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
J U LY 2 0 0 9 A Business Information Group Publication #40069240
Mutual Recognition by DAVID GAMBRILL
Lessons for Bankers By Alister Campbell
Part XIII Update By J. Brian Reeve
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VOL. 76, NO.7, JULY 2009 CANADA’S INSURANCE AND RISK MAGAZINE. PUBLISHED BY BUSINESS INFORMATION GROUP
www.canadianunderwriter.ca
Mutual Recognition
26
Canada’s solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI), has posted a discussion paper regarding the future of reinsurance regulation. The paper broadly addresses a number of issues including licensing, collateral and insolvency clauses, but it has most notably triggered a ‘Free Trade’-style debate about mutual recognition between global supervisors. BY DAVID GAMBRILL
FEATURES
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18 Part XIII Clarification
46 FromCapstoDeductibles
OSFI issued a revised advisory that has helped, in part, to clarify what it means to “insure in Canada a risk.”
Soon after a Nova Scotia court upheld the constitutionality of the province’s cap on minor auto injury claims payments, a new government entered the picture with a mandate to introduce deductibles instead.
BY J. BRIAN REEVE
Lessons for Bankers
Yes to Caps
36 Quake Risk
What can ‘boring’ insurance industry representatives teach glamorous investment bankers? Two words: Moral hazard.
The Alberta Court of Appeal has most recently declared that caps on minor auto injury claim payments are constitutional after all. The next stop figures to be the Supreme Court of Canada.
Updated earthquake catastrophe modelling will likely have a mixed effect on Canada’s projected regional losses.
BY ALISTER CAMPBELL
40 Upward Bound It seems strange to be reading about the peril of inflation when inflation is currently so low. But the numbers have nowhere to go but up, and that will have a big affect on claims costs. BY CHRISTIAN BIERI
BY DAVID GAMBRILL AND VANESSA MARIGA
44 Beyond the Borders
BY SHELLY ERICKSEN AND MARLEEN NYST
43 Red Cross The symbol of the Canadian Red Cross is often misunderstood to be a ubiquitous symbol of health and wellness, but its use is in fact protected by the Geneva Conventions and Canada’s federal laws.
BY VANESSA MARIGA
48 Australian Wildfires One thing Canadians might learn from the Australian wildfires earlier this year is to use controlled burns as a risk prevention measure. BY NEVILLE J. BUSSELL
BY THE CANADIAN RED CROSS
OSFI’s discussion paper on the future of reinsurance regulation is interrelated with the Part XIII discussion on licensed and unlicensed insurers, with collateral implications. BY ROBERT MCDOWELL AND KOKER CHRISTENSEN
July 2009 Canadian Underwriter
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VOL. 76, NO.7, JULY 2009
PROFILE
12 Reaching Out The incoming president of the Canadian Independent Adjusters’ Association (CIAA), Patti Kernaghan, thinks adjusters should be making themselves more available for mentoring and recruiting potential adjusters from other industries. 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 Michael Wells michael@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
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Editorial
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Marketplace
50 Moves & Views 52 Gallery
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. 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. 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. Š 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
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EDITORIAL
Are Caps off the Endangered Species List?
The whole exercise begs the question of whether or not the public would ever agree in principle to any method of reducing insurers’ claims costs. David Gambrill, Editor david@canadianunderwriter.ca
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Canadian Underwriter July 2009
As the auto insurance cap issue grinds slowly and inexorably towards the Supreme Court of Canada, and even as courts seem to be aligning with insurers on the constitutional validity of caps (thus far, at least), it's still hard to know under exactly what circumstances a cap is acceptable to the courts or the public. Reading the various judgments coming out of Alberta and Nova Scotia, here is a sampling of what judges have said so far about minor auto injury caps. • Caps on insurance payouts for minor auto injuries are constitutional, as long as they are part of a broader, comprehensive legislative package that offers some sort of compensation and/or treatment for the victims. • Caps can be implemented in and of themselves, so long as the statutory language mentions time limits for recovery instead of being specific about — and here trial lawyers here would say “stereotyping” — certain classes of injuries. • Caps on insurance payments discriminate (or not) against minor injury claimants, depending upon the case law you are reading and whether or not the trial judge in question, upon hearing all of the evidence, “reasonably” finds them to be (un) constitutional. As you can tell from the above, the legal status of cap legislation remains murky at best. Much remains to be sorted out. One outstanding issue is whether the politicos will sort out the situation before the courts do. For example, the NDP government in Nova Scotia is fresh from an electoral victory following
a campaign in which its leader, Darrell Dexter, openly talked of replacing the province’s cap with a deductible. Ontario also has a deductible regime, which the trial lawyers in Ontario have threatened to challenge in court. So you can see where this is going, right? It’s not hard to imagine a whole new round of litigation calling into question the future of deductibles, in much the same way that a morass of litigation has created uncertainty about caps — and on it goes, with each new alternative to a cap being tested for its validity in the courts. And even if the cap litigation goes the distance and insurers ultimately lose, at least one regulator has suggested governments will more than likely simply write up the legislation in a new way, so that the ultimate endgame of lower claims costs — and therefore, cheaper insurance — will be achieved. That’s something to keep in mind, since the industry may be guilty to some degree of presuming that the cap legislation represents the battle royale that will settle the claims costs issues once and for all. In fact, the uncertainty is even greater than the suspense around the 50/50 split on whether the courts will accept the caps, yes or no. The uncertainty now is whether politics in Canadian society at large will obviate whatever the Supreme Court decides down the road. This whole exercise is begging a much more important question than merely whether the Canadian courts or politicians will ac-
cept caps or not. It’s begging the question of whether the public would ever agree in principle to any method of reducing insurers’ claims costs. The dynamic thus far is pretty clear: whatever barriers to unlimited claims payments insurers might erect, personal injury lawyers are bound and determined to tear them down. The question is this: would lawyers’ efforts be for naught if the public actually sat down with insurers and hashed out a deal with which the public is satisfied, thus undermining the lawyers’ argument that they are acting in the public’s best interests? This might be the kind of dialogue that the Insurance Bureau of Canada (IBC) might want to start with the public. Perhaps the bureau could get the ball rolling by initiating public opinion surveys and/or focus groups that asked the public directly what kind of caps on insurers’ costs they might be willing to accept? This kind of dialogue would provide the IBC with the opportunity to discuss with the public why some means of controlling costs are necessary to keep premiums down. In this way, a much-needed, meaningful dialogue might take place between insurers and the public that would seek to achieve consensus on a thorny issue that is clearly not well-suited to the slow-as-molasses public arenas of litigation and/or legislation. If you want an alternative to caps or deductibles — something that will withstand the withering scrutiny of the public — best ask the public to participate in its creation.
When stormy winds blow, let’s put them to good use. In this tough economic climate, the instinct is to run for shelter. But what if that meant missing out on fresh opportunities? At Swiss Re, our position is clear. Yes, these are uncertain times, but confronting uncertainty has been our business for over 145 years. We’re here to shoulder the risk and enable our clients and brokers to look beyond the immediate challenges. Because at Swiss Re, risk is our raw material; what we create is opportunity. Breeze into www.swissre.com
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MARKETPLACE
Canadian Market CANADIAN COMPANIES FALLING BEHIND IN IFRS CONVERSION PROCESS Despite the fast-approaching Jan. 1, 2011 deadline for the implementation of international financial reporting standards (IFRS), more than 12% of public companies and 20% of the private companies surveyed by PricewaterhouseCoopers have not yet taken the first step in the conversion process. PwC surveyed 256 companies — 147 of which were public, 51 were private and 28 were Crown corporations. About 80% of public companies remain short of the halfway mark of the overall conversion process, the survey found. Private companies were lagging behind public companies, with 51% of the private companies saying that only 20% of their conversion process was complete
CREDIT INSURANCE AMONG FEW LINES EXPERIENCING RATE CUTBACKS IN CANADA The only product in the Canadian (re)insurance market experiencing cutbacks is credit insurance, said Jack Lee, national marketing manager at BFL Canada, in BFL’s publication The Cover Note. In a question-and-answer section on the state of the (re)insurance market, Lee also commented that: “One would also expect directors’ and officers’ coverage to show caution, but insurers
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Canadian Underwriter July 2009
are actually becoming aggressive due to the number of markets wanting to grow their portfolios.” Lee also told The Cover Note that Canada’s commercial markets are generally seeking modest rate increases in property, with casualty remaining flat. “Our market remains very diverse and there is plenty of capacity and competition,” Lee said. “Underwriters want and need premium increases. Choice accounts, however, are still desirable and competition remains fervent.” Lee said he expects to see considerable pressure in pricing by 2009 Q3 if the first six months of the year do not see improvement.
ALBERTANS GENERALLY NOT SEEKING COMPETITIVE AUTO QUOTES 65% of Albertans have not sought competitive auto quotes in two years. Sixty-five per cent of survey respondents living in Alberta indicated they had not sought competitive auto insurance quotes in the past two years, according to a 2009 public perception survey commissioned by the Alberta Automobile Insurance Rate Board (AIRB). The survey included 800 interviews of adult Alberta residents, resulting in a 3.5% margin of error, accurate 19 times out of 20. Of the 35 % of respondents that did seek competitive quotes, most got only two or three quotes before proceeding to purchase. A majority (63%) of the quote-seekers said they obtained their quotes by means
of telephone calls to brokers (down from 71% in 2008)”
Regulation IBABC CALLS FOR BAN ON CREDIT SCORING The Insurance Brokers Association of B.C. (IBABC) has asked the B.C. government for legislative changes that would prohibit insurers’ ability to collect information for the purpose of credit scoring. “Our position is that we don't want credit scoring to be an underwriting factor in B.C., and the best way to ensure that is to prohibit it by statute,” Trudy Lancelyn, deputy executive director of IBABC, said in an email. IBABC observes on its Web site that Alberta’s superintendent of insurance in December 2008 issued a notice that insurers could be fined up to Cdn$25,000 for requiring a customer to consent to a credit report as a condition of obtaining a policy premium quote. “While IBABC is not aware of credit-scoring abuses with insurance transactions in B.C., the IBABC is concerned that current legislation actually enables the practice,” IBABC says in an online posting.
ONTARIO REGULATOR “ACTIVELY REVIEWS” USE OF CREDIT SCORING “Almost all” of Ontario's insurers have indicated to the province’s insurance regulator, the Financial Services Commission of Ontario (FSCO), that they understand FSCO’s concerns about credit scoring, expressed in a Feb-
ruary 2009 bulletin. They have also indicated that if they don’t already conform to the practices outlined in the bulletin, they plan to do so in the near future. “In response to the replies that have been received, FSCO is in the process of following up with insurers that submitted remediation plans with their forms, or identified issues that require further review,” the regulator said in a follow-up bulletin. FSCO added it is continuing to “actively review” the credit scoring issue. “Statements from automobile insurance industry participants that suggest the review is complete, or that FSCO has determined that specific insurance companies are in conformance with the bulletin, are incorrect and should be disregarded,” the regulator says in its Bulletin A-03/09—Automobile Insurance Quoting and Underwriting Practices.
OSFI RULES A BANK WEB SITE IS NOT A BRANCH The Office of the Superintendent of Financial Institutions (OSFI) has ruled that a bank’s Web site is not a branch, and it can therefore promote and sell insurance products or services on its Web site. The Insurance Brokers Association of Canada had asked OSFI to clarify the issue of whether or not a bank that promoted and sold insurance through its Web site constituted a breach of the Bank Act. The Bank Act specifies that
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a bank must sell insurance in a building that is separate and distinct from its bank branches. In a ruling posted on June 30, OSFI says that the Bank Act’s definition of “branch” refers to physical premises. “Furthermore, there are numerous provisions in that statute that specifically distinguish a Web site from being a branch,” the ruling says. The definition of a “branch” under the act is as follows: (a) in respect of a bank, means an agency, the head office or any other office of the bank, and; (b) in respect of an authorized foreign bank, means an agency, the principal office or any other office of the authorized foreign bank in Canada at which is carried on the business in Canada of the authorized foreign bank. “OSFI concluded that, for purposes of the regulations, a bank Web site is not a bank branch,” the ruling says. “As a result, a bank may, on its Web site, promote in Canada any insurance policies or any insurance companies, agents or brokers, subject to the conditions that the regulations impose on such promotion outside a branch.”
HCAI was shut down in April 2008 at the request of the Insurance Bureau of Canada (IBC). At the time, insurers said they were experiencing serious disruptions in their claims adjustment process as a result of technical problems encountered by HCAI.
