansion of its use.
By CIP Society
By Eric Robinson
By Hollis Bromley
BY CRAIG HARRIS
What sort of approach will allow health care organizations to manage organizational risk? A newly developed model seeks to accomplish that objective.
Cat models do not yet cover flood perils since they present unique complexities. But Canadian insurers can still evaluate flood risk using new, open modelling platforms that offer insight into potential future losses. By Karen Clark
March 2015 Canadian Underwriter
3
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Editor Senior Publisher Angela Stelmakowich Steve Wilson and resources from all segments of Editorto insurance professionalsSenior Publisher astelmakowich@canadianunderwriter.ca steve@canadianunderwriter.ca Editor Stelmakowich Senior Wilson Publisher Angela Steve Editor Senior@InsuranceMedia Publisher (416) 510-6793 the industry, providing marketers with aTwitter: range of specialized Angela Stelmakowich Steve Wilson Angela Stelmakowich astelmakowich@canadianunderwriter.ca steve@canadianunderwriter.ca Steve Wilson (416) 510-6800 astelmakowich@canadianunderwriter.ca steve@canadianunderwriter.ca astelmakowich@canadianunderwriter.ca (416) 510-6793 Twitter: @InsuranceMedia Associate Editor steve@canadianunderwriter.ca and highly effective marketing communications opportunities. (416) (416)510-6793 510-6793 Twitter: @InsuranceMedia (416) 510-6800 Greg Meckbach Twitter: @InsuranceMedia Art Director Associate Editor (416) Associate Editor (416)510-6800 510-6800 gmeckbach@canadianunderwriter.ca Gerald Heydens Associate Editor Greg Meckbach Art Director Greg Meckbach Twitter: @CU_Greg Art Director Greg Meckbach Art Consultation Director gmeckbach@canadianunderwriter.ca Gerald Heydens Art gmeckbach@canadianunderwriter.ca Gerald Heydens Heydens (416) 510-6796 gmeckbach@canadianunderwriter.ca Gerald Twitter: @CU_Greg Twitter: @CU_Greg Sascha Hass ArtArt Consultation Consultation Twitter: @CU_Greg (416) 510-6796 (416) 510-6796 Online Editor ArtInsurance Consultation Sascha Hass Sascha Hass Canadian Underwriter’s Media Group is committed Production Manager (416) Editor 510-6796 Harmeet Singh Online Sascha Hass Online Editor Gary White to providing the most timely and relevant Production Manager news, information Jason Contant hsingh@canadianunderwriter.ca Production Manager Online Editor Harmeet Singh Gary WhiteManager (416) 510-6760 jcontant@canadianunderwriter.ca and resources to insurance professionals from all segments of Production Twitter: @CU_Harmeet Gary White Harmeet Singh (416) 510-6760 hsingh@canadianunderwriter.ca (416) 442-5600, Ext. 3652 Gary Whitewith a rangeService (416) 442-5600 ext. 3652 the industry, providing marketers of specialized (416) 510-6760 Subscriptions/Customer National hsingh@canadianunderwriter.ca Twitter: Subscriptions/Customer Service Associate@CU_Harmeet Publisher (416) 510-6760 Gail Page and highly effective marketing communications opportunities. Twitter: @CU_Harmeet (416) 442-5600 ext. 3652 Claims Bona Lao Associate Publisher Subscriptions/Customer Service Paul Aquino gpage@bizinfogroup.ca (416) 442-5600 ext. 3652 blao@annexnewcom.ca Subscriptions/Customer Service Paul Aquino paul@canadianunderwriter.ca Gail Page Manual Associate Publisher (416) 510-5187 (416) 442-5600, Ext. 3552 Gail Page Twitter: @InsuranceCanuk paul@canadianunderwriter.ca gpage@bizinfogroup.ca InsuranceMarketer.com Associate Publisher Paul Aquino (416) 510-6788 gpage@bizinfogroup.ca Circulation Manager Twitter: @InsuranceCanuk (416) 510-5187 Circulation Manager Paul Aquino paul@canadianunderwriter.ca Mary Garufi (416) 510-5187 Account Manager (416) 510-6788 Mary Garufi paul@canadianunderwriter.ca Twitter: @InsuranceCanuk Circulation Manager mgarufi@annexnewcom.ca Michael Wells mgarufi@bizinfogroup.ca Twitter: @InsuranceCanuk National Circulation Manager (416) 510-6788 (416) 442-5600, Ext. 3545 Account Manager Mary Garufi the insurance industry’s social network michael@canadianunderwriter.ca Claims (416) 442-5600 ext. 3545 (416)510-5122 510-6788 Mary Garufi Michael Wells (416) mgarufi@bizinfogroup.ca PrintManual Production Manager Account Manager mgarufi@bizinfogroup.ca InsuranceMarketer.com michael@canadianunderwriter.ca (416) 442-5600 3545 Phyllis Wright ext. Print Production Manager Account AccountManager Manager Michael Wells (416) 442-5600 ext. 3545 (416) 510-5122 Christine Giovis Phyllis Wright President Michael Wells michael@canadianunderwriter.ca Print Production Manager christine@canadianunderwriter.ca INSURANCE the insurance industry’s social network Jim Production Gliona michael@canadianunderwriter.ca Print (416) 510-5122 Account Manager Phyllis Wright Manager President (416) 510-5114 DIRECTORY (416) 510-5122 Vice President & General Manager Phyllis Wright Elliot Ford Creighton insBlogs Bruce Account Manager Account Manager President Joe Gliona INSURANCE eford@canadianunderwriter.ca Account Manager Elliot Ford President Elliot Ford Bruce Creighton Vice President DIRECTORY (416) eford@canadianunderwriter.ca Elliot510-5117 Ford Bruce Creighton eford@canadianunderwriter.ca Alex Papanou Insurance Blogs hosted by Canadian Underwriter (416) 510-5117 insBlogs Vice President eford@canadianunderwriter.ca (416) 510-5117 Property & Casualty Insurance Newswire Vice President Papanou Property & Casualty InsuranceAlex Newswire (416) 510-5117 Alex Papanou
Insurance Limited, James Cameron, president of Cameron &Consultants Associates was recognized by the CIP Cameron &Consultants Associates Limited, Insurance Society when hebyreceived its Insurance Consultants Limited, was the CIP 16recognized Broad View Established Leader Award. was recognized the CIPits Society when heby received Michel Pontbriand and Julie BY ANGELA when STELMAKOWICH Society he received Established Leader Award.its Chapdelaine, co-chairs of Established Leader Award. BY ANGELA STELMAKOWICH the upcoming RIMS Canada BY ANGELA STELMAKOWICH conference, encourage risk managers to take a broad view of risk to help put their companies in the SPECIAL FOCUS positions. best possible By Greg Meckbach SPECIAL FOCUS
6SPECIAL Editorial FOCUS 6 Editorial 86special Marketplace Editorial focus 8 Marketplace 56 & Views 812 Moves Marketplace Editorial 56 Moves & Views 58 Gallery 56 Moves & Views 14 Marketplace 58 Gallery 58 Gallery& Views 68 Moves 70 Gallery
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De-Railed
This includes minimum insurance requirements, levels of which are based on an analysis of rail accident cost data and the potential severity of accidents involving certain types of dangerous goods. Angela Stelmakowich Editor Canadian Underwriter astelmakowich@ canadianunderwriter.ca
12 Canadian Underwriter March 2015
Seeking ways to better manage the risks associated with oil-by-rail transport — as well as to deal with the often negative and costly fallout from derailments, collisions or worse — is gaining momentum in Canada. Ottawa looks to be moving forward with tougher protections for rail tanker cars, proposing new requirements that would give shippers until 2025 to upgrade rail tank cars by ensuring they are more resistant to punctures and valve failures following derailments and collisions. The proposal comes in the wake of a number of fiery and high-profile accidents both in Canada and in the United States. These events have included those near Gogama, Ontario and another not far from Gregg, Manitoba. In its newly released report, Review of the Canadian Transportation Safety Regime: Transportation of Dangerous Goods and Safety Management Systems, the Standing Committee on Transport, Infrastructure and Communities recommends to Transport Canada that the department, among other things, ensure all Class 11 tank cars used to transport flammable liquids meet enhanced protection standards that significantly reduce the risk of product loss when these cars are involved in accidents; implement a comprehensive reform of the liability and compensation regime for rail to ensure that victims and their families obtain the compen-
sation they deserve, that the polluter-pays principle is upheld, and that taxpayers are not forced to pay for compensation, remediation and reconstruction costs in the event of a rail disaster; and require railways to use on-board voice and video recordings as part of a company’s safety management system. Just a few weeks before the report’s release, Ottawa introduced legislation to strengthen rail safety and accountability through a new liability and compensation regime for federally regulated railways. This includes minimum insurance requirements (levels are based on an analysis of rail accident cost data and the potential severity of accidents involving certain types of dangerous goods); a compensation fund financed by levies on crude oil shippers; increased information-sharing (including railway companies sharing information with municipalities); and stronger oversight powers for both the federal transport minister and Transport Canada inspectors. “These changes are part of the government’s commitment to strengthen oversight and increase collaboration between communities and the rail industry, addressing issues raised in the Transportation Safety Board of Canada’s (TSB) final report on the LacMégantic derailment, as well as concerns of the Federation of Canadian Municipalities,” Transport Canada reported.
The TSB’s final report included a recommendation that Transport Canada “must take a more hands-on role when it comes to railways’ safety management systems — making sure not just that they exist, but that they are working and that they are effective.” In a recent posting, François Tougas and Ryan Gallagher of McMillan LLP write that the amount of insurance required of a railway company would depend on the quantity of crude oil and toxic inhalation hazard (TIH) commodities transported. “If claims exceed available insurance and the amount in the compensation fund, the federal government may draw on the Consolidated Revenue Fund (primarily taxpayer-funded) to cover such claims, with possible recovery of those monies by way of a further levy on railway companies.” It was reported earlier this year that $200 million will be distributed in settlement funds to families of those who died as a result of the Lac-Mégantic derailment, as well as to other parties. But the full costs — insurance, government response, reputational harm and, most important, human loss — have been far greater. It is unlikely all adverse oil-by-rail events can be eliminated. But with the recent requirements, and those now being contemplated, associated risks can be better managed and the severity of any events that do occur can, hopefully, be minimized.
marketplace
Canadian Market INTACT ACQUIRES CANADIAN DIRECT INSURANCE FOR $197 MILLION Intact Financial Corporation (IFC) is expanding its direct operations in Western Canada with the recently announced acquisition of Canadian Direct Insurance Inc. (CDI). IFC reports that it has entered into a definitive agreement with Canadian Western Bank to acquire CDI, which wrote approximately $140 million in home and auto premiums in 2014. The transaction has been approved by the boards of both companies and is expected to close in mid-2015, subject to the required regulatory approvals and customary closing conditions, notes a statement from IFC. The acquisition is expected to be financed exclusively with excess capital. “Growth and innovation are continuing priorities for IFC,” says Louis Gagnon, the company’s president of service and distribution. “The CDI acquisition presented an opportunity to grow our direct-to-consumer distribution channel,” Gagnon adds.
AvIVA ANNOUNCES MAY availability OF OVERLAND FLOOD ENDORSEMENT Aviva Canada has announced it will offer an overland water endorsement, coverage that has generally not been available to Canadian 14 Canadian Underwriter March 2015
homeowners, to residential policyholders in Ontario and Alberta this May. With the launch of the overland flood endorsement, home policyholders could be covered for “losses that result from the accumulation or run-off of surface waters, including torrential rainfall when water enters the property,” Aviva Canada reports. “The endorsement forms a key part of the Aviva Water Protection package, which combines base policy water protection (broken water pipes and more), sewer back-up protection (the backing up or escape of water or sewage) and overland water protection (from water entering the property),” the insurer adds. The coverage will be “available as an endorsement to personal property insurance policies that have sewer back-up protection in place,” Aviva Canada notes. The plan is to roll out the endorsement to other provinces in 2015.
ESURANCE LAUNCHES IN ALBERTA, OFFERS AUTO INSURANCE ONLINE The Allstate Corporation recently announced its Esurance unit is expanding into Canada, offering auto insurance online directly to consumers in Alberta. “Our research indicates there is an underserved segment of the Canadian market that prefers a self-directed experience,” says Jonathan Adkisson, president and chief operating officer of Esurance Canada. Esurance launched its
website and began writing personal auto insurance in the United States in late 1999.
Risk Wildfire Community Preparedness Day scheduled for May 2 Canada’s first Wildfire Community Preparedness Day is set for May 2, with the goal being to encourage communities to take part and to help communities reduce their exposures. FireSmart Canada — administered by Partners in Protection — announced the launch in collaboration with the Institute for Catastrophic Loss Reduction, the National Fire Protection Association and The Co-operators Group Ltd. “Proper risk management requires a partnership in which insurance companies, emergency responders, property owners and others each play a crucial role,” says Kathy Bardswick, president and chief executive officer of The Co-operators. Researchers are predicting “an alarming increase over the next 20 or 30 years in the risk of property damage in the wildland-urban interface, including risk of homes destroyed by fire,” says ICLR founder and executive director Paul Kovacs, but adds most losses are preventable “if property owners and communities take the time to prepare.”
MANITOBA AUTO COLLISION DEATH RATE DROPS Seventy people were killed on
public roadways in Manitoba last year, marking the lowest annual toll in 30 years, but distracted driving still claims the lives of 25 people every year, reports Manitoba Public Insurance (MPI). The death toll of 70 last year was 58% lower than the 30-year high of 168 in 1986. Beyond the 25 people killed annually as a result of distracted driving, about a third of road fatalities are alcohol-related and 10 people died from nine off-road vehicle crashes (two fewer than in 2013), reports MPI.
Claims PROPERTY POLICIES GETTING MORE SEGMENTed BY COVER: alberta adm Recent changes to insurance policies — in large part, responding to weather-related losses — could lead to more checker-boarding in coverage as additional segmentation within insurers occurs, suggested Mark Prefontaine, Alberta’s assistant deputy minister of financial sector regulation and policy. Insurers in Alberta are responding to a number of successive years of catastrophic loss with product change and various degrees of underwriting practices, Prefontaine said via Skype during the joint conference of the Canadian Insurance Claims Managers Association and the Canadian Independent Adjusters’ Association’s Ontario chapter. “No longer are we seeing policies that have a particular
marketplace
policy limit with all perils covered under that policy limit and one deductible,” he reported. Instead, a variety of perils are being lifted out of policies and there are differing deductibles and sub-limits, dependant upon geographic location and “a whole bunch of other underwriting factors.” As additional segmentation occurs within insurers, the level of inconsistency will be magnified, he added.
MORE THAN 10% OF CLAIMS HAVE ELEMENT OF FRAUD, EXAGGERATION The Insurance Corporation of British Columbia (ICBC) reports its two investigation units advanced 131 fraudrelated charges against 100 defendants to Crown counsel in 2014, estimating 10% to 15% of “insurance claims contain an element of fraud or exaggeration, consistent with industry estimates.” The figures were contained in an ICBC press release citing the insurer’s top auto claims fraud files for 2014. In one case, a customer “who was prohibited from driving claimed his vehicle had been stolen at the time it was involved in a three-vehicle crash,” notes the ICBC. After being found guilty of providing a false statement relating to an ICBC investigation, the customer was fined $1,000 and ordered to pay ICBC “more than $18,000 in claims costs and total loss payments paid out for the other two vehicles involved in the crash.”
Regulation NEW federal INSURANCE REQUIREMENTS TABLED FOR RAILWAYS HAULING OIL Canadian railways moving dangerous goods will have new minimum insurance requirements if a bill, the draft Safe and Accountable Rail Act, tabled in February, is passed into law. “The Canadian Transportation Agency (CTA) will assign legislated minimum levels of insurance to railways based on the type and volume of dangerous goods they transport,” Transport Canada reports. “Railways will have to demonstrate coverage before the CTA would issue the Certificate of Fitness they need to operate.” The act proposes specifying minimum levels of insurance for railways, depending on the type and quantity of dangerous goods transport. “Railways requiring either $25 million or $1 billion are not expected to need more time to adjust, so those levels would take effect immediately after the legislation comes into force,” notes a federal government backgrounder. For some short-line railways, the $100 million and $250 million levels will be phased in over time.
against the commercial practices of nine automobile dealers and one damage insurance firm in Quebec related to the unauthorized sale of automobile insurance. The AMF notes that when purchasing an automobile from the nine dealers in question, some customers were offered automobile insurance products covering civil liability and damage to the vehicle. “Only a damage insurance agent or broker registered with the AMF is authorized to provide advice about insurance and compare available automobile insurance products,” the AMF reports. AMF has issued orders — the dealers have responded by filing applications in court for a review — imposing administrative sanctions, ranging from $10,000 to $17,500. The Bureau de décision et de révision also examined the agreement entered into between the AMF and insurance firm Rochefort, Perron, Billette et associés inc., approving the joint recommendations of the parties to impose a $45,000 fine. As well, the firm and its responsible officer, Alain Houle, have been ordered to comply with An Act respecting the distribution of financial products and services.
SANCTIONS LAUNCHED AGAINST QUEBEC CAR DEALERS, INSURANCE FIRM
Reinsurance
With a view to ensuring customers are treated fairly, the Autorité des marchés financiers (AMF) has launched proceedings for sanctions
BOND PROVIDING CAPACITY FOR NAMED STORMS IN U.S., U.S./CANADA QUAKE SCOR has sponsored a new catastrophe bond that will
provide the group with multi-year risk transfer capacity of US$150 million for named storms in the United States, as well as earthquake events in both the U.S. and Canada. The risk period runs from February 11, 2015 to December 31, 2018. In connection with placement of the bond, SCOR Global P&C will enter into a risk transfer contract with the issuer, Atlas IX Capital Limited. The first issuance from the Atlas IX vehicle, Series 20131, protects SCOR’s extreme mortality exposures in the U.S., the company notes.
