Canadian Underwriter December 2008 by Annex Business Media

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

“As 2008 comes to an end, we start 2009 with uncertainty not only within the property and casualty insurance industry, but with a lack of predictability about how the global economy will affect Canada.”

“The year 2008 will forever be recorded in history as a year of global volatility. Damage to the economy has been fast and it went deep, wiping off the map companies that had been successful for more than 150 years.”

“Small, measured rate

“I expect the latter part of 2008 and early 2009 to be turbulent times for our industry, characterized by continued overall deterioration in industry combined ratios coupled with uncertainty in capital markets.”

increases today will stave off larger increases tomorrow. Looking to 2009, I strongly expect this trend will continue so that brokers and consumers are not victims of ‘rate shock.’”

“Now more than ever, insurers and brokers must work together to understand the needs of clients, provide highly responsive service and improve workﬂow efﬁciency.”

“Results across all product lines had already been deteriorating for some time before the investment climate unexpectedly eroded revenue further.”

“When rates do harden, the most important issue will be for insurers and brokers to work together to demonstrate the value of their propositions and help their customers ﬁnd practical solutions in tough economic times.”

D E CE M B E R 2 0 0 8 A Business Information Group Publication, PM #40069240

“I applaud everyone in the industry who stepped up in 2008 to assure consumers of the strength of our industry during these uncertain times.”

“A decrease in investment income will undoubtedly lead to a greater focus on underwriting proﬁt by shareholders.”

“We should always keep in mind how consumers, brokers, regulators and legislators reacted a few years ago when we, as an industry, failed to react in an orderly fashion to the deterioration of our proﬁtability.”

“It might be more important than ever to evaluate an insurance company based on its ﬁnancial strength, including knowledge of a company’s investment portfolio.”

Shifting Ground PRIMARY INSURANCE MARKET 2009 OUTLOOK

New Deal for Manitoba Brokers BY DAVID SCHIOLER

As Popular as ‘The Governator’ BY MARY LOU O’REILLY

速

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VOL. 75, NO.12, DECEMBER 2008 CANADA’S INSURANCE AND RISK MAGAZINE. PUBLISHED BY BUSINESS INFORMATION GROUP

www.canadianunderwriter.ca

“The year 2008 will forever be recorded in history as a year of global volatility. Damage to the economy has been fast and it

“Small, measured rate

COVER STORY:

Shifting Ground

increases today will stave off larger increases tomorrow. Looking to 2009, I strongly expect this trend will continue so that brokers and consumers are not victims of ‘rate shock.’”

“Now more than ever, insurers and brokers must work together to understand the needs of clients, provide highly responsive service and improve workﬂow efﬁciency.”

Canadian primary insurers in early 2008 were already starting to see more catastrophe losses, higher loss ratios, more severe claims payments and more evidence that auto insurance reforms in Ontario are required — and then the global credit market collapsed. Canadian primary insurers share their coping strategies with Canadian Underwriter.

FEATURES

Industry Image

Back to Basics

Canadian insurers can take pride in the fact that they are currently as popular as California governor Arnold Schwarzenegger when it comes to consumer satisfaction.

Heading into a financial maelstrom known as the global credit crunch, risk managers are cautioned to stay the course and keep following the fundamentals in order to emerge unscathed.

BY MARY LOU O'REILLY

BY VANESSA MARIGA

New Deal

Insurance Fraud

Manitoba's insurance brokers have successfully banded together to broker a novel compensation package with the province’s public auto insurer, MPI.

Insurance fraud appears to have arrived as a pop culture phenomenon now that it has been turned into a videogame, but fraud is no game, IBC investigators warn.

BY DAVID SCHIOLER

BY DONNA FORD

20 Speed of Shingles Researchers at the University of Western Ontario are using shingle damage patterns as a way to determine true hurricane winds speeds, thus aiding in hurricane modelling. BY GREGORY A. KOPP

30 Stuck in Neutral

tion issues as part of its mandate. (It currently does not.) BY DAVID GAMBRILL AND VANESSA MARIGA

54 Pump Up the Volume Brokers need to increase their advertising spending significantly if they want to gain any advantage over their free-spending competitors in the direct channel.

As the industry awaits a final court decision on whether auto insurance caps are in fact unconstitutional, the IBC and the Alberta rate board have a public exchange as to whether the rates that have been established in the meantime are adequate.

BY VANESSA MARIGA

BY DAVID GAMBRILL

BY WESLEY GILL

50 IBAO Convention

66 Boosting Sales

Ontario’s brokers met in October to discuss whether an insurer’s size matters in today’s turbulent financial markets; ask insurers to agree not to purchase brokerages; and prod the IBC to once again discuss distribu-

The Insurance Brokers Association of Canada (IBAC) recently observed there aren’t many educational opportunities available to help brokers sell insurance — and created a new program to fill the void.

62 Operational Risk Companies are now starting to use Business Intelligence (BI) processes to manage risks inherent in company operations such as clerical errors, power outages and internal fraud.

BY PETER FREDERICKS

December 2008 Canadian Underwriter

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expect nothing less

Kingsway General has built its business over the last 20 years helping brokers fill gaps and provide LQVXUDQFH FRYHUDJH WR FXVWRPHUV WKDW GRQÂśW ÂżW WKH VWDQGDUG PDUNHW 8QOLNH .LQJVZD\ÂśV VWDQGDUG PDUNHW counterparts, there are no contracts or volume requirements imposed to access the coverage required E\ PDQ\ EXVLQHVVHV DQG LQGLYLGXDOV DFURVV &DQDGD Kingswayâ&#x20AC;&#x2122;s value proposition to the broker is simple: unequaled access to insurance coverage for a wide array of harder to place risks, responsive underwriting processes that support your customer service goals, ease of doing business to avoid excess costs, and effective claims handling to ensure your FXVWRPHUV DUH WUHDWHG LQ D IDLU DFFXUDWH FRXUWHRXV DQG WLPHO\ IDVKLRQ .LQJVZD\ LV FRPPLWWHG WR VXSSRUW WKH JURZWK DQG VHUYLFH RI LQVXUDQFH EURNHUV DFURVV &DQDGD Finding solutions for your customers - expect nothing less!

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VOL. 75, NO. 12, DECEMBER 2008

PROFILE

14 Exemplifying Professionalism As the CIP Society celebrates its 10th anniversary, Peter Hohman, president and CEO of the Insurance Institute of Canada, sees the society furthering its initiatives related to professional demographics, recruitment and retention. BY VANESSA MARIGA

Senior Publisher Steve Wilson steve@canadianunderwriter.ca (416) 510-6800

Associate Publisher Paul Aquino paul@canadianunderwriter.ca (416) 510-6788

Editor David Gambrill david@canadianunderwriter.ca (416) 510-6796

Art Director Gerald Heydens

Associate Editor Vanessa Mariga vanessa@canadianunderwriter.ca (416) 510-6793 Account Manager Mike Wells mike@canadianunderwriter.ca (416) 510-5122 Advertising Sales Christine Giovis christine@canadianunderwriter.ca (416) 510-5114

Art Consultation Pylon.ca Production Manager Gary White (416) 510-6760 Print Production Manager Phyllis Wright President Bruce Creighton Vice President Alex Papanou

SPECIAL FOCUS

Editorial

10 Marketplace

Canadian Underwriter is published thirteen times yearly (monthly + the Annual Statistical Issue) by Business Information Group, a division of BIG Magazines LP, a leading Canadian information company with interests in daily and community newspapers and business-to-business information services. Business Information Group is located at 12 Concorde Place Suite 800, North York, ON, M3C 4J2. Phone: (416) 442-5600.

68 Moves & Views

Canadian Underwriter, USPS 022-494. US office publication: 2424 Niagara Falls Blvd., Niagara Falls, NY 14304-0357. Periodicals Postage Paid at Niagara Falls, NY, USA. US postmaster: Send address corrections to Canadian Underwriter, Po Box 1118, Niagara Falls, NY 14304.

70 Gallery

All rights reserved. Printed in Canada. The contents of this publication may not be reproduced or transmitted in any form, either in part or in full, including photocopying and recording, without the written consent of the copyright owner. Nor may any part of this publication be stored in a retrieval system of any nature without prior written consent. We acknowledge the financial support of the Government of Canada through the Canada Magazine Fund toward our editorial costs. ÂŠ Published monthly as a source of news, technical information and comment, and as a link between all segments of the insurance industry including brokers, agents, insurance and reinsurance companies, adjusters, risk managers and consultants. Privacy Notice From time to time we make our subscription list available to select companies and organizations whose product or service may interest you. If you do not wish your contact information to be made available, please contact us via one of the following methods: Phone: 1-800-668-2374 Fax: 416-442-2191 E-mail: jhunter@businessinformationgroup.ca Mail to: Privacy Officer, 12 Concorde Place., Suite 800, North York, ON, M3C 4J2 Subscription Rates: 2006 Canada 1 Year $ 34.95 + $ 2.45 GST = $ 37.40 2 Years $ 48.95 + $ 3.02 GST = $ 46.11 3 Years $ 62.95 + $ 4.41 GST = $ 67.36 Single Copies: $7.50 + .53 GST

= $8.03

Annual Statistical Issue (included with above subscription) Or separately: $37.00 + $2.59 GST = $39.59 Elsewhere 1 Year $42.00 2 Years $68.00 3 Years $95.00

MEMBER

Canadian Underwriter December 2008

GST Registration number 890939689RT0001 Second Class Mail Registration Number: 08840 Publications Mail Agreement #40069240 Return undeliverable Canadian addresses to: Circulation Dept. Canadian Underwriter 12 Concorde Place, Suite 800 North York, ON, M3C 4J2

pg 7 IBAO DecGraduateAd

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CONGRATULATIONS! The IBAO Education Committee and Department would like to congratulate all 2007-2008 CAIB Graduates, CPIB Graduates, Best Practice Brokerages and Award Recipients on your success!

THANK YOU TO ALL OF OUR 2008 EDUCATION SPONSORS!

CAIB Graduates (H denotes honors) Lynda Anderson Amy Armstrong Charles Badanai Kimberly Bates (H) Dario Battista (H) Chantal Bedard Sherry Bell Colleen Belore Philip Bettinson Pavneesh Bhalla Laura Biggar Sherry Biggar Debbie Bird-Thompson Anthony Blay Lynn Bousquet Tanya Brown Todd Bryant (H) Amy Bulmer (H) Joseph Campanelli Giuseppe Campolongo (H) Anne Carswell Nadine Chang Jennifer Charron Jeanne Cheeke Elizabeth Chopping (H) Toni Ciccone Shawn Craig Lisa Crocker Marcia Cudmore (H) Frank Dearie Jenny Desroches Wanda Dickey Brenda Duffy Shannon Dufty Sharon Durack Linda Edgar

Georgina Ens Krista Fallowfield Donna Fansher Mary Finlay Carol Forestell (H) Adeola Fowodu Jenifer Fox Tracy Frederick Jatinderpal Gahunia Kristen Gamble Glenda Gardner Heather Gimson Chris Gretton Holly Grotenhuis Karen Hampton Nanda Haveman Jacqueline Hawkes Lenora Heinrich Emily Heuts Judith Hicks Janet Hill Nicky Hoogendoorn-de Groot (H) Bashir Hothy Catherine Hsiung Randy Hughes Lori Hurley Anne Jacksic Tania Jansen Frank Jensen Leslie Johnston (H) Tamara Kalverda (H) Lesa Karns Mary Kelly Ann Marie Kiley-Taylor Hope King Mark Kloostra Gema Kramer Cale Krezek Michelle Kriedemann

Francine Laberge Jennifer Lachance Laurie Lalonde Emilie Lang Jacqueline Larmer Solange Laverty Jennette Lee Wah Patty Leyten Teresa Lloyd Christy Loshaw Michelle MacAloney Mark Mackenzie Christopher Main (H) Dave Mak Sukhjit Mand Susan Marcaccio Ann-Marie McDermott Conor McDonagh Kimberly McDonald Cheryl McTaggart (H) Marian Melick-Bonner Joanne Mintz Jeffrey Mitchell Nicole Mitchell Dianne Monteiro Tammy Moody Steven Moran Jeffrey Morehouse Christa Morgan Paulette Morse Andrei Munteanu Helena Nethery Barrie Ngeh Chad Nicholls Heather Nolan (H) Erin Oâ&#x20AC;&#x2122;Brien Paolo Perciballi Julia Petrova Michael Phillippo

Melissa Pitcher Sarah Pollock Matthew Poort Kimberly Powell Marta Prowse Jo-Anne Raymond Bonnie Reed Melissa Rhodes Ralph Rizzo Tim Robinson David Rooney(H) Michael Russell (H) Michael Schepers Matthew Schweitzer Sheila Slowe (H) Charles Smith Rachel Speijer (H) Melissa Starkey Lois Starr Dennis Thurston Tracey Tibando Andrew Tichelaar Glenda Tong Paul Topp Thea Trenholm Barbara Van Allen Victoria Van Santen (H) Tracie Van Vrouwerff Christina VanDalen Suzanne Vincent Kelly-Anne Vink (H) Diana Visser Tanya Walkom Kyle Weir (H) Safron Wiesner Linda Willert Kylene Williams Karen Winstanley-Hayes Judy Wong-Nuru

CAIB Top Student Award 2007-2008 Victoria Van Santen, Generations Insurance Inc., Scarborough (Proudly Sponsored by The Dominion of Canada General Insurance Company) Basic Broker Preparation Course Top Student Awards (Proudly Sponsored by The Dominion of Canada General Insurance Company) September 07 Ekaterine Iliadis, Jones DesLauriers Ins. Mgmt. Inc., December 07 Sharon Dunlop, Dunlop Insurance Limited January 08 Maria Perrott, Hudson Henderson Ins. Brokers Ltd. Philip Rowsell, W.L. Edwards Insurance Brokers Inc. Ronald A. Fritz, Leeds Insurance Brokers Inc. March 08 John Findlay, Brokerforce Insurance Inc. June 08 William Coffin, The Insurance Market Ins. Brokers Ltd. July 08 Adam Woolfrey, Rayburn Insurance Brokers Ltd. September 08 Ryan Bentley, Algoma Insurance Brokers Ltd.