This time, HCAI’s pilot phase will follow a staged approach, designed to test the capacity of the system at each implementation step. “The rollout process is driven by a series of control gates that are designed to ensure a positive user experience and avoid adoption
problems,” IBC said in a press release. “Each rollout phase will use a control point to confirm that the system is capable of adopting the next group of users.” All things going well, the full, regulated adoption of HCAI by insurers is planned to begin in March 2010.
Cunningham Lindsey offers expert claims handling for the most complex and specialized losses. To access our team of experts, write to us at corpservices@cl-na.com for a copy of our new Specialty Services Directory.
Claims ONTARIO'S NEW ELECTRONIC CLAIMS PROCESSING SYSTEM, HCAI, TO BE RE-INTRODUCED IN STAGES Health Claims for Auto Insurance (HCAI), an electronic system for processing auto insurance claims, is once again entering a pilot phase, starting on Sept.1, 2009.
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July 2009 Canadian Underwriter
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PROFILE
Reaching Out Vanessa Mariga Associate Editor
During the tenure of its incoming president, Patti Kernaghan, the CIAA is planning to approach the industry for guidance in planning what the association’s future role should be; it also plans to be accessible to potential new recruits. Patti Kernaghan, incoming president of the Canadian Independent Adjusters’ Association (CIAA), knew something was up when her father came to take her out for lunch one day in 1987. Kernaghan had been working in the banking industry for 10 years or so at that point. Her father, Stanley Kernaghan, ran Kernaghan Adjusters Limited, an independent adjusting firm he launched in 1953 in Vancouver.
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“Well, it wasn’t habit for him to come down and take me out for lunch, so I knew there was something up,” she laughs. “He came down, took me out for lunch and asked me if I would like to join the company. I told him I would try it for a year. Twentyone years later, here I am.” She admits she enjoys a good challenge. And that is precisely what a career in the claims industry is, she adds. “I think claims is a very interesting industry. Every claim is different and every one of my days is different too.” Since that fateful lunch, Kernaghan has succeeded her father and is currently the president and CEO of Kernaghan Adjusters. Now she’s about to take on another leadership role: in August 2009, Kernaghan will become president of the CIAA.
COLLABORATIVE EFFORTS During her tenure as CIAA president, she said she plans to develop a creative strategic plan for the association. This will generate feedback from all areas of the industry — adjusters, insurers, suppliers and self-insureds — in an effort to gain insight on what they think the CIAA is and what they think the
association should be doing for them. “I believe this is the time that the CIAA needs to stop and take a look at what it is and how it is delivering its service to the insurance industry at large, and to the property and casualty industry in particular,” she says. “The objective will be to reach out to the industry so the CIAA
We need to make ourselves available to mentor young people and/or people who are making career changes. can get feedback on what the industry feels our direction should be. Sometimes when people look in the mirror, they don’t see their own reflection so they have to ask other people.” Over the next two or three months, the association will send out a survey to industry stakeholders. It will likely cover off hot-button issues such as harmonized licensing, career and education planning for new recruits, continuous education, tools the CIAA can deliver to adjusters in the field and issues
around catastrophe adjusting. Once the survey results are collected and analysed, the association will release the basic results, likely in the fall, and then delve deeper into an analysis that will help develop a footprint for future initiatives. In addition to asking these industry groups for input into how the CIAA’s future should be directed, Kernaghan will be asking them about collaborative opportunities in continuing education and catastrophe programs. Collaboration with other industry players will be key moving forward, be it with other insurance industry associations, government organizations or other industry groups such as healthcare providers, she says. “From an educational perspective, the more education the better. The more collaboration between various groups in the industry, the more effective our adjusting is going to be in the long run. We should look for opportunities to collaborate wherever we can.” For example, in April 2009, the CIAA teamed up with the Insurance Institute of B.C. to deliver a seminar that she says was a huge success. She also plans to leverage technology to make those sorts
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PROFILE
are continually working with the emergency measures offices to set up programs for catastrophes.” To this end, the CIAA will also be working with the National Association of Independent Insurance Adjusters, its U.S. counterpart.
RECRUITMENT
of educational opportunities more accessible. “We’re talking at the CIAA executive meetings about doing Web cast seminars," she says. “That’s the kind of change to continuing education that’s easily possible given the technology currently available.” Kernaghan plans to increase cooperation in the area of catastrophe programs. Currently,
CIAA members can register with the association’s member adjustment assistance service so that, in the event of a catastrophe in another province, adjusters can be called in to lend a helping hand. “The other arm of that is the CIAA working closely with a number of emergency measures offices — in particular in Atlantic Canada and Manitoba,” she says. “We
Increasing the number of recruits into the adjusting field is also a priority. The CIAA has a committee at the executive level working diligently on developing different tools for recruitment. But CIAA members can help at the grassroots level by volunteering within their communities, Kernaghan suggests.It’s a chance to open up dialogue with people who may not otherwise have considered a career in insurance. Kernaghan is a member of the board for the British Columbia Institute of Technology’s brand new insurance and risk management program. Recently, the head of the program suggested to a young woman pondering an insurance career that she contact Kernaghan. The two sat and chatted for more than an hour, Kernaghan says. “That’s the kind of recruitment we need to do as independents,” she says. “We need to
make ourselves available to mentor young people and/or people who are making career changes.” This raises another point, she says. Potential future adjusters need not always be high school or college students that appear to be keen on the field. The average age of people entering the insurance industry is much higher than that of other industries, she notes, pointing to findings of the Insurance Institute of Canada’s demographic study. “Consequently, we’re seeing a lot of people [making] career changes,” she says. “They are bringing transferable skills to our industry, and we need to help them direct themselves on the insurance product so they can bring their skills and apply it to the insurance world.” Targeting these potential recruits can be done in a multitude of ways, and not necessary based solely on career fairs or educational institutions. “It doesn’t matter where you are when you’re in contact with people that are thinking about changing careers — whether it’s on a plane or in a coffee shop,” she says. “We need to talk about our industry and talk to people about moving into our industry.”
July 2009 Canadian Underwriter
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Boring is Beautiful* *or, What dull insurers can teach glamorous investment bankers
Chief Agent and CEO, Zurich Canada
14 Canadian Underwriter July 2009
ing and quantifying risk. Indeed, there are several guiding insurance principles that could be applied more broadly to the risk management challenges of other financial services sectors.
RESERVE ADEQUACY AND PEER REVIEW In selling a policy, an insurer is making a contractual commitment that its capital will be made available to offset losses of those who purchase such a policy.The industries’ core operating arithmetic is that while the sum total of future liabilities cannot be determined with 100% accuracy, insurers will make provision on their balance sheet for such future liabilities in the form of asset reserves. For obvious reasons, the property and casualty industry and its regulators have worked hard to make the valuation of future liabilities as much of a science as possible. Today, professional actuaries are formally responsible for determining the adequacy of required reserves. In this process,
Three in a Box/Greg Hargreaves
Alister Campbell
Over the last 18 months, we have had the extraordinary opportunity to witness a financial catastrophe unfolding worldwide. This catastrophe has laid bare failings in our regulatory frameworks. But perhaps more dramatically, it has exposed breakdowns in risk management practices in financial institutions that genuinely believed that they had properly identified and managed their risk. The property and casualty (P&C) insurance sector is by far the least glamorous of the financial services sectors.This is perhaps why it has proven to be in such a good position to weather these financial storms. Some life insurers with exposure to guaranteed investment products and some multi-line insurers with broader exposure to derivative markets may have stumbled, but pure P&C carriers have performed surprisingly well. The relative success of the P&C industry is worth mentioning because it is this industry that has the best expertise in understanding, evaluat-
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they make provision for such arcane things as IBNR (claims which are “incurred but not yet reported”) and worstcase scenarios (PFAD — a provision for adverse deviation). I mention these technical, actuarial mechanisms not to impress or bore, but instead to illustrate the degree to which our industry invests in the true professional discipline of appropriate reserving.We go one step further: we insist the reserving adequacy of each insurer be regularly peerreviewed by an external actuary that must countersign on the statements and affirm reserve adequacy. What is the application of this principle to the broader financial services marketplace? It tells us we do not in fact need to invent new forms of regulation. We already have a regulatory framework capable of managing this type of risk effectively in our sector.We simply need to expand the model’s scope to encompass the activities of global financial players and require peer-reviewed evaluation of the forward liability risk of newer financial instruments.
THE RISK OF MORAL HAZARD Much has been written about “moral hazard” and about how best to avoid it in the underwriting of insurance policies. Broadly speaking, moral hazard describes the following idea: if humans have the opportunity to transfer their total risk to another without cost, they will do so. Worse, the incentive to transfer risk grows in direct correlation with the increase in that risk. Worse still, this costless risk transfer actually incents immoral behaviour. And how does this concept apply to our recent financial system’s travails? The U.S. sub-prime mortgage marketplace is a textbook illustration of moral hazard run amok. Mortgage originators were able to generate large fee income through the activity of making loans, but were able to transfer to others 100% of the risk that such loans would not be repaid. As the demand grew for more origination to feed the enormous appetite for packaged, securitized assets,
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the temptation to originate bad loans grew as it became more remunerative. Additionally, bonuses paid for growth in fee income encouraged increasingly risky behaviour throughout the system among originators and packagers. The consequence of this misalignment of interests has now been painfully made clear. The proper identification of moral
hazard risk is at the heart of the training for junior underwriters in our industry. It does not seem to have been on the curriculum of junior capital markets regulators, or even the chairman of the U.S. Federal Reserve (who recently declared himself “shocked” by this tragic but perfectly explicable and predictable human behaviour).
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THE COMPELLING HUMAN LOGIC OF RISK RETENTION Human instinct is always torn between the desire to maximize reward and simultaneously minimize risk. Where insurance is available, individuals have an added tradeoff variable to include in their analysis: how much are they willing to pay to transfer the risk of loss to others? But our industry has learned over time that even those paying a fair premium to secure some degree of risk transfer should also be required to retain some additional financial obligation by means of some form of a “co-insurance mechanism” — think the “deductible” on your car insurance. Experience has taught us that when some portion — even a very small one — of the potential loss is shared by the insured, less risky behaviour ensues. How can this principle be applied more broadly to the issues of the day? Collateralized Debt Obligations (CDOs) are packaged bundles of risks where none of the loss is borne by the originator of the
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risk. It is now evident that moral hazard fueled the creation of more and more CDOs with higher and higher percentages of bad risks. But the lack of any coinsurance or deductible mechanism amplified this disastrous behaviour by the institutions originating the loans and those packaging the bundles. So, what specifically could insurance principles suggest to thaw credit markets and re-establish a viable securitization market? How about a Retained Risk Rating framework, with a minimum requirement for retained risk by the risk’s originator? Perhaps a regulation requiring that a minimum 25% of each loan be retained might enable the remaining 75% to be securitized safely. And perhaps CDOs with higher retained ratios (30%, 50%, etc.) would be worthy of higher ratings. Insurance experience suggests that the higher the percentage of risk retained, the lower the likelihood that loans unlikely to be re-paid would in fact be made in the first place!
THE IMPORTANCE OF EXPOSURE AND ACCUMULATION MANAGEMENT As a matter of common practice, insurers make provisions for anticipated future losses.These provisions will include an expected portion of total losses attributable to “catastrophe.” For practical purposes, these tend to be a direct result of dramatic weather conditions or geological disasters. Key to analyzing risks of this severity is effective “exposure” and “accumulation” management. “Exposures” are simple enough to define, quantify and manage. The logical concern is familiar to anyone who was taught as a child not “to put all your eggs in one basket.” From an insurer perspective, what that in fact means is that you can have too much market share if that significant share is disproportionately located in too small a territory or category of risk. Grizzled veteran underwriters terrorize new recruits with the horror story of the large insurer that discovered that, after the devastation of
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Hurricane Andrew, its two biggest agents in Florida dominated the same narrow strip on that state’s coast — exactly where that Category 5 storm made landfall. But it is not the “exposure management” part of the equation that has the broader application.What really matters is the “accumulation” calculation. The definition here is perhaps more complex; suffice to say, that “accumulation” is the product of exposures multiplied by the maximum possible loss per exposure (i.e. the cost to re-build the total number of hurricane-exposed houses if every house is a total loss). So how does this type of analysis help in thinking through our recent financial travails? Well, it helps us to understand how so many smart folks got the value of so many CDOs so wrong. It is easy enough to analyze the cases in which institutions simply held too much of a single asset class. One European bank, for example, turned out to be holding 30-billion Euros worth of “Alt A” U.S.