JANUARY CATastropheS INCLUDE U.S. NORTHEAST SNOWSTORM Record snowfall in January spurred at least US$500 million in economic losses on the east coast of the United States, Aon plc’s Impact Forecasting unit reports. One catastrophe affecting the U.S. was a storm January 26 to 28 that brought more than 90 centimetres of snow to some locations in Massachusetts and prompted officials to call states of emergency in Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York and Rhode Island, notes a statement from Impact Forecasting. Total economic damage and losses, including business interruption, “were minimally estimated” at US$500 million, Aon Benfield notes in the new report. March 2015 Canadian Underwriter 15
Profile
Broad View Greg Meckbach Associate Editor
Michel Pontbriand and Julie Chapdelaine, co-chairs of the upcoming RIMS Canada conference, suggest that risk managers adopt a wide view of risk to capture all the possibilities. Cyber liability, regulatory risk and directors’ and officers’ liability are among the topics scheduled for discussion at the Risk and Insurance Management Society (RIMS) Canada conference this September in Quebec City, the theme of which will be “Panorama — Dare to Go Beyond.” The Panorama theme follows a Crossroads theme last year in Winnipeg and a Discover theme in 2013 in Victoria. Attendees looking to take in the full spectrum of possibilities will have their view further broadened from speakers at the 41st annual RIMS Canada conference, including Canadian 16 Canadian Underwriter March 2015
geneticist David Suzuki and Maurice (Hank) Greenberg, former chairman and chief executive officer of insurer American International Group (AIG) Inc. “The focus of our program will be on managing the many challenges that arise from a constantly evolving business landscape, including technological, economic, legal, regulatory and environmental changes,” say Michel Pontbriand, a 27-year veteran of Desjardins General Insurance Group (DGIG), and Julie Chapdelaine, who manages risk for real estate company Ivanhoé Cambridge. Both Pontbriand and Chapdelaine previously served as president of the RIMS Quebec chapter, both are from Montreal originally and both attended College Maisonneuve. The RIMS Canada 2015 conference program committee “has confirmed a number of high-profile, plenary and keynote speakers that have taken risks and ‘dared to go beyond,’“ says Chapdelaine. One of those speakers is Canadian cyclist Louis Garneau, founder of cycling clothing and equipment retailer Louis Garneau Sports Inc. Another is Suzuki, a former zoology and genetics professor, as well as the long-time host of The Nature of Things.
RIMS Canada’s organizing committee chose the Panorama theme for the conference because it “wanted to convey the objective of the conference: to provide a broad and challenging perspective on the issues which are important to risk managers,” Chapdelaine reports. “We are focusing on some emerging areas like cyber liability and on new trends and developments and
The RIMS Canada 2015 conference program committee “has confirmed a number of high-profile, plenary and keynote speakers that have taken risks and ‘dared to go beyond.’” in traditional areas of interest like (directors’ and officers’) liability,” she says.
GETTING STARTED Pontbriand, currently director, expertise in operational risk at DGIG in Levis, Quebec, began his career in 1975 as a commercial underwriter for Belair. DGIG provides home and auto insurance in Ontario, Alberta
and Quebec, as well as writes commercial insurance — including property, liability, business interruption and equipment breakdown — in Quebec. At DGIG, Pontbriand says he deals with operational risks specific to the financial industry, including internal fraud, dissemination of confidential information, software and hardware failure, problems with computers and telecommunications systems, phishing and the cloning of cards. In addition, he notes that he also deals with risks to property such as armed robbery and fire. Property risk is certainly something that Chapdelaine can relate to as part of her work duties. Since 2006, she has been chief of risk and insurance for Ivanhoé Cambridge, the real estate subsidiary of the Caisse de dépôt et placement du Québec, which owns about $40 billion worth of property. Ivanhoé Cambridge has stakes in several shopping centres, including the Metropolis and Metrotown near Vancouver, Galeries D’Anjou near Montreal and Vaughan Mills north of Toronto. Office buildings in which Ivanhoé Cambridge has a stake include Place Ville Marie in Montreal, Eighth Avenue Place in Calgary and Bentall Centre in Vancouver, as well as several
properties outside of Canada, including 1211 Avenue of the Americas in New York City. “Being in the real estate business, mainly commercial/ retail, the main and first risk is still protecting our brick and mortar,” says Chapdelaine, who has been with the company since 2001. She served as co-ordinator of insurance and risk management from 2001 until assuming her current position in 2006, where her responsibilities include establishing insurance risk transfer tools for the construction and development of real estate projects. Chapdelaine’s past work experience includes officer, insurance and risk management at Canada Post from 1995 through 2001. At Canada Post, she was responsible for managing all insurance-related claims and liaising with the legal department on non-insured claims.
VALUE OF EDUCATION Chapdelaine, who holds the Canadian Risk Management (CRM) and Certified Insurance Professional (CIP) designations, has been a delegate at RIMS conferences in both the United States and in Canada since 1996. “Almost as soon as I started my career in risk management, my manager was adamant that I join my local chapter” of RIMS, she says.
Photo: Julian Haber
Profile
Chapdelaine has held “almost all the positions” — including president — of Quebec’s RIMS chapter, Association des Gestionnaires de Risques et d’Assurance du Québec (AGRAQ). Pontbriand, for his part, has a certificate in prevention and protection from Insurers Advisory Organization of Canada and has been involved with RIMS since 2006. He served as AGRAQ’s vice president from 20102012 and as president from 2012-2014. In addition, he has been the Quebec Chapter representative on the RIMS Canada Council since 2010. By getting involved with RIMS, Pontbriand’s aim
was “to be part of a team whose mission is to provide to its members and the community of risk management and insurance, a global environment of training and meetings between different professionals working in the field of risk management.” After working for Belair from 1975 to 1976, Pontbriand spent a dozen years working for Continental Insurance Company and Phoenix-Continental Insurance Inc. Joining DGIG in 1988, he held various positions in operational and risk management. “Our colleagues think we are very specialized and know everything about this sad and boring field called ‘insurance,’”
Chapdelaine quips. “To the contrary, I see myself as a generalist that needs to be aware of and understand the organization’s overall challenges,” she says of the risk management profession. “This is the reason why I like it,” she adds. This September, RIMS Canada promises that its conference will be “diverse and challenging with a pan-Canadian perspective on multiple issues,” she says. “With Quebec City as the venue, the choice of Panorama was a perfect fit. What better place is there to gain perspective and broaden your horizons than the beautiful UNESCO World Heritage site of Quebec City?” March 2015 Canadian Underwriter 17
Ports of Call Senior Vice President, Marsh USA Inc.
George Boire Environmental Practice Leader, Marsh Canada Limited
With the growth in oil traffic activity, environmental risks at ports and terminals are also on the rise. That said, a solid understanding of current conditions and potential risks can help with identifying what insurance solutions will help address and minimize any related loss. A sunken anchor. A stuck valve. A buried tank. A seemingly small problem at a port or terminal can lead to environmental events costing millions of dollars to repair and taking years to resolve. Add that the risk of such events occurring has increased with the rapid, albeit temporarily suppressed, rise in North American oil production. This comes at a time when crude transportation, especially by rail, has caused significant damage.
18 Canadian Underwriter March 2015
Use of marine terminals and facilities by the energy sector creates revenue opportunities, but carries great environmental risk, including uncovering unknown contaminants during expansion and running afoul of complex regulations. An understanding of these issues, combined with thoughtful co-ordination of marine and environmental insurance solutions, helps to address these risks.
ENVIRONMENTAL RISKS AT PORTS AND TERMINALS Operational risks Environmental releases at ports and terminals can develop from a range of daily operations involving vessel berthing, containerized cargo, railcar transfers, and liquid and dry bulk cargo. Any release has the potential to result in clean-up and disposal costs, regulatory fines and compliance requirements, as well as lost revenue. The resulting legal and insurance issues may have long tails, taking years to resolve. Beyond oil and chemical spills, ports and terminals could have environmental exposures as a
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Thomas Ptacek
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Compared with non-marine liability markets, marine insurers are not as rigidly bound to specific insurance language. They are receptive to broader, manuscript pollution wording, allowing for coverage beyond a limited set of perils.
result of the following: • Construction activity: Ports and terminals are frequently situated on reclaimed, low-lying land, with imported fill, which may contain contaminated materials. Construction activities at these sites can result in new pollution conditions as well as the exacerbation of any existing contamination. • Storage facilities: Liquid bulk tanks with connecting pipelines and railcar transfer stations could be subject to sudden and accidental structure failure, or gradual ground seepage and leakage. • Ancillary operations: Tank cleaning, ballast water treatment, shipbuilding, ship repair or demolition, metal finishing and plating, fire protection activities, paint shops, foundries and manufactured gas works present environmental exposures. These activities could release metals, fuel, oil waste, low-level radioactive material, dispersing agents, polychlorinated biphenyls (PCBs), asbestos and other agents now considered “bad actors.” Remediation projects involving contaminants are complex and costly.
tion activity required under various acts and regulations; • toxic tort occupational disease arising from exposure to environmental pollutants (e.g., asbestos); and • unknown environmental issues that are associated with past land transfers or expansion projects.
RISK TRANSFER’S ROLE IN PROTECTING the bottom line of PORTS AND TERMINALs Ports and terminals can transfer many environmental risks to insurers.
Historical and legacy risks Ports and terminals also face legacy issues from past operations, including those conducted by tenants or unrelated businesses previously operating on the site. Such claims extend decades into the past and, in the case of undiscovered seepage, lead to claims today that may not have been filed at the time of the original incident. Past tenants or unrelated businesses may no longer be viable entities — increasing exposures to existing ports and terminal operators. Among the examples of legacy claims include those noted below: • waste management and/or remedia20 Canadian Underwriter March 2015
profile and politically charged, regulators and prosecutors often rely on the concept of joint and several pollution liabilities under most provincial regulations as they pursue targets with “deep pockets.” In some cases, regulators have targeted current and former directors and officers of potential responsible companies/entities.
Regulatory scrutiny Environmental losses or claims can be complex, potentially involving a variety of regulations from environmental agencies. Regulations, and particularly site clean-up standards, have changed and have generally become more stringent across Canada. When pursuing companies for violating environmental regulations, government agencies and prosecutors typically interpret legislation to cast the broadest net possible, seeking financially viable targets to effect restitution. In situations that are often high-
Marine insurance solutions Marine insurers have historically recognized the pollution exposures inherent in shore-side operations, and have incorporated pollution coverage into policies without needing extensive underwriting, environmental surveys or premiums. Sudden and accidental (S&A) timeelement pollution liability coverage is found in a variety of marine liability insurance products typically purchased by ports and terminals. Compared with non-marine liability markets, marine insurers are not as rigidly bound to specific insurance language. They are receptive to broader, manuscript pollution wording, allowing for coverage beyond a limited set of perils. Although marine liability products provide robust coverage for many pollution exposures, typical pollution conditions and exclusions may result in uncovered exposures and ambiguities. For example, consider the following: • Marine policies provide S&A “timeelement” pollution, which amounts to restricted coverage. Although the specific time periods can be negotiated, there will always be limitations.
• Marine pollution liability policies typically exclude coverage for fines, penalties, exemplary, treble and punitive damages; first-party pollution clean-up, containment and removal; and sites or locations used, in whole or in part, for the handling, processing, treatment, storage, disposal or dumping of any waste materials or waste substances produced from insured operations and a variety of other sitespecific risks. Environmental insurance solutions Environmental insurance policies are specifically designed and engineered to provide pollution liability coverage with the intent to fill coverage gaps not insured by traditional marine and casualty markets. For ports and terminals, the two pertinent forms of environmental insurance are pollution legal liability and contractor’s pollution liability. Pollution legal liability (PLL) insurance: PLL can provide coverage for claims related to pollution conditions from both historic and current operations at an insured property. Available for single or multiple sites, a PLL policy is designed to cover pollution liabilities arising from the following: • clean-up and remediation; • third-party bodily injury and property damage; • defence costs; • transportation upset/overturn; • civil fines and penalties, and natural resource damage; and • business interruption, extra expense and diminution in value. PLL policies provide ports and terminals with the broadest environmental coverage available without the typical policy restrictions found in marine or casualty forms, and can respond to either preexisting conditions or new conditions. Contractor’s pollution liability (CPL) insurance: Designed to protect against liabilities associated with contracting operations performed by the insured, CPL insurance responds when a contractor causes contamination as a result of operations, or when pre-existing conditions are exacerbated.
CPL coverage is offered on a claimsmade or occurrence basis, and can protect contractors on a “practice” basis through a master policy for all contractor activities, or on a “project-specific” basis. Project policy terms match the project duration and include completed operations and extended reporting extensions. These programs are tailored to meet varying needs of ports and terminals. In addition to specialized coverage forms, PLL insurers provide valuable claims and loss control services to defend, mitigate or avoid pollution liabilities. Given the broad pollution coverage provided, retentions are typically higher than marine policies and PLL policies are written on a claims-made basis.
insurance as primary, with marine insurance policies being excess of the S&A elements of the environmental insurance. • Option 2: Design a marine primary liability policy to exclude pollution completely, allowing the environmental policy to cover both S&A and gradual events. A marine umbrella, or bumbershoot, would sit excess of the primary marine liabilities for nonpollution events and excess of the environmental policy for S&A events, subject to the bumbershoot’s S&A marine policy conditions. • Option 3: Design a marine program to include S&A pollution and to be primary to the environmental policy with respect to S&A pollution. The environmental policy would provide excess S&A pollution and difference in conditions to include gradual pollution coverage. The marine bumbershoot policy would sit directly excess of the marine primary coverage and excess of the environmental policy with respect to S&A pollution, but per marine S&A policy terms. • Option 4: Purchase independent and separate towers for marine and environmental. In building the right insurance program structure, it is important to take care to review “other insurance” provisions, indemnity triggers, policy exclusions and conditions.
MANAGING PORTs/TERMINALS’ ENVIRONMENTAL RISKS Building an effective insurance program Both marine and environmental insurance policies afford pollution coverage, but placing these on disparate terms can lead to unanticipated, negative results. Insureds should carefully co-ordinate placement of their marine and environmental insurance policies to avoid coverage gaps and to ensure their interests are aligned with those of their insurers. Program design options available to insureds include the following: • Option 1: Schedule environmental
From vessel berthing, cargo management and liquid cargo transfers to construction and mergers and acquisitions, ports and terminals operators must understand the significant environmental risks they face from current and historic operations and regulatory scrutiny. The good news for ports and terminals is that marine and environmental insurance policies will help to mitigate many of these risks. Insurance advisors can show how these insurance products are interrelated, and design and implement the right solutions for the operations in question. March 2015 Canadian Underwriter 21
Over
Exposed Thomas Varney
Regional Manager, North America, Allianz Risk Consulting, Allianz Global Corporate & Specialty North America
The 2015 Allianz Risk Barometer makes clear that concerns over cyber risk are on the rise, both in Canada and around the world. In the wake of that accelerating ascent, what might be the value in taking a “think-tank� approach to addressing cyber risk exposures? The 2015 Allianz Risk Barometer, released in January, outlined the global exposures uppermost on the minds of risk managers. The top three risks not only globally, but within North America as well, were business interruption and supply chain, natural catastrophes and fire/explosion. Looking specifically at North American results, though, there was a significant rise in concern as it relates to cyber risk exposures, with cyber risk moving into the number four slot. Cited by 25% of respondents, cyber was only 2% lower
22 Canadian Underwriter March 2015
than the 27% for the number three slot, fire/ explosion. In Canada, the results showed cyber risk was tied for the number two slot with reputational risk, behind the number one concern, business interruption and supply chain, the top risk at the global level. Cyber risk did not even crack the Top 10 concerns of risk managers in the 2013 Allianz Risk Barometer. This exposure has risen globally from number 15 to number five since 2013. Currently at number two in Canada, the majority of concern here seems to be with financial institutions and retail, which are the sectors where most data breaches have been experienced.
DATA BREACHES Data breaches exposing customer and client information, consistent hacking exposures, and mergers creating interconnected systems exposures with different interfaces and platforms, places companies at constant risk. And the increased use of mobile devices will only serve to increase the exposure levels. Loss of reputation was a major factor in the reason why cyber risk has created such a criti-
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The barometer found that 73% of those surveyed listed underestimating the impact that a business may encounter from a cyber attack as the reason companies are not better prepared. Knowledge silos and the overall difficulty of identifying threat scenarios are the main reasons.
cal concern for those taking part in the survey. The Canada Risk Barometer survey results reflect a significant concern with both cyber risk and reputational risk, the results show. The Edelman Privacy Risk Index, for example, indicates 71% of customers would leave an organization after a data breach. The almost-automatic blow to a company’s reputation can significantly hit the balance sheet. How can this exposure, with such potentially devastating bottom-line impact, be addressed? In order to better address any exposure, first the key issues or concerns must be understood. The 2015 Allianz Risk Barometer survey broke out in detail the four major concerns, namely economic loss, most feared exposures, most important areas to be protected and, finally, what is preventing companies from being better prepared. Each of those concerns demands a deeper dive to determine some potential solutions.