CPIB Graduates Kelly Adams Monica Dale Liane Edwards Steve Philpott

2007-2008 Jennie Black-Stuart Lorna Dansereau Eve McAllister

Best Practice Brokerages 2008 Binks Insurance Brokers Ltd., Ottawa Brown and Brethour Insurance Brokers Ltd., Sunderland Cornell Insurance Brokers Ltd., Markham Miller Insurance Brokers Inc., Kincardine North City General Insurance, North York Brian Greenslade Scholarship (Proudly Sponsored by Aviva Pilot) Adrian Pech, Fanshawe College

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EDITORIAL

Shell Game

As it stands, the public financial statements of too many companies today are completely written in code, borderline disingenuous and do nothing to contribute to public comprehension. David Gambrill, Editor david@canadianunderwriter.ca

Canadian Underwriter December 2008

Some time ago at a CEO forum, a broker asked insurance company executives to provide the best standard of financial health in these tough economic times. The confusion motivating the question is well-placed: one minute an insurer publicly reports having excellent quarterly underwriting earnings; the next day we learn it is bankrupt, awash in a sea of red ink. It is a sad comment on the state of transparency today that if a consumer wants a true measure of the honest state of a company’s health these days, he or she will not likely find it in a company’s public quarterly statement. Some companies do make a genuine effort to have their quarterly financial statements understood, it is true. Alas such renegade clarity is manifest only in contrast to the general befuddlement that accompanies the financial disclosures of most of their peers. Let's call a spade a spade: as it stands, the public financial statements of too many companies today are completely written in code, borderline disingenuous and do nothing to contribute to public comprehension. This is an area that requires immediate attention. If regulators were serious about transparency, they would find some way to de-mystify and clean up the jargon regularly appearing in companies’ public financial disclosures. Right now, it’s too easy for

companies to hide behind insignificant or irrelevant financial measures, or play a shell game with disclosed facts. Let me exaggerate (sort of) to prove a point. Is your net income down by almost Cdn$1 billion in the third quarter? No problem, lead with your net revenues. Are your combined ratios lousy? No problem, bury them or leave them out of your press release altogether; instead, you can quote your CEO gloating about the company’s 25% increase in net premiums written. The net effect of doing this on a grand scale is to create public cynicism about the honesty of public financial disclosure generally. How does the industry help to reverse this cynicism? Ideally, all companies in the industry — not just federally regulated institutions — should be required to publicly disclose financial data in a standardized, plain-language format. All of the relevant measures of an insurance company’s financial health should be included on the standard form — net income (i.e. profit), combined ratios, net premiums written, loss ratios in the various lines of business, return on equity (ROE), investment income, quarterly claims costs, MCT scores, etc. etc. Standardization is key. Companies’ quarterly disclosures should all be in the same format so that the financial results can be compared from company to company.

Income should not be expressed by placeholders (i.e. it’s “Cdn$200 billion,” not “Cdn$200,000,000 x 1,000”) Quarterly results should not be reported on the same form as nine-month or full-year results, thus ensuring clarity around the financial periods that companies are talking about. Most importantly, clear definitions should be a required feature of the form. Joe Schmo on the street does not know, for example, what the company is talking about when it says “organic pre-tax growth” hit record levels. Similarly, he won’t know why a company led in a press release with its “net operating revenues” instead of “net nottechnical results,” “net change in reserves for unearned premiums” or “gross premiums written.” In one company disclosure, the difference between “net operating income” and “net income” was almost Cdn$50 million. Does anyone out there, besides accountants, know the difference between these two different forms of income? Cleaning up financial disclosure statements will not be a quick fix. It may even require the involvement of the regulators. But if it gets done, public reporting on the financial statements will be greatly improved, as will the public’s understanding of what the numbers actually say and mean. And that will reflect well on the insurance industry as a whole.

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MARKETPLACE

Regulation IBC ASKS ONTARIO TO WORK WITH FEDS IN POSTPONING CHANGES TO PART XIII OF ICA Insurance Bureau of Canada (IBC) wants the government of Ontario to work with the federal government to delay changes to Part XIII of the Insurance Companies Act of Canada until the initiative is fully understood by provincial regulators. IBC made the suggestion as part of its pre-budget submission to Ontario’s minister of finance. The Office of the Superintendent of Financial Institutions (OSFI) changed the definition of whether or not an insurance policy is considered Canadian, effective Jan. 1, 2010. “There is not a clear understanding by provincial regulators about the change [to Part XIII] OSFI has made,” IBC said in its submission. “Because the federal and provincial acts differ, it is possible for an insurance policy not to be Canadian according to the OSFI definition, but still be considered a policy in Ontario.”

BROKERS SAY CCIR MISSES OPPORTUNITY TO LICENSE SELLERS OF INCIDENTAL INSURANCE The Insurance Brokers Association of Canada (IBAC) says the Canadian Council of Insurance Regulators (CCIR) has “missed

10 Canadian Underwriter December 2008

an opportunity” to implement a new licensing regime for sellers of incidental insurance products. The national insurance market conduct regulator released its much-anticipated Incidental Selling of Insurance Report. In it, the CCIR calls for the training and supervision of sellers of insurance products, including those for whom the selling of insurance is incidental to their operations. But it says insurers — and not regulators — should bear the ultimate responsibility for this. IBAC wanted to see regulators license sellers of incidental insurance products. “By allowing an un-regulated, un-licensed sales force of merchants to offer consumers insurance products, the CCIR has missed an opportunity to recommend to its members to take action on a very basic consumer right — the right to deal with licensed and experienced insurance professionals,” IBAC CEO Dan Danyluk said in a statement.

INSOLVENCY CLAUSES SHOULD BE A REQUIRED FEATURE OF REINSURANCE CONTRACTS: PACICC Canada’s solvency regulator should only count reinsurance as an allowable asset for an insurance company if an appropriate insolvency clause is part of the reinsurance arrangement. The Property and Casualty Insurance Compensation Corporation (PACICC), which reimburses Canadian policyholders in the event of an insurer bankruptcy, made this and several other recommen-

dations in its recent report, (Re)assurance of Solvency: reinsurance assets in insurance company liquidations. Among other things, the report looks at the thorny issue of whether insolvent insurers should be able to recover from reinsurers (and therefore count those ‘recoverables’ against their assets in the event of an insurer bankruptcy). Reinsurers have successfully argued in U.S. courts that insolvent insurers do not technically pay the claims they owe in the event of a bankruptcy, and therefore reinsurers should not have to pay the claims on their behalf if the primary insurer goes bankrupt. An insolvency clause, which PACICC says should be a required part of any reinsurance contract, clarifies “that if the reinsured stops making payments for losses because of insolvency, the reinsurer must continue to make payments to the reinsured or to its liquidator as if the insolvency had not occurred.”

Claims SUPREME COURT DISALLOWS POLICY EXCLUSION FOR “FAULTY DESIGN” The Supreme Court of Canada has ordered a group of property insurers to cover the costs related to a damaged tunnel-boring machine under an all-risk policy that contains an exclusion for ‘faulty design.’

In Canadian National Railway Co. v Royal and SunAlliance Insurance Co. of Canada, a panel of four Supreme Court of Canada judges (with three dissenting) rejected the validity of a policy exclusion for “faulty design” and ordered a group of six insurers to pay the CNR of nearly Cdn$30 million, plus Cdn$1.15 million in costs. In 1993, CNR was building a railway tunnel under the St. Clair River between Sarnia, Ont. and Port Huron, Michigan, using a state-of-the-art tunnel-boring machine. The Supreme Court found that although the design of the machine “proved in the result to be defective,” it “was not ‘improper’ or ‘faulty’ according to the state of the art at the time the design was finalized.” It thus overturned the Ontario Court of Appeal, which ruled that a design must “‘take into account,’ ‘accommodate,’ ‘provide for’ and ‘withstand’ all foreseeable risks however unlikely or remote.”

IBC VOTES TO MOVE FORWARD WITH THE REINTRODUCTION OF HCAI AFTER SUMMER OF 2009 The Insurance Bureau of Canada (IBC) has approved plans to move forward with the re-introduction of the Health Claims for Auto Insurance (HCAI) electronic dataexchange system, although re-introduction will not happen before testing begins in the summer of 2009.

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MARKETPLACE

HCAI, a Cdn$20-million electronic claims system, was suspended in April 2008 after users reported problems using the system. It is intended to link participants involved in Ontario’s auto insurance system, including insurers, health care providers and the provincial government. “In order to ensure that HCAI is re-introduced only under the highest standards of quality control, third-party audits will be performed at several points as part of the remediation process, and the system will undergo stringent stress testing prior to re-launch,” the IBC said in a Nov. 24, 2008 letter to stakeholders. “For insurers and/or health care facilities that require an environment for testing and training purposes, such an environment will be made available well in advance of the re-introduction of the live system. This test environment should be available sometime during the summer of 2009.”

Canadian Market

Institute of Ontario’s ‘At the Forefront’ breakfast in Toronto on the need for brokers to support domestic insurers to ensure the survival of a robust broker distribution channel. The European insurance mar-

ket leaders tend to leverage multichannel platforms, but a European insurer aiming to grow Canadian business will only get this market share from one place — brokers, Simpson said. When faced with a choice

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BROKERS NEED STRONG CANADIAN REPRESENTATION AMONG THEIR MARKETS Brokers must maintain a balanced portfolio and resist relying too heavily on European-based insurers, warned Colin Simpson, senior vice president and chief strategy officer of Kingsway Financial Services. Simpson spoke at the Insurance

between placing a risk with a domestic company or a European company, Simpson advised, “think twice as to what that European company is ultimately going to do to your distribution channel.”

Visit our website at www.cunninghamlindseycanada.com or email us at corpservices@cl-na.com.

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PROFILE

Winning the War for Talent Vanessa Mariga Associate Editor

Celebrating its 10 years of existence, the Chartered Insurance Professional (CIP) Society is working to further elevate the professionals of the insurance industry. A casual conversation at a social gathering that began with, “So, what do you do?” sparked an interest in the insurance industry that Peter Hohman, president and CEO of the The Insurance Institute of Canada, fanned into a career of which he is clearly proud. One of the feathers in Hohman’s cap is his involvement in the formation of the Chartered Insurance Professional (CIP) Society, now celebrating its 10th anniversary. The society of Insurance Institute CIP and FCIP (fellow) graduates has grown to a membership of more than 15,000 across Canada and counting. As the society’s momentum

14 Canadian Underwriter December 2008

gains, Hohman says in the coming years it will continue to foster the professional development of its members, as well as research and develop tools and programs to help the industry win ‘the war for talent.’ In the past, people have entered the insurance industry by following in the footsteps of a family member. But for Hohman, following his family's professional path led him to a career in the sciences. After graduating from high school in his hometown of Timmins, Ontario, he obtained an undergraduate degree in Microbiology from the University of Waterloo. But he admits the sciences “were not an ideal career choice.” Instead, he sought a career in business and accepted a position at a bank. “I was becoming somewhat bored with that experience,” he recalls. “One night I happened to be speaking with a field adjuster and his job seemed fascinating and like something that I would really enjoy. I didn’t know the person beforehand, it was just one of those things where you chat with someone at a party and ask: ‘What do you do?’ He talked about working in the industry and helping people in their time of loss, and that really attracted me to what he did.”

After a bit of research, Hohman discovered that with his limited, two-years-plus experience in the banking sector (as well as an undergraduate degree), he was a good candidate for Safeco

Insurance, which offered a strong training program. For the next three years, he worked as a field adjuster in Southern Ontario. He then moved into management, underwriting and marketing

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PROFILE

positions. “A position became available at the Insurance Institute some years ago, and it was something that intrigued me, so I took up the opportunity.”

ELEVATING PROFESSIONALISM It’s been nearly three decades since Hohman entered the insurance industry. In that time, he’s witnessed a shift within the industry towards “bringing on different types of people” that are more prepared and better educated, he says. “We used to look for folks with an undergraduate degree,” he said. “Now more often than not for our technical positions, we’re looking for people that would come with a university degree and are committed to completing their professional qualifications.” The CIP Society’s mandate is to help elevate individuals throughout their careers. Over the past decade, the society has provided its membership with professional development courses and seminars, as well as networking opportunities. “What really started as a vision 10 years ago has seen the society evolve to become a vital component of the industry’s fabric,” Hohman says. Its mandate, he continues, is to strengthen the in-

surance knowledge base of CIP and FCIP graduates. “We’re grooming them to become the industry leaders of today and tomorrow by developing their leadership skills so that they are able to inspire and motivate others,” he says. “We are also working to develop our graduates to exemplify professionalism and instil confidence in the public.” The society in 2009 is launching its National Leadership Awards program, a first for the industry. “These awards will recognize CIP members who are leaders in their organizations, the industry or in their communities,” Hohman says. There will be two categories of awards: one for the well-established leaders, and one for emerging leaders.

found a large percentage of the industry was preparing for an exit to retirement; only a trickle of new entrants were coming into the field to fill the gap. Identifying and quantifying the issue through the research was only the first step, Hohman says. “Our biggest challenge in the area of recruitment is that our industry is the bestkept career secret out there.

BEST-KEPT SECRET

This is a great business. Many of us came into the industry through different experiences, and perhaps more by happenstance than by design, but the reality is that we have all chosen to stay in the business.” The CIP Society is now trying to convey this reality to prospective industry talent. The Career Connections program has already brought Insurance Institute ‘ambassadors’ to more than 50 high schools, and the Institute is currently

Elevating professionalism, imparting knowledge and creating industry leaders can’t happen without recruiting the right people to begin with, Hohman said. He recognizes recruitment and retention are not issues unique to the property and casualty industry, but statistics show the issues are particularly pressing for the insurance industry. Earlier this year, the Insurance Institute released a demographic study that

“Many of us came into the industry ... perhaps more by happenstance than by design, but the reality is that we have all chosen to stay in the business.”

in the process of “taking it to the next level,” Hohman says. “We’re currently developing new messaging and tools that will help us to reach young adults more broadly, beyond just high school students.” These include people who are looking for a career change, as well as newcomers to Canada. At the same time, the Institute is working on Phase 2 of its demographic research, with an anticipated completion time of Spring 2009. “It’s intended to examine in more detail some of the industry [segments] that seem to experience a higher level of turnover, as wells as to look at what are the drivers that lead to effective recruitment and retention strategies.” Hohman holds to the belief that developing talented, knowledgeable and passionate people for the industry is absolutely paramount. “Certainly in my experience people make all the difference in the success of an organization and to the industry,” he maintains. “We need qualified individuals who can excel at delivering the insurance promise to consumers. We need leaders who can chart the course for their organizations and the industry, but in a way that’s nimble and proactive and responsive.”