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mortgages.This was simply mismanagement of exposures. But the holders of large securitized portfolios actually believed themselves to be properly managing risk.Their multibillion dollar investments in CDOs (holding mortgages, car leases, credit card balances, etc) appeared to them to represent a diversified portfolio — sufficiently diversified (they thought) to justify the very high leverage ratios they increasingly employed to generate enhanced yields. Sadly, the collapse in the U.S. housing market was the equivalent of Hurricanes Andrew and Katrina combined. Once you multiplied all the exposures by the accumulated total loss on each — and multiplied the losses by the leverage ratio — you had a true financial catastrophe. All of this was based on a simple breakdown in risk management and a failure to evaluate worst-case scenarios. This is where “accumulations” could have been, and were not in fact, managed properly.
PLANNING FOR THE TECHNICOLOUR SWAN Today in my dull and boring industry, we regularly review reports analyzing our exposure to 1-in-100 year events and 1-in-250 year events. My reinsurance providers have models — and sell me insurance policies based on these models — to quantify the risk of 1-in -500 year events (the great and inevitable West Coast Quake) and even the 1-in- 1,000 year event (don’t ask). The boring P&C industry is unsurprised by “black swans.” We spend our nightmare time imagining flocks of technicolour ones all happening at once! In the end, we have all seen the risk of not thinking hard enough about risk. I would cautiously suggest (which is as aggressive as us P&C folks get) that those who do so for a living could help ensure that this type of global financial catastrophe never happens again.”
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Part XIII:
The Countdown J. Brian Reeve Partner, Cassels Brock & Blackwell LLP
Canada’s solvency regulator, OSFI, has made another move to clarify its proposed changes to Part XIII of Canada’s Insurance Companies Act, which will take effect as of Jan. 1, 2010. Changes to Part XIII of the Insurance Companies Act, which govern the operations of foreign insurance companies in Canada, will come into effect on Jan. 1, 2010. Despite rumours the implementation of Part XIII may be delayed again, the Office of the Superintendent of Financial Institutions (OSFI) has confirmed that it will come into effect on schedule.
THE REVISED ADVISORY OSFI issued a revised version of the Advisory on the “Insuring in Canada of Risks” in May 2009. This version of the advisory supersedes previous versions and attempts to provide greater clarification with respect to when a foreign insurer
18 Canadian Underwriter July 2009
will be deemed to be “insuring in Canada a risk.” Section 2 of the revised advisory provides nine basic indicia that can be used to determine whether a foreign insurer is “insuring in Canada a risk.” The latest version of the advisory has dealt with some of the criticisms of earlier versions, including how the indicia are to be applied and which of them are the most important. The advisory now provides a clearer and more understandable set of indicia that may be used to confirm that the “insuring in Canada of a risk” is occurring. The relevant indicia occur when a foreign insurer or reinsurer: (a) promotes insurance products in Canada; (b) directly solicits a person in Canada to obtain coverage; (c) receives in Canada a request for coverage; (d) negotiates from Canada the terms and conditions of coverage; (e) decides in Canada to bind coverage; (f) communicates from Canada an offer to insure; (g) receives in Canada acceptance of the offer to insure from a policyholder; (h) receives in Canada the premium; (i) interacts in Canada with a policyholder
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regarding coverage (including handling claims). OSFI has indicated that a foreign insurer is “insuring in Canada a risk” when its business model includes:
Scenario 1 Two or more of the activities outlined in subparagraphs 2(b) to (h) of the advisory. Scenario 2 Any one of the activities referred to in subparagraphs 2(b) to (h), and both of the activities referred to in subparagraphs 2(a) and (i). Scenario 3 Reaching agreement on most or all of the material terms and conditions of coverage during the course of negotiations in Canada. According to the advisory, OSFI considers that a foreign insurer or reinsurer is not “insuring in Canada a risk” if its business model encompasses only one of the activities referred to in the above list (i.e. Paragraph 2 of the advisory). In December 2008, OSFI issued implementation instructions with respect to the Part XIII changes. OSFI is requiring Canadian branches of foreign insurers and reinsurers to provide regular updates to OSFI during 2009 with respect to their plans to prepare for the Part XIII changes.The first report to OSFI was due on May 31, 2009. It will be interesting to see if OSFI issues any additional clarifications as a result of its review of the initial Part XIII reports that it receives.
GRANDFATHERING OF PRIOR BUSINESS OSFI has already advised that all risks written by a Canadian branch prior to Dec. 31, 2009 will be grandfathered — it will be considered to be licensed business — unless a company makes an application to OSFI for a release of the applicable vested assets. As a result, it will
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not be necessary for a foreign insurer or reinsurer to analyze business that is in run-off in order to determine if it qualifies as licensed business under the new rules. It will only be necessary to analyze business that will be in force after Jan. 1, 2010. The only companies likely to apply to OSFI for a release of vested assets on the basis that their policies were not insured in Canada are ones that are attempting to withdraw their Canadian branches.There are a number of requirements necessary for a Canadian branch to apply to OSFI for a release of vested assets for business not insured in Canada. As a result, most companies will not likely believe there is sufficient benefit to become involved in this relatively complicated process.
It appears the provinces have reached a compromise with OSFI...This compromise will allow for the provinces to still be able to collect the same amount of premium tax that they are currently receiving. TRANSITION ISSUES In a sense, Part XIII is already in effect, since policies that are issued during 2009 with a term of one year or longer will have part of their term in effect in 2010. As a result, it is necessary for foreign insurers and reinsurers to begin making decisions now as to how the unearned premiums with respect to these policies will be reported in 2010. Most foreign insurers and reinsurers with Canadian branches have now realized that maintenance of the status quo is likely the preferable outcome after Jan. 1, 2010. As a result, it will be necessary for many foreign insurers and reinsurers to make changes to their busi-
ness models in order to be able to comply with the requirements of Part XIII. A foreign insurer unable to comply with the requirements of Part XIII will face the following challenges: • policies will now be considered to be unlicensed, making them more difficult to be sold by insurance brokers in Canada; • insureds will be required to pay Excise Tax (unless the Excise Tax can be waived); and • the provisions under the provincial insurance legislations against carrying on the business of insurance without a licence will still be applicable and will make it difficult to undertake various activities including promotion, negotiation of coverage, delivery of policies, collection of premiums and handling of claims. Foreign reinsurers will also be at a competitive disadvantage if they are not licensed since ceding companies will be subject to the requirements of the Reinsurance Regulations, which limit the amount of unlicensed reinsurance they can use to 25% of gross written premiums. OSFI is currently reviewing this limitation, but no changes have been announced to it yet.
CHANGING THE BUSINESS MODEL Insurers and reinsurers operating in Canada without an office will be required to ensure that their chief agent is involved in a sufficient number of the indicia in the advisory. For example, the chief agent might be involved in the receiving of premiums, as well as in the delivery of the policies. Commercial insurers and reinsurers that issue a relatively small number of policies in Canada should ensure as much as possible that their underwriters visit with policyholders — or their brokers — in Canada to negotiate the terms and conditions of coverage. All trips by underwriters to Canada should be tracked; a record should be kept of with whom they met and what was discussed for
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both new business as well as renewals. It will be necessary for insurers and reinsurers that have an office in Canada, but that do some or all of the underwriting for particular business outside of Canada, to take similar steps to ensure a sufficient number of the indicia are met.
PROVINCIAL ISSUES Another important issue with respect to the implementation of Part XIII is how the provinces are reacting to it. Quebec, British Columbia and Alberta have indicated they are not happy with the changes and may retain some aspects of the current reporting system for their own purposes. The current reporting system OSFI uses is based on the location of risk and is the one the provinces also use to assess provincial premium tax. The provinces want to make sure there is no deterioration of their tax revenue as a result of the Part XIII changes. It is clearly preferable for foreign insurers to be able to report the same business to OSFI as well as for provincial premium tax. It appears the provinces have reached a compromise with OSFI: additional pages will be added to the annual return that will disclose the gross premiums written by provinces using the current test based on location of risk.The provinces will allow the new OSFI test to be used for the purposes of preparing financial statements as well as for the Branch Adequacy of Assets (BAAT) test. This compromise will allow for the provinces to still be able to collect the same amount of premium tax that they are currently receiving.
BROKER ISSUES Insurance brokers, as well as reinsurance brokers, have started to realize there are significant issues that must be dealt with regarding Part XIII as well as potential liabilities. If an insurance broker accidentally places an unlicensed policy with an insured, it is possible that Excise Tax will be payable by the insured. The
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result is that the broker may have an errors and omissions claim with respect to the policy.The broker may also be liable to pay the Excise Tax in the event that the insured does not pay it. In some cases, it may be a number of years before it is discovered that a policy was in fact unlicensed and that Excise Tax was payable. Many reinsurance brokers are now asking foreign reinsurers to sign certifications that their reinsurance agreements will comply with the requirements of Part XIII. It is difficult for any foreign reinsurer to provide an absolute certification that a reinsurance agreement
The latest version of the advisory confirms that almost all foreign insurers and reinsurers operating in Canada will be able to comply with Part XIII with either minimal or no changes to their current business models. complies with Part XIII until OSFI provides additional guidance or rulings with respect to it. At this point, a better approach for a foreign reinsurer would be to indicate that to the best of its knowledge, its reinsurance agreements comply with Part XIII and also that it intends to report the business to OSFI as being licensed. A clear indication on the signing page of a policy or reinsurance agreement that the risks covered are being insured in Canada should be used in the future. Although the intention of the parties is not listed among the indicia in the advisory, it is still an important fact to confirm. Brokers should not simply rely upon the certification of the insurer and reinsurer and should, when necessary, do their own due diligence with respect
to the applicable business model that is involved.
AUDIT ISSUES It is unlikely that, once Part XIII comes into effect, OSFI will do audits on insurers and reinsurers to determine whether every individual policy or reinsurance agreement complies with Part XIII. It is more likely the auditors will be responsible for ensuring compliance with the requirements of Part XIII. Part of the audit process will include determining whether all policies have been properly reported to OSFI and included as part of the financial statements for a Canadian branch. The preliminary view of some auditors appears to be that they will not examine every policy or reinsurance agreement. As an alternative, they will focus on the internal controls and reporting systems that a foreign insurer or reinsurer uses to track the Canadian business that it is reporting. Auditors will also likely rely on management representation letters from senior management of foreign insurers and reinsurers to give them additional comfort.
SUMMARY The latest version of the advisory is an improvement over earlier versions and clarifies what will be required in order for a foreign insurer or reinsurer to be considered to be “insuring in Canada a risk.� The pending implementation of the Part XIII changes has definitely created a level of anticipation (and even anxiety) among many foreign insurers and reinsurers operating in Canada as well as the brokers with which they work. The latest version of the advisory confirms that almost all foreign insurers and reinsurers operating in Canada will be able to comply with Part XIII with either minimal or no changes to their current business models. As a result, they will be able to continue to write their Canadian business in substantially the same manner as it is currently being done.
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David Gambrill Editor
Vanessa Mariga Associate Editor
Alberta’s Court of Appeal has ruled that the province’s cap on damages for minor auto injuries is constitutional, since it is only one piece of a broader legislative scheme that includes treatment protocols and payments for minor injury victims. Does Alberta’s cap on non-pecuniary damages for minor auto injuries discriminate against whiplash victims? Yes, Alberta’s courts have ruled. But is the overall legislative package that introduced the auto cap constitutional? Yes, the Court of Appeal of Alberta has also determined, thus providing the latest ruling in a legal odyssey widely anticipated to end at the doors of the Supreme Court of Canada.