WHAT MAJOR CAUSES OF ECONOMIC LOSS WERE CITED? Survey respondents listed the number one potential for an economic loss to be loss of reputation at 61%. Clearly, as outlined in the Edelman Privacy Risk Index, the realization that the economic health of a company is tied to its reputation will have an impact in the marketplace. The loss of reputation through a data breach or other loss of customer data will lead to a potentially significant economic loss. 24 Canadian Underwriter March 2015
The second two highest exposures of concern involved potential business interruption exposures (noted by 53% of respondents) and the loss of production capabilities (45%) from some sort of a cyber event. The largest economic fears involve how customers and clients view a business, as well as the ability of a company to continue at proper production, potentially exposing a company to the economic downturn of failing to get products and/or services to market.
WHAT CYBER RISKS ARE MOST FEARED BY RESPONDENTS? Data theft and manipulation topped respondent fears at 64%. Being responsible for client or customer data and then having it stolen, or in some way changed, would clearly place any company’s bottom line at risk. This concern was followed by loss of reputation (48%) and the increased threat of persistent hacking at (44%). The top three respondent concerns reflect the overall interconnectivity of this type of exposure. The overall safety of client or customer data or information, coupled with the impact on reputation and the constant hacking atmosphere, supports these top three feared risks.
WHAT IS PREVENTING COMPANIES FROM BEING BETTER PREPARED? Lack of preparation The barometer found that 73% of those surveyed listed underestimating the im-
pact that a business may encounter from a cyber attack as the reason companies are not better prepared. Knowledge silos and the overall difficulty of identifying threat scenarios are the main reasons. Clearly, cyber is not an IT issue alone. Involving a think-tank approach across all departments within an organization is required. By involving other areas of the organization, a more realistic evaluation of the potential threat scenarios and the potential bottom-line impact will provide more robust data on which to make risk management decisions. Budgetary restraints Since the overall potential impact from a cyber attack is underestimated, it is no surprise that 59% of barometer respondents reported feeling that budgetary restraints were a reason for businesses not being better prepared for a cyber event. Only 54% of the respondents responded that they felt they had not even analyzed the problem. Global economy, company mergers, legacy IT systems and the technology development explosion can make potential expenses seem daunting. An atmosphere where companies are underestimating the risk, budget constraints, and inadequate analysis, will lead to a potential issue. But applying a think-tank approach can prioritize impact scenarios, bring the potential costs of solutions to the surface
and help focus analysis on the most critical areas. This type of approach will provide better C-Suite data for budget development.
HOW CAN COMPANIES PROTECT THEMSELVES? Improved hardware and software solutions, including monitoring tools, were voiced by 75% of respondents, and outlining better processes and access schemes were listed by 62%. Interestingly, only 56% of respondents said they felt that raising employee awareness was a critical prevention measure. That said, IT security should be a concern of every employee. The human factor in this type of exposure should not be underestimated. Employees can cause large IT security or loss of privacy events, inadvertently or deliberately. Even with improvements in the top three exposure areas listed above, this will not guarantee 100% IT security.
BETTER UNDERSTANDING OF CYBER RISK OPTIONS? Supporting full operational analysis The aforementioned think-tank approach involving a full operational analysis — which includes IT, but is supported by all stakeholders — is required. The sharing of knowledge and information, where IT experts can identify the scenarios, but other business partners can quantify duration and cost, is necessary. This method will assure proper C-Suite level decisions around aspects of avoidance, acceptance, control or transfer as it relates to cyber risk exposures. Avoidance, acceptance and control, for the most part, will involve internal avenues of solutions. The decision to transfer the risk seems to be an area on which both insurers and brokers could focus more attention. Promoting enhanced awareness The ability to make proper decisions involving the transfer of risk seems to be
a grey area with risk managers. There is a significant amount of awareness surrounding cyber insurance in general, but many risk managers still do not have a good grasp on what exactly it is or does. A company may develop a solution, which involves transfer of part or all of the cyber risk exposure to a carrier or other external option. If this is the case, there appears to be a lack of understanding about how the coverage responds if an event was to occur. There is a need in the marketplace for education of both brokers and clients. Brokers have advised carriers that clients are constantly asking about cyber insurance, but many brokers admit they are not sufficiently well-versed to be able to effectively sell the product. Almost all carriers in Canada have a cyber product at this point. But there is currently no standardization of wording so it can be difficult when comparing different product offerings.
The CIP Society Ethics Series
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 professionals.
Business gifts. Are they always sincere and simple demonstrations of appreciation? Or do these gifts sometimes come with strings attached? How can rules-based, people-based and situation-based guidance help insurance professionals determine an ethical course of action? Over the past year, an insurance company’s branch manager and a local broker found themselves having many business-related conversations. During these conversations, they discovered their mutual love of hockey. As they both lived and worked in a large Canadian city, there were many opportunities to attend games of different levels of hockey. During one of their conversations, the broker
26 Canadian Underwriter March 2015
said he had just been given a pair of tickets for one of the local junior team’s games and asked whether or not the branch manager would like to attend with him. Appearing to be simply a friendly gesture, the manager agreed and the following Friday night, the broker picked up the manager at the office. While chatting away, the manager noticed that they were heading towards the home venue of the local NHL team and wondered if the junior team was playing there that night instead. The two started walking, continuing their chatting, until the broker excused himself to make a call. Upon returning, the two proceeded inside. Once inside, the broker led them to their seats, which happened to be at platinum-level and centre ice. By this time, the manager realized they were about to watch the pros play. The manager asked what had happened to change the original plans for the evening and the broker advised him that he had misplaced the junior team tickets and did not want to ruin the manager’s evening. He confessed that when he
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Gift of Giving?
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said he was making a phone call earlier, he was actually purchasing the tickets from a scalper. Doing the calculations in his head, the manager estimated the evening must have cost between $500 and $800. He was concerned for all the obvious reasons, including appearances and potential expectations, and wondered what he should do next. They were already seated and watching the game. He did not want to appear ungrateful or rude, but how should the situation be addressed?
branch manager did not solicit or ask for the tickets and was unaware that the gift was going to be pricey NHL tickets when he initially accepted. Under these circumstances, the recommendation would be that the branch manager attend the game with the broker, but politely advise him that this value of gift is unnecessary for the sake of the business relationship and is contrary to the company’s policies.
Mike Kosturik, BA, FCIP Regional Vice President,Toronto Region Intact Insurance Company
Most insurance companies, including Intact, have established protocols around the acceptance of gifts and entertainment, and that is typically the best place to start when considering what to do. At Intact, the approach to the giving and receiving of gifts and entertainment is not zero-tolerance; rather, the time must be taken to consider each scenario. First, is the value of the offered gift reasonable? In this situation, the value of the tickets would not be viewed as reasonable or nominal. NHL tickets are quite costly and above the value of the normal course of gift-giving from Intact’s view of a reasonable value. It would also be important to know if the gift is recurring in nature, and if it can suggest an improper motive. In the present case, it would not appear from the facts that this is the first time such a gift has been given to the branch manager. Finally, it would be necessary to know if the intent is to improperly influence the receiver of the gift. It appears here the intention of the broker’s gift is not to deceive the branch manager. However, there are a few points that may lead one to question whether or not the broker was trying to gain favour with the branch manager. Based on their face value alone, the cost of the tickets would violate company policy. That said, evaluating the appropriateness of a gift requires discretion and sometimes flexibility. The 28 Canadian Underwriter March 2015
This may be a good opportunity for the company to review its code of conduct or ethics, and remind employees about the importance of acting ethically. This shows good corporate governance, sets expectations with employees and lets external sources know they should not attempt to influence employees to gain favours. Doug Laird, BSc., FCIP President (Edmonton) McLean & Shaw Insurance Inc.
A business gift, if used appropriately, can help strengthen relationships, build
trust and show appreciation for business conducted between two entities — as long as the gift falls within the parameters of both companies’ business gift guidelines. A broker entertaining a branch manager and bringing him to a junior or NHL hockey game is a common practice across the country. It is a great way to spend a few hours with someone and discuss interests other than day-to-day business issues. The objective of this type of business gift should be to strengthen the bond between the two professionals and must be done with trust, honesty and integrity. By not making the manager aware of the change in plans, however, the broker has breached the manager’s trust. Despite the fact that the broker was not trying to be deceitful, the manager could have easily perceived it that way. The change of plans did not provide the manager ample time to decline if the NHL hockey ticket was at odds with his company’s policies. Because the business gift was not an attempt to deceive, the manager should respond by bringing clarity to the situation and explaining both his intent and expectations of going to a hockey game with the broker. The gift was an attempt to bring two professionals together who share a common passion, so it is important that the manager’s approach derives something good from the situation. Obviously, there is a lot of goodwill between the two individuals, as they have built a relationship over the past year. Giovanna Alvaro, CIP Senior Manager, Regional Underwriting Operations Client Acquisition & Service RBC General Insurance Company
The situation in this scenario has many dimensions that can be analyzed, including the relationship between the two individuals; the value of the gift, which was small when accepted, and changed to a rather large one; and, finally, the legality of the gift, as the NHL tickets were scalped at the venue. Had this come from a personal friend,
the friend receiving the ticket can then sink into his seat at the game, tell the friend that next time he would walk out if he buys scalped tickets, and then have a couple of beers and enjoy the game. Had this been an established business relationship, and the tickets were purchased normally, then the manager should remind the broker that he had only agreed to come to a junior game, thank him and ensure that the broker understands that he would not try to reciprocate his gift. But the fact that this is a business relationship and the tickets were purchased in the black market, the manager should not accept the gift. The manager should simply walk away. While it may have been a very innocent move for the broker to choose to buy scalped tickets, he could have easily made other arrangements, say, treating the manager to supper at a bar where the game was showing. There is also the risk that there was an underlying reason that the broker went through so much trouble for the tickets. What happens if, in a future business meeting, there is mention of this event? Yikes! Darrell Mack, FCIP Manager, Saskatoon Injury Claims Saskatchewan Government Insurance
From the scenario, it appears the manager has innocently agreed to attend a junior hockey game with a broker who writes business for the manager’s company.
The manager may intend to buy a snack or beverage in appreciation of the tickets and the ride to the game. But the broker appears to have a different agenda, in which his intent is to impress the manager and, perhaps, go so far as to influence the manager on existing or future claims coverage issues. Less probable, perhaps, is that the broker wants to gain favour so the manager will direct business his way. What should the manager do? He has an obligation to inform his manager or his company’s ethics advisor. This is done so that his reputation is not brought into question at a later date. The insurance company likely has a code of conduct or ethics that guides both personal and business situations. The code would help determine if there is an actual or perceived conflict of interest, and what needs to be done. In this case, the manager realized a problem with the size of the gratuity and the broker being less than honest after the fact. He has an opportunity and obligation to bring this to the attention of his employer. He could then advise the broker that he is unable to accept a similar invitation in the future because of company policy, or a broker service manager could help deliver the message. This may be a good opportunity for the company to review its code of conduct or ethics, and remind employees about the importance of acting ethically.
This shows good corporate governance, sets expectations with employees and lets external sources know they should not attempt to influence employees to gain favours.
FINAL WORD When faced with ethical scenarios, insurance professionals can make use of three different approaches to help provide guidance on what course of action to take in response. First, look to formal rules that apply in the situation (rules-based). Second, try to maximize outcomes for individual stakeholders (people-based). And, third, focus on the end result (situation-based). In the aforementioned situation, if the focus is on the rules, insurance professionals can be guided by company policies specific to gift-giving and receiving. If the focus is the stakeholders, consider the relationship between the broker and manager as being paramount to the decision that is made. And finally, if the focus is on the end result, evaluate the perception that accepting or rejecting the tickets would have on the business relationship of the broker and manager in the future. Perhaps the most confident outcome may come from using a combination of the three approaches. In that way, the complexity of the situation can be fully appreciated, and both the intent and perceived intent of receiving the gift can be well-understood. March 2015 Canadian Underwriter 29
Seeking
Satisfaction
J.D. Power’s recent study of risk professionals and risk management team members in the United States and Canada shows that insurers and brokers need to work together to meet commercial customer needs. Care must be taken with regard to limiting customer-reported issues, understanding the customer’s business and communicating effectively. Timothy Bebout
Director of Commercial Insurance Practice, J.D. Power
Traditionally, commercial insurers have relied upon insurance brokers to manage customer relationships. Risk managers now are looking for both parties — their insurers and their brokers — to work together to meet their needs. J.D. Power’s 2014 Large Business Commercial Insurance Study, released in early February, examines the performance of large business commercial insurers and brokers, and highlights best practices that are critical to satisfying large business insurance customers. Brokers — who are independent and typically represent multiple insurance providers — often are the most frequent point of contact for customers for service-related interactions. Yet the study finds that customer satisfaction is notably higher when insurers are involved during service interactions, compared with service interactions that are exclusively with the broker (865 versus 769, respectively, on a 1,000-point scale among property customers). The large commercial insurance market is a large but unique niche for which there is very limited information available on how customers rate their satisfaction with brokers and insurers.
30 Canadian Underwriter March 2015
With no benchmark or industry-wide baseline for customer satisfaction, the first-ever such study seeks to provide an independent and objective measure of overall satisfaction among large business insurance risk professionals in the U.S. and Canada. The study is based on responses from almost 1,000 risk professionals or employees of organizations who provide oversight or are members of their organization’s risk management team. Organizations included in the study have at least US$100 million in annual revenue or operating budget, and have purchased commercial property, workers’ compensation or auto insurance from one of the insurers or brokers included in the study. More than one-third of customers surveyed have more than 10,000 employees, more than three-fourths of the businesses have more than 10 physical locations, and 81% realize annual revenue amounts of US$500 million or more.
MEASURING SATISFACTION The study measures customer satisfaction with commercial property, workers’ compensation and auto insurers based on five factors: interaction;
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program offerings; price; billing and payment; and claims. Satisfaction with brokers is measured based on four factors: ease of contacting broker; reasonableness of fees; advice and guidance in selecting program offerings; and timeliness of resolving contact. Interaction Of the factors measured in the study, interaction is consistently a large driver of overall customer satisfaction. It is the second most impactful factor across product lines, contributing to nearly one-fourth of the overall index model in each line. Within each product line, program offering is the leading driver of satisfaction among property insurance customers, while price is the leading driver among auto insurance customers.
on satisfaction when a KPI is not met shows a significant drop in customer satisfaction. The 11 KPIs centre on three core servicing principles: • Limiting issues: Limiting customer-reported issues — either as a result of errors that occur during billing or problems during the renewal process — is an important performance indicator that underscores how essential it is that insurers provide accurate information and ensure the renewal process is free from errors. • Understanding a customer’s business: Two KPIs emphasize the importance that customers place on insurers’ and brokers’ understanding of their businesses and adding value by becoming partners in their organizations. Ensuring flexibility when designing and implementing
insurance programs and making sure insurers and brokers “completely” understand a customer’s specific business needs are two KPIs that significantly impact the customer experience. Making sure the broker “completely” understands the business’ needs is a leading KPI that brokers can deliver to provide a satisfying experience among broker-served customers. More than four out of five (84%) brokers meet this KPI. However, there is a significant 228-index point decline in satisfaction among customers who report that their broker partially or does not understand the business’ needs compared with customers who say their broker understands their needs (890 versus 662, respectively). • Communicating effectively: It is vital that
Key performance indicators The Business Benefits of Customer Satisfaction Delighted/Pleased In addition to quantifying the factors Financial return by customer satisfaction tier – insurers Indifferent/Displeased that most influence overall satisfaction, Auto Compensation Property Workers’ Compensation Property Workers’ the study provides valuable insights regarding the service practices — or key 16% 26% 21% 16% 26% performance indicators (KPIs) — that 67% 80% 74% 80% 74% Will recommended Will recommended Will recommended have the most influence on customer Will recommended Will recommended satisfaction. This analysis of KPIs focuses on service practices that insurers and 7% brokers can incorporate into their busi19% 26% 53% 54% 14% 7% Will not switch Will not switch Will not switch ness models in order to increase cusfor any price for any price for any price 19% 53% 54% Will not switch Will not switch tomer satisfaction. for any price for any price Ultimately, these insights can foster 10% 15% greater collaboration and discussions 22% 57% 62% 48% Will renew Will renew Will renew among customers, insurers, and brokers, 10% 22% and lead to stronger, mutually beneficial 62% 48% Will renew Will renew business relationships. KPIs establish the relationship between Source: J.D. Power the subjective impressions of the endcustomer (such as courtesy, knowledge Overall Index 890 Overall Property CSI and Factor Scores: Telecom and Utilities and ease of contacting) that determine Overall program offerings 903 the index scores and objective metrics Overall program’s price, given the coverage 887 (such as time, frequency and cost) that Overall Index 890 Overall billing and payment process 890 are behaviour-based and actionable for Overall service interaction with broker program offerings 909 Overall 903 insurers and brokers to integrate into their Overall service interaction with insurer 935 Overall program’s price, given the coverage 887 performance improvementOverall initiatives. experience interacting with insurer 886 Overall billing and payment process 890 The study identifies 11 KPIs have Overallthat claims experience with insurer 840 Overall service interaction with broker 909 the greatest impact on satisfaction, and, Overall service interaction with insurer 935 hence, are critical to a satisfying experience for large business commercial inOverall experience interacting with insurer 886 surance customers. Customers who say Overall claims experience with insurer 840 their insurer or broker delivered on each KPI were more satisfied; the impact Source: J.D. Power 32 Canadian Underwriter March 2015
21%
14%
15%
information be shared with customers, especially regarding changes to policy coverage or pricing. Providing in-person interactions and making sure insurers are involved in service and claims processes are important KPIs that allow insurers and brokers to communicate with customers.