December 2008 Canadian Underwriter

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Sharing a Podium with

The Governator

Mary Lou O’Reilly Vice-President, Public Affairs and Marketing, Insurance Bureau of Canada

When someone asks you what you do for a living, how proudly do you say that you work in the insurance industry? I’m guessing you don’t beam about it like you might if you were, say, an astronaut. But I’ll bet you say it with a little more confidence now than you did three years ago. Those were dark days for our industry’s image — the darkest ever, in fact. At that time, you couldn’t tell people you worked in this industry without bracing yourself. You were surely in for a rant about rising premiums, unfair underwriting and allaround “corporate greed.” And you’d be just as likely to get the speech from a business owner as a student. We were nobody’s friend. Things are a lot better today. Our industry image rating has gone from an all-time low of 4.9 to an all-time high of 6.0.This turn-around in just 36 months is notable from many perspectives.To get a better idea of how significant a leap that is, I talked to Michael Marzolini, who is chair and founder of Pollara and one of the leading pollsters in the country. He said: “Well, 4.9 is Stephane Dion, and 6.0 is Arnold Schwarzenegger.” (He has polled for both.) He noted anything in the low 5s is decent for

16 Canadian Underwriter December 2008

any individual or organization. David Suzuki is in the 6s, which is even better than Al Gore, who scores in the 5s. A score above 7 is pretty much unheard of, according to Marzolini. He added: “A score of 6.0 means you have the right to speak.You are a respected voice with the public and with government. Not many people can win a war of words against someone with a 6.0.” So, yes, our 6.0 image rating is significant. This extraordinary turn-around can be attributed to two things: a consumer-friendly insurance marketplace and IBC’s Restoring Consumer Confidence campaign. Regrettably, there is a good chance we are about to lose one of these things — that is, the favourable insurance marketplace — so we ought not to abandon the other. In his book, ‘The 18 Immutable Laws of Corporate Reputation,’ Wall Street Journal editor Ronald J. Alsop writes: “When companies are firing on all cylinders, they build up ‘reputation capital’ to tide them over in turbulent times. It’s like opening a savings account for a rainy day.” I think it’s safe to say our industry has been firing on all cylinders in recent years. The industry

Illustration: Laurie LaFrance

Canada’s insurance industry recently scored a 6.0 in a public popularity survey, putting it in the esteemed company of such well-known personalities as California governor Arnold Schwarzenegger

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is financially strong. Premiums have come down and stayed down. Insurers are competing hard for business and promoting add-ons like identity-theft protection for homeowners’ policies and accident forgiveness for auto policies. We’ve made great strides in the affordability and availability of commercial lines as well. But a consumer-friendly marketplace is not enough to bring an industry’s image up to Schwarzenegger levels. We’ve had soft markets before. But we’ve never gone Governator. IBC’s Restoring Consumer Confidence campaign put us over the edge. Featuring ad campaigns and outreach in communities across the country, the campaign has helped the industry reconnect with consumers in a very real way. Through this outreach, we have supported injury prevention, emergency preparedness and road safety, starring the ever-popular driver distraction simulator, the D.U.M.B. Car. More recently we have ramped up the consumer education component of the campaign, with commercials and a re-tooled Web site to help Canadians better understand the insurance product. And every holiday season we sponsor the designated driving program Operation Red Nose. The numbers tell a compelling story. During the three-year campaign, we have connected face-to-face with almost 150,000 Canadians at 220 community events. Through news media hits, we have reached a total of 5.7 million Canadians. The amount of negative media coverage about our industry dropped from 63% to 12%. Governments have noticed: We have received almost 160 letters of recognition from politicians. In short, not only have Canadians been reaping the benefits of a healthy insurance market, they have also seen us giving back and doing good work all across the country. So there’s no question we have a lot of “reputation capital” in the bank. But is it enough? The answer is no. Our image rating at the moment is high, but our hold on consumer trust is fragile. Our business is not easily understood and consumers are quick to hold us account-

18 Canadian Underwriter December 2008

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able, oftentimes with incomplete information. Given that we are very likely heading into more turbulent times, we cannot afford simply to rest on our laurels. William G. Margaritis, corporate vicepresident of communications with FedEx Corporation, said: “A strong corporate reputation is like a life preserver in a crisis and tailwind when you have an opportunity.” For our industry, there is potential crisis. Consider that for 2007, in addition to what we know of 2008, claims cost growth has exceeded premium growth.

The next time someone asks what you do for a living, hold your head up high when you tell them you’re in the insurance industry: your image rating is right up there with The Governator’s. This is especially true for Ontario auto, which is by far our biggest line. Economic growth has exceeded growth in business insurance premiums since 2004, suggesting that premiums in that line are inadequate. And even Canadian property and casualty insurers are not immune to the global financial crisis. All this strongly indicates we are facing a period of declining earnings, which may lead to a hardening market. In fact, there are some signs that we have already entered one. It seems reasonable to expect a period of time when consumers will be receiving more bad news than good from their insurers, and they may be a little perturbed.

Of course this is not the full extent of our issues. There’s also Ontario auto insurance reform, court challenges against minor injury caps in Alberta and the Atlantic provinces, the need to improve regulatory regimes all across the country and a host of other issues. The outcomes of these stories remain unknown. Who knows? In the end, they could prove to have been more opportunity than crisis. Suffice to say, they are hot button topics that can translate into pocketbook issues. Hard markets. Auto insurance reform. Caps on pain and suffering awards. Regulatory burden. These are tough issues with which consumers and governments will grapple. And even when our positions are strong, and the facts are on our side, it can be difficult for us to look like the good guys when our customers gather around the kitchen table. At times like these, it’s good to have banked some “reputation capital.” As Pollara’s Marzolini explained, our 6.0 rating gives us the right to be heard. We are a credible voice. So maybe, just maybe, if we find ourselves having to explain premium increases, or why excessive regulation is bad for consumers, we will be consulted and believed — at least to a greater degree than we have been believed in the past. This is why we continue our work on IBC’s Restoring Consumer Confidence campaign. We will be out in full force again in 2009. We will be in the communities. And we will be on the airwaves. We will deliver our messages about emergency preparedness, injury prevention and road safety to as many Canadians as we can find. And consumer education about insurance basics will continue as well. This is how we will continue to make deposits in that bank of good will and “reputation capital.” This long-term investment will help you, as well, as an industry employee. The next time someone asks what you do for a living, hold your head up high when you tell them you’re in the insurance industry. You may not be an astronaut, but your image rating is right up there with the Governator’s.

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Shingle Damage: In the Eye of the Storm New research is trying to get a true measure of wind speeds and shingle damage in order to help model for hurricane damages. Gregory A. Kopp Associate Professor and Canada Research Chair in Wind Engineering, University of Western Ontario

Damage surveys following major wind events are critical for identifying potential problems with building codes, construction practices and building products. In order for the surveys to be of value, it is necessary to know the wind speeds that caused — or did not cause — damage, since all design is based on the induced forces at particular wind speeds. This is more challenging than it may appear: wind speeds in the neighbourhoods where houses and other buildings have been damaged are rarely measured. Usually, the only direct measurements of ground-level wind speeds are at airports or other weather stations. But these are sparsely spaced, are often far from where the hurricane makes landfall, and often do not function during the storm because of power outages. Although ‘hurricane hunter’ aircraft measure wind speeds in the hurricane, these are far above ground and assumptions have to be made about what is happening down where the houses are. Hurricane hunters nevertheless provide valuable data for input to numerical models, which are getting increasingly better at predicting or esti-

20 Canadian Underwriter December 2008

mating surface wind speeds. Recently, there has been a significant effort to get portable anemometers into storms; at least three different groups are now making these measurements routinely. In the 2004-05 hurricanes, these groups tried to find the highest wind speeds in the hurricanes, since hurricanes are categorized by these speeds on the Saffir-Simpson Scale. More recently, the emphasis has shifted to relating the speeds in open areas near the coast, where the highest speeds are found, to those in suburban neighbourhoods, where the majority of houses are.

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aged except for loss of about 2% of shingles. Nearby houses lost up to 50% of the shingles.

Hurricane Gustav was not a particularly powerful storm, although it is estimated to have caused upwards of US$10 billion in damage. And yet, despite the damages related to Gustav, its wind speeds were significantly lower than those used for design in this area. Mea-

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sured peak gust speeds in Houma were about 80 mph, while the design speed for the region is 140 mph. Much of Gustav’s damage was caused by flooding and storm surge. But wind damage also played a role, with much of the media attention focussed on Baton Rouge. However, much closer to coast, where wind speeds are highest, the eyewall passed close to Houma, Louisiana, an area which had been hit by the 2005

hurricanes.This provided an opportunity to evaluate recent construction and measure wind speeds in typical suburban neighbourhoods. University of Florida researchers, Drs. Forrest Masters and Kurt Gurley and their team positioned 5 portable towers in several neighbourhoods in and around Houma and then waited for Gustav to arrive. One of the advantages (for researchers) of a hurricane making landfall during the day is that you can see what is going on. And what we saw surprised us. Shingles were coming off everywhere, even in the weaker winds in the range of 40 to 60 mph prior to arrival of the eye of the storm. What was worse is that these failures appeared to be particularly bad for the new houses built since Hurricane Rita in 2005. When you can stand outside in the wind, effortlessly, and watch things coming apart, you know there is a problem.

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As a result of these observations during the storm, the team decided to conduct a damage survey on the following day of more than 1,000 houses in Houma, in randomly chosen streets, but covering every quadrant of the city. It was apparent that shingle failure was the

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only real issue in Houma, aside from the downed power lines and trees, so our damage survey focussed on this issue alone. It seems that the problems were primarily with new construction with relatively high roof slopes and few trees around. Preliminary analysis suggests these failures may have been due to insufficient connection between the adhesive on the underside of the shingle, with the roof. This led to shingle tabs flipping over and pulling the shingles over the nail heads.The close-up photos show this in detail:

Close-up photographs showing typical shingle failures with the nails still in the roof (left) and one of the shingles that came off with two nail holes visible (right).

Aside from direct costs associated with the replacement of the roofing material, other potentially more significant costs can arise from these types of failures. One is obviously water penetration, while the other is more indirect, namely, the costs associated with damage when the shingles become wind bourne and impact adjacent structures. Fortunately, neither seems to have played much of a role during Gustav because of the low wind speeds. One wonders what would have happened if the wind speeds had been much higher.

24 Canadian Underwriter December 2008

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SHINGLES, HIGH WIND SPEEDS

SHINGLE DISTRIBUTION PATTERN

Close-up stroboscopic image showing a single realization of shingle flight from the roof of a house in a scale model wind tunnel study. In this image, the shingle fails in the lower right, gets caught up in high speed flow at the roof edge, and accelerates upwards, eventually moving downstream with a speed higher than the gust speed upstream of the house that actually caused the failure.

Typical flight distances observed in wind tunnel experiments. Note the great variability and that typical trajectories are further than the distance between houses.

To answer that question, we have been conducting wind tunnel studies at the University of Western Ontario on shingle and roof tile flight in order to assess the risk due to shingles impacting and penetrating adjacent houses. We have found several surprising facts, perhaps the most important pertaining to the flight speeds of the shingles.Typically, shingles can fly at speeds in the range for 50% to 120% of the undisturbed, upstream gust wind speed.This is a large range and is due to the nature of the turbulent wind gusts. While the shingles do not fly faster than the wind (actually they can, but there is not space to explain that interesting fact here), wind is actually accelerated above the roof of the house. Since the shingles are so light, they also accelerate quickly, leading to these high flight speeds.What this means, practically, is that they carry a lot of energy and the potential to break windows. They can also travel very far. Just as important for answering the question above, is to determine the flight speeds which break windows, and such research is currently being conducted at the University of Florida using fullscale impact tests. We have just begun to link the data from these two types of experiments.

As this research progresses we will be able to link all of this observational data in loss models which consider typical neighbourhood layouts, shingle loss frequencies (from damage surveys such as these, sponsored by the Institute for Catastrophic Loss Reduction), the flight distance data (from the wind tunnel tests), and the full-scale impact test results to develop probabilistic models for shingles hitting windows and breaking them. This is then linked to observed financial costs associated with the broken windows (due to water penetration and potential subsequent roof or sheathing failures due to internal pressurization) so that expected losses versus wind speed can be established. Relating storm wind speeds in open areas near the coast to wind speeds in the typical suburban and urban neighbourhoods (from observed tower data) is required for such models. Of course, loss models already exist, but the point to be made here is that it is of critical importance to incorporate all of this new information so that they are based on the most accurate engineering data available.These same data are also critical for the development of loss mitigation strategies, modifications to building codes, identification of code enforcement issues, and improvements to product tests.All of this starts by riding out the storm to get that data accurately.

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New Deal

Manitoba’s insurance brokers showed their collective strength as negotiators in working out a new compensation deal with the province’s public auto insurer. CEO, Insurance Brokers Association of Manitoba

Manitoba’s 1,700 independent property and casualty insurance brokers and Manitoba Public Insurance entered into a historic accord for a new compensation model on Aug. 8, 2008. The new model is intended to support a more convenient renewal process and new product offerings for customers in the future. MPI will introduce its Streamlined Renewal Process (SRP) in the fall of 2009.Technically, the SRP will require customers to visit a broker only once every five years. This is a marked departure from the traditional, annual visit to a broker.While some brokers felt it would be dangerous to lose the forced, annual contact with customers, others understood that performing 80% less in transactions could mean saving in the neighbourhood of 2530% in annual labour costs related to MPI work. MPI president and CEO Marilyn McLaren contends that “the new compensation plan accommodates future business changes, while ensuring a strong and viable future for the 300-plus insurance brokers distributing products and services on MPI’s behalf.” So then, just what then was negotiated between MPI and the Insurance Brokers Association of Manitoba (IBAM)? And how and why was it done?

THE DEAL IN SUBSTANCE The structure of the new arrangement essentially looks like this:

The Designated Broker A “designated broker” will be established for each Manitoba registered vehicle at the first renewal

26 Canadian Underwriter December 2008

upon implementation of the new SRP. A broker will be assigned as the designated broker as of the last renewal prior to Nov. 1, 2009 — i.e. a staggered introduction —carrying specific rules ensuring predictability, stability, broker competition and consumer choice. The designated broker in each case will receive annual compensation with respect to the policy’s basic, mandatory coverage over the five-year period.

The Compensation • Implementation of a sliding scale to facilitate a transition to reduced commissions compensation received by brokers on basic, mandatory Autopac coverage — moving from the current 5% to 2.5% by 2012. • Basic compensation of 4% commissions on fleet coverage from 2010. • Under a new Drivers Safety Rating Program, driver licence transaction compensation will be tied to a percentage of written premium instead of flat fees. • An additional flat fee on drivers licence new applications until 2013. • Commission increases on the sale of extension products from 12.5% to 18.5%. • A 96% increase in aggregate monies annually for fee-based transactions • A fee escalation clause linked to CPI (i.e. inflation-proof) • Brokers will receive a cash infusion of Cdn$44 million to help them prepare for the changes over four to five years (this translates to a Cdn$41million Net Present Value (NPV) benefit over the five-year period between 2008 and 2013.

Illustration: Laurie LaFrance

David Schioler

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WHY WAS THE NEW DEAL DEEMED NECESSARY? Not long ago, in addition to providing Manitoba consumers with auto insurance, MPI took over the Government of Manitoba’s responsibilities in the area of driver and vehicle licencing (DVL). As a result, the government through MPI became increasingly intent on fusing the two areas of functionality. Furthermore, the province wanted to institute the fusion on behalf of its “border-crossing” citizens, who wanted enhanced identification cards and enhanced driver’s licences. So MPI recommended the move to the five-year Streamlined Renewal Process in terms of the delivery of both auto insurance and DVL. THE PROCESS FOR CHANGE This past summer, IBAM representatives worked successfully with executives and management at the monopoly public insurer in order to bring about the aforementioned structural change to the brokers’ role as the paramount service delivery vehicle for MPI. There were good reasons for the winwin results that were achieved in both process and substance. First, MPI consciously invited IBAM to the table to negotiate a new arrangement for brokers. This was significant. As IBAM president Wade Garriock stated just after the deal was done: “Never before have we as independent brokers had such direct involvement in shaping the way we work with MPI. As a result, we’ve arrived at a system that works better for everyone, including our customers.” Although MPI’s inclusion of the brokers’ association in the process seemed simple and obvious, it was nevertheless brilliant. After all, how could the corporation effectively negotiate with the principals of approximately 300 brokerages otherwise? IBAM has of course acted and continues to act generally with a mandate to advance the interests of its members; notwithstanding this, the association was never properly set up to be the collective voice or official bargaining agent of its membership in terms of actually negotiating anything that would bind its membership in any legal or actual sense.