COURT OF APPEAL: THE BACKGROUND Alberta Court of the Queen’s Bench Justice Neil Wittmann introduced a world of uncertainty into Alberta’s insurance industry in 2008, when he
22 Canadian Underwriter July 2009
found that the province’s cap legislation was unconstitutional. More than a year later, in its June 12, 2009 decision, the Court of Appeal of Alberta gave deference to Wittmann’s finding that the province’s Minor Injury Regulation (MIR), which introduced a Cdn$4,000 cap on damage claims for minor auto injuries in 2004, discriminated against whiplash victims. But the MIR represents only one aspect of a broader legislative package that introduced the caps, the Appeal Court further ruled.The Court of the Queen’s Bench of Alberta erred in examining just the MIR and not the entire legislative scheme of which the MIR was a part.That broader legislative scheme includes a treatment regimen that ultimately allows injury claimants to apply to insurers for benefits exceeding the cap, as long as the treatment regimen is followed and the injuries persist. The Alberta Court of Appeal reviewed the history of Alberta’s cap legislation in Morrow v. Zhang. The case is based on injuries sustained by Peari Morrow and Brea Pedersen in two separate automobile accidents. Morrow suffered soft tissue injuries to her neck and back, diagnosed as a Grade 2 whiplash associated disorder (WAD II), as a result of an auto collision in October 2004. As of the time of trial,
Three in a Box/Greg Hargreaves
The Cap’s Odyssey Continues
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in April and May 2007, she was still suffering from pain that was affecting every aspect of her life. Pedersen suffered soft tissue injuries to her neck, shoulders, back and wrists from an auto collision in March 2005. Her neck, shoulder and back pain resolved a month after the accident, but at the time of trial, she still suffered pain in her wrist that affected her everyday life and household chores. Wittmann found at trial that were it not for Alberta’s auto injury cap, both Morrow and Pedersen would be entitled to non-pecuniary damages in excess of Cdn$4,000. He assessed general damages of Cdn$20,000 for Morrow and Cdn$15,000 for Pedersen. He then considered their constitutional challenge that the cap infringed their Sections 7 and 15 Charter rights. In considering the Section 15 challenge (which relates to the right not to be discriminated against on the basis of
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physical disability), the trial judge focused on the MIR because it was the only part of the legislative package being challenged. He sided with the plaintiffs
The trial judge erred when he ‘constitutionally assessed only the MIR’… and stated that ‘the distinction in the MIR was the focus of [his] analysis.’ The correct approach was to assess the entire package of insurance reforms. in finding that the MIR treats minor injury victims differently by preventing them from claiming more than Cdn$4,000 for non-pecuniary damages.
What’s more, this distinction was discriminatory because it strongly suggested minor injury victims — particularly those suffering from whiplash associated disorders — are subjected to stereotyping and prejudice since they are portrayed as “malingerers.” He thus struck down the MIR as unconstitutional. On the issue of the MIR’s discriminatory effect on minor injury victims, the Alberta Court of Appeal confirmed the trial judge’s finding. “In my view, the trial judge’s finding is entitled to some deference,” Alberta Court of Appeal Justice Patricia Rowbotham wrote on behalf of a unanimous panel of three judges. “While an appellate court can read the transcripts and reports, this is not the same as a trial judge who, after listening to days of evidence, forms an impression which leads him to making a finding of fact.The trial judge was entitled to weigh the evidence. I cannot say that his finding in this regard was incorrect.”
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Rowbotham then goes on to acknowledge the Nova Scotia court’s decision came to the opposite conclusion on the matter of discriminatory effect. “In the recent decision in Hartling v. Nova Scotia, which considered the Nova Scotia cap on damages for non-pecuniary loss, the trial judge found that the claimants had not established a stereotype,” Rowbotham wrote. “Indeed, the trial judge [in Nova Scotia] saw the same IBC [Insurance Bureau of Canada] videos tendered as evidence [of stereotyping] in this case. However, the other evidence adduced in Hartling was not the same as in this case, and each trial judge was entitled to arrive at his decision based upon the evidence before him.”
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botham wrote. “In my view, the evidence supports the interrelationship of the insurance reforms. Indeed the evidence demonstrates that the MIR likely would have been instituted unless the DTPR was implemented with it.” Rowbotham goes on to say that: “although the trial judge reviewed the entire scheme of the insurance reforms and was aware of their interrelationship, his method of analysis was to assess only the MIR, and then look to see if the other regulations would ‘offset’ the MIR.”This amounted to an error on the part of the trial judge, she concluded.
OVERALL CAP LEGISLATION But despite evidence of the MIR’s discriminatory effect in Alberta, the Alberta cap legislation is nevertheless constitutional because the MIR is only one piece of the broader legislative context, the Alberta Appeal Court found. “The trial judge erred when he ‘constitutionally assessed only the MIR’… and stated that ‘the distinction in the MIR was the focus of [his] analysis,’” Rowbotham wrote. “The correct approach was to assess the entire package of insurance reforms.” That package included the introduction of the Diagnostic Treatment Protocols Regulation (DTPR), which provides for 10 to 21 treatment sessions in the first 90 days after an auto injury without the need to seek approval from the insurer. It pre-authorizes payment, thus eliminating any need for payment by an injured person.The DTPR also uses protocols for diagnosing and treating sprains, strains and other whiplash-associated disorders. Once the maximum number of treatments or 90 days has been reached, an injured person can apply for “Section B” coverage, which requires the approval of an insurer for further payments. The DTPR increased Section B coverage from Cdn$10,000 to Cdn$50,000. “It is clear that when the court considers a Section 15 challenge to a section of one part of a legislative scheme, it must consider the whole scheme,” Row-
24 Canadian Underwriter July 2009
“In my view, the trial judge failed to assess the measures in the DTPR which promote and assist treatment. Legislation that provides for an individualized assessment of a claimant cannot normally be characterized as perpetuating a stereotype.”
INDUSTRY REACTION The industry’s general reaction to the Court of Appeal’s decision is one of one of cautious optimism. “We believe that a well-functioning auto insurance program strikes a balance between those who pay insurance premiums and those that are injured in automobile accidents to make a legitimate claim,” Alison Redford, minister of justice and attorney general of Alberta, said during a press conference. “We feel our auto insurance system is
a good system and today’s unanimous Court of Appeal decision supports this and confirms that the government’s auto insurance system as a whole responds to the needs and circumstances of those suffering from minor injuries.” Randy Bundus, vice president, general counsel and corporate secretary at Insurance Bureau of Canada (IBC), hailed the decision as a definite positive step for the insurance industry, and a “victory for drivers and motorists of the province of Alberta.” He says he’s delighted that the Court of Appeal accepted IBC’s argument that in order to analyse the validity of the MIR, “we have to look at the way that it fits into the entire set of reforms.” Ginny Bannerman, Insurance Brokers Association of Alberta’s CEO, says that the Court of Appeal’s decision to look at the reform package in its entirety was gratifying. “To take a look at any one of [the regulations] in isolation was to discount the benefit that they all brought as a package in working together,” Bannerman says. Barb Addie, a principal at Baron Actuaries, agrees. “In this case, they brought in protocols to ensure that people got early intervention and that their treatments were paid for. It wasn’t like these people were left to dangle.” Despite the victory, Bundus says he remains cautiously optimistic “but, deep in my stomach, I feel [the trial lawyers] will seek leave to appeal to the Supreme Court of Canada.” If that is the case, and leave is granted, “it could be a long haul of uncertainty,” he adds. In the meantime, Addie believes insurers’ claims costs will see a reduction now that the MRI is restored. According to figures from IBC, the impact of the cap challenge had resulted in a loss ratio 25% higher in 2008 than in 2007, increasing from just over 50% to slightly more than 76%. “The difference between claims costs of those that settled in the interim [between the trial court’s decision in February 2008 and the Court of Appeal’s decision] would be pretty dramatic,” Addie says.
Mutual Recognition By david gambrill
26 Canadian Underwriter July 2009
Canada
is swept up right now in an international current flowing (albeit with glacial speed) towards the mutual recognition of reinsurance supervision. Mutual recognition describes a situation in which a supervisor or regulator in one jurisdiction agrees to abide by the standards of a regulator in a jurisdiction where the parent company of a global reinsurer resides — and vice versa. Reinsurers pleased with the direction of this current say a long-term move towards supervisors “mutually recognizing” each other’s licensing requirements would increase the free flow of a reinsurer’s capital from one jurisdiction to another. They argue mutual recognition is in keeping with a global reinsurer’s interest in being able to transfer capital across jurisdictions, making money available at a moment’s notice to pay claims on a balanced, global and diverse portfolio of risks. It would also reduce reinsurance premiums, they argue, since liquidity costs associated with posting collateral would be reduced, as would the costs of regulatory compliance. Several reinsurers in Canada, however, question whether this international drift is good for Canada. They argue that Canada’s solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI), has a reputation as having one of the more stringent regimes in the world for capital and reinsurance collateral requirements. This is one reason why Canadian financial institutions have emerged from the global economic recession without wholesale financial distress, they say. And so why at this point would OSFI relinquish its supervisory authority to a supervisor in a different jurisdiction that has a different — and potentially lower — standard of protection for Canadian policyholders? Call it the ‘Free Trade’ debate, reinsurance style.
July 2009 Canadian Underwriter
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COVER STORY
Mutual Recognition The International Current In October 2007, a little less than a year before the U.S. housing market collapsed (triggering a lingering global economic recession), the International Association of Insurance Supervisors (IAIS) issued its Discussion Paper on the Mutual Recognition of Reinsurance Supervision. The paper was developed in consultation with 16 IAIS members, including Canada. The mission of the paper “is to facilitate [the international supply of] reinsurance by fostering the development of a framework for an efficient and effective international system. The framework should be sufficient to allow supervisors to mutually recognize the quality of the supervision exercised by one another in their respective jurisdictions and thus possibly remove or alleviate unnecessary regulatory and supervisory requirements for reinsurers in the host jurisdiction, to the extent that the home jurisdiction already applies and enforces equivalent regulation.” One year later, the IAIS followed up with a guidance paper on the issue, which was approved in Budapest on Oct. 17, 2008. This guidance paper notes that the objective of mutual recognition can be achieved in any one of a number of ways. For example, “unilateral recognition refers to a situation where a supervisor recognizes the supervision exercised by another, without requiring that the latter recognize the supervision exercised by the former.” In a bilateral approach, two supervisors would recognize each other’s supervision. And in a multilateral approach, three or more supervisors would recognize the supervision exercised by the others. “Supervisory recognition may take place with or without the use of a formal agreement,” the IAIS guidance paper says. “It is important to note here, however, that all approaches to supervisory recognition rest on the assessment of the acceptability of the counterpart regime.” One month after IAIS released its guidance paper, OSFI released a discussion paper designed to take into account the international debate about mutual recognition and other matters and “assess our own regulatory and supervi28 Canadian Underwriter July 2009
sory approach to reinsurance.” OSFI’s Regulatory and Supervisory Approach is a broad work and outlines a number of hot-button issues within Canada’s reinsurance community. For example, in addition to mutual recognition, OSFI’s paper deals with topics such as: • the country’s 25% limit on risks ceded to unregistered reinsurers; • collateral requirements for unregistered reinsurance;
What mutual recognition really means is that capital is fungible. It moves a lot more easily. You wouldn’t be stuck with an arbitrary collateral requirement in one country if everyone were to be regulated at the same level. • capital requirements for registered reinsurers (i.e. reinsurers licensed with OSFI); • the 75% fronting limit, which does not allow a Canadian property and casualty insurer to cede more than 75% of its gross premiums to a reinsurer; • insolvency and other contract clauses; and • corporate governance. On the topic of mutual recognition, OSFI’s paper says: “mutual recognition is generally understood to mean that reinsurers registered in certain countries, and subject to a mutual recognition agreement, may write business in
all other countries in the agreement without collateral or restrictions.” This is further subject to an agreement that the solvency requirements and regulations are mutually acceptable to each supervisor, reliance on the home jurisdiction for the regulation and supervision of the foreign (or in Canada, the “unregistered”) reinsurer, as well as informationsharing between supervisors regarding the relevant reinsurers. OSFI’s paper does note “some significant challenges” to implementing a global scheme of mutual recognition. Among them, “in contrast to banking supervision/regulation, there is a wide variation in the regulatory and capital requirements for reinsurance across several jurisdictions, including Canada, the U.S., E.U., Switzerland, Japan and Bermuda, among others…” Canada’s solvency regulator goes on to note that: “OSFI’s regulation of reinsurers is generally more extensive than that of most countries. OSFI would need to be satisfied that the regulatory and capital requirements for reinsurers operating in other countries provide sufficient protection for Canadian policyholders before eliminating the collateral requirement for unregistered reinsurers.” OSFI gave reinsurers a Mar. 6, 2009 deadline to comment on the paper; as of press time, OSFI is reviewing the comments. “In undertaking such a broad and comprehensive policy review, with so many inter-linked issues, it would have been unfair and imprudent to set impractical time and process constraints (on OSFI and on the industry) at the beginning of this exercise,” OSFI communications director Rod Giles said in an e-mail exchange. “However, having assessed the industry response to the reinsurance paper, we hope to be in a position to make some notable changes to the reinsurance regulatory and supervisory framework this fiscal year.” Free-flowing Capital Supporters of mutual recognition discuss the benefits for a reinsurer of being able to move capital around the globe with fewer restrictions.