INSURER-SPECIFIC DELIGHTS — PROPERTY The study identifies five KPIs among property insurance customers that are critical to providing them with a satisfying experience. These KPIs focus on limiting errors and problems, as well as making sure an insurer is involved in service interactions and claims management. Limiting customer-reported problems during a renewal is the most impactful property-related KPI. Insurers are delivering on this KPI at a high rate — 93% of customers say they did not experience issues during the renewals. But satisfaction erodes by a
significant 159 points when customers experience issues during the renewal process. In contrast, only 56% of customers indicate their insurer is “completely” flexible when designing and implementing programs — another impactful property-related KPI — and satisfaction among these customers is 877. However, satisfaction declines by a significant 138 points when customers perceive that their insurers are not completely flexible when designing and implementing programs. There is a strong relationship between satisfaction levels and loyalty and advocacy. Among property insurance customers who are “pleased/delighted” (overall satisfaction scores of 800 or higher), 62% say they “definitely will” renew with their current insurer and 80% say they “definitely will” recommend their insurer to family and friends. In contrast, only 22% of customers who are “indifferent/displeased” (scores
below 800) say they “definitely will” renew and 26% say they “definitely will” recommend their insurer (see upper graphic on page 32).
HIGHEST OVERALL CSI AND FACTOR SCORES: TELECOM AND UTILITIES • Overall property insurance satisfaction is highest among customers in the telecom and utilities industry (890, see lower chart on page 32) and is lowest among customers in the accommodations, food services, arts, entertainment, retail and recreation industries (778). • Price and coverage options are among the main reasons for choosing a property insurer across all industries. • 77% of telecom and utilities customers indicate their insurers met flexibility demands when designing and implementing insurance programs — the highest percentage in the study — compared with only 48% in the transportation, warehousing and waste management industries.
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March 2015 Canadian Underwriter 33
More O More Open p Interp en retatio Interpretation? n?
Are th ethe coucourts ready to reassess application of the “sistership” asseAre ss app rts ready to liability (CGL) policies? l in commercial general “sistexclusion “sister ership ication of t res h ps”restrictive Canadian have interpretation of he had mostly ” excourts could comm such, h ia c potent l u i s t s e o i r r i i o a c c l a n in little in-depth ly be ea recent case lly the ial ge providing exclud (CGL)the clause, nor o e cove analysis. clause But neral r us. As w a t g h p as draf a m e e o f l o d l i r a i a m out of British Columbia represents a first, offering reading c t ted plain h bility ages a ies? C ose da courts s o as to i r n m i v s i a o n g a l g v e n e s h , d in from t adian ave hof the exclusion ther use. andby potential he oriof oits than y restric review cciden the Su the aexpansion g i n a p t l r tive in ad mostly ( e a s m i e r c e S e ra t eamsh a the cl t e ip Co., Court of Wa the 1991 ru ft r p olburn r e s l a hingto CGL policies ing reads as follows: tationto virtually everyAncommercial c. v. many modern argum Ingenin-dep use, proviUbiquitous ng ent can Centennial I n, Olympic o f e x c l u d n eralin liability policy is thesi“sistership” ex-b This exclusion does not apply to: s. on p th ana g litt(CGL) resents e made that Co.) cname lusionfromrethe r l l e e y c clusion, which gained its airline 1. Any loss, cost expense incurred by you t s o h e s i n e s nt in the e of th n sisteror . But inconsall aircrafts shipof use, withdrawal, recall, e morfor CG a of grounding practice ofLthe others the loss policyor istent e Colum case out ofindustry LP vexing , at lea j dicia expletenoted bia re B st basrepair, same type when a defectrewas inuthat type adjustment, rel treat inspection, r i w t ed on replacement, i i t s h m o p h h e e f r n p a f e t t o v h ering y relia licy be s i e t e ofts aircraft after an accident. moval or disposal of: Canada, h n as rece nce on hind t ive plaiarising first, damages the intproduct”; hthe review a plain re Thearesulting e exloss n read from dent 1) “your c ention d, l u i n s i g o a n o o d t , f an hat it ccould potentially the excbe 2) “your a ingof these “sisterships” cross arries poten f the excl of use lusion s oppwork”; osed t or d t h i s evide o a e mo was 3)its“impaired u ion As such, historically tial ex elf. clause property”; nce the that its niker “sisters The very fac a Bromley pansio senormous. use. Hollis n i n d fl u t or property is withdrawn hip”product, so as to exclude coverage ence th for thosehidamstorica if such n drafted exclus work Partner, at mak o l f d b i i o f i a fi n t g es fresthe or recalled cult. arising from gage e from the market or from use by any s than the damages ages, other Ubiqu Alexander Holburn h ju xer i to s to ts a ial inte or organization A coinmthe accident (see the dicperson original aircraft involved because of a known or eral lia uBeaudin + Lang LLP mon v rpretat n bility ( virtually eve m e ion deficiency, inadequacy or danr a sion o ny moCourt of Washington, suspected defect, ry com1991 ruling by the Supreme CGL) p clusion f th dern C mercia olicy i , ic Thv.iCentennial L polic e excgerous lusion condition in it. Steamship Ins. G Co.). s the “ Olympic l gen- Co., Inc. h gainHolburn s indust whAlexander e x c ies rea found l usion sistersh ed itLLP ry prBeaudin d + Lang s 1 in d s n . a i o An argument can be made that the sistership a p c a A e s tice of me fro ” exny los s the sam f o n l o l ows: t apply s, cost m the o e typisea member ofground r o t o CANADIAN CASE LAW t exclusion represents one of the more vexing exa hers fo o : irline ing all type o whenGroup of Canada, r the l r expense in f aircrThe ARC a a i n i d r s e c p f r o e clusions at least based af in the CGL epolicy, cGulf ss of on aft afte of independent c c urredPlastics Ltd. v. damag use,the by you r a a t was noted ts of mov tion, repair, es aris a network withdCornhill ccacross Co. Ltd. it has received, in that judicialal treatment r iinsurance e ident. inconsistent ng fro lawnfirms rawal, Insurance p o l r aceme dispos The re m the recall, case law is limited, in one signt, adjWhile Canadian al ointention 1)reliance heavy on the and sultiwith f “ loss of replete : y u Canada. o stmen ng ur p usepolicy , re- British Columbia’s Court of Appeal uc of thbehind ) “you rasodopposed nificant tcase, the2exclusion, ese 2015 r work t”; to a plain 3) “im itself. ”; or looked at a slightly older wording of the exclureading of the exclusion paired promoniker The very fact that it carries the perty” “sister- sion in the 1990 case, Gulf Plastics Ltd. v. Cornhill ; ship” exclusion is evidence its historical baggage Insurance Co. Ltd. In that case, the exclusion applied exerts an influence that makes fresh judicial in- to damages caused by the “withdrawal, inspection, replacement or loss of use of the Named terpretation difficult. A common version of the exclusion found in Insured’s products or work completed by or for
34 Canadian Underwriter March 2015
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the Named Insured, or of any property of which such work or products form a part, if such products, work or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein.” The insured had manufactured “masterbatch,” which was used by its customers in the manufacture of white opaque film for later use by others in the manufacture of plastic bags for the frozen food industry. One of the ingredients used by the insured was defective and, therefore, the masterbatch was defective in that the film could not be properly sealed. Ultimately, the insured’s customer sued as a result of the failure of its product. The court found that the film was rendered useless for the purpose for which it was intended through a fault in the manufacture of the masterbatch, caused by one of the masterbatch ingredients. In assessing the sistership exclusion, the court adopted a description of the intent of the exclusion from a United States text on liability insurance and, ultimately, concluded that the exclusion did not apply as there had been no “withdrawal” from the market since the insured’s customer did not withdraw the film from its own customers. Further, for the exclusion to apply, there needed to be a withdrawal of other products because a similar fault may possibly occur in the bags. In other words, there was no “sister” product that was being recalled. Rather, the court found the product was removed from use because the customer’s film had suffered “property damage” caused by the insured’s defective ingredient. The court arguably erred in failing to properly consider the plain reading of the exclusion as, on its face, the exclusion fit squarely with the facts of the case. By applying a restrictive view of the term “withdrawal” that does not appear to be based on a plain reading of the word or its common understanding, the court limited the application of the exclusion. In addition, a plain reading of the exclusion disclosed no requirement that 36 Canadian Underwriter March 2015
there be a “sister” product. Rather, this restriction appears to be based largely on historic interpretation of the clause. In another seminal case released in 1986, Foodpro National Inc. v. General Accident Assurance Co. of Canada, the insured’s defective food ingredient (a pre-mix agent) was incorporated into a peanut butter product manufactured and packaged by E.D. Smith. The pre-mix effectively ruined the end-product, rendering E.D. Smith’s peanut butter unusable because of the off-taste it had caused. The product was recalled by E.D. Smith from its customers, resulting in lost profits and the cost of replacing the product.
Essentially, the court applied a very simple plain reading application, without any tortuous definition of the term “withdrawal,” and concluded that the exclusion applied. Importantly, the court makes no attempt to find a “sister” product, nor did it limit the exclusion on the basis that there was not one. The product was, ultimately, able to be salvaged after “re-conditioning,” although there was a cost associated with that process as well. The Court of Appeal for Ontario, in concluding that the sistership exclusion did not apply, referred exclusively to the description of the clause as set out in a liability text. There was no reference to the words of the exclusion itself. The court noted that the exclusion was “designed” to limit coverage where, because of a failure of the insured’s products, similar products were withdrawn to prevent further failure. On that basis, the court concluded the exclusion did not apply since the with-
drawal was due to “property damage” to the customer’s entire product from the insured’s product and there was no withdrawal of “sister” products. The court suggests that if the clause applied, it would render coverage nugatory for “the most obvious risks” for which such policies are issued. However, it is not clear that the court was provided with any evidence to support its conclusion that this would be the case; nor is it clear how the court finds the “acknowledged purpose” of the clause when the insurer was arguing against such an interpretation.
LACK OF ANALYSIS OF EXCLUSION Because of the restrictive manner in which the clause has been interpreted, there is relatively little in-depth analysis of the sistership exclusion by the Canadian courts. A brief review of the case law shows fewer than 15 decisions considered the exclusion prior to the Supreme Court of Canada’s decision in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, released in 2010. While Progressive Homes does not address the sistership exclusion, it does revisit the general principles of policy interpretation and reminds courts that “the primary interpretive principle is that when the language of the policy is unambiguous, the court should give effect to clear language, reading the contract as a whole (Scalera, at para. 71).” Based on the Progressive Homes decision, there should be a new approach taken to the sistership exclusion as well, which means relying only on a plain reading of the words as opposed to general principles behind the exclusion. Since the Progressive Homes decision, the sistership exclusion has only been reviewed twice. In California Kitchens & Bath Ltd. v. AXA Canada Inc., released by Ontario’s Superior Court of Justice roughly one month after Progressive Homes, the claim arose out of the negligent installation of kitchen cabinetry by California Kitchens. California Kitchens brought an application, seeking a declaration that its insurer had a duty to defend.
The court found there was “property damage” as the result of an “occurrence.” However, the insurer also argued that several exclusions, including the sistership exclusion, applied to exclude the claim from coverage. The court stated the burden was on the insurer to show that the exclusions apply. It found that the insurer did not discharge its burden and its entire analysis in relation to the sistership exclusion is as follows: Exclusion (l) is known as the “sistership” or “recall” clause as it addresses products withdrawn from the market as a result of defects discovered in other “sister” products (Tsubaki of Canada Ltd. v. Standard Tube Canada, [1993] O.J. NO. 1855, para. 13). It does not apply. The decision in California Kitchens gives little hope that new life will be given to the sistership exclusion, in the form of a full consideration based on a plain reading of the exclusion’s words. However, a more recent case from B.C.’s Supreme Court indicates there may yet be some use for the sistership exclusion. In the 2014 ruling, Westaqua Commodity Group Ltd. v. Sovereign General insurance Co., the insured supplied to its customer defective corn gluten meal (CGM), which the customer was going to use in its fish food. It was discovered that the CGM was contaminated prior to it ever being put to use by the customer. However, the customer incurred significant cost to dispose of the CGM. Although the case was ultimately decided on the issue of whether or not there was an “occurrence,” the court also looked at the potential application of the sistership exclusion. The court set out the words of the exclusion, and then applied those words to the facts of its case. It stated that the issue was the “disposal” of the contaminated CGM. The CGM was a “product” of the insured and it was “withdrawn” from the market by an “organization” (the customer) because of its known “defect.” Essentially, the court applied a very simple plain reading application, without any tortuous definition of the term “withdrawal,” and concluded that the exclusion applied.
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Importantly, the court makes no attempt to find a “sister” product, nor did it limit the exclusion on the basis that there was not one. The decision is significant in that it represents the first plain reading review of the sistership exclusion and the result is a potential expansion of its use. In particular, this is the “sistership” exclusion no more, as a plain reading
of the exclusion discloses no reason to limit the exclusion in such a manner. Therefore, it is time to retire the “sistership” nickname and give the exclusion back its true title, the “product loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal exclusion.” Perhaps, however, the name could use a little work.
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March 2015 Canadian Underwriter 37
Moving Target Cyber risk is evolving. Despite recent high-profile attacks meant to disparage, disrupt and produce fear, though, a true picture of cyber risk involves far more than intended events. Risk managers must, first, accept the breathtaking breadth of the risk and, second, be ready to absorb information that will help them to set an accurate sight on what is (and will continue to be) a moving target. ANGELA STELMAKOWICH
CYBER RISK
38 Canadian Underwriter March 2015
H
ardly a week goes by without news of a new cyber risk, some breach that has prompted concern ove e first points, but likely not on the last. “Cyber risk is different than most risks in the sense that it will never stop emerging and evolving,” suggests Nate Spurrier, director of business development at IDT911. “Like technology itself, this will continue to evolve, as will our response and adaptation to this risk,” says Sean Duggan, vice president and practice leader for Cleantech, Technology, Life Sciences, at HUB International HKMB. “Cyber risks have been around for quite some time and exist in a dynamic environment of ever-changing technology, evolving threats and a legal environment that is in a constant state of flux,” says Jeremiah Tonn, senior underwriter in Zurich Canada’s Management Solutions Group. And while more mundane breaches and security lapses may not be quite as sexy as attacks, they are equally important, warranting attention and care. The leading cause of data breach “is from the loss of a laptop that is not encrypted, followed by hackers and then rogue (disgruntled) employees,” reports Carol Kreiling, vice president at Swiss Re. “Breaches can also occur from the inside — employees taking or sharing confidential information, accessing customer and client files when not authorized to do so, loading information onto laptops or USBs which are lost or stolen, confidential files being tossed into the garbage rather than being properly shredded and, of course, the photocopier where the data is not cleaned off the hard drive. The list goes on,” says Betty Hornick, national commercial senior manager and team leader, Product Development & Functional Support, at Aviva Canada. “As an organization’s dependence on technology increases, so does its exposure to this issue. It’s not solely financial loss that is a concern, but physical damage or bodily injury,” says Jacqueline Detablan, vice president, Personal Lines, for AIG Canada.
March 2015 Canadian Underwriter 39
COVER STORY
Moving Target CHANGE IN APPROACH Kreiling suggests that the risk management approach may change depending on whether a risk is established, emerging or evolving. “If a risk is emerging, there may not be as much information to evaluate the risk as a risk manager would like,” she points out. “If it is emerging, then it is monitored for significance of risk and potential impact; if it is established, it is monitored and managed with all the company’s other risks; if it is established and evolving, it requires constant monitoring and upgrading of the risk management approach, techniques, tools and policies and procedures to monitor and mitigate effectively,” explains Ed Berko, senior vice president and chief risk officer for Economical Insurance. The view of Tony Nicholls, chief architect at Insurance Technology Solutions Inc? “Everybody should be on guard all of the time, keeping their software patched and implementing best practices.” Duggan says “there’s been a paradigm shift in the risk management approach to include intangible (digital) risk as part of the enterprise risk management plan. In many cases, the CIO (chief information officer) now has a seat at the risk management table and is actively involved in designing the business continuity plan.” In addition, many corporations are now bringing an IT or cyber expert into the C-suite, says Kreiling, but acknowledges that “designating a CRO (chief risk officer) and apportioning the necessary resources towards protecting a corporation against a cyber attack might be two different issues.” Being on the same page is key. “‘Getting’ the risk, and then having the preventative measures and systems in place and designing for that anticipated event, are different things,” says Kadey B.J. Schultz, a partner at Hughes Amys LLP. Notes Tonn, “It is very clear businesses that want to protect themselves from cyber risks must adopt a mindset of resilience, with steps in place to deal with cyber risks at all stages. Resilience means identifying the risks, establishing protective barriers, segmenting sensitive data, 40 Canadian Underwriter March 2015
creating rapid detection mechanisms, and responding effectively — all with the goal of achieving a successful recovery.”
COMMON TARGETS In a cyber attack, Kreiling says there are generally three types of information that are most commonly stolen: • Personally identifiable information (PII) — information that could be used on its own to identify, contact or locate a person, including name, date of birth or mother’s maiden name; • Protected health information (PHI) — information that concerns a person’s physical or mental health; and
“There is now concern over the impact of cyber on systemic risk, and with cyber risk transcending to the Internet of Things as well as digital attacks leading to tangible damage in the physical world,” suggests Sean Duggan of HUB International. • Finally identifiable information (FII) — credit/debit card and banking information. “There is now concern over the impact of cyber on systemic risk, and with cyber risk transcending to the Internet of Things as well as digital attacks leading to tangible damage in the physical world. This could be a game-changer,” Duggan contends.