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So the IBAM board decided in early 2008 that it would invite all of the province’s approximately 300 property and casualty brokerages to join the association and its membership in a “participation process.” In this process, each participating brokerage authorized IBAM to appoint a committee comprised of the CEO of IBAM, elected IBAM executives and directors and non-director volunteers to negotiate the terms and conditions of a Brokerage Representation Agreement with MPI on all of the participants’ behalves. Like MPI, the IBAM board was also smart: it understood the importance of brokers determining their

MPI’s new model for auto insurance will require customers to visit a broker only once every five years. This is a marked departure from the traditional, annual visit to a broker. own destinies. Each participating brokerage agreed it would be bound by the terms and conditions of the Brokerage Representation Agreement upon approval by a two-thirds majority of those participating brokerages that cast a ballot in a ratification vote. Effectively then, the IBAM Committee would freely negotiate the arrangements with MPI; the participants would then determine the outcome, by voting on whether they would be bound by the terms of the agreement. The results of the vote were overwhelmingly in favour of the new deal. KEYS TO SUCCESS One of the advantages the IBAM committee had in negotiating the deal was

the diversity of the group itself. Essentially the committee consisted of ruraland urban-based brokers of varying ages and experiences, large and small brokerages and multi-location operations. And so the wider brokerage community was well represented across many sectors. This naturally resulted in strong positions that IBAM took and defended. Most of the contentious issues were properly vetted by the committee membership, with all of its inherent diversity and character, well before the next meeting would take place with MPI. Also, the IBAM committee was also committed to the principle that no brokerage would be left behind. In the end, this also proved to be the case with MPI. Communication with MPI became unambiguous. Another reason for success was a cognitive focus by the parties on the interests of the province’s auto insurance consumers. This consumer focus was also beneficial once again inside the IBAM committee itself — particularly at times when committee members had, let’s say, divergent opinions on matters. MPI and IBAM also recognized early on that integrity, fairness and trust in the process were paramount if negotiations were to succeed. Not that any problems were expected along these lines, but the negotiators understood all too well that if the parties did not operate with these principles in mind, the process would fail. In order to ensure this was the case, the parties early on held a series of one-on-one meetings in order to address any potential concerns; in the end, none existed. So at the end of the day, an arrangement was reached that was acceptable to all. One of the unexpected highlights in consequence of the excellent process that took place — as well as the substantive results that were achieved — is that the parties agreed new and higher levels of cooperation and negotiation would be just the start of an improved relationship that could continue to produce positive results for Manitoba consumers. After all, once you’ve negotiated your way to mutual success, there’s no turning back. There’s only more to come.

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Stuck in Neutral IBC’s Eighth Annual Regulatory Affairs Panel

David Gambrill Editor

As the industry bleeds Cdn$400 million in unfunded liability each year, the IBC and the Alberta Auto Insurance Rate Board don’t agree on how rates should be set in the absence of the province’s cap on minor auto injury claims. Canada’s auto insurance industry and the Alberta Automobile Insurance Rate Board (AIRB) seemingly agree to disagree on what interim financial measures should be taken pending a court appeal that will decide whether Alberta’s $4,000 cap on minor auto injury claims will remain rescinded or be restored. At its Eighth Annual Regulatory Affairs Panel in November, the Insurance Bureau of Canada (IBC) took the opportunity to go public with its concerns that the AIRB hasn’t required the province’s insurers to squirrel away enough premium money in the event the cap remains rescinded. Perhaps surprisingly, AIRB’s chairman A.F. (Alf) Savage, a speaker at the IBC conference, agreed with the IBC’s point. “This year, of course, we gave [insurers] a 5% increase, which was inadequate — I won't argue with anybody that it was inadequate — but we were faced with the fact that our actuaries [said] a 20% increase would be necessary if the cap wasn’t on,” Savage said. “We said,‘Okay, we don’t know if the cap is going to come or go, so we’ll split the difference [between a 20% increase and no increase] and we’ll go 10%,’” Savage said, explaining the board’s logic.

30 Canadian Underwriter December 2008

Savage noted the AIRB raised rates in 2008 by a total of 10%.The starting point was a 5% rate reduction (since the AIRB’s actuaries recommended a 5% rate reduction if the cap was back on), and so the application of a 10% increase to that starting point amounted to an overall rate increase of 5%. As of press time, arguments have already been made in the Alberta Appeal Court about whether or not to restore the cap.A decision is due at any time. Most legal observers note the issue is likely to be resolved at the level of the Supreme Court, regardless of how the Alberta Court of Appeal resolves the matter. “It may go to the federal court [i.e. the Supreme Court of Canada],” Savage said in his presentation. “I’ve been asked many times by the industry:‘Will we appeal to the [Supreme] Court?’ and I think the best I can say on that is we’re not going to flog a dead horse, but we’ll see what comes down in the provincial court.” That begs the question: What are the province’s auto insurers supposed to do with rates in the meantime, pending the courts’ resolution of the matter? “The problem with the AIRB’s logic is that, following [Alberta Court of Queen’s Bench Justice Neil] Wittmann’s decision striking down the tort cap, the Alberta industry is accumulating an estimated [Cdn]$400 million per year in unfunded liability,” IBC vice president of policy Barb Sulzenko-Laurie said in a speech at the symposium. “If the appeal is ultimately lost, say at the Supreme Court in 2009, the industry could potentially have hundreds of millions of dollars in unfunded liability, with no way of recovering those losses. In light of this possibility,

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the board’s decision to split the difference on future costs could well end up hurting the interests of the very people it seeks to protect.” In contrast to the AIRB’s actuarial estimate of 20%, in its submission to the AIRB earlier this year, the IBC’s actuaries called for a 37% rate increase to take into account what would be needed in the event the province’s appeal failed and the cap remained off. A member of the audience asked panelists to comment on the retroactive

Page 32

nature of the Alberta Court of Queen’s Bench decision. In other words, if the cap remains unconstitutional, would the province’s insurers be exposed for claims dating all the way back to 2004 (when the province first introduced reforms including the cap)? “It’s certainly a reason why we bloody well want to win that appeal, because ultimately we don’t actually want to incur those backward costs,” Sulzenko-Laurie said. “It’s a matter of enormous concern to us.” “We understand the concern,” Savage

Announcing a new member of the team

Jon Schubert PRESIDENT & CEO

T. Richard Turner, on behalf of ICBC’s board of directors, has announced the appointment of Jon Schubert, CMA, as ICBC’s president and CEO effective November 15, 2008. Jon is responsible for providing overall leadership and strategic direction to help ICBC fulfill its vision of becoming BC’s preferred auto insurer, providing protection and peace of mind to customers. He has more than 30 years of knowledge and experience in the private and public insurance industries. Most recently, Jon was President and Chief Executive Officer of Saskatchewan Government Insurance. Prior to this, Jon operated a consulting firm assisting clients in the insurance and rehabilitation industries. Throughout his career, Jon has served on a number of boards, committees and task forces, including the Saskatchewan Cancer Agency, Saskatchewan Brain Injury Association, and the United Nations Bone and Joint Decade Task Force on Neck Pain and its Associated Disorders. icbc.com

The Insurance Corporation of British Columbia is driven to ensure the well-being of drivers. We’re working to keep our auto insurance rates low and stable, while providing hassle-free service and proactively partnering to reduce vehicle crashes and loss.

32 Canadian Underwriter December 2008

said in response to Sulzenko-Laurie’s comment. “The industry asked for a 37% increase.This was beyond anything we could comprehend. Our actuaries said 20% and we split the difference [between 0 and 20].We understand a lot of the companies are now paying $4,000 [for a minor injury claim] and signing an agreement to change that if the court case changes. We have a number of companies that have told us that.” Savage said he wasn’t sure how to advise companies how to adjust to the uncertainty in rate-setting as a result of the court case currently being in limbo. As for the AIRB’s decision, he said, “I don’t know how to do it any differently than what we have done.” In the end, Savage said, the provincial government would likely step in if the cap challenge were to fail. “If the cap is struck, my prediction is the province will probably change the law, so we’ll wonder what it was all about,” he said. Savage nevertheless expressed optimism about winning the challenge at the Alberta Court of Appeal level. He said the lawyers arguing the case on behalf of the provincial government and the insurance industry had a better feeling about making their case this time around. “I might say our lawyers tell us we had a very good reception this time,” Savage observed. “The last time, our reception was not very positive in the first part of the case. In this case [the appeal], we had a panel of three judges and the questions were very relevant. In the first hearings, the questions left a lot to be desired.” In court, government and industry lawyers have argued that minor auto injury victims do not suffer from discrimination that is constitutionally protected, because the Charter of Rights protects against people being discriminated against for having “immutable” characteristics. Minor auto injuries are not “immutable” injuries (i.e. they go away), industry lawyers have argued, and thus they do not benefit from constitutional protection. Serious, catastrophic injuries leading to “immutable” impairments, they add, would not be subject to the cap even if the cap were to be reinstated.

EXPERTISE / INTEGRITY / RESPECT / TRUST / STRENGTH / STABILITY These characteristics should be the price of admission to any business relationship. At Great American, this is where the conversation begins.

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Property & Inland Marine Division These values are fundamental to our success as one of the most respected property and casualty carriers in the United States. By partnering with a Canadian network of skilled independent brokers, we can offer our customers the unbeatable combination of security, protection and the peace of mind they need to build their businesses for the future.

34 Canadian Underwriter December 2008

Shifting Ground We asked CEOs of primary insurance companies in Canada to identify their top issue facing the Canadian insurance industry looking forward into 2009. Here, in alphabetical order, are their responses.

the beginning of 2008, Canada’s primary insurers were starting to report rising loss ratios and other signs that this year might not be as prosperous as the past two years have been. And then, in mid-September, the financial markets in the United States bottomed out, leaving the more highly-leveraged insurance companies in the States declaring massive write-downs related to subprime mortgages. In Canada, insurers and regulators say the industry on the north side of the 49th parallel have been much more prudent in their investments than their counterparts in the United States. And so while some fallout in Canada is expected from the U.S. market meltdown, no one is able to say specifically what kind of impact that might be. Not surprisingly, the volatility of current market events is top of mind for many Canadian insurers these days. Many are calling on the industry to batten down the hatches in these tough times and make sure the fundamentals are taken care of — i.e. good relationships with broker partners, solid underwriting that stays the course and premium pricing that properly reflects the risks being underwritten.

December 2008 Canadian Underwriter 35

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pg 36,37 Applied

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COVER STORY

Shifting Ground

Kathy Bardswick President, CEO, The Co-operators Group Ltd.

The discipline and resolve of our industry is being put to the test once again. If our performance in recent challenging times is any indicator, there is reason for concern about our ability to get through this period with our financial health and reputation fully in tact. Results across all product lines had already been deteriorating for some time before the investment climate unexpectedly eroded revenue further. It is a difficult time for this industry and many others. Rate adequacy needs to be addressed. At the best of times, this is a sensitive and risky proposition. But in the current economic environment, we can expect rate increases to generate rising levels of scrutiny among stakeholders. The knee-jerk reactions our industry exhibited when faced with comparable challenges five years or so ago must not be repeated. Our reputation and credibility is only now beginning to solidify following the low point of a few years ago. By taking a measured approach to addressing our deteriorating results, we can manage our way through the turbulence ahead while continuing to build upon the progress the industry has made over the past few years.

Jean-Francois Blais President, CEO, AXA Canada

The year 2008 will forever be recorded in history as a year of global volatility. Damage to the economy has been fast and it went deep, wiping off the map companies that had been successful for more than 150 years. As the world faces recession and we contemplate the lessons to be learned from the past year, I am optimistic about Canada and about

38 Canadian Underwriter December 2008

to the changes ahead of us. AXA’s culture enables it to innovate, react swiftly and to be ﬂexible, all the while being careful to maintain consistency. Our insurance market has always followed cycles. This time around, the length of the recovery of the global economy will play a large part in the depth and length of our next industry cycle. Whatever the economic outlook, AXA is committed to remain available, reliable and attentive to the needs of our brokers and their clients.

Charles Brindamour

“The knee-jerk reactions our industry exhibited when faced with comparable FKDOOHQJHV ÀYH \HDUV or so ago must not be repeated.” Kathy Bardswick The Co-operators

AXA’s preparedness to face a new environment together with our brokers. At AXA, we are staying the course on our ambitious path and we need to maintain a strong broker channel to accompany us. We will invest in many areas to ensure that AXA does everything within its control to grow the market share of our brokers. We will continue to be a ﬁnancial partner for brokers facing the consolidation of the network and planning for their succession. AXA will work to improve productivity to enable brokers to thrive in a single-entry environment and to maximize their efﬁciency. The economic slowdown will have an impact on consumers. It will require that we adapt and respond

President, CEO, ING Canada

The unprecedented volatility of the capital markets over the past two months and the continued slow deterioration of the industry’s underwriting results will create additional pressures on its profitability for the year to come. With both their underwriting and investment profitability under pressure, insurers will most likely pay more attention to their pricing and underwriting practices. Given the uncertainty brought about by the current turbulence in the economic environment, providing pricing stability and capacity will become more important. As a result, it will be imperative for insurance companies to proactively anticipate and identify market trends that affect their performance and react with discipline and celerity, thus avoiding significant price corrections over a short period of time. We should always keep in mind how consumers, brokers, regulators and legislators reacted a few years ago when we, as an industry, failed to react in an orderly fashion to the deterioration of our profitability. As uncertainty sets in, consumers will assign greater value to their brokers’ advice and understanding of

Strength and stability - uninterrupted. www.swissre.com As a leading and highly-diversified reinsurer, we remain well positioned to weather the current market storm. We have four key strengths that will allow us to continue delivering sustainable solutions for you in this stressed economic environment: our clients, our underwriting expertise, our strong capital base and our prudent asset management. Swiss Re has a 145-year history of being there for you. Strength and stability. Talk to Swiss Re.

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COVER STORY

Shifting Ground

their needs, as well as the personalized service brokers offer. In times like these, broker entrepreneurs thrive and succeed by offering innovative and enhanced value propositions to their customers. As an organization, one of our key priorities will be to continue to support our brokers by providing capacity, enhancing our product offering, improving the quality of our services and developing with brokers new and innovative ways of doing business.

Alister Campbell Chief Agent, CEO, Zurich in Canada

Every insurance cycle has an inflection point that is usually apparent only in retrospect. The extraordinary events in global financial markets, combined with a series of more traditional insurance market factors, may indicate we are seeing the market turn as I write these notes. Even the strongest companies are seeing some diminished capital capacity going forward. Many other insurers with less effective risk and investment policies have had their balance sheets materially and negatively altered by market declines and related impairments. If you combine these facts with a heavy hurricane season, reductions in reinsurance capacity through diminished hedge fund participation and, closer to home, a Canadian property and casualty industry generating singledigit returns for the first time in some years (and in all likelihood seeing reduced investment yields for the forseeable future), there are a lot of variables all pointing to a single conclusion — more rate is required. When rates do harden, the most important issue will be for insurers and brokers to work together to demonstrate the value of their propositions and help their customers find practical solutions in tough economic times.

40 Canadian Underwriter December 2008

“With both their underwriting DQG LQYHVWPHQW SURÀWDELOLW\ XQGHU pressure, insurers will most likely pay more attention to their pricing and underwriting practices.” Charles Brindamour ING Canada

Andy Hall President, Chief Operating Ofﬁcer, CNA Canada

As 2008 comes to an end, we start 2009 with uncertainty not only within the property and casualty insurance industry, but with a lack of predictability about how the global economy will affect Canada. Future market trends have been difﬁcult to gauge, but we are already witnessing indicators of

a slowing economy: rising costs, reduction in manufacturing profits, a drop in the total value of building permits and higher prices for wheat, rice, corn and oil. Although CNA Canada has enjoyed excellent results over the past few years, we recognize the challenges ahead and the need to continue focusing on our strategies to grow and remain profitable. In 2009, we will continue to proactively respond to the challenges ahead by concentrating our efforts on: s MAINTAINING UNDERWRITING DISCIpline, which has been our mantra here at CNA; s MAINTAINING CLOSE AND STRONG PARTnerships with our distribution partners, by understanding the issues they face and providing solutions to minimize any negative impact; s INVESTING IN NEW INITIATIVES TO support our broker partners and helping them meet all the insurance needs of our mutual clients; s REWARDING AND RECOGNIZING OUR talented team of experienced professionals who are a valuable asset to the company; and s DESIGNING AND OFFERING PRODUCTS and services that provide significant opportunities. We will focus on implementing our key business strategies for 2009, ensuring continual broker support and building an infrastructure that will enable us to make the right decisions and act appropriately under volatile market conditions.