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COVER STORY
Mutual Recognition “The whole concept, the foundation of mutual recognition is that OSFI, along with all of the international regulators around the world, all of those jurisdictions, would in fact mutually recognize that reinsurer as domiciled in the local country and therefore give credit without the significant collateral requirement,” says Sharon Ludlow, the chief financial officer for Swiss Re Canada. “Under the current regime, OSFI, in the protection of policyholders, requires the collateral so that those assets are basically here in Canada. So if that foreign reinsurer were to go insolvent, the assets are actually sitting here and be just for Canadian claims. They wouldn’t become part of foreign insurer’s or reinsurer’s solvency pool, if you were…. “What mutual recognition really means is that capital is fungible. It moves a lot more easily. You wouldn’t be stuck with an arbitrary collateral requirement in one country if everyone were to be regulated at the same level. OSFI would say, ‘Oh yes, I recognize Switzerland or Germany as having the same type of solvency requirements we have in Canada, so we will permit and give credit for reinsurance. We’re therefore not worried that the Swiss regulator is going to allow that reinsurer to fail. They have the same stringent requirements.” Francis Blumberg, chief agent in Canada for PartnerRe, says that the ability to shift capital quickly from one part of the globe to the other also underpins an important element of the reinsurance model, namely to diversify risk over lines of business, markets and geographies. “The basic model of reinsurance involves moving capital around,” he says. “We can write earthquake risk in B.C. and combine that with writing windstorm risk in Japan efficiently because [those risks are] not correlated. A reinsurer needs to be able to move capital around to continue to optimize the diversification benefit and balance of risk across their portfolio. And that is fundamentally not possible here because capital inside [Canada] is effectively locked.” Locking capital in Canada, the result of imposing collateral requirements, costs reinsurers in at least two significant 30 Canadian Underwriter July 2009
ways. First, there is a liquidity cost associated with posting collateral. “Some of the collateral is in the form of letters of credit, and so you are basically tying up your liquidity lines for the purposes of regulatory credit in a specific jurisdiction,” Ludlow says. “In a risk diversification business, particularly at Swiss Re, we write significant business in jurisdictions that are complementary. We’re not worried if we have a hurricane in
Regulation is necessary, but we think that if a country has good regulation, there’s no need to duplicate it. Having different rules in different countries is inefficient from a number of perspectives, reporting costs being a significant factor. one location, because the chance of that happening and another catastrophe happening in another jurisdiction are completely diversified based on the number of jurisdictions in which we write around the world. If we didn’t have the ability to write in so many places in the world and have that risk diversification, the cost of us providing that reinsurance would be higher, including the cost of the liquidity lines.” Depending on the reinsurer, these liquidity costs could amount to between “tens and hundreds of million of dollars,” one source says. There are also costs associated with a reinsurer’s compliance to the various
regional requirements of supervisors around the globe, Blumberg says. “Regulation is necessary, but we think that if a country has good regulation, there’s no need to duplicate it,” he said. “Having different rules in different countries is inefficient from a number of perspectives, reporting costs being a significant factor.” Both the liquidity and regulatory costs are passed along to policyholders in the form of higher premiums, advocates of mutual recognition point out. By reducing such costs, reinsurers will be able to pass their savings along to policyholders in the form of cheaper premiums. Most supporters of mutual recognition realize that even if it were to happen, it won’t happen for some time. “Solvency II implementation in the E.U. is 2012, so it’s not going to happen before that,” Ludlow says. “Both of the life and P&C industry associations in Canada are working with OSFI on our economic internal capital modeling….All of those things have to be fundamentally in place, and the timeline on that is maybe 2014. I don’t think mutual recognition is going to come any sooner.” Supervisory Sovereignty Several reinsurers in Canada are skeptical it will even happen at all. “If it ain’t broke, why fix it?” André Fredette, vice president and general manager of the Caisse Centrale de Reassurance (CCR), said of Canada’s current regulatory system. Many wonder why OSFI would even consider reducing or waiving its collateral requirements through a mutual recognition agreement with another jurisdiction — especially after the global economic downturn exposed flaws in regulatory schemes throughout the world. “It’s kind of naïve,” Fredette said. “If the reinsurer goes belly-up, a Canadian insurance company is in a much better position to get paid on its claims if the [reinsurer’s] assets are in Canada, and they cannot take those assets out of Canada without OSFI’s permission. Which means OSFI will not let them take it out unless all of the liabilities have been met or extinguished. But if you
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COVER STORY
Mutual Recognition
If you have a [reinsurance] company over in Europe and they go belly-up, well guess what? Get in line with all of the other hundreds of clients that are probably trying to collect money from them. Do you really think a European regulator is going to play favourites with a Canadian insurance company? Are they really going to look after your interests as well as OSFI over here? have a [reinsurance] company over in Europe and they go belly-up, well guess what? Get in line with all of the other hundreds of clients that are probably trying to collect money from them. Do you really think a European regulator is going to play favourites with a Canadian insurance company [i.e. a policyholder of the bankrupt European reinsurer]? Are they really going to look after your interests as well as OSFI over here? That’s just the real world.” Henry Klecan Jr., president and CEO of SCOR Canada Reinsurance Company, said he sees Canada getting caught in the current of a movement in the United States and Europe towards mutual recognition. “In the Canadian marketplace, considering how small it is, we have a very good regulatory system the way it is right now. My question is: Why has OSFI decided to jump on a bandwagon because the U.S. is making so much noise with the European and Bermudian market? I don’t understand why they feel they must be involved in some kind of new process. “In the U.S. in particular, the process is found wanting because you’ve got 50 jurisdictions with 50 little bodies doing their own thing, whatever that may be. And so the desire in the United States is to get a consolidated methodology, so that we have one source to go to rather than a multiple of sources and there’s a consistency in how regulations are applied… 32 Canadian Underwriter July 2009
“A number of companies in the U.S. are in favour of mutual recognition, and that’s because the big players, the European players, are saying: ‘Let’s stop trying to continually oversee something that’s already overseen.’ The point of coming into Canada, though, you’ve got to wonder….” Especially when, as several reinsurers pointed out, there aren’t really any Canadian reinsurers that would benefit from mutual recognition going the other way. OdysseyRe is as close as many can come to naming a so-called “Canadian reinsurer,” since OdysseyRe’s parent company is Canadian-owned Fairfax. But OdysseyRe’s reinsurance operations are based in New York. Fredette said he is well aware of why European reinsurers covet unlimited access to how much business they can write in Canada. “All reinsurance companies, including mine, if they could bring all of the assets to their head offices, they would rather do that,” he said. “All companies, if they can put all of their resources, all of their assets into head office, where they can control them and disperse them, that’s their preference…I mean sure they would like that: it’s in their interests. But I mean, we have our interests. Let’s not be naïve about this. I think we have to look after the Canadian interests first.” But just as easily as capital can move into Canada under mutual recognition, it can also move out, Klecan says. Mu-
tual recognition “makes it that much easier for reinsurers to say: ‘Okay, we’re not supporting Canada in the next year or the next five years because it’s too competitive, it’s too small of a market, everybody’s just focused on price and nothing else. There’s no value-added, therefore we are going to move out our capital and put it to better use in Egypt, let’s say, or in developing countries, for instance.’ This kind of thing facilitates that kind of decision.” When this debate was put to OSFI, the Canadian solvency regulator confirmed it is working within the IAIS context, which is working towards some form of mutual recognition. Nevertheless, OSFI says it always retains its own authority to regulate and supervise within the Canadian context. “OSFI has the authority to act independently on any matter respecting the safety and soundness of financial institutions and the stability of the financial system,” Giles said in an email. “Note there is a ‘prudential’ carve-out for financial services in the WTO and NAFTA trade agreements. “Having said that, it is not OSFI’s intention to act independently of the IAIS, of which OSFI is a key member, or to be out of step with broader international regulatory practice. Although achieving a system of full mutual recognition for reinsurance regulation and supervision (i.e. relying entirely on the home-jurisdiction regulator/supervisor) is a chal-
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COVER STORY
Mutual Recognition lenge in the short-term (as noted in the discussion paper), OSFI is giving consideration to moving toward a system of risk-based collateral requirements similar to what is being proposed in the United States and what is currently in effect in Australia. OSFI will, however, continue to work closely with its IAIS counterparts in the possible pursuit of a full system of mutual recognition in the long-term.” Risk-based Mutual Recognition In keeping with OSFI’s reflections about “risk-based” collateral models, Ludlow points out that mutual recognition would not necessarily signal the death knell for collateral requirements. “The point we made directly to OSFI is that if you move to mutual recognition magically in four or five years’ time, that wouldn’t prohibit two independent companies from agreeing that they might want to have collateral for whatever reason,” Ludlow says. “We don’t think we should give up on a risk-based approach. We feel very strongly that companies should have the right risk management framework, and that they should be assessing the credit-worthiness of their reinsurers based on financial strength ratings, etc. etc. Using Bermuda as an illustration, let’s say Bermuda has the equivalency and I should give credit. But I’m not happy because they don’t fit all of the criteria in my risk management box. So then those two parties should be free to say: ‘Yes, I’d like collateral from you, ABC Re.’ The regs shouldn’t stand in the way of good business practice.” But then doesn’t such use of collateral defeat the purpose of mutual recognition in the first place? critics argue. “Are you going to turn around and [establish] trust accounts that are going to require OSFI’s approval?” Klecan said. “Okay, so what has changed?” Short-term Flexibility In the absence of mutual recognition anytime soon, some global reinsurers would like to see more flexibility in some of OSFI’s existing rules around re34 Canadian Underwriter July 2009
insurance arrangements. OSFI proposes a number of possibilities in its paper. One is to expand an existing limit on reinsuring through an unlicensed reinsurer up from 25% to 30%. It should be noted that representatives of reinsurers opposed to mutual recognition similarly balk at changing existing limits on the use of unregistered reinsurance. The existing limits are fine, many say. And besides, “to whom are you doing favours?” Klecan asks. “Are you doing favours to the unlicensed market? It’s a market that [OSFI] doesn’t oversee and they’re doing them a favour? That just doesn’t make sense… The [licensed] industry has more than adequate capacity to service the insurers in this country. Okay, you might not like the price, but by the same token, what are you going to do? Are you going to buy your reinsurance from a company called Banana Republic Re and expect them to meet up with their obligations somewhere down the road — long-tail business, in many cases? This movement from 25-30% is for a very narrow, selfinterested group, but it doesn’t benefit the industry as a whole.” The Insolvency Viewpoint Certainly, much within OSFI’s paper is premised on what is the best protection afforded to Canadian policyholders if capital is pulled out of the country — or if a foreign reinsurer goes bankrupt and cannot meet its obligations. But interestingly enough, and to show how muddy the reinsurance waters can get, insurance company insolvencies caused by reinsurer insolvencies aren’t at all common in Canada. “We’ve looked at
[insolvencies] over the last 50 years, and it is incredibly unusual — that is, we can’t find a case in Canada — where a reinsurer went bankrupt and that caused an insurer to go bankrupt,” said Paul Kovacs, president and CEO of the Property and Casualty Insurance Compensation Corporation. (PACICC). PACICC, which did not take a position on mutual reinsurance in its submission to OSFI, pays claims to Canadian policyholders in the event that an insurance company goes bankrupt. “However, what is really, really, really common is that in a very large number of the 35 P&C failures that we’ve studied in Canada over the past 50 years, it was quite common that reinsurance didn’t quite go right.” That is to say, there is a debate over whether the primary insurer has access to its reinsurance funds if it were to go bankrupt. “There’s not much other money around when [a primary insurance company has] gone bankrupt, so [reinsurance] is the largest source of money, it is very contentious and it is inevitably a challenge to sort out,” says Kovacs. “So coming from where we come from, what we put in our response to OSFI’s discussion paper, is: Is there anything in OSFI’s rules and regulations that would make it easier to sort things out in those rare occasions when a company fails and they need to recover the reinsurance? It turns out there is something called an insolvency clause, and the insolvency clause says: ‘I’m going to give you reinsurance.’” OSFI has included a section in its paper on insolvency and other contract clauses. It defines an insurance clause as a section in a reinsurance contract that clarifies: “a reinsurer must continue to make full payments to an insolvent insurer without reduction resulting from the ceding company’s insolvency.” OSFI’s paper goes on to say that it proposes to “issue guidance, or to amend existing guidelines, on its expectations regarding good business practice associated with reinsurance contracts, including its expectations regarding insolvency and other clauses contained in such contracts.”