“Although we constantly see headlines about breaches and how most CEOs recognize the threat of being hacked is a significant one, very little if anything is being done about addressing the issue,” argues Hornick. A recent A.M. Best survey of property and casualty, life and health insurance firms found that 53% of respondents reported they do not buy any kind of cyber coverage, while 30% noted they purchased between US$1 million and US$5 million in limits. In light of the changes now under way, Tonn advises customers to bear in mind a number of things: • as more businesses become global, data centres may be located in different parts of the world; • with expanding use of “the cloud” for IT operations and data storage, a presence may be established in foreign countries even when business is only conducted domestically; • the reliability of foreign data centres can be challenging depending on the condition of the local infrastructure, local organized crime, and the economic and political stability of the region; • cyber failures (unplanned IT and telecommunication outages) represent more than 50% of supply chain interruptions; and • losses due to supply chain business interruption are significant and higher than businesses anticipate. “Currently, cyber threats are focused on high-value targets: large firms, sensitive government information, and the computing ‘cloud’ where multiple companies can be attacked through a single point of entry,” Berko notes. “Cyber security risk is not a matter of if; it is a matter of when and how bad.” Hornick notes that businesses and organizations must take preventive steps to protect valuable assets, such as business practices, personal data of employees and intellectual property.
HIGH-PROFILE VALUE There are many ways to incorporate protections to guard against cyber risks — whatever form they take — but sources emphasize the need to be open
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Moving Target to all fixes. “When we just focus on beefing up computer systems and network security protection, we’re missing out, being blindsided to, a whole other set of risk factors that face an organization,” argues Katie Andruchow, national cyber and privacy expert for Aon Risk Solutions. “There’s a whole host of risk management tactics that can go along with mitigating privacy risk that are separate from the IT department’s responsibility in managing that network security breach aspect,” Andruchow emphasizes. “The internal threat is as large, if not larger, than the external threats,” suggests Rick Roberts, president of RIMS, the risk management society. Roberts says organizations are now very good at setting up firewalls and monitoring penetrations, but adds “it’s very hard to control it internally when you need to give your people access to all the information they need to do their jobs. How do you protect it?” Errors and omissions “are accounting for an increasingly large number of security breaches on an annual basis. That really comes down to the need for security awareness, effective policy, acceptable usage, etc., to try and combat those threats,” says Kevvie Fowler, partner, Advisory Services, at KPMG Canada. “Errors and omissions, if you look at it, it’s growing in terms of the amount of cases. They’re currently being reported in the industry as an area that a lot of organizations are seriously looking at. It is preventable,” Fowler reports. Even things as simple as use of thumb drives demand care, Roberts says. Only company-sponsored drives should be used to ensure there is some element of protection, he emphasizes. “Once you put a thumb drive into a company computer, who knows what can happen?” There is also the challenge presented by people wanting to use personal devices in conjunction with company systems. “If there’s no protections, you’re really just leaving your company’s computer systems wide open for some kind of Trojan horse to come in and infiltrate the system,” Roberts cautions. 42 Canadian Underwriter March 2015
Questions need to be answered, says. Schultz. “What kind of internal systems have been articulated, implemented and are adhered to in a consistent way by membership of any company?” she asks. “What is your security policy for remote access? For using laptops? For your personal iPhone or BlackBerry? What kind of security is implemented and education provided to your staff around using that equipment?” she continues.
“Underwriters must stay current on the latest technologies to be able to assess and predict new exposures. Better understanding will also come with time as more claims are experienced and, therefore, more data can be collected to help improve predictive modelling,” says Zurich Canada’s Jeremiah Tonn. “We need to be willing to engage in the mundane to really nail down what the risks are to protect ourselves from (cyber) risks going forward,” she contends. The general consensus seems to be that companies and organizations are not well-equipped — or, at least, not equipped well enough — at present to deal with all cyber-related risks. Add to that the challenge of how varied preparedness is among industries, or even within the same industry.
“Sometimes it is a question of resources, priorities, sophistication of the infrastructure; sometimes it is a lack of awareness of how exposed the organization actually is,” Detablan explains. “It is unlikely that a firm can protect itself completely from all cyber exposure. Even with the most secure network, there are additional exposures such as employees acting outside the scope of their mandates, which are hard to prevent.” As such, care must be taken to consider interconnectedness. Tonn advises the following be addressed when reviewing cyber exposure and internal controls: • move beyond the IT department and embark on an enterprise risk management approach; • map critical data by knowing what is most important, where it is, how it is protected, who touches it and where it travels; • ensure all employees engage in ongoing cyber awareness training (a security awareness and training program is the lowest cost security measure with arguably the highest return on investment); • formulate an incident response plan with internal and external teams and test it regularly so that everyone knows what to do when an incident occurs; • extend beyond the four walls of the company by engaging with the organization’s insurance carrier or broker’s risk management team in an ongoing review of all business partner relationships, including how those vendors/ partners approach their own exposures and controls, and how the vendor’s supplier’s approach fits into the company’s overall resilience plan. Berko further suggests “most companies are not looking broadly enough when assessing the risk and potential impact of a cyber security breach,” including, for example, suppliers and business partners. Companies “need to consider current and former outsourced service providers, consultants, contractors, key partners, employees, in addition to internal and external threats. They also need to consider the communication channels used by the company,” he recommends.
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12/8/14 11:28 AM
COVER STORY
Moving Target “It’s the small, very minimally secured entities that are then going to create more and more risk for their business partners,” Schultz suggests. Detablan’s advice? “We think awareness around organizations as being only as strong as their weakest link is becoming clear, and many risk managers are trying to tackle this issue.”
tions. However, these recommendations are not always followed through.” Fowler emphasizes the need for risk managers to provide an accurate message to company boards. “A lot of times, these risk managers try and water down
MUCH-NEEDED SUPPORT Although there have been improvements, most sources suggest a lot more needs to be done with regard to companies supporting their risk managers so that they, in turn, can help to properly inform boards and C-suites of the risk. “The issue is that business doesn’t like to spend money on IT; just look at the amount of legacy solutions in the average business!” Nicholls argues. Still, there are positives. “This is certainly on the C-suite radar screen, given the potential correlation between data breach events and downstream D&O (directors and officers) claims claiming breach of fiduciary duty for inadequate network security or levels of cyber insurance coverage,” Duggan reports. “Cyber risk is not a traditional risk management area of focus, and it requires a cross-functional working group of senior members of an organization to be effective,” says Detablan. “This crossfunctional group should include business senior management, as well as representatives from operations, IT, finance, legal and human resources,” she adds. “It is critical for business to build a culture of awareness at all levels from the board room to the mail room,” agrees Tonn, adding that C-suites are seeing the importance of increased communication and bringing all key stakeholders to the table, including risk management, general counsel and supply chain teams. Ivan Au, underwriter specialist-team leader, Technology Underwriting, at The Sovereign General Insurance Company, says there is often a cost-versus-benefit discussion that comes into play. “In recent years, there has been an increased use of network security consulting firms that audit and provide recommenda44 Canadian Underwriter March 2015
“Currently, cyber threats are focused on high-value targets: large firms, sensitive government information, and the computing ‘cloud’ where multiple companies can be attacked through a single point of entry,” says Ed Berko at Economical Insurance. “Cyber security risk is not a matter of if; it is a matter of when and how bad.” the messaging. In some cases, they don’t articulate the message in its entirety because they fear that it won’t be absorbed correctly by the board,” he reports. “But it’s very important that an accurate picture get sent to the board because, at the end of the day, the risk and liability lies with the board,” he says. Understanding the risk helps boards to be engaged, Fowler says.“An engaged board will help put the organization in a defensible position,” he maintains.
“Putting yourself in a defensible position is ensuring you’re doing the right thing, but you can also demonstrate that you were doing the right thing when that breach did occur. And that can save the organization lawsuits and financial penalties associated with that,” he adds. Andruchow suggests that teaming up with suitable partners is a great way to speed up the in-house knowledge base of an organization. “A way that organizations can gain expertise and the assistance that they need when there’s so much flux and vulnerability in this space is partnering with third-party service providers who specialize in the risk management of certain areas,” she advises. “With a strong contractual agreement with those service providers and really integrating them into your company’s incident response plans, business continuity plans and your management process, I think there’s a way you can outsource that expertise, but still keep that knowledge within your organization.”
PINPOINTING COST High-profile cyber events serve the function of creating “an enhanced awareness of cyber risk and the responses to data breach events, including claims precedents from losses,” Duggan suggests. “Once a company or organization has a basic awareness of the risk, then the risk manager can peel back the layers of the cyber risk ‘onion’ and begin to understand the potential losses and damages,” notes Kreiling. As it stands, Hornick does not believe organizations have a good understanding of the true implications of the financial cost in the event of a breach. “The financial impact could be potentially huge,” she says, depending the size of the corporation, the extent of the breach and where the corporation does business. “A lot of organizations have actually made the news in relation to security breaches not relating to a failure within their organization, but within one of their third parties,” Fowler says, adding that third-party risk is critically important from a cyber security standpoint.
‘‘
I took the motto ‘Be Prepared’ very seriously. I wasn’t even a Boy Scout.
Looking out for others is just something John has always done. So it’s only natural that he would end up in risk management. At Northbridge Insurance, we’re here to help minimize the impact of an incident or even prevent claims from happening to your business in the first place. It’s what we’re all about. Visit us at www.nbins.com or get in touch with your broker to learn more about our risk management solutions. ® Trademark of Northbridge Financial Corporation (“Northbridge”). Used under licence from Northbridge. [3459-002-ed01E] * Policies underwritten by Northbridge General Insurance Corporation and Northbridge Commercial Insurance Corporation.
John Risk Services, Western Canada
COVER STORY
Moving Target “Any organization, when they look at cyber security, number one, they identify the assets that they have, then they identify the kind of safeguards they want to put in place to ensure they protect those assets,” he explains. “A lot of times, they stop there and they don’t look at these controls that the third party has to ensure the same of level of protection is provided by that third party that they would provide internally within their organization,” he says. “Many companies are focused on the risk to customer data and fail to appreciate the full impact to their own businesses, both direct first-party costs, as well as potential liability to third parties,” Duggan says. “Whether it’s brand damage and reputational harm, business interruption, intellectual property/ corporate confidential or employee information, all companies have a degree of exposure,” he emphasizes. “Some aspects of cyber risks are more quantifiable than others. Hard costs such as regulatory expenses/privacy notification costs, credit monitoring and business interruption are easier to estimate using a data breach calculator, but how do you put a price on downstream risks such as brand and reputational damage, drop in share price, compromised intellectual property or lost customers?” Most of today’s loss dollars arise from first-party privacy breach costs, including notification costs, breach coaches, credit monitoring costs and call centre costs, Tonn reports, but notes there are others, including business interruption (income) loss, liability lawsuits, administrative actions from regulatory agencies, and derivative shareholder suits for the mismanagement of cyber risks. But pinning down which coverage may be needed, and which risks could be excluded, continues to be challenging. Berko notes that protecting an organization would be difficult to achieve in light of the rapidly evolving nature of cyber risk. “Mitigation of the impact is a more reasonable and achievable goal.” Andruchow reports that in the last year, Lloyd’s of London has come out 46 Canadian Underwriter March 2015
with a special code for cyber insurance products so it can properly manage the risk it is taking on its books. In addition, there have also been exclusions come out in policy wordings. “Insurance companies are realizing that there can be an interconnectedness of exposure between bodily injury, property damage and some of the different insurance policies out there,” she says.
“Once a company or organization has a basic awareness of the risk, then the risk manager can peel back the layers of the cyber risk ‘onion’ and begin to understand the potential losses and damages,” notes Carol Kreiling of Swiss Re. “As the technology that organizations rely upon grows and changes, insurance offerings will need to evolve as well,” Detablan points out. “When it comes to general liability and property protection, those are thought up on an annual basis or when there’s some sort of event that spurs taking a look at it,” such as the purchase of new equipment or merger and acquisition activity, Andruchow points out. “But the developments in the cyber space are so frequent right now that the risk management needs to have more
touch than just an annual basis, or just a quarterly basis, even,” she recommends. As it stands, Berko says that he thinks cyber risk and potential losses are not yet sufficiently understood to properly underwrite the risk. “Since the risk is established, but still evolving, it will require additional time and events to better understand the types of risks and their potential impact in cost, business interruption and reputation,” he says. “From an insurance standpoint, this is a very complex issue and there is not a lot of experience in underwriting the product,” says Steve Kaukinen, president and chief executive officer of Insurance Technology Solutions. “However, an insurance product with reasonable limits and, preferably, tied to some kind of risk management/technology assessment would give underwriters more knowledge about the risk and potential losses. For sure there is a real opportunity for these products,” Kaukinen adds. “Currently, as a main street insurer, the products being offered by most carriers today deal with measurable exposures. Limits provided are usually low and if higher limits are required, there is a charge for that increase,” Hornick says. “Do we know if the premiums being charged are adequate? No, not yet. We do not have enough experience or data. This will evolve with time and as the portfolio of this business grows,” she says. Some sources suggest that cyber risk should be seen as an opportunity with regard to product development. Earlier this year, Willis Group Holdings plc announced its reinsurance division released a modelling tool intended to let insurance carriers quantify the exposure of their portfolio to data breaches. “Our model help provide greater objectivity and will allow insurers to underwrite this risk with more confidence and to, therefore, write more and/or higher limits,” says Mark Synott, executive vice president of Willis Re. At Marsh, it launched a catastrophic cyber policy for large companies that offers limits of more than $300 million in coverage above a $100 million selfinsured retention.
s u n i o j e s a ple
COVER STORY
Moving Target
“The key with cyber risk is to layer your protection to minimize your loss. A basic first layer could be usage policies and training, a second could be things like firewalls, network intrusion detection, internal and external protection, a third could be insurance,” says The Sovereign General’s Ivan Au. Au, however, sees issues forming. “The problem is a lot of insurers are jumping on the bandwagon without a good understanding of the risk/reward, and it puts downward pressure on pricing and gives that impression to both insureds and brokers that it is often a ‘throw in’ cover or an enhancement,” he argues. To his mind, the right approach is two-fold: a breach endorsement that provides basic cyber coverage for existing business, and a full-fledged standalone policy that caters to accounts that have real-world risk. “The key with cyber risk is to layer your protection to minimize your loss. A basic first layer could be usage policies and training, a second could be things like firewalls, network intrusion detection, internal and external protection, a third could be insurance,” he says. Hornick notes that “Aviva, on most of its commercial policies, provides privacy breach expense coverage as a frill on its insurance policy.” A small limit is offered and insureds can purchase higher limits if they wish, she reports. The U.S. Insurance Market Report 2015, released by Marsh in February, notes that in the energy sector, standard policies, including property and general liability, contain exclusions for bodily injury, property damage and business interruption resulting from a cyber attack.“But evolving cyber insurance can fill many of these gaps, providing direct loss and 48 Canadian Underwriter March 2015
liability protection for technology risks. Emerging cyber insurance solutions designed for the energy industry are also written to specifically address this risk,” the report adds. “I am almost sure demand for cyber insurance products will eventually outpace the availability. Companies are going to have to assess any risk points and current practices to mitigate as much as possible,” Kaukinen comments. “A good portion of underwriting the risk is also explaining to the broker (and insured) what could happen and how coverage responds,” Au says. “It is not like general liability or property, where there has often been a predefined rate that is credited or debited based on risk profile. There are no preset rates in cyber. It largely has to do with an underwriter’s understanding of the risk, and the savviness of the broker to make the proper recommendations,” he says. “Risk managers should also appreciate the high degree of variability among cyber insurance products and policies in the marketplace to ensure that when they purchase coverage, it is addressing their core risks,” Duggan advises. “There is a lot of cyber coverage capacity out there, but it is non-commodity capacity,” he points out. “Like any peril, insurers will not be able to eliminate the threat or exposure,” Hornick says. “However, they will be able to ensure that a risk manager has
options to transfer the financial exposure to a third party, thus mitigating the exposure to their company,” she says. “Cyber risk mitigation needs to be built into an organization’s fundamental solution architecture,” Nicholls argues. “Insurance products are certainly part of the overall solution, but the business should be focused on eliminating the risk through good design first.”
LOOKING FORWARD Roberts says he believes recent events have really helped focus people on being able to develop plans around business resiliency. “Many risk managers have the awareness and understanding of measures that must be in place to address the risk,” says Kreiling. “But the worrisome aspect of cyber security is that simply putting measures in place does not eliminate the risk. For every step a risk manager takes in cyber security, the bad guys are working around the clock to stay one step ahead,” she cautions. “The understanding of cyber risks is a continuous process. Underwriters must stay current on the latest technologies to be able to assess and predict new exposures,” Tonn says. “Better understanding will also come with time as more claims are experienced and, therefore, more data can be collected to help improve predictive modelling,” he adds.