Shaun Jackson President, CEO, Kingsway Financial Services Inc.

As we look forward to the prospects for the industry for 2009, I think it is worth reﬂecting on the events of 2008. It has been quite a tumultuous year in capital markets and has been a challenging one for every ﬁnancial services company in North America. Our industry is typically

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COVER STORY

Shifting Ground

one that goes through cycles; of course one always hears that it is different this time, and usually it isn’t! Turns in the insurance cycles are usually caused by the insurance industry’s self-inflicted wounds, a consequence of over-zealous pricing caused by oversupply of capital, which comes back to bite the industry. In the last quarter of 2008, we are seeing declines in market value of invested assets; this has reduced the available capital for the insurance industry at a time when rates need to increase. If we look back to the last time we had a hard insurance market, it was caused by a confluence of events both internal and external to the industry. Looking at where we are today, I can see several similarities between today’s events and events that created the last hard market. At present, we are experiencing deteriorating underwriting results caused by aggressive pricing and escalating costs. Premium rates have not kept pace with inflationary measures. In contrast, we have actually seen reduced pricing in many lines. We have seen a significant decline in equity market values and concerns over the credit quality in many corporate issuers, causing significant reductions in capital available to the industry. I expect the latter part of 2008 and early 2009 to be turbulent times for our industry, characterized by continued overall deterioration in industry combined ratios coupled with uncertainty in capital markets. There is still a high degree of uncertainty in capital markets, but once this stabilizes and confidence returns, I am cautiously optimistic that we will see firmer market conditions in 2009.

Kevin McNeil President, CEO, Gore Mutual Insurance Company

As Gore Mutual prepares for 2009, our 170th year serving Canadians,

42 Canadian Underwriter December 2008

“If you combine [the 8 6 PDUNHW YRODWLOLW\@ ZLWK D KHDY\ KXUULFDQH season, reductions in reinsurance capacity through diminished hedge fund participation and, closer to home, a Canadian property and casualty industry generating singledigit returns for the ÀUVW WLPH LQ VRPH years, there are a ORW RI YDULDEOHV DOO pointing to a single conclusion — more rate is required.” Alister Campbell Zurich in Canada

we are focused on delivering a new business model to help brokers signiﬁcantly enhance their customers’ experience. Now more than ever, insurers and brokers must work together to understand the needs of

clients, provide highly responsive service, and improve workflow efficiency. Recognizing that response is a key indicator of client satisfaction, we support brokers so they can offer clients instant transaction capability and hassle-free service. Gore Mutual is aggressively developing technology designed to help brokers improve sales results, increase retention and earn more profit per policy. We are also committed to single-entry solutions through broker management system integration. Gore Mutual offers direct integration with Policy Works and comXP. Brokers using Power Broker, sigXP and CIM-Data have single sign-on and integrated policy inquiry capability through Nexisys. At Gore Mutual, we are trying to be the kind of company brokers need, offering leading-edge technology paired with genuine personal service. We are prepared for the hard market and will continue to offer a stable Canadian solution. This is an excellent time for us to work together to highlight the value delivered by independent brokers and to strengthen the broker channel.

Ellen Moore

President, CEO, Chubb Insurance Company of Canada

The economic environment will challenge our industry during 2009. Canada’s strong and conservative banking system, general ﬁscal responsibility and strict regulation of insurer capital puts us in a position superior to that of the United States. There could still be disruption in the marketplace from consolidation, business mergers or defaults due to the credit crisis. It might be more important than ever to evaluate an insurance company based on its ﬁnancial strength, including knowledge of a company’s investment portfolio. Our investment portfolio has zero direct exposure to

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COVER STORY

Shifting Ground

sub-prime mortgage-backed securities or derivative products such as collateralized debt obligations or collateralized loan obligations. As always, balance sheet distress and deteriorating underwriting results should bring reason to the downward pricing. Excess capacity has led to broader coverage and lower prices. This may create signiďŹ cant issues for companies that did not practice proper underwriting discipline. We have made tough decisions to sustain our margins, and are well positioned to provide added capacity and new products in 2009. Chubb sees signiďŹ cant opportunity during 2009 to enhance the strong relationships we have with our brokers. We look forward to working with all of our business partners in the coming year and wish them much success.

Rowan Saunders President, CEO, RSA

A number of issues will be high on the radar of property and casualty insurers heading into 2009, but I believe the key focus will be the transitioning of the market cycle. We are already seeing evidence of looming changes: capital positions within the industry, reinsurance losses and investment yields have already been affected. A decrease in investment income will undoubtedly lead to a greater focus on underwriting proďŹ t by shareholders. A market transition does not happen without its challenges. We have learned from previous cycles, during which concerns were expressed about broker instability, inconsistency in underwriting appetite, lack of capacity on more complex or grey accounts and service level slowdowns with the remarketing of business. In addition, unanticipated price increases led to decreased

44 Canadian Underwriter December 2008

and weâ&#x20AC;&#x2122;re already working hard to explain our rate management strategy to our broker partners, as well as using education programs like our Making Partner Program to examine and discuss changing market dynamics.

Robin Spencer President, CEO, Aviva Canada

â&#x20AC;&#x153;Turns in the insurance cycles are usually caused by the insurance industryâ&#x20AC;&#x2122;s VHOI LQĂ LFWHG ZRXQGV a consequence of RYHU ]HDORXV SULFLQJ FDXVHG E\ RYHUVXSSO\ of capital, which comes back to bite the industry.â&#x20AC;? Shaun Jackson Kingsway Financial Services Inc.

conďŹ dence by consumers and political intervention. The industry has struggled to successfully manage the cycle in the past. Heading into 2009 there is opportunity to get things right. At RSA we will continue our prudent investment strategy and remain well capitalized, allowing for room to grow. We will also be making sure we are responding to early trends instead of waiting until more severe underwriting actions are warranted. Providing brokers with preemptive education will also be key,

Firstly, I would like to applaud everyone in the industry who stepped up in 2008 to assure consumers of the strength of our industry during these uncertain times. During the past year, we launched our â&#x20AC;&#x153;change insuranceâ&#x20AC;? campaign because Canadians told us insurance is too complex. So far weâ&#x20AC;&#x2122;re excited by the reaction from consumers and brokers alike, and I assure you that our mission to change insurance for the better is just getting started â&#x20AC;&#x201D; stay tuned. Product innovation, technology investment and succession ďŹ nancing will continue to be important to the broker channel in 2009. Ultimately, Aviva will differentiate itself through its long-term relationships and consistency of underwriting support though the cycle. Brokers have recognized Aviva as leaders in the commercial lines market and we will build on this with continued product innovation. In personal lines, our investment in technology will drive efďŹ ciencies and proďŹ tability for brokers. Avivaâ&#x20AC;&#x2122;s commitment to the independent broker channel will continue in 2009, including the support of brokers who wish to grow their business or investigate succession planning. We are steadfast in our belief that insurance company ownership of brokerages is not right for consumers or the broker channel in the long term. Lastly, as a new IBC Board member, I look forward to working with

other industry leaders in tackling our biggest issues, including product reform and insurance to value.

Bob Tisdale

President, Chief Operating Ofﬁcer, Pembridge Insurance

For the past couple of years, consumers, brokers and insurers have beneﬁted from and enjoyed a stable and sound marketplace. Unfortunately, 2008 has brought with it some all-too-familiar problems — and some not-sofamiliar problems — that threaten this stability. Loss frequencies and severities have increased again this year and the ﬁnancial meltdown has wreaked havoc on investment returns. Yet some companies continue to reduce rates, forgive tickets and accidents

and pay inﬂated overrides to acquire books of business. Pembridge has been a leader in the industry by clearly outlining what actions we were going to take in order to brace and position ourselves for the bumpy road that is ahead. First, Pembridge has been only one of a very few companies that have consistently articulated our support and commitment to work with brokers and broker associations that promote independence.

Second, we have maintained a sound underwriting discipline so that consumers insured with Pembridge today do not end up on the street when the hard market is ﬁnally upon us. Finally, Pembridge has introduced small rate increases. Pembridge has maintained that small, measured rate increases today will stave off larger increases tomorrow. Looking to 2009, I strongly expect this trend will continue so that brokers and consumers are not victims of ‘rate shock.’ It is inevitable that we will be faced with the challenges of another hard market. But I am conﬁdent that the steps Pembridge has taken and the initiatives that have been implemented will enable our broker partners and us to grow and prosper together.

December 2008 Canadian Underwriter 45

12/3/08

Risk and Insurance Management Society (RIMS) Webinar

Vanessa Mariga Associate Editor

7:06 PM

Page 46

Back to Basics As the fallout from the credit crisis slowly rolls out, risk managers need to stick to the basics of what they do — identify potential liabilities, develop action plans and monitor the financial strength of their companies’ insurers.

The cascading financial services crisis in the United States has risk managers on both sides of the border bracing for a bumpy renewal season in the coming year. The crisis has forced many risk managers to re-consider how they approach evaluating the financial stability of insurers, their insurance portfolios and whether or not they will move policies from carriers that have been redflagged by rating agencies and the media. To aid risk managers in navigating through the turbulent times, the Risk and Insurance Management Society (RIMS) hosted a Webinar featuring a panel of risk managers representing the corporate, public and educational institution sectors. “These are extraordinary times and I think it’s really critical for a risk manager to go back to the basics,” said Webinar panellist Janice Ochenkowski, RIMS president and managing director at Jones Lang LaSalle Inc. What does this entail?

46 Canadian Underwriter December 2008

The first step is to identify the issue and look at the liabilities the organization faces, Ochen- kowski said. “Quite honestly, over the next few weeks, these [liabilities] will be changing almost daily.” The next step is to assess the potential liabilities and develop an action plan. “Work with your internal management and operations, implement the action plan and, on an ongoing fashion, assess it.” Ochenkowski also stressed the importance of continuously monitoring the financial strength of insurers, as well as the lenders, vendors, clients, contractors and tenants upon which an organization relies. “You notice that I am not saying that I am doing all of this [on my own], because risk managers themselves cannot fully control all of these aspects,” she added. “We need to work with other management.We need to show we are part of our senior management teams, and that together we add value in helping them create good, effective strategies for the business.”

STAY OR MOVE ON? Monitoring the viability of carriers on an ongoing basis is good risk management practice, but what should risk managers do when it becomes apparent that a carrier with which they deal is operating on shaky ground? Should a risk manager seek coverage with a different insurer that appears to be withstanding the economic crunch, or should they stick it out? “This thing is happening and cascading so quickly

Illustration: Laurie LaFrance

pg46,48Turmoil_v1_DG_VM

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If your reputation is important to you, Chubb is your best partner.

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www.chubbinsurance.com Chubb Insurance refers to Chubb Insurance Company of Canada. The precise coverage offered is subject to the terms, conditions and exclusions of the policy as issued.

pg46,48Turmoil_v1_DG_VM

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that you can get blindsided,” warned William Strachan, director of risk management for the City of Enfield, Connecticut. Leslie Seabrook, director of risk management for Dartmouth College in Hanover, New Hampshire, agreed with Strachan. She admitted she is concerned not only about AIG, but other insurers as well. “I believe that we haven’t heard it all yet, and things will continue to unfold,” she said.

Page 48

Seabrook said that in addition to monitoring the financial stability of carriers, her department has also been checking the cancellation wording on the college’s policies “to ensure that if we made the decision to get out from under an insurer, we would have the ability to do that.” The school’s insurance renewal is in July. She voiced her concern — echoed by risk managers across all sectors — that the market will have hardened

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48 Canadian Underwriter December 2008

considerably by that point. Ochenkowski suggested there are two schools of thought on whether or not the market will begin to harden. On the one hand, she noted, the need for cash flow in the wake of diminishing investment returns might lead to a hardening market if “market [participants] stand firm on pricing [they need] to maintain in order to manage their business.” On the other hand, Ochenkowski continued, “the same need for investment income is going to continue the soft market because there will be competition for those [premium] dollars and the need to have that cash flow [to offset investment losses] is going to continue, and that will continue to drive prices down.” Ochenkowski admitted she was uncertain which of the two scenarios would occur. Strachan said he had a gut feeling that as insurers’ investment income dries up, it will lead to adjustments that result in a hard market. “Insurers are experiencing underwriting losses,” Strachan observed. “As of [year-end 2008], the industry’s combined ratio is estimated [by A.M. Best] to reach 103%, the surplus is dropping like a stone and loss ratios are climbing.” In addition, he added, the number of people able to make infusions of capital into the market is diminishing. “It’s going to be surprising, it’s going to happen quickly and it’s going to be very volatile over the next six months,” he concluded. Seabrook said risk managers must take this opportunity to step back and evaluate an organization’s insurance portfolio, including limits, retention levels and policy enhancements. “When the market is soft, you tend to buy more limits because it makes good economic sense to do so,” she said. “Certainly in the next six months, we’re going to be looking at the whole insurance portfolio; not only the carriers and watching the viability of those, but also the retention levels. Are they appropriate? Can we move it up a little bit? What kind of coverage are we willing to give and take on? Just be prepared for those kinds of discussions and analysis with your senior management.”

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Page 50

Does

88th Annual General Meeting of the Insurance Brokers Association of Ontario

David Gambrill Editor

Vanessa Mariga Associate Editor

Size Matter? Ontario’s brokers have a number of issues on their mind, including the best measure of an insurance company’s financial solvency, ownership and control of brokerages and the use of Internet technology. DOES SIZE MATTER? The answer, of course, varies according to the size of the insurance company. The question came up during a CEO panel at the 88th Annual General Meeting of the Insurance Brokers Association of Ontario (IBAO). Brokers asked six company CEO panelists to suggest a reliable financial strength indicator.