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Canada’s Quake Risks Shelly Ericksen Risk Management Solutions (RMS)
Marleen Nyst Risk Management Solutions (RMS)
Updated earthquake damage models will have a mixed effect on Canada’s regional losses. Achieving accurate insured loss estimates for earthquake-induced damage requires a realistic representation of inherently complex natural phenomena, detailed inventories of insured exposure, building and contents damage calculation and loss allocation along the risk transfer chain. Together these factors quantify what catastrophe modelling terms as “earthquake risk.” RMS upgraded and extended its earthquake model-ling capabilities throughout the Americas in 2009, establishing a consistent view of risk from Canada to Chile. In the new Canada model, our view of earthquake risk has changed. One might ask why, since no major events have driven claims analyses initiatives or other reviews. However, recent years have seen significant advancements in global earthquake hazard assessment, including improved predictions of earthquake ground shaking and more refined approaches to modelling seismicity.The prior RMS model was based on the current Geological Survey of Canada (GSC) seismic hazard maps, which predate many of these advances.The GSC is currently updating its maps. In the meantime, RMS has supplemented existing data with new approaches to predicting ground
36 Canadian Underwriter July 2009
motion and modelling seismicity; more specifically, it has applied techniques and data from the recently released 2008 United States Geological Survey (USGS) hazard maps, as well as its own science and research, to achieve a new view of hazard.These hazard updates link to innovations in modelling of building performance during an earthquake, improving estimates of damage and resulting loss. The re-evaluation of hazard, performance and damage culminates in a refined view of Canada’s earthquake risk. Updates to each component affect this view; different changes have different effects depending on the region in question. Using industry loss estimates as the measure of risk, the new model indicates risk is higher in the West up to a loss return period of around 1,200 years (or an annual probability of about 0.083%), at which point we see a crossover to the East for more severe events. The impact of these changes will vary depending on the portfolio of properties insured; however, the net effect on industry-level estimates of financial loss due to ground shaking and consequent fires is an increase throughout Canada for essentially all lines of business and at all return periods.
DIFFERENTIATING THE VIEW OF HAZARD Canada’s most populated urban areas unfortunately tend to overlie zones of moderate to high earthquake hazard. In the West, hazard is domi-
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nated by the Cascadia Subduction Zone, which is capable of generating devastating earthquakes up to magnitude 9, putting British Columbia’s major cities at risk. Although eastern Canada occupies a relatively stable continental region, damaging, moderate to large magnitude events have occurred near Montreal and Quebec City. To establish the likelihood and severity of earthquakes in a region, the GSC divides Canada into zones, deriving a uniform level of hazard for each zone based on the average frequency and magnitude of events. The prior RMS model correspondingly assumed that earthquake hazard was uniform across a zone, employing an averaged view of hazard that typically did not target specific seismic sources.The new model refines this view, subdividing each zone into a grid of small cells to localize regions of higher seismicity (and thus higher hazard). Maximum potential magnitudes and frequencies are determined using the Canada earthquake catalog, a detailed historical record of earthquakes dating back to the 17th century. The USGS developed this “smoothed seismicity” approach to refining hazard assessment, which RMS has applied to all of Canada (and the Americas in their entirety). It has shown to be especially relevant in high-risk, high-exposure areas where localized hazard can greatly affect risk. For example, hazard increases significantly around Quebec City, as the refinements show a concentration of historical events that a uniform, regional approach could not capture. The approach leads to locally significant hazard increases in other areas of Eastern Canada as well, but has a lesser effect in Western Canada because subduction zone hazard is primarily assessed using geological data and is only marginally affected by historical event data.
RE-ASSESSING GROUND SHAKING SEVERITY AND BUILDING RESPONSE The depth, magnitude and type of earthquake, as well as local site conditions, all affect ground-shaking levels. Based on a thorough review of the latest science, RMS implemented updated ground
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motion models that assess the severity of shaking based on the regional characteristics of the different types of events that Canada experiences. Although the view of hazard in Western Canada was not greatly revised by the smoothed seismicity approach, it is significantly affected by these ground motion updates (primarily the more accurate characterization of the Cascadia Subduction Zone).The subduction zone generates shallow earthquakes at depths of 5–10 km, as well as events as deep as 50 km. Results show that Vancouver’s risk from these deep events is greater than initially indicated, leading to an increase in the city’s overall probable maximum loss. But, implementation of new ground motion models specific to Eastern Canada leads to a slight decrease in losses, again attesting to the event- and region-specific nature of the model component updates. In assessing the impact of ground motion on a property, estimates of building and contents damage depend not only on the severity of ground shaking, but building characteristics as well — including age, the number of stories and construction type. The new model supports the increased differentiation of building inventory for more accurate loss estimations, even if any or all of the building characteristics are unknown. If information is lacking, the model assesses damage by assuming building characteristics based on an average representation of the existing building stock broken down by line of business-by region-by occupancy. Innovative engineering technology allowed for realistic computer simulations and full-scale experiments of how a building responds to strong shaking, further refining property damage estimates and greatly enhancing our ability to model realistically the building performance for an event of virtually any type or magnitude. These damage assessment updates have a mixed effect on regional losses: they slightly decrease losses for personal lines in the whole country, increase losses for the commercial lines in western Canada and significantly decrease losses in the East.
The total picture of risk also includes a consideration of how losses can escalate due to societal and economic factors after an event. Demand surge and regional infrastructure failures can increase insured losses to property and business interruption coverages in a severe earthquake. And consequent effects such as fire triggered by an earthquake can push losses into policies that would otherwise not cover shake damage. Because these earthquake-related fire calculations are directly related to ground shaking severity, estimates of fire losses have correspondingly increased, especially in eastern locations such as Quebec City.
THE IMPACTS In the majority of cases, the model updates lead to increases in risk for Canada’s high hazard and densely populated regions, roughly translating into a 25% increase in modelled losses across Canada. In the West, updates to the modelling of the Cascadia Subduction Zone and changes to building response characteristics have the greatest effect on losses, with increases on the order 30–40%. In the East, where model results are most affected by the adoption of the smoothed seismicity approach and changes in building response characteristics, increases in loss range from a few percent to around 15%. These changes reflect estimates for an industryrepresentative portfolio. The resultant changes in loss for individual client portfolios will vary depending upon such factors such as construction characteristics, geographic spread and policy conditions; this in turn could lead to a much wider potential range of increases or decreases in loss at the account level than observed in the general estimates. Changes in loss overall reflect the updated, highly detailed approach to earthquake risk assessment. The wealth of information provided by the GSC and innovations in seismic hazard assessment have allowed RMS to achieve greater accuracy and a more realistic assessment of risk for improved risk management — the ultimate goal in catastrophe risk modeling.
July 2009 Canadian Underwriter
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Christian Bieri Managing Director, Products, Swiss Re Canada
With very low inflation currently at hand, one might question the reason to feature the topic in this magazine at the moment. Still, there are good reasons for not losing sight of inflation and its eventual impact on our underwriting results. Before going into these reasons, let’s make sure we are all on the same page. Insurers are interested in the change of claims severity over time. Claims severity is influenced by consumer price index (CPI) inflation and social cost escalation. In this article, we will look at both.
HOW INFLATION AFFECTS SEVERITY For an underwriter, it is crucial to have a good estimate of the increase in claims severity from the time when the business is underwritten to the point when it runs-off.This estimate is of course much harder to come up with for a casualty underwriter, due to the long-tail nature of the
40 Canadian Underwriter July 2009
underlying business. Inaccurate estimates for future CPI inflation and social cost increases can have a significant impact on the underwriting results of the business. To illustrate this, I have picked three lines of business: personal auto, general liability (GL) on a claims-made basis and product liability with occurrence trigger. If we assume an additional one percentage point of annual claims severity inflation compared to the initial underwriting estimate, the nominal ultimate claims value will
Three in a Box/Greg Hargreaves
Updating Your Inflation Forecasts
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increase by 2% for personal auto, 4% for GL and a substantial 5% for product liability. In other words, even if the estimates are largely accurate, a one-percentagepoint difference can have a significant impact. If the forecast is less accurate and annual claims inflation ran five points above our estimate, the ultimate claims value would increase by 12% (personal auto), 21% (GL) and a whopping 29% for product liability. The example above illustrates the importance for underwriters of having accurate forecasts for CPI inflation and social cost escalation. For reinsurers, the above effect is even more pronounced. Non-proportional reinsurance treaties with fixed deductibles absorb all adverse claims severity due to inflation, once a claim has reached the deductible. The next question then is, what are the current forecasts for CPI inflation and social cost escalation?
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There is only one way the Consumer Price Index inflation can go and that is up. How far up will it go? upon which they would intervene in the case of increasing inflation. Bank of Canada’s (BoC) target is to keep CPI inflation below 2%. A common counter-argument is that the current budget deficits in most countries, coupled with the stimulus packages, will lead to above-normal inflation going forward.While the amount of money in circulation is certainly higher than normal, central banks will most likely take part of it out of the system again as soon as the economy recovers.The same applies for the stimulus packages, which will run out and not be replaced when robust growth has kicked in. However, while the majority of economists see the danger of high inflation
CPI INFLATION Let’s look at CPI first. Forecasts for the next 12-24 months regarding CPI inflation are low. Bank of Canada’s core CPI (see boxed text) is estimated to go up by 1.2% for 2009 and by 1.4% in 2010. This is a typical pattern for a recession, which normally triggers a period of between two and three years of falling inflation. The main reason is that existing overcapacity causes demand to be lower than supply. In addition, rising unemployment reduces inflation pressures from wage increases.The current shortterm trend is a continuation of a longterm pattern of falling inflation.This has been observed over the last 20 years and has helped casualty results in the past. Therefore, there is only one way the CPI inflation can go, and that is up. But how far up will it likely go? Most economists believe inflation to be “mean-reverting,” which is to say it will return to 2-3% after a period of lower or higher inflation. This belief is mainly based on the assumption that central banks will be able to manage CPI inflation. This is something they closely monitor and
as limited as long as central banks stay independent, there is a group with a different view. This group foresees the supply of oil will not be able to keep up with demand when the world economy rebounds.This could lead again to tripledigit oil prices and high inflation for prices of all goods.
SOCIAL COST INFLATION What about social cost escalation? Not surprisingly, from an insurance perspective, social cost has a high correlation to health care cost. In Canada, health care costs are currently growing faster than the CPI and population growth. According to the Canadian Institute for Health Information, these costs are forecast to equal about 11% of Canada’s GDP in 2009 — a new record. Besides health care costs, legal changes are another driver of social cost inflation. Examples of this are currently in several provinces in the motor line of business.
PROTECTING AGAINST INFLATION WHAT IS THE CPI? The Consumer Price Index (CPI) provides a broad measure of the cost of living in Canada. Although there are other ways to measure price changes, the CPI is the most important indicator because of its widespread use, for example, in calculating changes in government payments such as the Canada Pension Plan and Old Age Security. Through the monthly CPI, Statistics Canada tracks the retail price of a representative shopping basket of about 600 goods and services from an average household's expenditure: food, housing, transportation, furniture, clothing and recreation. The percentage of the total basket that any item occupies reflects typical consumer spending patterns. Besides this “total CPI,” Bank of Canada also uses the "core CPI," which excludes eight of the most volatile components (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity transportation and tobacco products), as well as the effect of changes in indirect taxes on the remaining components. Source: Bank of Canada website
Faced with the need for long-term forecasts, which are by nature very difficult to get correct, what can insurers do to protect themselves? The good news is, CPI inflation can be hedged relatively easily through government or corporate bonds whose principal or interest payments are linked to the CPI (TIPS, CIPS or inflation-linked structured notes). Empirical analysis shows that commodities and treasury bills are also good CPI inflation hedges. It is much more difficult to protect against social cost inflation. Equities are a possible hedge since the increased social costs will flow back to companies as revenues. However, there is an enormous amount of basis risk in this and it will potentially work only over the very long term (maybe too long term). One hedge against both CPI and social cost inflation is, of course, reinsurance. Non-proportional treaties give a 100% protection against adverse claims severity developments for larger claims hitting the cover.
July 2009 Canadian Underwriter
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CU Seminar ad July 09
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Putting the pieces together.
Events and Seminars Calendar You work hard to protect your clients’ property. Now, it’s time to ensure that you apply the same kind of energy and commitment to your own success. CIP Society Events and Seminars give you the opportunity to learn, to network, to catch up on industry developments and to think about your career.