TM
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Personal lines auto has garnered most of the attention around telematics and usage-based insurance (UBI) in recent years. However, the application of data analytics to commercial fleets represents an arguably better insurance fit when it comes to rating transparency, safety performance and loss management. The use of telematics for large vehicle fleets and long-haul trucking firms is hardly a new subject. In fact, companies with significant fleet sizes have had various forms of telematics systems in place for decades to track vehicle location, delivery times, fuel costs and driver safety. However, scalable insurance solutions for commercial auto have been lacking in the Canadian market — until recent months. Two broker-based announcements in January revealed new developments in telematics for fleet managers. On January 13, Calgary-based InsureMy Ltd. introduced the first time-based insurance product for commercial drivers in Alberta and Ontario. Using telematics technology offered by Intelligent Mechatronics Systems (IMS), the brokerage allows operators to receive a premium refund based on use/vehicle inactivity, while providing the convenience of full-term coverage. “Telematics has been around in this (large
50 Canadian Underwriter March 2015
fleet) space for a long time, but really nobody has been talking about [it] in terms of insurance on the commercial side,” says InsureMy president Hugh McTavish. “It is only in the last eight months or so that we have had that discussion with our markets,” McTavish reports. “We are out prospecting heavily, getting a lot of interest from clients,” he says, adding that one underwriter is “on board and another one close.” On January 19, Independent Broker Resources Inc. (IBRI), an independent arm of the Insurance Brokers Association of Ontario (IBAO), launched a customizable telematics program that is called Fleetadvisor. Already tested out with taxi fleets, it is designed to help fleet managers reduce operational risks and costs, as well as improve vehicle maintenance. “Fleetadvisor has received a positive response from both brokers and insurers in the Ontario marketplace,” comments Kevin Warren, IBRI’s director of operations. “Since our launch, 20% of our members have been trained on the product and conversations are moving positively with insurers who want to incorporate the Fleetadvisor offering into their commercial strategy,” Warren says. Recently, Unica Insurance Inc. endorsed Fleetadvisor, opting to offer a 5% premium discount
Illustration by Dave Whamond/threeinabox.com
Transitioning to Fleet
Brokers are moving the needle on telematics for commercial auto insurance. New data solutions could allow fleet owners of all sizes to keep closer tabs on their vehicles for pricing discounts — and improved safety.
to fleet managers that provide access to drivers’ data.
MARKET APPETITE Brokers are seen as an ideal intermediary for commercial clients who shop regularly for fleet coverage. Several recent studies on telematics and UBI point to a significant potential market appetite for commercial auto. In August 2014, LexisNexis published the results of a study on telematics that included findings on fleet insurance. “Two-thirds of small fleet managers shop for insurance every two years or more,” says Ernie Feirer, vice president and general manager, commercial insurance at LexisNexis. “These fleet managers are looking for ways to save money and our study shows 27% of them would sign up for a UBI program. This leaves a lot of room for growth and a huge opportunity for carriers offering UBI,” Feirer reports. IMS published a white paper in 2014, Commercial Lines UBI: Insurance Telematics Opens New Opportunities, in which the tech firm observes “adoption of telematics by commercial fleets is expected to reach par with long-haul trucking telematics by the end of 2014 and dominate commercial fleets by the end of 2019, according to new research from ABI Research.” IMS also notes “telematics technologies and services, which were first adopted by the long-haul trucking industry, should reach 50 million vehicles in the coming five years.”
when you start to apply some of the data we collect through telematics, it allows more price transparency,” he says. “You get a clearer idea of what the risk and exposure is up against the kinds of coverage the customer truly requires and what that means from a rating standpoint — that is really the connection the broker wants to bring to the process,” he observes. Warren explains increased visibility
and the ability to give fleet managers a real-time view of a fleet’s operation can provide both short and term benefits in the commercial auto insurance sector. “This allows brokers to become true risk managers for their clients,” he says. “Common problems that impact the performance of many vehicle fleets, such as vehicles being driven in a dangerous manner, vehicle health, excessive fuel
If you’re in Manitoba, this is considered an automobile. Surprised? ARC isn’t.
Your customer has a list of the vehicles that are covered by your fleet policy. You have a list of the vehicles that are covered by ARC Group Canada is a national that policy. network of independent law firms, And your lists aren’t theintimately same. each connected to their local market. When the one vehicle that is involved in Insurance risk appear management an accident is the one thatand doesn’t on experts. Regionalnext? strength. both lists, do you know what happens National scope. ARC does. That is the ARC Group.
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Potential to lower premiums Insurance and risk management experts. Regional strength. The rationale for commercial auto and National scope. Go to AskARC.com fleet telematics is, at least initially, the lure of lower premiums. A case in point is InsureMy’s time-based product. The ARC Legal Reporter “If the vehicles are sitting idle for Winter Issue – Article #1 periods of time, why is the customer A National Network of Independent Law Firms paying for the coverage that sits on those vehicles?” asks Gord Mansfield, When is a medical examination considered a second examination InsureMy’s director of national sales. “It under Rule 36 of the New Brunswick Rules of Court? is a simple and transparent way to bring The ARC Legal Reporter something back to the customer and yet v. Crowther and Kelly Case: Winter IssueReported – Article #1 Blyth 2009 NBCA 80 Citation: still make sure there is proper protection.” When both the plaintiff’s physical and mental condition are in issue in an action At Issue: A National Network of Independent Law Firms the plaintiff undergoes a physical examination, will a subsequent application This also helps with underwriting and psychiatric examination be considered an application for a second me examination? rating clarity, Mansfield suggests. “I think When is a medical examination considered a second examination Should medical examinations that are ordered as part of the discovery proces characterized as ‘independent’ medical examinations? under Rule 36 of the New Brunswick Rules of The Court? Court of Appeal of New Brunswick Court: ARC_Fleet ad_1/2 page.indd 1
Reported Case: Citation: At Issue:
Judgment Rendered: Factual Summary:
October 13, 2009 (Reasons delivered November 2015-02-14 26, 2009) 1:05 PM The plaintiff suffered injuries in a motor vehicle accident and commenced an a seeking damages. Both the plaintiff’s physical state and mental state were in iss the action. The plaintiff submitted to a physical examination by the defendant’s ex but subsequently refused to submit to a psychiatric examination.
Blyth v. Crowther and Kelly 2009 NBCA 80 When both the plaintiff’s physical and mental condition are in issue in an action, and
consumption and vehicle location, can be rapidly identified. This adds to the broker value proposition,” Warren says. Roadblocks to adoption With the range of potential advantages for commercial fleets of all sizes, a valid question is why is the take-up rate of telematics solutions relatively low, especially for smaller fleets? Estimates show that fewer than 20% of commercial fleets with between five to 20 vehicles have adopted these data solutions. Sources suggest a main reason behind that could be a lack of awareness among smaller commercial clients. “With telematics still in its infancy, it’s still seen as a nice-to-have, but not an essential, tool for fleet operators,” says Warren. “There is a lack of understanding that telematics is plug-and-play technology with an easyto-understand web interface,” he adds. “We see opportunities in the smallersized fleets, businesses that may not even consider themselves as having a fleet,” says Christopher Dell, senior director, product development and management for IMS. “They are not actively looking for a solution, but they have the same concerns (as large fleet operators).” Others agree with that assessment. “Small fleet management is an underserved market at this stage compared with the long-haul trucking market, with substantial opportunities for insurers to capitalize on the rising interest and growth in this sector through commercial UBI,” notes Warren.
MATTERS OF SIZE For large fleets and long-haul trucking firms, the challenges posed by telematics are the exact opposite. Many companies may have already adopted their own proprietary data and tracking systems, raising questions about the applicability of insurance-based telematics solutions. “That is an area we are still working through from an industry perspective — we are looking at how we can take that data in on behalf of the insurance carrier and still provide the same kind of information in terms of risk analysis that is required so they can make the 52 Canadian Underwriter March 2015
assessments,” Dell reports. “It is not about displacing, but rather integrating that technology and how we do that in a cohesive manner,” he says. Privacy concerns Another familiar possible roadblock is client concern about usage of data and privacy in data collection. “As a broker, we are able to work with the customers and the markets, so the markets have to understand what the data is telling them and the customer has to understand what the data says about how their fleet performs,” Mansfield says. “As an intermediary, we can bridge those two and balance the use of data with each indi-
vidual client’s perspective or concerns.” Data and privacy issues extend to regulators as well, McTavish notes. “We have to communicate with regulators on what the ultimate goal is here,” he says. “It is not to collect data to punish the bad folks; it is to collect data to help people that have some fleet management concerns or personal driving concerns to mitigate those losses through actual changes in behaviour,” he adds. Warren notes that the “Fleetadvisor product ensures that the data is owned by the consumer. With the fleet manager’s consent, brokers — and, in some cases, insurers — will have viewing access to the data. This is a win from a consumer perspective,” he says. Overcoming obstacles Even with these potential challenges, sources say that the opportunities in commercial auto and fleet management far outweigh the obstacles. “We see this as a very exciting intersection where we
are able to offer that fleet management functionality for a distribution channel that has a much higher penetration rate than other solutions out there,” says Dell. In particular, the role of the broker will be pivotal in the adoption of telematics for commercial auto in the months and years ahead. “The commercial policies are higher value, higher margin and not as straightforward as personal lines,” Dell says. “Brokers are in a unique position where they can have that one-to-one client relationship — there is more opportunity for differentiation in the commercial space.”
McTavish says the role of telematics in Canada “has taken on a life of its own. The answer doesn’t have to come from one source. Along with self-aware, connected and driverless vehicles, there is this whole other avenue of products that will require the industry to come up with new and innovative solutions on both the personal and commercial side of things.” When it comes to insurance, sources say the collection and interpretation of data will be king. “I think data is the critical thing. We have to embrace the opportunity and understand what that looks like for this industry and what the role of the broker is,” Mansfield says. “If we don’t understand data and telematics, I think we miss an opportunity to understand how it can benefit consumers,” he argues. “Data provides patterns of information that lead to predictive knowledge. When you know better, you do better,” Warren observes. “Over the next couple of years, we believe there will be more insurers offering discounts to commercial clients that have telematics devices in their vehicles,” he concludes.
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INSPRESS COLUMN AD MAR 2015.indd 1
15-03-09 10:01 AM
Underinsurance – Broker Liability
Nathalie Durocher
Associate Norton Rose Fulbright
André Legrand
Senior Partner Norton Rose Fulbright
In a case of loss involving underinsurance, broker liability can be at play. A 2014 ruling by the Quebec Superior Court reiterates that as a “licensed professional,” a damage insurance broker has a duty to provide clients with sound advice and to direct them towards the right resources and information to help them obtain suitable insurance coverage. In the 2014 case of Bar et spectacles Jules et Jim inc. v. Maison Jean-Yves Lemay Assurance inc., the Quebec Superior Court ordered a broker and his insurance firm to pay damages for negligence when renewing insurance for a building. This decision, under appeal, explores the “duty to advise” of damage insurance brokers.
LEGAL FRAMEWORK In Quebec, the activities of damage insurance brokers are governed by the Quebec Civil Code (CCQ), the Act Respecting Insurance (ARI) and the Act Respect-
54 Canadian Underwriter March 2015
ing the Distribution of Financial Products and Services and its regulations (ARDFPS). The ARDFPS deals with most obligations of the damage insurance broker towards clients, including the duty to inform, the duty to personally gather information from a client, the duty to advise and the duty to follow up on client files. The relevant provisions to the present issue read as follows: 2138 CCQ: “A mandatary is bound to fulfill the mandate he has accepted, and he shall act with prudence and diligence in performing it. [...]” 28 ARDFPS: “Insurance representatives must, before making an insurance contract, describe the proposed product to the client in relation to the needs identified and specify the nature of the coverage offered. Insurance representatives must also indicate clearly to the client any particular exclusion of coverage, if any, having regard to the needs identified and provide the client with the required explanations regarding such exclusions.” 39 ARDFPS: “Damage insurance agents and brokers must, when renewing an insurance policy, take the necessary steps to ensure that the coverage provided corresponds to the client’s needs.” One of the most important roles of the damage insurance broker is to ensure that the products purchased by clients fit their needs throughout the mandate, and that the insurance product will provide adequate and sufficient insurance in case of a loss.
Announcing the Announcing the
QUARTERCENTURY CENTURY CLUB QUARTER CLUB th 56 56thAnnual AnnualReception Reception
Wednesday, May 13th, 2015
The Albany Club
th WEDnesday, 91 King Street EastMay 20 , 2015
Toronto, ON, M5C 1G3
The Albany Club 91 King Street East p.m. Reception – 12:00 Toronto, ON, M5C 1G3 Cost - $75.00 Reception – 12:00 p.m. 56th Annual Reception Cost - $75.00Committee:
John Cherrie - 416-737-7525 John Sharoun - 416-957-5001 56th Annual Ford Blow - 416-457-7072 Reception Committee:
John Cherrie - 416-737-7525 Stewart Ponton - 905-740-1100 Send Contact Info and Ford Blow - 416-457-7072
Cheque Payable to (or VISA, provide exp. date):
Featuring… Featuring… ‘The Roasting of of ‘The Roasting Paul Hancock Paul Handcock
John SendSharoun Contact Info and Cheque Quarter PayableCentury to (orClub VISA, provide exp. date): c/o Crawford Stewart Ponton & Company (Canada) Ltd. Quarter Century Club 300 123 Front St, Suite Granite Claims Solutions Toronto M5J 2M2 5915 Airport Road, Suite 200 Email: John.Sharoun@crawco.ca Mississauga, ON, L4V 1T1 Phone: 416-957-5001 Phone: 905-740-1100 Fax: 905-671-2088 Email: stewart.ponton@graniteclaims.com
Thank you for the support of these generous event sponsors: Thank you for the support of these generous event sponsors:
Once again this year, the Quarter Century Club plans to continue to make a donation to the Insurance Institute Scholarship Fund, in memory of our claims colleagues Design and Space Compliments of:
Design and Space Compliments of:
The court held that, were it not for the faults committed by the broker, the insured would have asked for full insurance coverage for its building and the insurer would have agreed to increase the amount of insurance accordingly.
There are very few decisions in Quebec relating to underinsurance. This recent court decision is, therefore, of particular interest.
BAR ET SPECTACLES JULES ET JIM INC. V. MAISON JEAN-YVES LEMAY ASSURANCES INC The insured owns a building in which it runs a show bar on the ground floor and rents out apartments on the upper floors. It had insured its building through the same insurance broker firm since 2006. On June 1, 2010, the insurance policy expired. The amount of insurance on the building was $424,000. Two business days before the expiration of the insurance policy, the broker in charge of the insured’s file met with the insured to discuss the renewal. During the meeting, the broker mentioned that the amount of insurance might not be enough in the event of a loss. The broker and the insured agreed the building should be appraised and that the broker would hire a chartered appraiser to do so. The cost of the appraisal was to be shared by the firm and the insured. In the interim, the insurance policy for the building was renewed for the same amount of insurance ($424,000). It took almost a month before the chartered appraiser’s services were retained to appraise the building. The broker received the appraisal report a month and a half after the policy was renewed on June 1, 2010. The appraiser recommended that the building’s reconstruction value be increased to $565,000. The broker read the report briefly on July 20, 2010, then left on vacation two 56 Canadian Underwriter March 2015
days later without contacting the insured or asking the insurer to increase the amount of insurance on the building. On July 23, 2010, the building was destroyed by fire without the amount of coverage being increased. The cost of demolishing and reconstructing the building amounted to $1,003,708. The insured sued the broker and the firm for $224,701, representing the difference between the amount suggested by the appraiser and the amount of insurance, as well as damages for loss of income. The insured also claimed from the broker, the firm and the appraiser $233,865, representing the difference between the replacement value the appraiser should have suggested and the value he, in fact, suggested, plus the demolition costs. The insured alleged the broker’s negligence in the follow-up on its file, as well as the failure to adequately inform and to advise on suitable insurance coverage for its needs at the time of the renewal.
JUDGMENT In a detailed judgment, the court recalled the obligations and duties of insurance brokers, including the duty to act with prudence and diligence and the broker’s duty to advise his client. The court commented as follows: [Translation] “[53] Section 39 of the Act [AFDFPS] creates a special obligation for brokers. When a policy comes up for renewal, the broker cannot merely allow the policy to be automatically renewed, despite the possibly regular and automatic increase in the amount of coverage suggested by the insurer.The broker has an obligation under the law to offer his client a product that covers a potential loss for an appropriate amount of insurance, and the insurance
product offered must be adapted to the client’s needs.When he sends the policy proposed by the insurer, his role as an adviser must continue. [54] A broker cannot merely allow things to evolve according to the circumstances and the value of the property since the last policy was issued. [...].” [emphasis added] The court noted the following acts of negligence by the broker: • a lack of prudence and diligence in managing the insured’s file (lateness in taking steps to renew the insurance policy, the delay in hiring the appraiser, the failure to follow up with the appraiser and poor management when he received the appraiser’s report); • the failure to inform the insured of the presence of a clause having the practical effect of incorporating the demolition costs into the replacement value of the building and the need to increase the amount of insurance as a result; • the failure to tell the appraiser that he should mention that demolition costs were excluded in his appraisal report or indicate an amount for such purpose; and • the failure to adequately inform the insured of the potential additional costs resulting from the reconstruction of the building in compliance with new building standards and municipal by-laws. The court also found the appraiser to be negligent in his appraisal of the building’s replacement value, which the appraiser admitted at trial. However, only the broker was held liable. The court ruled that the broker had committed the decisive error that caused the insured’s loss, not the appraiser, whose faults in connection with
his appraisal report, [translation] “were not directly related to the initial fault.” Thus, the court held that, were it not for the faults committed by the broker, the insured would have asked for full insurance coverage for its building and the insurer would have agreed to increase the amount of insurance accordingly. The court ordered the broker and his firm to pay the insured $348,032. The judgment was appealed on December 8, 2014.
comes necessary to review the value of property to establish the parameters of new insurance coverage required upon a renewal. Thus, the duty to advise places a heavier responsibility upon the insurance broker who, as a “licensed professional,” must ensure he gives sound advice to his clients and directs them towards the right resources and infor-
mation to help them obtain suitable insurance coverage. When it is time for renewal of the insurance coverage and/or when the insurance broker becomes aware of changes, notably with regard to the value of the goods covered by the insurance, he must react diligently by ensuring his client will have insurance coverage suitable to his needs at all times.