50 Canadian Underwriter December 2008

Such an indicator would allow brokers to determine whether a Canadian property and casualty insurance company’s solvency is strong enough to survive the worst financial crisis to hit the North American markets since the Great Depression era. Smaller insurance companies represented at the IBAO’s annual CEO panel — measured by direct premiums written — made the case that size doesn’t matter when determining solvency. Just because an insurance company is large doesn’t mean it isn’t vulnerable to financial stress, noted Kevin McNeil, the president and CEO of the Gore Mutual Insurance Company. He noted AIG, “the largest insurer in the world,” seemed an improbable candidate for bankruptcy, and yet it survived insolvency only thanks to a recent US$85-billion loan from the U.S. Federal Reserve. “The question is going to be:Are there going to be any [more] casualties?’” McNeil noted. “And if you go to the newspapers or watch TV, you’ll hear a CEO of a major company stand up there and say, ‘My company’s fine, no problem, we’ll survive this, we’ll be okay.’And then you hear two or three days or a week later that that company went bankrupt.” So if public statements can’t be taken at face value, how does a broker know which of its

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insurance markets are strong and which are not? McNeil told brokers attending the CEO panel that the best strategy for determining financial strength in these unpredictable times is to monitor the Minimum Capital Test (MCT) scores of Canadian property and casualty insurers on a regular basis. Quarterly MCT scores are publicly available on the Web site of Canada’s solvency regulator, the Office of the Superintendent of Financial Institutions. Described in basic terms, MCT scores are a measure of an insurers’ available capital divided by its minimum capital requirement. The answer is expressed as a percentage. OSFI requires a property and casualty insurer to maintain a minimum MCT score of 150%. Gore Mutual's MCT score in 2008 Q2 (the latest available figures) was 278%, whereas the other companies represented on the panel had 2008 Q2 MCT scores of 207.55% (The Dominion), 184.83% (ING Insurance Company of Canada) and 181.71% (AXA Insurance Canada). Not surprisingly, though, the largest companies represented on the panel — in terms of direct premium written — jumped in at McNeil’s remarks and reiterated that size does matter. “I wanted to address the comment that Kevin made about having an MCT ratio that is significantly higher than any other company, which, if you look at it in analytical terms, in Ontario it’s probably a Cdn$300-million requirement,” said ING Insurance president Derek Iles. “And, if I may be so bold to say, that would be a rounding error at ING.”

CONTROL IN FACT: “GENTLEMAN'S AGREEMENT” The IBAO has asked the province’s insurance companies to sign a memorandum of understanding, promising, in effect, that the insurers will not purchase a majority control in brokerages. IBAO leadership suggested in Spring 2008 that it would approach the

52 Canadian Underwriter December 2008

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province’s insurance regulator and ask it to re-establish and enforce a “control-infact” test that existed in legislation in early 2000.Very basically, the test established that insurance companies could not own more than a 50% controlling interest in a brokerage. The association has since changed tack and asked the province’s insurers to sign a sort of “gentleman's agreement” not to control brokerages. It is not publicly known which insurers have opted to sign the IBAO’s Memorandum of Understanding and which have not. Randy Carroll, IBAO’s CEO, disclosed that four out of 52 Ontario

“If you go to the newspapers or watch TV, you’ll hear a CEO of a major company stand up there and say, ‘My company’s fine, no problem, we’ll survive this, we’ll be okay.’ And then you hear two or three days or a week later that that company went bankrupt.” insurance companies did not sign the memorandum at a recent York Fire and Casualty Insurance Executive Forum recently. “You will recall that our initial strategy is to get agreement among insurers, via a Memorandum of Understanding, that all insurers dealing with brokers agree ‘not to purchase brokerages, nor be in a position to control the management and operational decisions within a brokerage,’” IBAO president Rod Hancock told delegates attending the IBAO’s annual convention in Toronto. “In addition, the Memorandum of Understanding also provides an option for insurers currently controlling brokerages. “These insurers can sign the agreement and by doing so agree ‘to cease this practice and to provide a plan that will

remedy this situation so they would comply with/pass the control in fact test.’” The control-in-fact test looks at several factors including, among others, who controls brokerage decisions, equity, financing and volume commitment.

OLD WINE, NEW BOTTLES The insurance industry is taking its old marketing techniques and just dumping it into a new channel — the Internet — and the approach will not work, Mitch Joel, president of Twist Image, told delegates at the IBAO convention. “Each month in Canada, there are 5.2 million searches on Google for ‘insurance’ and you’re not there,” he told brokers at the conference. “So, how do you evolve?” It’s a common misconception that the consumer is now in control, Joel told the crowd. “But one thing has changed,” he said. “Before, when a consumer would talk or complain, it went into a file folder somewhere. Now when they talk about your brand, everybody can hear them. They have this Marshall stack amplifier called the Internet.” In order to harness this evolution in technology, Joel suggested six points: 1) Think in terms of tribes, not demographics. People are part of a community that includes their work, their families, their cars, etc. Learn to target the tribes. 2) Everything is “with” and not “instead of.” Brokers need to be doing traditional and new forms of marketing effectively. 3) Don’t be fleeting. Every time you connect with a consumer, it’s an opportunity to build a relationship with them. 4) Earn the trust of the consumer to get them out of ‘lurker’ mode (someone who is on your site, but not buying). 5) It’s attitudinal, not generational. The cultural shifts required to increase sales have nothing to do with age, but everything to do with one’s attitude. 6) Do something. By using tools like YouTube, Facebook, Twitter or blogs, you will fundamentally understand why people are using them.

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Volume

Up the

Independent brokers need to spend a lot more money on advertising in order to compete with the direct channel, Ontario brokers say. Brokers must consistently deliver on the unique aspects of their distribution channel — independence from insurers, community involvement, representation of consumer values and offering choice to consumers — in order to differentiate themselves from direct writers and agents, Randy Carroll, CEO of the Insurance Brokers Association of Ontario (IBAO) told delegates of York Fire & Casualty Insurance Company’s Annual Executive Forum. To halt any erosion of marketshare, the independent broker channel must market itself more aggressively, Carroll told the 250 people attending the forum, held at the Mississauga Convention Centre on Nov. 17. As it stands, Carroll says, internal association polling shows a majority of the province’s consumers still prefer to buy their insurance products through the independent broker channel. The IBAO surveyed 15,000 Ontario consumers in 2007, with a response rate of 5% (or about 750 consumers). Fifty-one per cent of the consumers polled reported that they bought their insurance products through the independent broker channel, whereas 38% said they bought their insurance from agents or direct markets. Survey respondents cited independence, consistent values and choice as reasons for using the broker channel, Carroll said.

54 Canadian Underwriter December 2008

“When you took a look at the agents, the consistent value of independence is not there,” he added. “And when you take a look at the direct and financial group writers, [the appeal to consumers is] basically Web online access that’s quick and easy.” But if the broker distribution model can’t differentiate itself from direct writers effectively, brokers could find themselves losing market share, Carroll warned. “Brokers still have a competitive advantage over agents, but the direct and financial group writers are starting to blur the line,” he said. “They are starting to come in and entrench in what was traditionally broker and agent territory. We have to do everything we can to make sure that that changes.” Although consumers cited the above characteristics as motivating factors for working with the independent channel, brokers do not deliver on these factors consistently enough to differentiate the channel from direct writers, Carroll said. “When we started to look at the Internet, and the new direct writers and the new distributors that were [using the Internet as a marketing tool], we kind of sat back and said: ‘I’m not too sure if that’s the type of client that I want to deal with. I’m not too sure if that’s the type of business that we want to write,’” he said. “But I think now we are effectively making the change, and it’s safe to say that it’s business that we can’t ignore. We have to understand how to write that business and to do it well. We have to understand how to compete with those distributors that are fighting in that arena.” There is an urgent need for brokers to make appropriate investments in order to deliver on the unique aspects of their value proposition, he said. That’s where marketing activities come into play.

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SPREADING THE WORD Carroll said the amount brokers have invested in advertising is roughly half of that needed in order to compete with direct writers. Ontario brokers are spending, on average, less than 2.1% of their revenue on advertising. This amount should be 4% at a minimum, Carroll said. He added the amount of money that independent brokers are currently spending on ad-

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vertising pales in comparison to the amount of money direct writers are spending for advertising. “We need to make sure collectively that we’re doing a better job of advertising and letting the consumer know that we are a very viable part of the distribution channel,” he said. Carroll cited the results of a comScore study, a US-based Internet usage research firm, which found that 32.3 million consumers received a quote online in

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the U.S. in 2007 — an increase of 15% over the prior year. In addition to analyzing consumers’ actual online behaviour, comScore also asked consumers what action they would take if they wanted more information after seeing an auto insurance advertisement. The survey found that second only to visiting the Web site specified in the advertisement (26%), respondents reported they would most likely do an online search (22%) to find more information about a company. The percentage of respondents that said they would do an online search to find a Web site or company jumped eight points versus last year, to 22%, underscoring consumers’ increasing reliance on their own research. “This is something that we can’t just decide to not look at,” Carroll said. “We have to make it part of our business strategies on a go-forward basis.” In response, the IBAO launched its homemade myinsuranceshopper.ca Web site in May 2008. The online tool provides information to the public about the independent broker channel and helps link online consumers to independent brokers. Carroll noted the site “started out fairly slow.” It had 3,600 unique visitors in its first month, most of them brokers. “But then reality hit,” Carroll said, noting the association ramped up its marketing of the site during the summer. “In October, we had more than 11,000 unique visitors to the site.”

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56 Canadian Underwriter December 2008

Of course spending advertising dollars and launching marketing campaigns is not enough to differentiate the channel, Carroll continued. The consumer actually desires more contact from his or her broker, and this plays to one of the strengths of the independent broker channel, which is a strong community presence, Carroll said. “You need to reach out to those consumers and you have to get them to understand what your value proposition is, because they don’t get it and they need to get it,” Carroll said. Certainly customer service and satisfaction levels have to be increased, “and it’s easy to get there,” he said.

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Videogaming has now latched on to the Cdn$600-million industry of insurance fraud, although real-world fraud has graduated well beyond the level of an idle pastime. Donna Ford Freelance Writer

“Earn some quick cash by jumping in front of a car.” That’s the promotional blurb for a new video game, Saints Row 2—Insurance Fraud. Designed for several game systems, Saints Row 2 shows the dollar value of a collision each time a male avatar throws himself at or under a moving car. Game players can watch the man’s body bounce off the car, fly through the air and spurt blood on the pavement; each and every time, the avatar jumps up with his machinegun and runs into traffic for more. A demonstration for those who “certify” that they are at least 18 years old is available free online at <http://gamevideos.1up. com/video/id/21649>. Insurers attending an Insurance Bureau of Canada (IBC) fraud seminar in Toronto on Oct. 2 learned about the disturbing new video game. Those in attendance knew well that insurance fraud is no game: two IBC auto theft investigators, Dan Beacock and Greg Martin, noted auto theft costs Canadian insurers Cdn$600 million per year.

58 Canadian Underwriter December 2008

Cars are stolen for four main reasons, the investigators noted. They are: • used for transportation to commit a crime; • used for parts at a chop shop; • given a new identity with a false identification number; or • exported. In an update, IBC investigators provided information about the following illegal activities: • “Owner give-up”: Describes a situation in which an owner turns his car over to thieves, submits a false police report and then makes a theft claim to the insurer. • Leased and exported vehicles: When leased vehicles are illegally exported, lease payments are usually continued after the car is exported; the car is then reported stolen months later. • “VIN switch”: Describes when a VIN plate is moved from a wrecked vehicle to a similar one that has been stolen. • “Cloning” or “Twinning”: This occurs when the fraudster copies down the VIN number from a vehicle being operated in the United States, and then installs a similarly-numbered VIN plate and other identifiers on a stolen car of the same model and colour in Canada. The stolen vehicle is then registered in Canada using forged or fraudulent ownership documents. (Since 1968, the VIN has been visible through the windshield of passenger cars and light trucks.) This fraud is possible because there is no interface between the depart-

Illustration: Laurie LaFrance

Insurance Fraud is No Game

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ment of motor vehicles (DMVs) in the United States and Canada. Beacock said some car dealers in the United States put their entire inventory on the Web, including VIN numbers. On eBay, there is a space for the VIN number to help establish the identity/type of vehicle, but the information also provides valuable information to fraudsters. To help prevent vehicle theft and insurance fraud, IBC investigators recommend that underwriters look for certain telling indicators. For example, is the vehicle: • several years old, but there is no record of previous owners? • previously registered as “salvage,” “irreparable” or “wrecked”? • from another province or the United States, and listed as “salvage” or something similar? • registered as “rebuilt”? With a rebuilt vehicle, the VIN begins with the letters ‘RBT’ and is 17 characters long in total. On occasion, Beacock said in an interview after the seminar, the rebuilt VIN may contain the correct characters/digits for the make/model of the car, but not always. According to IBC investigators, the vast majority of stolen cars are leaving Canada in storage containers. Sometimes, as many as six cars are squeezed into a single container headed towards an intended foreign destination. Some cars are bolted and chained to the ceiling; some are slotted in every which way. Even if there is minor damage to some cars as a result of improper transport, there is still a market for such cars, and the profits are huge. How profitable? According to investigator Greg Martin, a Ford Explorer sells for US$40,000 in Panama. The cost to steal it in Canada, re-VIN it and ship it to Panama is US$10,000. If the Explorer is traded in Panama for 16 kilos of cocaine, valued at around US$2,500 per kilo in Panama, the car has suddenly helped fraudsters reap a street value of well over Cdn$400,000. In 2006, 159,000 vehicles were stolen in Canada.The rate of recovery has been on the decline for the last few years, falling to an average of 70% across the

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country. Between July 2005 and September 2008, the IBC investigation team, operating as “Ontario Auto Theft and Vehicle Services,” has been involved in the recovery of 2,131 vehicles valued at more than Cdn$28 million. Between January and September 2008 alone, the team has been involved in the recovery of 849 vehicles.The team also assists police in the laying of Criminal Code charges,

leading to numerous convictions and some restitution orders. In an interview after the seminar, Beacock provided examples of convictions with restitution orders: • In October 2005, after a chop shop investigation, the accused pleaded guilty to possession of stolen property and was sentenced to 90 days in jail to be served on weekends.The accused was ordered to

December 2008 Canadian Underwriter 59

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pay Cdn$700 per month towards a total order of Cdn$31,820 in restitution. • In January 2007, an individual charged in relation to stolen vehicles was convicted on charges of theft over Cdn$5,000 and possession over Cdn$5,000. He received 12 months’ probation and was ordered to pay Cdn$2,000 in restitution to the three insurance companies involved. Investigators shared a few means they have used in the past to help detect and combat fraud. If, for example, stolen vehicles are not recovered after five years, police purge those records; however, IBC does not purge its records and makes them available to police. Insurance investigators say they have also had success using aerial satellite photos from the Internet. For example, a residential backyard in Hamilton that was being used to store car parts was visible using online satellite photos.