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11th Annual CIP Society Golf Tournament . . . . . . . . . . . . . . . . . . . . . . . . . . September 25
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Edmonton 21st Annual CIP Society Golf Tournament . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 24 PROedge seminar: Environmental Liability . . . . . . . . . . . . . . . . . . . . . . . . . . September 18
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Keeping you at the forefront of the P&C industry. The CIP Society. MEMBERS BENEFIT. www.insuranceinstitute.ca/cipsociety
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Misuse of Red Cross Emblem Letter to the Editor Canadian Red Cross
The Red Cross emblem – five, red, equal-sized squares forming a cross, resting on a white background, is one of the most recognized emblems in the world. It is also, however, one of the most poorly understood. The Red Cross emblem was used on the cover and in the feature article of the May 2009 edition of Canadian Underwriter. We often see the red cross emblem used as a decorative symbol on signs, in advertising or to indicate first aid stations. This may not seem like a problem but it is wrong and against Canadian and international law. The Red Cross is an international symbol for protection, recognized around the world. Every day, Red Cross personnel work in regions of
armed conflict, disasters and health emergencies. Their ability to carry out their humanitarian missions safely and protect people in their care depends on universal acceptance of the emblem as a sign of Red Cross neutrality and protection. Unauthorized use of the emblem contributes to confusion over what it represents and can put lives at risk. To prevent this, Canada and other states that are signatories to the Geneva Conventions agree to protect the emblem and restrict its use to official Red Cross organizations and programs, as well as the medical and religious services of their armed forces. No organization — except the Canadian Red Cross and the medical corps of the
armed forces — may use the Red Cross emblem in Canada. This use is legislated by the Geneva Conventions Act, the Trade Marks Act and the Canadian Red Cross Society Act. If using a first aid symbol to depict health and wellness, international and Canadian organizations responsible for standards recommend a white cross on a green background. Your help in assisting us in educating Canadians as to the nature of the Red Cross emblem and with our humanitarian mission is greatly appreciated. We thank you for taking the emblem down from your Web site, removing it from your digital edition and appreciate your ongoing commitment to respecting its proper use in the future.
July 2009 Canadian Underwriter
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Considering Capital Movement
Robert McDowell Financial Institutions and Services Group, Fasken Martineau
Koker Christensen Financial Institutions and Services Group, Fasken Martineau
In the February 2009 edition of Canadian Underwriter, we provided an overview of the Discussion Paper on OSFI’s Regulatory and Supervisory Approach to Reinsurance, released by the Office of the Superintendent of Financial Institutions (OSFI) in December 2008. This article provides an update on the status of OSFI’s review of its approach to reinsurance.
Unregistered reinsurance • Collateral requirements for unregistered reinsurance. • 25% limit on risks ceded by property and casualty insurers to unregistered reinsurers. • 15% limit on the use of letters of credit as acceptable collateral for an insurer to obtain credit where it has ceded risks to an unregistered reinsurer. • Mutual recognition regime for reinsurance supervision and risk-based collateral requirements. • Approvals for unregistered reinsurance with related parties.
OVERVIEW OF THE DISCUSSION PAPER
Registered reinsurance • Capital requirements. • 75% fronting limit applicable to property and casualty insurers. • Approvals for registered reinsurance transactions.
OSFI’s discussion paper provides an overview of the Canadian regulatory and supervisory regime governing reinsurance, summarizes a number of current OSFI initiatives relating to reinsurance and requests input on the direction of reinsurance regulation and supervision. In particular, the discussion paper addresses the following topics:
Governance • Guideline on Corporate Governance. • Update of Guideline on Sound Reinsurance Practices and Procedures (B-3) to address OSFI’s expectation that insurers establish and implement sound reinsurance cession practices and procedures.
44 Canadian Underwriter July 2009
Three in a Box/Greg Hargreaves
OSFI’s discussion paper on reinsurance has the industry talking about what it means to be licensed, unlicensed and the collateral implications.
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• Guideline on Reinsurance Agreements (B-13) to set out prudential considerations relating to time lags in reinsurance arrangements and address wording used in reinsurance agreements. • Insolvency and other clauses in reinsurance agreements.
RESPONSES TO THE DISCUSSION PAPER We understand OSFI has received approximately 30 submissions in response to the discussion paper, reflecting the fact that the issues addressed in the discussion paper are of central importance to insurers and reinsurers. In some cases, the submissions reflect the differing views and interests of stakeholders. The European Insurance Committee (CEA), which represents European insurers and reinsurers, and The General Insurance Association of Japan, which represents the non-life insurance industry in Japan, have expressed their opposition to any collateral requirements in connection with unregistered reinsurance. Other parties, such as the Canadian Life and Health Insurance Association and the Canadian Institute of Actuaries, have expressed the view that in the absence of an effective system of mutual recognition, some form of collateral requirements is unavoidable. As well, the CEA and The General Insurance Association of Japan support eliminating the 25% limit on unregistered reinsurance and the 75% fronting limit. In contrast, the submission from the Canadian Institute of Actuaries expresses the view that these limits serve important functions. There is also debate among Canadian stakeholders. The Insurance Bureau of Canada’s submission recommends a risk-based approach to collateral requirements.The Canadian Life and Health Insurance Association’s submission recommends that OSFI be cautious in this area and take a wait-and-see approach. In other cases, there is some consensus. For example, the submissions we have reviewed are generally supportive
of eliminating or modifying the 15% limit on the use of letters of credit as acceptable collateral.There also seems to be general support for the idea of mutual recognition, although there are different views on what this should mean.
AMENDMENTS TO PART XIII OF THE INSURANCE COMPANIES ACT In considering the issues addressed in the discussion paper, it is important to be aware of amendments to Part XIII of the Insurance Companies Act. Amendments changing the concept of “insuring a risk in Canada” to “insuring in Canada a risk” will be implemented on Jan. 1, 2010. This will shift the focus from the location of the risks to the location of
While we expect OSFI will set out its position on many of the issues addressed in the discussion paper, some of the issues, such as mutual recognition, are clearly long-term projects. the insurance activities in determining whether an insurance activity is occurring in Canada and is thus subject to Canadian supervision and regulation. OSFI’s interpretation of “insuring a risk in Canada” is set out in its revised Advisory Insurance in Canada of Risks released in May 2009. (See article on page 18.) One consequence of the amendments to Part XIII is that reinsurance that was previously registered may become unregistered (i.e., because the reinsurance is conducted outside of Canada, notwithstanding that the risk reinsured is within Canada). This raises the possibility of federally regulated insurers inadvertently becoming offside the 25% limit on unregistered reinsurance. To address this problem, OSFI issued a release on June 19, 2009 providing that it will exercise its discretion in adminis-
tering the 25% limit as follows: • OSFI will consider all premiums paid or payable by the cedant to registered reinsurers prior to or on Dec. 31, 2009, to continue to be considered registered reinsurance for the sole purpose of calculating the 25% limit beyond that date. • In addition, in their annual calculation of the percentage of unregistered reinsurance, as applicable after Dec. 31, 2009, cedants will be permitted to continue excluding the premiums paid or payable prior to or on Dec. 31, 2009 that were up to that date excluded from this calculation. The June 19 release states that any cedant that benefits from these discretionary relief measures will thereafter be expected by OSFI to refrain from ceding additional risks on an unregistered basis until their ratio of unregistered reinsurance (calculated without taking this relief measure into consideration) falls below the 25% threshold. This release also provides that OSFI will consider all reinsurance agreements between cedants and the Export Development Corporation entered into after the date of this letter to be registered for the sole purpose of calculating the 25% limit.
NEXT STEPS OSFI is currently considering the submissions it has received and developing its position on the various issues addressed in the discussion paper. We anticipate OSFI will release new guidance on reinsurance in the next several months. While we expect OSFI will set out its position on many of the issues addressed in the discussion paper, some of the issues, such as mutual recognition, are clearly long-term projects. Many of the issues addressed in the discussion paper are interrelated and, accordingly, OSFI will likely address these issues at the same time. However, certain relatively discreet issues (e.g., the 15% limit on the use of letters of credit as collateral) may be addressed on a stand-alone basis.
July 2009 Canadian Underwriter
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Out of the
Frying Pan… Vanessa Mariga Associate Editor
Soon after a Nova Scotia court confirmed the constitutional validity of the province’s minor auto injury cap, voters elected a new government with a mandate to replace the cap with a deductible. On the heels of a Nova Scotia Superior Court decision that upheld the province’s Cdn$2,500 minor injury cap, the province of Nova Scotia went to the polls and elected a premier whose campaign promises included auto insurance reform. Private auto insurers across the country have commented on the rate uncertainty as a result of constitutional challenges to auto insurance regulations in Alberta, Ontario, New Brunswick and Prince Edward Island. In Nova Scotia, shortly after insurers exhaled a sigh of relief about the court’s cap decision, Darrell Dexter, head of the Nova Scotia New Democratic Party, became the premier of the province in a near-landslide victory. During his campaign, Dexter voiced his preference for a deductible in the $10,000-$15,000 range instead of the current cap on minor injuries. Local media quoted Dexter during the campaign as saying that he believed the benefit of lower premiums for the general public, which flowed from the cap, did not outweigh the harm the cap caused to the injured parties. As Nova Scotia insurers ready themselves for the Court of Appeal in the fall, with the very real possibility that the issue will make its way to the Supreme Court of Canada, one has to wonder whether or not ongoing cap challenges might be derailed by Dexter making a legislative change to impose a deductible — which would essentially
46 Canadian Underwriter July 2009
give the plaintiff’s bar its desired outcome (i.e. no caps) by other means. “The new premier has a majority of Nova Scotians voting for him and he made it clear during the campaign that he thought these caps were bad public policy and they were limiting compensation to people that shouldn’t have it limited in that way,” George Cooke, president and CEO of The Dominion, says. “He quite properly has the mandate of the people to go ahead and do that.” Two questions need to be asked, Cooke says. They are: • what is the will of the legislature today, as elected by the people of Nova Scotia? • what was the will of the legislature in 2003 [when the caps were put in place]? “It appears that the courts have said that the will of the legislature in 2003 was that it was okay to have these caps, and the public got the corresponding premium decreases,” he continues. “Today, the public may say: ‘It’s okay, we’ll pay more for auto insurance because we want to provide an increased level of compensation to these people that aren’t seriously injured.’” Bob Fitzgerald, executive vice president of marketing and underwriting at Aviva Canada, says deductibles, although seemingly positive in terms of controlling costs, have proven to be less stable than regulated caps or any combination of a cap and a deductible. “Deductibles are less stable because they can raise the bar on awards,” Fitzgerald says. “Theoretically speaking, if it’s a $25,000 event with a $3,000 deductible, in time courts will inflate the awards to $28,000 in order to back the deductible out.” Deductibles are intended to control prices, he continues. “But in time what we actually see in other jurisdictions is that it doesn’t actually do that; in fact, it accelerates price inflation.”
Information from Insurance Bureau of Canada notes that Newfoundland implemented a Cdn$2,500 deductible on pain and suffering awards for minor injuries in 2004. This “did not effectively reduce the cost of court awards, and will not provide the long-term cost control that has been seen in the other Atlantic provinces [using a] $2,500 cap instead of just a deductible,” IBC’s information says.
REVIEW PENDING Shawn Fuller, director of communications for the premier’s office in Nova Scotia, says the newly elected party is in the process of assessing its priorities. He confirmed that a review of the auto insurance legislation is on the list, but it is not a top priority. In the next fiscal year, he said, the government will conduct an independent review of auto insurance, in which case stakeholders will be consulted. Bill Adams, IBC’s vice president of the Atlantic Region, notes that during the province’s 2003 election, auto insurance ranked second (after health care), on the list of hot issues for voters.This time around, it didn’t even register: less than 0% of Nova Scotians cited it as an issue that needs to be addressed. “Darrell Dexter has been clear both publicly and in conversations that we have had with him that because it’s not on the minds of Nova Scotians, [auto insurance is] not a key issue for him that he will be addressing early in his mandate,” Adams says. “Having said that, he has indicated that he will be conducting a review and would have a preference for a deductible over a cap.” At what level would the deductible have to be set to maintain current premium levels? The answer remains uncertain. Adams says IBC is willing to crunch the numbers and bring the results to the table, allowing Dexter’s government to make an informed decision that is in the best interests of Nova Scotia drivers. John Pino, president of Insurance Brokers Association of Nova Scotia, also remains cautiously optimistic that the government “does not appear to be ready to make any knee-jerk reactions.”The being
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said, Pino continues: “We suspect that the personal injury lawyer lobby will increase strongly over the next little while.” Pino says the cap has brought a great deal of stability to the marketplace. If major reforms were to occur, he adds, “there could be the possibility of insurers pulling out of Nova Scotia or restricting business. And if they are permitted to increase their rates significantly according to their models, then the furore among the public will be
outrageous.” That furore, he adds, always raises the spectre of governmentrun auto insurance. “At this point, we’re cautiously optimistic that Dexter is going to consult and take a very good look at this,” Pino says. “We may not entirely agree on everything, but he’s certainly willing to listen to us and he’s certainly shown that to us. We’re hoping that common sense will prevail if he decides to undertake any reforms.”