OBSERVATIONS The principles developed in Fletcher v. Manitoba Public Insurance Co., issued by the Supreme Court of Canada in 1990, a decision emanating from a common law province, are applicable in Quebec and were taken and adapted by the Quebec courts, notably in the 1991 ruling, Baril v. L’industrielle, compagnie d’assurance sur la vie. In Fletcher, the Supreme Court of Canada ruled that the duty to inform is imposed upon insurers and intermediaries, while the duty to advise is imposed upon insurance brokers who must especially advise clients as to insurance coverage suitable for their needs and the extent of the coverage provided for in the insurance policy. In Baril, even though the dispute focused on the failure to inform the insured of the possibility of obtaining temporary coverage by an insurance agent and not an insurance broker, the court quotes remarks in Fletcher: “In my view, it is entirely appropriate to hold private insurance agents and brokers to a stringent duty to provide both information and advice to their customers. They are, after all, licensed professionals who specialize in helping clients with risk assessment and in tailoring insurance policies to fit the particular need of their customers. Their service is highly personalized, concentrating on the specific circumstances of each client. Subtle differences in the forms of coverage available are frequently difficult for the average person to understand.” As was seen in Bar et spectacles Jules et Jim, the distinction between the duty to inform and the duty to advise takes on its full dimension, especially when it be-
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Eric Robinson Senior Scientist, AIR Worldwide
Canadians are certainly no strangers to harsh winter weather. The City of Winnipeg, for example, on average experiences just 15 days from December through February with temperatures above freezing and 50-plus days a year when the temperature drops below a frigid -20°C. Quebec City has a 50% chance of seeing some form of frozen precipitation on any given day during the same time frame, averaging a formidable three metres of snow annually. From an insurance perspective, however, the harsh winter weather story is a bit different. Information on catastrophic loss as a result of winter weather in Canada is somewhat sparse: Over the last 35 years, industry sources indicate there have been slightly more than 30 catastrophic events attributed to winter storms, with insured loss ranging from only a few million dollars to over $2.5 billion (trended to 2012 dollars). Without a doubt, the scant data available represent an incomplete picture of winter storm risk in Canada, and for two significant reasons: • the short time frame and relatively lean claims history make it difficult to assess the risk of
58 Canadian Underwriter March 2015
loss on a catastrophic scale; and • exposure growth in Canada is increasing exponentially. To the first point, by their nature, catastrophic storms are low-probability, high-risk events. Even the best statistical or actuarial models would find it difficult to predict the details of a 1-in-250year event given only 35 years of data. To the second point — and perhaps more important — past claims history may have little to nothing to do with a company’s current book of business if it has experienced significant growth over the last 30 years. Also, even the small amount of catastrophe loss data the industry has reflects exposure growth, with four catastrophic events in the 1980s, 10 in the 1990s, and 16 in 2000s. While one might be tempted to blame this increasing trend on climate change or variability, the more likely culprit is the growth of Canadian exposure. What is the best way to manage and explore this ill-defined, yet ever-growing, source of risk? How can the industry take what little data it has and combine it with the best science has to offer to quantify how winter weather might affect the bottom line? Enter catastrophe models.
Illustration by Dave Whamond/threeinabox.com
Break the Ice
When it comes to winter storm damage, does the industry have enough information (over a long enough period of time) to accurately quantify the risk? Claims experience, catastrophe models, responsible risk management and solid underwriting practices are all needed to develop a full picture of the risk.
CATASTROPHE MODELS CAPTURE WINTER STORM RISK Modelling catastrophic events became accepted as a key tool for managing risk in 1992. This is when catastrophe modelling firm AIR Worldwide used modelling to accurately project the insured losses from ruinous Hurricane Andrew, which levelled parts of Florida and bankrupted 11 insurance companies. Since that early catastrophe model (and Andrew’s legendary destruction) shocked insurers into understanding why such models are important, the catastrophe modelling landscape has evolved to include multiple regional and worldwide modelling vendors and a range of modelled perils — from tropical cyclones, severe thunderstorms and winter storms to earthquakes, inland flood, pandemics, terrorism, and most recently, cyber risk. Canada had its own “Hurricane Andrew” of winter storms in the late 1990s with the arrival of the Great North American Ice Storm of 1998. Although the aftermath of the storm was not as devastat-
Given the sensitivity of precipitation to the vertical structure of temperature in the atmosphere, the difference between 10 inches of snow or an inch of ice accumulation is often only a couple of degrees. ing as Andrew, the $2 billion-plus (2012 dollars) insured loss total and the weeks of ensuing power outages caught many insurance companies off guard. Before 1998, the most costly winter storm event in Canada had been the 1996 Victoria Blizzard, which totaled over $200 million (2012 dollars) in insured losses. Similarly, events since the 1998 Ice Storm have come in significantly smaller punches, the most expensive being the 2013 Toronto ice storm at around $225 million (2013 dollars).
While it is tempting to call the 1998 storm an outlier, catastrophe models show that, in reality, nature is capable of creating even bigger and costlier winter wallops.
THE NUMERICAL WEATHER PREDICTION MODEL Catastrophe models seek to better quantify the view of risk provided by actuar-
ial data by accounting for the scientific principles that underlie each modelled phenomenon. For weather-related models, this often involves incorporating observational data from automated weather stations and eyewitness reports of severe weather, and even from a type of atmospheric data called reanalysis, which contains basic-state variables, such as temperature, wind speed and humidity
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Putting the pieces together.
Events and Seminars Calendar You work hard to protect your clients’ property. Now, it’s time to ensure that you apply the same kind of energy and commitment to your own success. CIP Society Events and Seminars give you the opportunity to learn, to network, to catch up on industry developments and to think about your career.
CIP Society Events & Seminars:
Professional Development Curriculum
IADQ – Montreal Convocation.........................................................March 20 Toronto – Symposium ....................................................................... April 16 Toronto – Annual Fellows’ Reception ................................................May 20 Toronto – Golf Tournament ..................................................................June 8 Webinar – ADVANTAGE LIVE: Future of Claims ................................... April 8 Webinar – ADVANTAGE LIVE: Urban Flooding ................................... May 13 Webinar – ADVANTAGE LIVE: Being Social Online ...............................June 2
Toronto – Building Better Relationships at Work .............................. April 23 Conestoga – Essential Management Skills....................................... May 5-7 Vancouver – Essential Management Skills....................................May 12-14 Halifax – Think on Your Feet® ...................................................... May 20-21 Edmonton – Essential Management Skills..................................... June 9-11 Conestoga – Building Better Relationships at Work ...................... October 1 Edmonton – Think on Your Feet® ...........................................October 20-21
Keeping you at the forefront of the P&C industry. The CIP Society. MEMBERS BENEFIT. www.insuranceinstitute.ca/cipsociety
EDS event based on 1998 Ice Event: Radial Ice Thickness (mm) 50N
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Radial ice thickness (mm) resulting from a winter storm with the characteristics of the 1998 Great North American Ice Storm, relocated to occur over Toronto.
at multiple layers of the atmosphere over a historical time frame. Since the atmosphere is highly nonlinear and chaotic in nature, it can be unclear what information these sometimes-disparate data sources are giving us. Numerical weather prediction (NWP) models — the same models that local meteorologists use to predict the temperature — can help with understanding the effects of these variables. Specifically, when provided with past weather data, NWP models can re-simulate significant historical meteorological events. Importantly, NWP models can serve as tools to understand how slight perturbations in atmospheric conditions might result in drastically different historical outcomes. Coupled with information about the vulnerability of certain exposures to various hazard impacts, such as large ice accumulations, and to a financial module capable of handling complex insurance terms and uncertainty, how small changes in atmospheric conditions can translate to large changes in insured loss can be studied.
EXTREME DISASTER SCENARIOS CLARIFY RISK POTENTIAL Perhaps the best way to understand the value of catastrophe models is to see them in action — for instance, to model the 1998 Great North American Ice Storm in a slightly different location.
First, review the hazard. Freezing rain occurs when precipitation falls through a layer of relatively warm air aloft into a layer of very cold air at the ground. If the cold layer is shallow enough, precipitation will melt in the warm layer and then fall to the earth’s surface as supercooled water, freezing on contact with objects on the ground.
The resulting ice build-up can be particularly damaging to high-power transmission lines and other forms of infrastructure. Power loss resulting from damaged lines can contribute to a high volume of business interruption losses, as well as to building damage as a result of the freezing of pipes no longer being
kept warm by heating systems that rely on electricity. Similarly, the ice load on branches and trees increases the amount of damage from falling limbs, and ice damming contributes to building losses. Given the sensitivity of precipitation to the vertical structure of temperature in the atmosphere, the difference between 10 inches of snow or an inch of ice accumulation is often only a couple of degrees. Now, imagine what would happen if the 1998 Ice Storm happened today, but this time situated over Toronto. With catastrophe models, the loss from such an unlikely (but possible) event can be calculated. The map on this page shows the ice accumulation from an event with the characteristics of the 1998 storm, but modelled to occur farther to the west, over downtown Toronto and the surrounding area. In terms of uniform radial ice accumulation, this event would produce a layer of ice nearly 60 millimetres in diameter (the width of about two toonies, side by side). Given today’s building stock (and typical insurance policies), insured losses could approach $25 billion (2012 dollars). This extreme case demonstrates how small changes in a previously observed event can have a lasting impact on a company’s bottom line. While this event was created with the intention of having the most impact possible, the point remains that, given the short observational period mentioned above, explicit modelling of these phenomena may be the only way to fully develop a wellrounded view of risk. Ongoing exposure and population growth make winter storm risk in Canada an attractive market for many insurers; however, the relatively sparse historical record can challenge quantification of risk. Accurately quantifying risk can be even more difficult for other, even less well-observed perils facing Canada, such as severe thunderstorm. Supplementing claims experience with catastrophe models, coupled with responsible risk management and underwriting practices, can make the Canadian marketplace significantly more manageable. March 2015 Canadian Underwriter 61
Many organizations manage risks independently, much like a patchwork of activities within functional or departmental silos. As a result, some risks receive attention and resources while other more important risks go undetected or unacknowledged. Consider, for example, the Mid Staffordshire NHS Foundation Trust, a 500-bed hospital about 250 kilometres northwest of London, England. It became the centre of an international scandal — and a cautionary case study in risk governance and management — after it was determined that more than 1,000 patients died as a result of substandard care and neglect over a four-year period. The organization was the subject of a number of external reviews, including two high-profile public inquiries, which revealed many shortcomings in the organization and the broader system of regulation and oversight. However, the greatest failure was determined to be an ineffective board that ignored the biggest risk facing the organization — the risk to patients of poor quality care — in its focus on reaching financial and other non-care-related targets, notes a press release from the Mid Staffordshire NHS Foundation Trust Public Inquiry.
)
Taking Care
Polly Stevens
Vice President, Healthcare Risk Management, Healthcare Insurance Reciprocal of Canada
Lois Hales
Senior Healthcare Risk Management Specialist, Healthcare Insurance Reciprocal of Canada
What sort of approach will allow health care organizations to manage organizational risk? A newly developed model seeks to accomplish that objective through the adoption of a standardized, efficient and effective approach to integrated risk management.
In the absence of an integrated approach to managing key organizational risks, serious losses can occur. In healthcare organizations where these losses can include the loss of human life, the stakes are very high. What sort of approach will allow health care organizations to manage key organizational risk? A collaborative of healthcare organizations sought to develop a model for managing key organizational risks by developing a standardized, efficient and effective approach to integrated risk management. The effort involved an extensive review of published and tacit knowledge, development of a common taxonomy of key organizational risks, and a shared online application to support identification, assessment, management, reporting and benchmarking of risks.
NEED FOR INTEGRATED RISK MANAGEMENT High-profile failures in the business, financial and healthcare sectors have underscored the importance of attending to serious organizational risks.
62 Canadian Underwriter March 2015
INTEGRATED RISK MANAGEMENT CHALLENGES Integrated risk management (IRM) — a term synonymous with enterprise risk management, but more commonly used in the public sector — is defined by a Treasury Board Secretariat of Canada implementation guide as “a continuous, proactive, systematic approach to identifying, assessing, understanding, acting on and communicating risk from an organization-wide, aggregate perspective.” Unfortunately, progress towards effective IRM has been slow. There is a great deal of uncertainty and skepticism about current frameworks and approaches, suggests the 2014 Harvard Business School Working Paper, Towards a contingency theory of enter-
prise risk management, and sometimes wellintentioned activities, undertaken in the name of IRM, are found in retrospect to be counterproductive. The end result is lost time and resources, with little realized benefit.
COLLABORATIVE APPROACH TO IRM In 2014, a group of healthcare organizations from across Canada — with co-ordination and support from their shared, non-profit insurance reciprocal — formed to co-create a standardized, evidence-based, effective and efficient approach to IRM, and to develop a shared, online risk record and reporting tool. Knowledge synthesis The project began with an extensive review of the published literature on IRM and analysis of tacit knowledge gleaned through a number of field interviews with organizations that had more mature IRM programs. The findings confirmed that many common approaches to IRM, while helpful to some, are obstacles to many more, including the following: • Risk domains — Standard risk domains focus attention on so-called strategic risks, such as mergers and acquisitions, over operational risks. In healthcare, however, it is failures in operations (e.g., a widely reported, poorly managed, preventable death of a patient) that pose the biggest strategic risk to organizations. • Risk appetite/tolerance statements — Standard practice dictates that organizational leaders develop a risk appetite or tolerance statement that outlines acceptable levels of risk. In healthcare, this would theoretically entail a statement on how much harm to patients, perhaps even the number of preventable deaths, would be acceptable. This is, of course, an unpalatable and unethical proposition. Risk tolerance is operationalized, rather, on a risk-by-risk basis when decisions are made to invest resources on additional mitigation efforts or not. • Inherent versus residual risk — It is now known that risk assessment is a highly biased and flawed process as a
result of cognitive biases hard-wired into individual and group decisionmaking processes. Given this, coupled with the limited utility derived from such measures, measurement of inherent risk absent of controls and mitigation strategies is not supported. • Upside versus downside risks — There has been a great emphasis in recent years on the assessment of upside risks (strategic opportunities) in addition to downside risks. It was found, however, that efforts to divert attention away from the high rates of downside risk, particularly adverse events to patients, is unacceptable. Based on the evidence, a simplified IRM process, absent unnecessary complexity and non-value added processes, was articulated, including the following: • ensure board and senior leader(s) engagement; • engage a skilled co-ordinator(s); • focus on key organizational objectives; • start with a few key risks; and • do not look for perfection. Common taxonomy Suspecting risks in healthcare organizations are largely known and consistent across all organizations, the collaborative then turned its attention to the development of a common taxonomy of healthcare organizational risks. This entailed a review of strategic plans from dozens of healthcare organizations and the discovery that all strategic objectives fell into one of 11 categories, including care, human resources, financial, leadership, external relations, information systems/technology, regulatory, teaching, research and community health. Following this, key risks within each category were identified from a number of sources and collated into a concise taxonomy, greatly assisting in risk identification and due diligence efforts. Risk register application The final component of the collaborative effort was the identification and configuration of a shared online application to support documentation and reporting of key risks. A software provider with ex-
pertise in this area was selected and the team worked to configure the system to be both as intuitive and straightforward as possible. Key features of the application include the following: • standardized coding of risks based on the common taxonomy, while at the same time supporting organizationally defined risk names; • support of multi-site organizations; • promotion of appropriate accountability of each risk to a senior leader and senior committee; • assurance framework, including key controls and gaps; • risk rating of likelihood, and impact and tracking of ratings over time; • email actions; • document attachments; • progress notes; • user access control and protections related to own risk information; and • highly developed dashboard and reporting capabilities. Pilot tested in late 2014, the program was made available to all organizations in the reciprocal, free of charge, this past January. In two months, more than 45 healthcare organizations have adopted the application.
BENCHMARKING AND KNOWLEDGE SHARING ACROSS ORGANIZATIONS The program allows for sharing of a common web-based risk register application and use of a common taxonomy to code risks. It is anticipated this will enable aggregate analysis of risk across the system yielding never-before-seen data on top risks in the healthcare system, as well as changes in top risks over time. The application will also enable identification of leading practices in the management of specific risks while supporting improvements in healthcare though the sharing of this knowledge across the system. While the journey of implementing an IRM program may be challenging based on innate organizational differences, the new program provides a helpful grounding, with the ultimate goal being to partner to create the safest healthcare system. March 2015 Canadian Underwriter 63
WaterSurge Modelling flood risk in Canada would be no easy task. Flood perils have not yet been covered by the catastrophe models because of several unique complexities. Canadian insurers, however, can evaluate flood risk using new, open modelling platforms that provide insight into potential future losses from a wide range of scenarios.
Karen Clark Chief Executive Officer, Karen Clark & Company
Flooding is one of the most frequent and costly natural perils in Canada, but to date, the catastrophe modelling companies have not developed flood models for the country. The flood peril is very challenging to model using the standard catastrophe modelling approach. Relative to perils such as hurricanes and earthquakes, flood models require higher resolution data and have several unique complexities. The catastrophe models have four primary components: 1) an event catalogue defining where, how severe and how frequent future events are likely to occur; 2) scientific formulas to estimate the event intensity at each impacted location; 3) vulnerability curves to estimate the damages for different types of buildings and their contents based on the intensities; and 4) a financial module to translate the damages to insured losses, accounting for policy conditions such as deductibles and limits. While the financial module does not change significantly, the first three components are unique to each peril region. Ideally, these components are built using historical data and other scientific information, and
64 Canadian Underwriter March 2015
the more data that is available, the more credible the model will be. Where data are scarce, expert judgment is used to develop the model components and assumptions.