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is too new to be on the system; and the collision occurred in a rental or a borrowed vehicle. IBC investigators then gave an example of the potential profits and payouts to the “players” involved in such a staged accident (assuming four claimants in this scenario): • The “occupants” of a car in the staged collision pay the organizer between Cdn$500 and Cdn$1,000 per person

PERSONAL INJURY IBC investigators Kathy Metzger and George Gladish and team leader Kirk Quinn updated seminar participants on developments in personal injury investigations. The personal injury unit investigates the following types of issues: billing for services not provided; excessive treatment; assistive device fraud (devices that are billed to insurers but not provided to insureds); double invoicing; double assessments; and identity theft (regulated health professional’s registration number being used by the clinic without his or her knowledge). The unit has also identified some possible indicators of another form of fraud — staged accidents. Indicators of staged collisions include low-speed collisions; collisions resulting in little or no damage; older vehicles; three or more occupants per car; vehicle with prior damage; VIN doesn’t match pink slip; previously salvaged vehicles; conflicting descriptions of an accident; one driver says he was deliberately hit; severe soft tissue injury claimed but vehicle damage minor; questionable pink slips; a binder/policy

60 Canadian Underwriter December 2008

The vast majority of stolen cars are leaving Canada in storage containers. Sometimes as many as six cars are squeezed into a single container headed towards an intended foreign destination. (x4) for a seat in the car. As claimants, they receive weekly income replacement benefits of Cdn$41,600 (Cdn$400 x 104 weeks) x 4 = Cdn$166,400 • The tow truck operator gets a kickback of between Cdn$500 and Cdn$1,000 per client delivered. • The paralegal sometimes collects a retainer of between Cdn$1,000 and Cdn$1,500 per client, takes 20-30% of each client’s claim and sometimes gets a kickback from the clinic. • Rehabilitation clinics collect about Cdn$10,000 (x 4) for treatment, notwithstanding the following assessments: • In home: $1,200 x 4 = $4,800

Work site $1,200 x 4 = $4,800 FAE $1,200 x 4 = $4,800 • Dental $1,500 x 4 = $6,000 • Psychological $2,250 x 4 = $9,000 • Driver evaluation $1,300 x 4 = $5,200 Add all of these assessment costs together and the total exposure to the insurer is Cdn$74,000. • •

WHAT CAN YOU DO? What can insurers do to detect and prevent this type of fraud? IBC investigators offered some tips. They include: • re-inspecting the vehicle after repairs are done; • checking the underwriting file to see if the vehicle is classified as rebuilt; • checking for salvage records; • considering an accident reconstruction; • considering the use of surveillance, especially if there are concerns about where the party actually lives or works; • obtaining detailed statements; • comparing client signatures on various documents; • contacting the doctor or other health practitioners directly; and • requesting backs and fronts of cancelled cheques, T4 slips, records of employment and, perhaps, bank statements showing deposit dates for the cheques (in order to prevent employment fraud). As an example of what can be done through co-operative investigation, the Financial Services Commission of Ontario (FSCO), the IBC and IBC member companies were able to obtain a conviction on Oct. 23 of the principal of Ideal Therapy Inc., Osman Abukar. Quinn said Abukar was one of several defendants in a case in which the defendants were convicted for a total of 64 of 67 provincial offences charges laid by FSCO investigators under section 447 of the Insurance Act.The offences consisted of using the registration number of a psychologist without his knowledge and consent and billing for services not performed by him. A fine of Cdn$72,000 was levied against each of the accused. In addition, Osman Abukar was put on two years’ probation, restricting his activity related to Ontario auto insurers.

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Ivan Wahl, MBA, Chairman and Chief Executive Officer, Xceed Mortgage Corporation Luncheon Keynote Speaker: Glenn Gibson, CIP, CLA, FCIAA, CFE, CFEI, CFIIc, Global Chief Strategy Officer, Crawford & Co. Reception Keynote Speaker: Dr. Lloyd Atkinson, Ph.D, Global Economic Specialist & Best Selling Author Breakfast Keynote Speaker:

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Managing Day-to-Day Risk

Wesley Gill Enterprise Risk Manager, SAS Canada

Itâ&#x20AC;&#x2122;s been a fairly recent phenomenon to use B.I. processes to manage risks inherent in day-to-day operations such as clerical errors, power outages and/or internal fraud. Operational risk is inherent in every aspect of insurance operations because management deals with losses incurred in day-to-day business operations, whether related to claims fraud, clerical errors, IT outages or other activities. The management of risk has been around for a long time, but operational risk has only recently become a focus for risk management professionals in the last several decades. In the insurance sector, management practices are helping organizations identify the risks associated with people, processes, technology and events. As such, insurance companies have been motivated to develop and implement formal operational risk systems to help manage these risks. In simple terms, these risk management systems are based on four basic steps: identify, measure, monitor and control. These steps seem easy enough until you start to look at what is involved to make them work across the organization in a way that minimizes effort and cost.

IDENTIFY The challenge starts with the identification of operational risk. This requires an approach that identifies potential risks across the entire enterprise. The most common approach is what many call a risk and control self-assessment (RCSA). In general, RCSA is enterprise-wide; it identifies and documents risks within day-to-day operations.

62 Canadian Underwriter December 2008

Identified risks are then compiled for each business unit, along with descriptions of the risks, how they are being managed and/or mitigated and any action plans designed to lower the companyâ&#x20AC;&#x2122;s risk exposure. Risks may be self-identified or identified by third parties (internal audits). Once the business unit has identified its risk exposure it then needs to develop action plans to mitigate the risks. After the business units develop their RCSAs, they are typically submitted to a central group that compiles the RCSAs from all business units across the organization.The group then looks for systemic risk that may exist across multiple business units, preparing an enterprise-wide view of operational risks in the organization and actions being taken to address those risks. Early on, many firms started the RCSA process by creating lists and expanding on them. But as organizations grew, and the process became more involved, simple lists werenâ&#x20AC;&#x2122;t sufficient. As a process develops within an organization, there is often a need to do more with the collected data. This might include creating summary reports, searching the data for common risks or events or manipulating the data for analysis.Thus, as operational risk practices such as RCSAs develop, many companies find an increasing need for an integrated platform that allows their business unit users to input identified risks and mitigating action plans, store the data and information, analyze data and investigate and report on the data and findings from multiple organizational perspectives. Many organizations quickly realize that information needs to be collected in a standardized way so that it can be aggregated, compared and used in other stages of the risk management process. This is especially important if operational risk processes are to be effective, efficient and economical. Without standardization, business units

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Cameron & Associates Insurance Consultants Ltd. Claims consultants to the insurance and reinsurance community. www.cameronassociates.com Keal Technologies Complete technology solutions for insurance brokers. www.keal.com

CLAIMS ADJUSTING FIRMS Crawford Adjusters Canada One Globe, One Company www.crawfordandcompany.com Cunningham Lindsey International independent claims services. www.cunninghamlindsey.com Kernaghan Adjusters Adjusting Solutions — Depend On Us! www.kernaghan.com McLarens Canada International Loss Adjusters and Surveyors www.mclarens.ca SCM Adjusters Canada Ltd. Committed to providing leadingedge claims management services. www.scm.ca

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

ENGINEERING SERVICES Giffin Koerth Forensic Engineering and Science Investigate Understand Communicate www.giffinkoerth.com Rochon Engineering Inc. Forensic Consulting Engineers & Code Consultants. www.rochons.com

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

INSURANCE COMPANIES AIG Commercial Insurance Company of Canada "THE STRENGTH to BE THERE". www.aig.com Aviva Canada Inc. Home Auto and Business Assurance. www.avivacanada.com/

FM Global The leader in property loss prevention. www.fmglobal.com Grain Insurance and Guarantee Company Commercial Lines Underwriters www.graininsurance.com The Guarantee Company of North America “Specialized insurance products...professional service” www.gcna.com Kingsway General Insurance Company The Specialty Insurer www.kingsway-general.com Royal & Sun Alliance Insurance Company of Canada Forward thinking since 1710. www.royalsunalliance.ca Sovereign General Insurance Company of Canada Since 1953 www.sovereigngeneral.com Wawanesa Insurance Earning your trust since 1896. www.wawanesa.com

PREMIUM FINANCING Third Eye Solutions Inc. Provides Internet-enabled premium financing/payment plan software solutions. www.thirdeyesolutions.com

REINSURANCE Guy Carpenter & Company The world’s leading reinsurance intermediary. www.guycarp.com Munich Reinsurance Company of Canada Complete reinsurance coverage from Canada’s largest reinsurer. www.mroc.com Swiss Reinsurance Company Canada The leading P&C reinsurer in Canada. www.swissre.com Transatlantic Reinsurance Company For all your reinsurance needs. www.transre.com

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

Winmar Property Restoration Specialists Coming Through For You! www.winmar.on.ca

RISK MANAGEMENT INSURANCE SOFTWARE APPLICATIONS Keal Technologies Complete technology solutions for insurance brokers. www.keal.com Tritech Financial Systems Inc. Provider of an enterprise solution to P&C insurance companies and their agents and brokers in Canada and USA www.trifin.com

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

SPECIALTY INSURANCE Firstbrook Cassie & Anderson Ltd. Your Source For Camp Insurance www.nbrown.com William J. Sutton & Co. Ltd. Insuring Special Risks since 1978 www.wjsutton.com

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are at risk of reporting information in different ways, thus reducing the likelihood of having a cohesive organizational perspective. Without such a perspective, it would be next to impossible to understand systemic risk that might exist within the organization. Standardization helps companies organize, analyze and report on data in a costeffective and efficient manner; it also helps to ensure the accuracy, completeness and timeliness of information. Additionally, this information must be stored in a manner so that other individuals can access it at other stages in the risk management process. MEASURE Once potential operational risks are identified, the next step is to measure their loss potential in terms of likelihood of occurrence, severity of loss and, for more sophisticated users, the amount of economic capital required to cushion financially against unexpected losses. Quantifying operational risks requires combining data on current and potential risk (and their potential severity of loss) along with information on past risk and loss experience.This requires the organization to have a database from which it can extract past observations for use in developing measures for current risk exposures. Fortunately, many organizations have not experienced significant losses across all potential areas of exposure; as such, they need to supplement internal data with third-party data and/or market expertise to properly measure current risk exposure.

TECHNOLOGY AS AN ENABLER Today’s software solutions for insurance organizations are designed to measure and manage operational risk in a scientific way — not just for regulatory compliance purposes, but also for making sound business decisions. To support the risk management process, IT managers play a crucial role in finding better ways to integrate disparate systems and leverage existing applications in order to reduce the resources required to maintain and extend user functionality.

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Technology plays a key role here. Many of these processes were once spreadsheet-based. However, spreadsheets are no longer effective. As the quantity and variety of data increases, so too does the complexity of acquiring, storing, manipulating, analyzing and reporting on it. This is where integrated data management and analytical/business intelligence solutions play a key role. The ability to handle structured (numbers) and unstructured (text) data is also critical. This ability to collect, organize and analyze data allows an organization to measure risk and focus on preventable losses rather than chasing phantom risks that are unlikely to occur or risks that aren’t detrimental to business.

Without standardization, business units are at risk of reporting information in different ways, thus reducing the likelihood of having a cohesive organizational perspective. MONITOR AND CONTROL Once risks have been identified and measured, the next stage in the process is to monitor and control risk, ensuring that business objectives are met. In the RCSA process, this is done in two ways. First, RCSA is a living, ongoing process, as opposed to a one-timeonly process. On a regular basis, most organizations ensure all business units update self-assessments and roll the re-

Technology today enables the implementation of enhanced, integrated operational risk management frameworks by: • consolidating data so you can apply a full range of risk-management techniques; • providing unrivaled statistical modelling capabilities for robust econometric and time series analysis so you can apply modelling insights to data for more accurate risk measurement; • applying consistent approaches that can be used across the organization and that

sults up to an enterprise view. Second, action plans coming out of the RCSA process need to be tracked to ensure progress is being made against plans to eliminate, mitigate or manage identified risks. By putting the RCSA process on an integrated platform, users are able to provide real time updates to the risks they have identified and to add new risks as they arise.At the same time, those parties receiving and compiling the individual business unit RCSAs are able to use this up-to-date information to provide current views of the operational risk exposures across the enterprise. An informed management may thus take the appropriate action to manage the enterprise’s operational risks. Insurance companies are always seeking new ways to ensure shareholder value and earnings consistency. To help accomplish these goals, insurance organizations often find they must pull information from many distinct and separate areas and compile it in order to get a complete picture of the enterprise’s risk profile and how it is being managed. Part of this process includes companies having the need to identify operational risks affecting business units, measuring the risk, monitoring for changes in the enterprise risk profile and controlling risk through elimination, mitigation or management. As insurers improve their operational risk management, they will be better positioned to safeguard policyholders’ interests, by ensuring their financial well-being while at the same time protecting sensitive information.

support the production of coherent results. Allowing analyses within specific time frames and the delivery of results in an easy-to-use manner; • allowing users to access and understand risk measures across the enterprise so that everyone has a strategic vision (but without losing sight of granular details); and • integrating easily with existing IT and management frameworks and providing an environment that meets current and future needs. •

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Elite Sales Force For years, Canadian insurance education courses have not dealt directly with how to improve broker sales. IBAC has come up with a way to change that.

Peter Fredericks President, Insurance Brokers Association of Canada

As president of the Insurance Brokers Association of Canada (IBAC), I am pleased to announce the launch of the Elite Force—Best Practices Insurance Producer School in Canada in 2009. Looking at the education courses being offered within the industry over the last number of years, we realized there was no specific course targeting insurance brokers on the selling side of the equation. We asked ourselves the question: Why not? Is selling not important to our profession? Brokers from across the country also wondered why there was no specific course tailored to sales. Instead of re-inventing the wheel, we looked outside of Canada and discovered there was such a course offered in the United States by our coun-

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terparts, the Independent Insurance Agents & Brokers of America (IIABA).They have generously offered to make it available to us. We have customized it to the Canadian broker marketplace and will be offering it beginning in February 2009. The program covers everything from prospecting to data gathering and closing. Participants in the Elite Force will learn the full psychology of the sale, not just tricks or gimmicks.We will teach personality traits, negotiation skills, time management, consultative relationship building, building credibility and more. Several popular sales techniques are reviewed. Guest speakers are brought in. Case studies and the students’ own actual experiences are discussed among the group so they learn from each other’s successes and failures. Plus, they learn about presentation skills, using the Web for prospecting, and how to set, measure and track their sales goals. The program has been delivered in the United States for more than 10 years. It is the most comprehensive insurance sales training course available.

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Graduates of the course in the American industry averaged more than $62,000 in first year commissions! Data from the United States shows us that first-year graduates’ commissions increased between US$15,000 and US$269,000. If this is not an incentive for both brokers as well as their employers, I fail to see what is. The Elite Force intends to develop skills in order to encourage life-long learning in insurance and sales.This limited-seating program is designed to train the best and brightest in our industry in the most elusive of skills — sales. The Elite Force program is designed to be complete training for young brokers who have a basic understanding of sales and need the foundation of a strong education to transform them into superstars in production.The course is recommended for brokers who have fewer than three years’ experience in sales and less than five in the industry. The Elite course builds accountability into the daily habits of the student.

“Selling is not an event, but a process. It has a beginning, a middle, but never an end. You improve it, perfect it, change it, even pause it. But you never stop it completely.” The IBAC Canadian program will be 12 days of classes, held three days per quarter, in Toronto in February, June, August and December 2009. Class sizes will be limited to conference rooms so that students will receive individual attention during and after the classes. Provincial broker associations will contact students monthly via e-mail. Students will be required to report monthly sales activities to their association; that activity will be reviewed quarterly with the facilitator.

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One of the most successful advertisers in Britain once said: “Selling is not an event, but a process . . . It has a beginning, a middle, but never an end.You improve it, perfect it, change it, even pause it. But you never stop it completely.” This course is intended to provide

tools for brokers to improve their technique, perfect it or change it. We are pleased to offer it and look forward to hearing success stories in the years to come. Please contact the manager of professional development at IBAC for further information about this course.

Insurance Professionals Know Where to Look for Their Next Career Move.

AT Y JOB M D OUN

Get the job. Done. TM

Positions posted on i-hire.ca are also featured in the Insurance Careers Section at canadianunderwriter.ca and appear on canadianunderwriter.ca’s twice-weekly Insurance Headline News Email Alert.

December 2008 Canadian Underwriter 67

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MOVES & VIEWS

UPCOMING EVENTS: FOR A COMPLETE LIST VISIT

www.canadianunderwriter.ca

AND CLICK ‘MY EVENTS CALENDAR” ON THE HOME PAGE

In the most recent Canadian Underwriter online poll we asked: Will the financial crisis in the United States lead to a hardening of the North American insurance market within the next 12 months? Of the 154 respondents, an overwhelming majority responded yes (78.57%). Only 21.43% said no, the soft market will continue throughout 2009.