DEFINING THE PERIL The first complication with modelling floods is defining the peril. Separate and very different models are required to cover the various types of floods, such as the following: • storm surge from hurricanes; • inland precipitation caused by tropical cyclones; • tsunamis generated by earthquakes; • river flooding resulting from heavy rains and excessive snowmelt; and • flash floods from heavy precipitation over a short period of time. Storm surge flooding is the most straightforward to model because the driving events are hurricanes, and the hurricane models are welldeveloped and based on a wealth of historical data and scientific information. The event catalogue can be the same as the hurricane catalogue. The intensity formulas will also utilize many of the same parameters used to estimate the hurricane wind intensities. The minimum central pressure in a hurricane
determines, to a large extent, the peak wind speeds and the peak surge heights. The peak surge will also be influenced by the coastal bathymetry, tides and the presence of inlets and bays. High-resolution coastline data is required to capture the storm surge footprint along the coast and high-resolution elevation data is used to calculate the water depths inland — data that are generally available from scientific and government organizations. Studies on the flooding induced from storm surge, along with data on past events, inform the vulnerability curves for damage estimation. Hurricane Katrina and Superstorm Sandy are two recent events with significant losses from storm surge. Along the U.S. coastline, Tampa is the most vulnerable to storm surge flooding. For example, the surge footprint of a 1,000-year hurricane — a strong Category 4 storm — could lead to a loss of more than US$100 billion.
Subduction Zone where the Juan de Fuca plate subducts beneath the North American Plate pose the biggest threat. A recent report from the Canadian Geological Survey, A Preliminary Tsunami Hazard Assessment of the Canadian Coastline, suggests that there is a 10% chance over the next 50 years of a megathrust event in this region. To estimate the inundation area and damages from such an event, many of the same parameters used in a storm surge model apply. For example, high-resolution elevation and bathymetry information are used to estimate the peak wave height at the coast and the water heights inland. Tsu-
namis travel at much greater speed and, therefore, will impact coastal properties with much greater force and will cause flooding inundation further inland. The scientific formulas underlying the intensity calculations and the vulnerability curves can be refined to account for these impacts.
ESTIMATING EVENT FREQUENCY, SIZE The more difficult and most challenging aspect of modelling tsunamis under the catastrophe model paradigm is estimating the frequencies and sizes of future events. Defining the event catalogue for tsunamis is more challenging than for
Image 1
TSUNAMI RISK IN CANADA Storm surge flooding does not pose a significant threat to Canada, but coastal areas such as Vancouver Island, could be inundated by tsunamis. A tsunami is a series of waves in the ocean caused by the displacement of a large volume of water. The wavelengths are much longer than ocean waves associated with storm surge, and whereas a strong hurricane is not likely to cause storm surge heights greater than about 10 metres, a large-magnitude earthquake can generate a tsunami wave tens of metres high at the coast. Many types of underwater disturbances can cause a tsunami, but the most destructive tsunamis in Canada will most likely result from large-magnitude earthquakes, particularly those generated on thrust faults associated with major plate boundaries. These types of events create more vertical displacement and, therefore, generate larger waves. The Atlantic, Arctic and Pacific coasts of Canada are all susceptible to inundation from tsunamis, but the risk is highest on the west coast. Large-magnitude earthquakes generated by the Cascadia 66 Canadian Underwriter March 2015
Image 2
Image 1: Flood footprint for the Alberta flood in 2013 Image 2: 100-year flood footprint for Alberta Image credit: Massive Flooding in Calgary, Canada - 1D/2D Models, Inundation Mapping and Reality by Peter Onyshko, P.Eng., CFM, Government of Alberta; Bryce Haimila, CFM, Government of Alberta Association of State Floodplain Managers Annual Conference, 2014
storm surge, because while all hurricanes generate some storm surge, not all earthquakes generate tsunamis. And because there is more historical data for scientists to work with, the estimated frequencies and severities of hurricanes are more robust than for earthquakes — particularly large-magnitude events. The best that can be done currently is a scenario-type model that provides possible deterministic tsunami scenarios without specific probabilities. Tsunami scenarios have been created by the catastrophe modellers, and newer, open loss modelling platforms enable users to create their own events. These events can be superimposed on a book of business to estimate the resulting damages. While not fully probabilistic, this method can still inform underwriting and risk management decisions. For example, an insurer can estimate how much property value they insure within a possible footprint and decide if that is too much. Insurers can evaluate specific locations within the footprint to make individual risk decisions. This approach is also recommended for river and flash floods, which are the most frequent flood events in Canada, but also the most difficult for catastrophe modellers. Because each event is so different in terms of severity, spatial extent and duration, Canadian insurers cannot expect to have a credible fully probabilistic model for inland flooding. That said, high-resolution data can enable insurers to get robust scenario loss estimates. For example, Image 1 (upper, opposite page) shows the flood footprint for the Alberta floods of June 2013. This footprint can be superimposed on highresolution elevation data available in the open loss modelling platforms. It can be “floated� along the river to see how losses are impacted by different scenarios. Canadian government agencies have invested in creating high-resolution maps for different return period floods in significant floodplains. For example, Image 2 (lower, opposite page) is a 100year flood footprint for Alberta, presented at the 2014 Association of State Floodplain Managers Annual Conference.
While not quite the methodology employed by the catastrophe models, insurers can leverage the detailed work that has been done. Historically, flood perils have not been covered by the catastrophe models because of several unique complexities. Even though catastrophe modelling technology is expanding to cover new perils that require more complex and
higher-resolution models, it will take a lot more time and scientific knowledge for the catastrophe modellers to create fully probabilistic models covering all types of flooding in Canada. In the meantime, Canadian insurers can evaluate flood risk using new, open modelling platforms that provide insight into potential future losses from a wide range of scenarios.
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March 2015 Canadian Underwriter 67
MOVES & VIEWS
upcoming events: for a complete list visit
www.canadianunderwriter.ca
and click ‘my events calendar’ on the home page
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Swiss Re Canada welcomed its new president and chief executive officer, Veronica Scotti [1a], effective April 1. Scotti most recently served as Swiss Re’s client executive, based in Armonk, New York, and will now work out of Toronto, the reinsurer reports. She fills the vacancy left by Sharon Ludlow [1b], who was named as president of Aviva Insurance Company of Canada last June. Scotti’s previous roles at Swiss Re include head of business development and key account manager, in Zurich. She has also worked for Banque Paribas, Union Bank of Switzerland and Banco di Napoli. Scotti will continue to be a member of Swiss Re’s Americas Management Team.
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Jeff Burke [2a] has stepped down as Western Financial Group Inc.’s president and chief executive officer. Scott Tannas [2b], who has represented Alberta in the Senate since March 2013, will serve as interim president and CEO of the company he founded. Burke replaced Tannas as president in September 2013 and then as CEO that December. “A search for new leadership will commence shortly,” reports Western Financial Group, owned by Desjardins Financial Group.
68 Canadian Underwriter March 2015
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CNA Financial Corporation has named John Tung [3] as vice president, technology and professional liability for CNA Canada. With more than 20 years of experience, Tung will now be responsible at CNA Financial for the strategy and underwriting of professional liability and cyber, with a focus on technology. He will also oversee the company’s miscellaneous professional liability coverage, the company reports. Tung “brings extensive technology, errors and omissions, and commercial general liability underwriting experience to our growing team,” Michael O’Connor, CNA Canada’s vice president of underwriting, says in a company statement.
Arthur J. Gallagher & Co., which provides retail and wholesale commercial insurance brokerage and risk management services in 30 countries, announced it has acquired Ottawa-based Cohen & Lord Insurance Brokers Ltd., whose target markets include commercial realty and condominiums, construction and fleet, and personal lines for high-income individuals. Horace Cohen, Irvin Hoffman, Andrew Swant and their associates will continue to operate in Ottawa under the direction of Steve Bryant, head of Arthur J. Gallagher’s Ontario property/casualty brokerage operations. The terms of the transaction were not disclosed.
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Canadian National Insurance Crime Services (CANATICS) has named Mario Silvestre [5a] as its new vice president of analytics and operations and Alexander Adeyinka [5b] as its new chief privacy officer and general counsel. Silvestre, previously director of shared services for RSA Canada who has also worked for The Co-operators, has 25 years of experience in auto insurance claims management, CANATICS reports. Adeyinka was previously associate chief privacy officer and senior regulatory counsel for Rogers Communications.
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At CARSTAR Automotive Canada Inc., Michael
MOVES & VIEWS MOVES & VIEWS
of Calgary; Gordon Adams; Robert Cartwright, Jr.; Al Gorski; Leslie Lamb; John Phelps; Michael Phillipus; Frederick Savage; and Lori Seidenberg.
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positions have included gen7 eral adjuster, branch manager, Macaluso [6a]ofhas been vice president operations named the company’s new and Lloyd’s Division leader. president and M.J. Marshall [6b] has been appointed its chief financial Chisholm officer. Macdonald Macaluso, who joined Trask Insurance the (MCT) company in 2008inasearly announced managerthat of insurance relations, January it will join propmostand recently served as chief erty casualty brokerage operating officer. Marshall, BrokerLink. The terms of the who joined CARSTAR in transaction were not disOctobernotes 2005a as controller, closed, statement has served as vice president from BrokerLink. BrokerLink of finance and vice president companies, subsidiaries of of finance. Lisa Mercanti-Ladd Intact Financial Corp., [6c] will84 continue her role include offices in serving as executive vice president. clients in Atlantic Canada,
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Alberta and Ontario. Dating Vancouver-based back more than 60 years, Kernaghan Adjusters MCT has more than 110 inLtd. has opened new surance professionals ina18 branch in St. Catharines, offices. Michael Brien, who Ontario, appointing has led MCT over theMarie last 12 Gallagher as manager. years, joins[7] BrokerLink as Gallagher, who served as head of its Atlantic operations.
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Carolyn Snow [7] will president ofRIMS the Canadian lead as president Independent Adjusters’ for the 2014 term, Association for 2013-2014, which took effect January 1. previously managed Snow, who has beenthe on St. the Catharines branch of Granite RIMS Board of Directors for Claims Solutions. She began seven years, is currently diher insurance career in rector of risk management for 1983 at brokerage Cosburn Humana Inc. She previously Griffiths Brandham, now served asand RIMS’s treasurer, known as The CG&B Group secretary and director of Inc., andaffairs. in 1986, external Thejoined RIMS Ponton Coleshill Edwards & board for 2014 also includes Associates, later known as vice president Richard McLarens Canada and Julie then Roberts, Jr.; treasurer as Granite Claims Solutions. Pemberton; corporate secre-
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tary Nowell Seaman, director Pario of global riskEngineering management for and Environmental Potash Corporation of SciencesInc.; — formerly Saskatchewan Gloria Rochon Engineering —director Brosius; Steve Pottle, recently announced Anthony of risk management services (Tony) Petruccelli is the at York University;[8] Jennifer company’s new director Santiago; Janet Stein, direcof development. torbusiness of risk management and Pario Engineering’s services insurance at the University
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As of January 8, Toronto insurance broker Jones DesLauriers 5a Insurance Management Inc. (JDIMI) had acquired Whitley Insurance and Financial Services. Whitley Insurance has offices in Belleville, Ontario and the nearby communities of Trenton, Deseronto and Stirling. “The acquisition is expected to build a solid presence for JDIMI in Eastern Ontario 9 and position the firm to better service their clients, with strengthened commerinclude, cial and among personalothers, insurance accident firea offerings reconstruction, in the region and and explosion investigation, new financial services divimould investigation and resion,” notes a statement from mediation, contaminated JDIMI. President and CEOsite remediation and hazardous Shawn DeSantis will lead the materials identification and teams from both companies. management. Pario owned Loris Clarke [8] has is been by SCMsuccessor InsurancetoServices. named Paul
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Whitley, president of Whitley Dan Ogale [9]remain has Insurance, who will been named Crawford during a transition period. & Company (Canada) Inc.’s client service manager in the human risk division. Ken Rayner [9] has Previously “a Anderson consultant joined overseeing the management McTague & Associates and implementation Ltd. as its director ofofbusiworkers’ compensation and ness development, Central third-party administration Region. “Ken brings a wealth programs,” Ogale hascommore of experience to our than yearsheld of experience. pany,30 having various He hasmanagement held executive and senior positions management positions in with insurers and other MGAs,”
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says Chuck McTague, president of Anderson McTague & Associates, a familyowned MGA based in New Brunswick. In January, Anderson McTague & Associates announced it was expanding, adding an office in Toronto to service the brokers of Ontario and Manitoba. Rayner’s appointment confirms the 5b company’s “commitment to the Ontario/Manitoba marketclaims and to riskthe management place, and building of for private organizations in a local support team to assist the global transportation brokers with their surplus and storage industry, as lines and difficultastowell place with insurance carriers. business,” McTague adds.
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Business insurance provider QBE The Guarantee Services Inc. Company of has signed a newNorth lease America for office space in Vancouver, has announced that with Tara the intended occupancy Wishart [10] becamebeing vice August 1. of The company’s president claims for the general for Canada, insurer’smanager Toronto branch on David Edgar, “will assume December 2, 2013. Having the responsibility of general 21 years of experience in The manager, Western Guarantee’s claimsRegion, based in Vancouver, department, Wishart and will be focus his efforts on operations the responsible for the growth and expansion of the Toronto Branch of Claims. QBE Service’s She first joinedgeographical The Guaranfootprint in the West.” The tee in 1995 as an adjuster search for a Toronto-based and has held roles of increasgeneral manager start ing seniority with will the comimmediately. Themost company’s pany, including, Canadian business has for recently, claims manager focused “its core products, specialtyonlines. Wishart is a including general liability, member of both the Surety commercial construcAssociation property, of Canada and tion all risk, auto fleet andof the Canadian Association professional indemnity.” Women in Construction. Follow @CdnUnderwriter on http://twitter.com/CdnUnderwriter
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CNA Canada hosted a Specialty Products Launch event on January 5 at the Shangri-La Hotel in downtown Toronto. A few hundred brokers gathered to hear CNA Canada president and chief operating officer John Hennessy announce the introduction of the company’s specialty products in Canada. With the launch, Canadian commercial brokers will have access to “the full array of CNA’s products, so moving away from just a commercial operation, to a full operation that would encompass technology risks, healthcare, life science, professional services, management liability, financial institutions,” Hennessy told attendees. “These are all areas of the company that CNA enjoys great successes in other jurisdictions, and we want to bring those capabilities to our brokers so we can together service our customers in the most effective way possible.”
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A record 399 repairers, insurers and suppliers representing the insurance claims and collision repair industries attended the Canadian Collision Industry Forum (CCIF) meeting on January 30 in Toronto. Leanne Jefferies, director of collision programs for the Automotive Industries Association of Canada (AIA), welcomed the group and introduced speakers of the day. These included Larry Coan, damageability product concern engineer, Customer Service Engineering for Ford Motor Company - 2015 Ford F150 Collision Repair Program; Jason Bartonen, director of industry technical relations at I_CAR US; Norm Kramer, a consultant with Workplace Safety & Prevention Services; Andrew King, managing partner of DesRosiers Automotive Consultants Inc; George Cooke, president of Martello Associates Consulting; Marie Artim, vice president of talent acquisition for Enterprise Holdings; Larry Jefferies, CCIF chairman; and an OEM panel discussion moderated by David Adams, president of Global Automakers of Canada.
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PROPERTY CLAIMS ADJUSTER
Get the job. Done. TM
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The CICMA/CIAA Ontario Chapter’s 48th Annual Joint Conference was held February 3 at the Metro Toronto Convention Centre. The theme of the conference was Catastrophes – It’s not just about the weather. Guest speakers were master of ceremonies Brian Maltman, executive director of general insurance for OmbudService; Alex Walker, president of the Ontario CICMA chapter; Dorothy Lowry, president of the Ontario CIAA chapter; Glenn Gibson, president and COO of the Hamilton TigerCats Football Club; Carol Kreiling, vice president at Swiss Re; Mark Prefontaine, assistant deputy minister of financial sector regulation and policy for the Government of Alberta; and the keynote speaker, insurance training professional Carl Van, president and CEO of International Insurance Institute.
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Hundreds of insurance claims industry guests attended the 9th Annual Post CICMA/CIAA Joint Conference Cocktail on February 3. Entitled The Big Mingle, Giffin Koerth and Blouin Dunn LLP hosted the event, held at The Fifth Social Club in Toronto.
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More than 150 exhibitors from across Canada showcased their wares and services at the Ontario Insurance Adjusters’ Association’s (OIAA) Professional Development and Claims Conference in Toronto on February 4. The event featured a trade show and seminars covering a wide variety of timely claims topics.
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The Toronto Insurance Women’s Association (TIWA) Wine and Cheese Reception was held at The Hyatt Regency in Toronto on February 19. More than 900 guests attended the association’s annual signature event. This year’s Wine and Cheese event was a chance for all to celebrate TIWA’s 55th Anniversary in 2015.
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To celebrate its official brand launch, Xpera Risk Mitigation and Investigation hosted clients, stakeholders and staff to an evening of food, drink, and mingling at Toronto’s historic John St. Roundhouse, home of Steamwhistle Brewery on February 2. The event was celebrating the official unveiling of the new brand name Xpera, following the merger of CKR Global and Forensic Investigations Canada (FIC). Speakers at the launch event included Robert Burns, President; Ken Cahoon, Senior Vice President; and Bob Fitzgerald, CEO of SCM.
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WICC Ontario Presents
PROHIBITION PARTY
Wednesday, April 22, 2015 – Westin Hotel Westin Harbour Castle 1 Harbour Square Toronto, ON M5J 1A6
5:00 p.m. Cocktails and Silent Auction 7:00 p.m. – Dinner
Tickets: $200 each plus HST $2,000 plus HST for a table of 10.
For Sponsorship Opportunities Visit www.wicc.ca Design compliments of Informco
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