YES 78.57%

NO 21.43%

Gordon Kerr [2a] has accepted the role of CEO and chief agent of Arch Insurance Group’s Canadian insurance operations. Kerr was previously the chief operating officer of American International Group’s (AIG) Canadian commercial insurance operations. He replaces Michael Baxter [2b], who will become worldwide chief underwriting officer for Arch Insurance Group’s Onshore Energy

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(Technical Risk) and CAR/EAR platforms. Baxter will oversee these lines across Canada, the United States and Europe.

Compu-Quote Inc. has teamed-up with E2Value to release a new insurance-to-value (ITV) tool, ezITV. Compu-Quote previously worked with MSB to provide brokers with the insurance-to-value (ITV) tool RCT EvaluRater. Since 2002, the Insurance Brokers Association of Ontario (IBAO) has distributed E2Value’s ITV tool — now known as MCV Costworks calculator, but formerly known as RS Means — as an alternative tool to the RCT EvaluRater. ezITV is an integration of Compu-Quote’s data-gathering technology and E2Value’s cost engine. The new desktop application is fully integrated into PropertyRater. “The RS Means format is by no means a stranger to brokers,” IBAO CEO Randy Carroll says, “but we are nevertheless working with Compu-Quote in the development of a conversion tool that would allow for a smooth transition between the two products [RCT EvaluRater and ezITV].” Brokers have the opportunity to testdrive ezITV free of charge

until Dec. 31. At that time, it will become the default ITV tool through PropertyRater.

Crawford & Company (Canada) has announced five appointments. Santo Carbone has been appointed vice president of the partnerships and regional claims centre (RCC) operations at Crawford & Company (Canada). Carbone brings more than 27 years of claims management and operations experience to Crawford’s Mississauga RCC. Serge Deschenes has been appointed manager of Crawford’s Quebec City branch. Deschenes, who has nearly 20 years experience in the insurance industry, will manage the branch and direct its growth and strategies within the provincial marketplace. MaryLynn Coulas has been appointed manager of Crawford’s North Bay, Timmins and Kapuskasing branches. Coulas will apply her claims

5 and management experience to create and direct growth strategies for these three branches within the Northern Ontario marketplace. Randy LaBrash has been appointed branch manager of Crawford’s Winnipeg branch. LaBrash has been with Crawford since 1986, working in a variety of positions including branch manager in Winnipeg, Peterborough, Toronto West and Toronto East. David Cherrie has been appointed manager of Crawford’s Victoria, Nanaimo and Campbell River branches. Formerly the manager of the Cambridge branch, Cherrie’s cross-country move will result in a greater management role

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6 as he takes on responsibility for the Vancouver Island operations.

XL Insurance has appointed Ken Lam as senior environmental underwriter, rounding out the company’s specialized environmental underwriting team in Canada. Lam brings more than a decade of specialty underwriting experience to the environmental underwriting team — including six years of professional liability underwriting with XL Insurance’s design professional unit, which provides professional liability coverages to architects and engineers. His career also includes time with Zurich Canada and HB Group Insurance Management.

Grant S. McEwen has been appointed the new chief financial officer at Chubb Insurance Company of Canada. McEwan was most

8 recently director and controller of world markets trading and treasury finance at CIBC. He brings international experience to Chubb through his work in Canada, the United States and Australia.

Blake Craig, president of J. Leroy Gallant Insurance Limited, has been named president of the Insurance Brokers Association of Prince Edward Island. Craig succeeds the association’s past president, Karen Doiron, who currently serves on the board of directors for the Insurance Brokers Association of Canada. Craig is the grandson of J. LeRoy Gallant, who founded the family-owned brokerage in 1958. Craig took over the management of the agency in 1983. The association’s 2008-10 board of directors includes vice president Darke Carr, secretary Fred Hyndman and treasurer Daniel McInnis.

Sylvie Paquette is now the president and chief operating officer of Desjardins General Insurance Group. The appointment comes after Jude Martineau announced his retirement after a 14-year stint as the head of Dejardins Group’s general insurance subsidiaries. Paquette will sit on Desjardins Group’s strategic management committee. She has been with the company since 1984, most recently as senior executive vice president corporate development.

CNA Canada has announced four appointments. Matthew Lewis is vice- president, Marine Manager; Stacey Shepherd is vice-president human resources; Garth Huestis, is assistant vice-president, Advanced Medical Technology; and Troy Bohan is manager, Underwriting (Ontario).

McLarens Canada has opened four new locations in Ontario. Lynn Brantnall has been appointed branch manager for the new Gravenhurst location. C. Keith Wright has been appointed branch manager of the new Kingston location. Cathy Grant-McDowell has

been appointed branch manager of the new Sault Ste. Marie location. Effective immediately, McLarens Canada has acquired Szypka, Welton & Associates in Bolton. George Szypka has been appointed branch manager for the location.

Disaster Kleenup Canada Ltd. has announced three appointments. Lisa Arnold has been appointed Western region account manager, Peter Glinka is the new national operations specialist and Jae Drum joins the team as customer service representative. Arnold will be responsible for sales in the western region, overseeing customer relations, driving sales growth and ensuring that the highest industry and company standards are met. Glinka will take on the role of developing and implementing best practices and standard operating procedures for all Disaster Kleenup product and service offerings. Drum will focus primarily on customer satisfaction and overall service level management initiatives designed to decrease timelines and identify areas for improvement, thus increasing overall efficiency throughout the claims process.

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Compu-Quote Inc. celebrated its 25th anniversary in Toronto during the 88th annual IBAO Convention in October. John Savage, Brian Schwab and Stephen Savage founded the software services company in 1983. For a quarter-century, Compu-Quote has provided underwriting and rate comparison tools to brokers across Canada and corporate solutions for insurance companies â&#x20AC;&#x201D; from Web-based, consumer-level comparative auto rating to customized back-end EDI solutions.

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Hundreds of delegates and attendees visited with more than 75 exhibitors at the 88th Annual Insurance Brokers Association of Ontario Convention and Exhibition held Oct. 22-24 at the Fairmont Royal York Hotel in Toronto. The Guarantee Company of North America won â&#x20AC;&#x2DC;The Best Exhibitor Award.â&#x20AC;&#x2122;

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The Insurance Brokers Association of Ontario held its inaugural Awards of Excellence Gala at its 88th Annual Convention held in Toronto. Recipients were selected for community and professional contributions that examplified the positive impact insurance

brokers have on their communities. “Insurance brokers are known to be very involved in their community,” said IBAO CEO Randy Carroll. “It’s a pleasure to honour these brokers for their dedication to their profession and their communities.”

Brokerage (under 10 brokers) — James Purcell Insurance Broker Ltd. (JPIB), Spencerville. JPIB are heavily active in their community, providing support for many community golf tournaments, a minor soccer team, the local hockey association and other community festivals and organizations.

The winners of the 2008 IBAO Awards of Excellence were: Individual Broker — Keith Miller, W.B. White Insurance Ltd., Oshawa. A 23-year insurance industry veteran, Miller has been involved in many community organizations including the YWCA and the Oshawa Chamber of Commerce. He is also active with the Durham Humane Society. He is a volunteer with the Ontario Special Olympics and has taught night school at Durham College for the past 18 years. A dedicated blood donor, Miller has given blood 54 times thus far.

Brokerage (over 10 brokers) — Smith Petrie Carr & Scott Insurance Brokers Ltd (SPCS), Ottawa. SPCS is actively involved in the Ottawa area, partnering with many community groups including the National Capital Region YMCA-YWCA for the Safe Kids Program. SPCS staff raised money to help purchase Epi-pens and life preservers for children enrolled in Y childcare programs and the Y Camps.

Canadian Underwriter December 2008

Affiliate — Insurance Brokers Association of Hamilton (IBAH). IBAH members serve on many community organizations including the Neighbours to Neighbours Centre, a community centre for the unemployed and working poor and City Kidz, an organization that provides fun, entertaining and exciting events that teach positive attitudes and behaviours in young children.

Young Broker — Monica Dale, Dawson & Keenan Insurance & Financial Services, Sault Ste. Marie. Dale, current president of the Sault Insurance Broker Association, is a member of the local Chamber of Commerce’s Take 5 Social gathering events and the Bon Soo Winter Carnival. A proud Ontario Students Against Impaired Driving (OSAID) volunteer, Dale is also an active volunteer on the Algoma District School Board School Council co-ordinating committee.

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Friends and members of the Insurance Institute cheered on the Toronto Argonauts from the Rogers Centre’s Summit Lounge as they took on the 2007 Grey Cup Champions, the Saskatchewan Roughriders, on Oct. 30. The event celebrated the Institute’s newest CIP program ad in the ‘Player or Spectator’ series. Special guests Chuck Winters, defensive back, Obed Cetoute, wide receiver (both for the 2008 Argos) and former Argos coach and general manager Leo Cahill popped into the event to mingle and help cheer.

TIC Award of Excellence Robin Spencer, President & CEO of Aviva Canada, HMCHUHCT@K QDBHOHDMS HMRTQDQ B@SDFNQX ÆQRS @MMT@K V@QC of Excellence from the Toronto Insurance Conference:

“Thank you TIC. It is truly an honour to have been chosen for this award. And thank you to the team at Aviva Canada. You are the power behind our commercial program. This is your award. Congratulations!”

December 2008 Canadian Underwriter

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Insurance-linked securities (ILS) took center stage at PartnerRe’s technical event, held at the National Club of Toronto on Sept. 22. At a time when the convergence of the capital markets and reinsurance gathers momentum, the event gathered 80 clients for an afternoon focusing on the new opportunities opening up for insurance and reinsurance companies. Albert Benchimol, CFO of PartnerRe Group and the CEO of PartnerRe Capital Markets, along with Brian Tobben, PartnerRe’s vice president of insurance-linked securities,

looked at the pros and cons of ILS as compared to the use of traditional reinsurance. Two insurers shared their experiences with ILS products from both the life and nonlife perspectives: Joel D. Aronchick, chief risk officer of The Chubb Group of Insurance Companies and François-Fréderic Ducos of Axa Cessions. Participants got an opportunity to explore the subject further at a cocktail reception with the speakers and the event MC Francis Blumberg, head of Canadian operations and chief agent of PartnerRe.

Aon Re Canada held its 7th annual Rendezvous from Oct. 29-31 in Mississauga, Ont., drawing an attendance of nearly 300 clients and reinsurers. The three-day event allowed Aon’s clients to meet with both domestic and international reinsurers and begin the 2009 treaty renewal discussions. Luncheon speakers included Colonel Omer Lavoie, commander of the CounterImprovised Explosive Task Force, who spoke on risk management related to military operations in Afghanistan, and James Hoggan, chair of the David Suzuki Foundation,

who spoke about opportunities to reverse the harm that has been done to the earth and the limited time left to do so. It wasn’t all business though: evening entertainment included Canadian comedian John Wing and the ever-popular Texas Hold’em Poker Tournament. This year, Rob Crawford of CNA Canada walked away with the poker championship. Plans are already underway to organize next year’s Rendezvous, which will be held Oct. 21-23, 2009, at the Delta Meadowvale Resort & Conference Centre.

Munich Reinsurance Company of Canada hosted a climate change exhibit at its head office in Toronto during the last week of October and the first week of November 2008. The

exhibit offered people the opportunity to stop, have a look at the display and learn how climate change is affecting the property and casualty industry as well as healthcare.

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The Women in Insurance Cancer Crusade (WICC) hosted its annual breakfast at the Arcadian Court in downtown Toronto on Nov. 4. More than 400 industry professionals gathered to hear keynote speaker Erin Anderssen talk on the topic of ‘Cancer and the Canadian Experience — Stories to Educate and Inspire.’ Anderssen, a senior writer for the Globe and Mail, published a series in 2006 entitled ‘Cancer: A Day in the Life.’ For five months, starting on June 15, 2006, Anderssen tracked the experiences of dozens of Canadian as they experienced — or died from — cancer on that day.

The right partner can help you get a leg up on the competition. If you’re looking to make the most of your business opportunities, CNA is there for you with an industry-wide reputation for integrity, diversity, financial strength and customer focus. We offer brokers the resources and support to help them succeed. Global presence. Local underwriting authority. Financial strength and stability. When you want solid support for your business, we’re ready to give you a hand.

www.cnacanada.ca One or more of the CNA insurance companies underwrite the products and services described. Information is for illustrative purposes only and is not a contract. This document is intended to provide a general overview of products and services described. Remember that only the policy can provide the actual description, terms, conditions and exclusions. All coverages not available in all provinces. CNA, the OneWorld design, and the One Product One Source design are registered trade-marks of CNA Financial Corporation that are used under license. © 2006 Continental Casualty Company, Toronto, Canada.

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After 49 years in the industry, Brian Harris, senior vice president of corporate compliance for Cunningham Lindsey, will be retiring on Dec. 30, 2008. Friends and colleagues gathered to celebrate Harris’ career at a retirement party on Nov. 12 at the St. Andrews Club and Conference Centre in Toronto. Harris has been a member of the Canadian Independent Adjusters’ Association (CIAA) since 1984. He was recently named an honourary life member at the CIAA’s AGM. “As you retire,” Miles Barber, past president of the CIAA wrote in a letter read during the retirement party, “know that you put more into the industry than you took out.” Harris thanked his wife, to whom he has been married 43 years (and counting), and his family. He thanked his friends as well as his colleagues from Cunningham Lindsey and the CIAA.

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The Toronto Insurance Conference (TIC) found its “sweet spot” thanks to Michael ‘Pinball’ Clemons, who was the keynote speaker at the 53rd Annual Black Tie Dinner on Nov. 12 at the Four Seasons Hotel. This year’s event included the presentation of the first annual TIC Awards of Excellence to an active broker (Jack Lee, vice president and associate and national marketing manager of BFL) and an active insurer (Robin Spencer, president and CEO of Aviva Canada Inc.).

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The Honourable Order of the Blue Gooseâ&#x20AC;&#x2122;s Ontario Pond hosted a Night at the Races at Woodbine Race Track in Toronto on Oct. 26. One-hundred and thirty-five ganders and guests braved the frigid night air in a heated trackside tent for good fun, great food, camaraderie and to raise funds for WICC [Women in Insurance Cancer Crusade]. They tracked nine horse races with eager anticipation, although there were no reports of any really big winners aside from the chosen charity. The event was sponsored by Blakeney Henneberry, Murphy Barristers Solicitors and Fairview Insurance Brokers. In all, Cdn$12,000 was raised for breast and prostrate cancer research.

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global: adj. relating to the entire world. Business may begin locally, but often with a view to global opportunities. When you anticipate client growth, your insurance should be prepared. Chubb Insurance has 120 offices in 29 countries to provide local expertise at global standards.

If your clients think globally, Chubb is your recommendation.

Chubb Defines Insurance

www.chubbinsurance.com Chubb Insurance refers to Chubb Insurance Company of Canada. The precise coverage offered is subject to the terms, conditions and exclusions of the policy as issued.

How to add a touch of yellow to your holidays: Canary diamond Butterscotch candy canes Sports car Vacation in the sun Labrador puppy Holiday wishes from Aviva From our family to yours, have a happy and healthy holiday season and best wishes for the new year.

Aviva CU Dec 2008 final.indd 1

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