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Lessons from
Down Under Neville J. Bussell Australia’s horrific bush fires Regional Vice President of Canada, International Institute of Loss Adjusters
earlier this year provided some valuable lessons in risk management as Canada confronts its own wildfire season. During the month of February 2009, I had the pleasure of visiting New Zealand and my homeland of Australia. In that month, there were catastrophic events in Australia that I believe are worthy of noting, because they highlight the importance of adjuster empathy when adjusting claims in disaster situations. They are also instructive in light of recent reports of wildfires in Western Canada earlier this year. Canada can learn some valuable lessons from events in Australia, including the importance of preventative measures such as controlled burns. Around the time of my visit to Australia, Tropical Cyclone Ellie in early February was responsible for torrential rains in Northern Queensland on the Northeastern coast of Australia. As a result of the rains and overflowing rivers, these towns were disaster areas, as the only entry was
48 Canadian Underwriter July 2009
by helicopter or boat. Residents of many towns were trapped in their houses for weeks.The Australian government had arranged for emergency assistance to the stranded home and property owners. Insurance coverages in these circumstances have been minimal because of the peril of flood not being indemnified under many of the insurance policies. I was in Western Australia on Feb. 8, 2009 when I learned of the worst peacetime disaster in Australian history. On Feb. 7, bushfires in Victoria were responsible for the destruction of many towns northeast of Melbourne, including Marysville, Kinglake, Narbethon, Strathewen and others.The loss of life was horrific.Two hundred and eighteen people lost their lives. Seventyeight individual townships were badly affected by the fires, some being completely destroyed. In excess of 3,000 homes and structures were destroyed and 7,500 people were left homeless. The towns of Marysville and Kinglake (both less than 90 kms from the city of Melbourne) were incinerated in 30 minutes during the inferno, which was emitting radiant heat in excess of 1,500 degrees and being fanned by 65 km-h winds. As described in an article from the Melbourne Herald Sun newspaper on Saturday, Feb. 14, “the roar will be likened to jet planes and freight trains. There will be reports of the sorts of fire bowls that that visited Dresden and Tokyo during World War Two. Embers will swirl like lit matches in a clothes dryer. Lawn mowers will explode, tires will pop, gas tanks will blow and 30-metre gum trees a metre wide will be ripped out of the earth. People will draw smoke for their last breaths and perhaps wonder how and why they could be taken so fast. Some, it seems, will fall where they stand, to resemble those petrified bodies at Pompeii.�
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Wildlife losses in the bush during the fires were in the thousands. Who can forget the worldwide television coverage of the koala with burned paws being comforted by a fire fighter and given water? Koalas rarely drink water. This little guy was so dehydrated he drank two bottles. On reaching Melbourne on Feb. 11, smoke could be seen in the air. The
have enough insurance,” and decided to save what he could of the property. Cinders were raining down on the vehicle at that time. The wife and children drove on through the smoke. Visibility was almost non-existent during the terrible drive and the wife could hardly recognize the bends in the road. At a dark moment, one of the boys asked: “Are we all going to die, Mommy?” For-
general parching of the ground was noticeable as a result of the heat wave that had reached temperatures of 47 C. Many of the fires were still burning out of control and other towns were threatened. Fortunately, due to the actions of the firefighters and favourable weather conditions, the crisis was defused. During the height of the bushfires, the Melbourne Age had reported that the residents had the right to “save life or fight for property.” One reported case — there were hundreds like it, although some were not as lucky — told of a husband, wife and their twin nine-year-old boys following their fire plan. As the blaze approached their property, they got in their vehicle and left. A few kilometers down the road, the husband decided to go back, saying to his wife: “We don’t
tunately, they were able to safely reach another town that was not so affected. Shortly afterward, they were reunited with the husband. Their property had been totally destroyed. Insurance losses are believed to exceed $1.5 billion Australian. People in Australia and other countries contributed to the Red Cross Bushfire Fund to help all of the people affected by the bushfires. Experts have suggested the causes of the fires were due to the following: • high temperatures up to 47 C; • years of drought; • low humidity; • lack of controlled burn-offs to clear fuel sources such as shrubs, leaves, etc.; • high winds; • arson; and • climate change.
To a lesser degree bushfires are a problem in Northern Ontario and Western Canada as well. Some causes of these fires are similar to the ones listed above, although drought and high temperatures are not usually involved. Having said that, future climate change may alter the situation. In addition, a lack of controlled burn-offs to clear fuel sources in Canadian forests could lead to unnecessary hazards. Hopefully we in Canada will be able to apply lessons learned by authorities during the catastrophes in Australia. The Australian tragedy was of particular concern to me, having lived and gone to school in Melbourne, and having adjusted bush fire claims in the past.These claims present many challenges for adjusters, particularly on the “human” side: it requires a great degree of social skill to deal with insureds who have lost everything — including, in many cases, members of their family. Empathy, compassion and a sense of sorrow are necessary, together with the ability to impart a feeling of cooperation and assistance to those involved. When I was in school in Australia, every school student was familiar with a poem by Dorothea McKellar. The name of the poem is ‘My Country.’ An extract is as follows:
“I love a sunburnt country, A land of sweeping plains, Of ragged mountain ranges, Of droughts and flooding rains. I love her far horizons, I love her jewel-sea, Her beauty and her terror — The wide brown land for me!” The events in Australia during February 2009 were certainly due to “her terror.” With all of the technology and knowledge available to us, when confronted by the dark side of ‘Mother Nature,’ we are powerless to prevent the result.
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MOVES & VIEWS UPCOMING EVENTS: FOR A COMPLETE LIST VISIT
www.canadianunderwriter.ca
AND CLICK ‘MY EVENTS CALENDAR” ON THE HOME PAGE
1
In the most recent canadianunderwriter.ca poll, we asked readers if they support the concept of mutual recognition for reinsurance supervision. In this case ‘mutual recognition’ describes a situation in which a reinsurer registered in one country can write business in another country without requiring the use of collateral or other restriction. Sixty-four per cent of poll respondents said ‘no’ and 36% said ‘yes’ they do support the concept.
NO 64%
YES 36%
2
Towers Perrin, Forster & Crosby Inc. and Watson Wyatt Worldwide Inc. have merged to form a new publicly-listed company, Towers Watson & Co. The implied equity value of the transaction is approximately US$3.5 billion, according to a release. The CEO of the new company is John Haley, CEO of Watson Wyatt, and the new president is Towers Perrin CEO Mark Mactas [2]. Towers Watson is expected to have annual revenues in
50 Canadian Underwriter July 2009
excess of US$3 billion. Significant savings are expected during the first two years following completion of the transaction; full realization of synergies is anticipated to take three years and cost approximately [US]$80 million. “Towers Watson will also have significant non-cash expenses during the first two years following completion of the transaction,” a release says.
3
CNA Canada has appointed Gale Lockbaum as senior vice president, finance and chief financial officer. The company has also appointed Michael O’Connor to assistant vice president of marine underwriting for Ontario and Kevin Mateus as branch manager in Montreal. Lockbaum’s background includes financial leadership roles with First Canadian Title, CIBC Insurance and Guardian Insurance. O’Connor joined CNA in 2004 as a senior underwriter; most recently he served as Montreal branch manager. Replacing him will be Mateus, who joins CNA from Zurich, Montreal, where he lead the commercial mid-market underwriting team.
4
Canadian Underwriter has launched instouch.com, an online network for insurance industry professionals. “Membership at instouch is open to individuals working
within all segments of the insurance market,” said Steve Wilson, senior publisher of Canadian Underwriter’s Insurance Media Group. Members of instouch can connect and send messages to trusted industry contacts, join or start a group, upload photos and videos, post and interact on discussion forums and blogs, add and respond to industry events and much more. “We’re trying to provide a mix of social network elements that industry professionals may find useful and of interest,” Wilson said. “We want to help bring together many individuals, groups and associations from all segments of the market, allowing them to interact and network in a common space.”
5
The University of Western Ontario, in affiliation with the Institute for Catastrophic Loss Reduction (ICLR), has received funding to build the first wind tunnel that will simulate a tornado. The Canadian Foundation for Innovation has confirmed Cdn$9.5 million to build the WindEEE (Wind Engineering, Energy and Environment) Dome. The dome will be the world’s first six-sided wind tunnel able to simulate an F3 tornado, according to the ICLR. WindEEE will use a series of giant fans to simulate an F3 tornado roughly six metres in size, the re-
2 lease says. The facility will be able to test the vulnerabilities of structures, power lines, agricultural crops, forests and wind turbines against the swirling winds associated with tornadoes, as well as the powerful winds resulting from downdrafts. The dome could also be used to track the spread of pollutants over wide areas. Construction of the facility is anticipated to begin in a year; it will be in operation a year or two later.
6
Aviva Canada Inc. has formed a partnership with Hagerty Insurance, a specialist in the collector car market, across Canada. Under the partnership, Aviva Canada will underwrite Hagerty Insurance in Canada and assist in distribution through its broker network. Hagerty will provide service, call centre operations and marketing support. Hagerty Insurance will enter the Alberta market this June, British Columbia in July and Ontario in the fall. The Hagerty products will complement Aviva’s Silver Wheel
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MOVES & VIEWS
9 Plan and Custom Wheel Plan products that Aviva provides through Lant & Co. Insurance Brokers Limited and its associate brokers across Canada. Hagerty will extend its Hagerty Plus program to Canadian car enthusiasts. The membership-based program includes benefits such as flatbed towing, roadside assistance, regulatory advocacy, youth programs and support of the Collectors Foundation, a non-profit organization that helps to preserve the collector car hobby through grants to clubs and museums, and that. The Collectors Foundation offers scholarships to accredited colleges with special automotive programs.
7
ACE Canada has launched an errors and omissions product designed for the Canadian technology market. ACE DigiTech digital technology and professional liability insurance program offers up to Cdn$20 million in limits and provides comprehensive, technology-based, professional liability coverage and related network security, pri-
10 vacy protection and cyber extortion coverage. The product includes coverage for liability arising out of the abuse of computer networks and the loss of sensitive customer or business partner information. Privacy liability coverage extends to hacker attacks and the unintentional release of information, as well as the cost of combating postbreach stakeholder fallout. ACE DigiTech will also provide a data breach fund to cover the insured’s expenses to notify customers whose personal information has been compromised. This fund covers such costs as legal, public relations and crisis management services to restore a company’s reputation.
8
The first two Co-operators representatives in the province of Quebec launched in June. One office opened for business in Aylmer on June 9. The second opened in Gatineau one week later. The Co-operators currently have 480 exclusive agents providing insurance and financial services in 383 communities throughout Canada’s other nine provinces.
Thus far in Quebec, The Cooperators group of companies has been best known through its insurance subsidiaries L'Union Canadienne, The Sovereign General, TIC Travel Insurance Coordinators and COSECO, as well as investment management firm Addenda Capital.
9
James Giffen has been promoted to director of the Global Technical Services (GTS) division with Crawford & Company (Canada) Inc. Giffen has nearly 25 years of experience and currently manages Crawford’s Toronto GTS branch. He is an executive general adjuster and has multi-line claims expertise. He specializes in major commercial/industrial property, fidelity, false pretense and lessors’ contingent losses.
10
Paul Johnstone has been appointed manager of Chubb Personal Insurance, Canadian zone, Chubb Insurance Company of Canada. He assumed the role effective May 11, 2009. Johnstone brings 15 years of industry experience to his post, having served in underwriting, marketing and management positions at Chubb. He first joined Chubb in 1994 as an underwriting trainee; before that, he worked as manager and underwriter of facultative reinsurance at another firm. He returned to Chubb in 2000 to take on the market-
ing manager role for Ontario. Most recently, he was manager for Chubb Personal Insurance, responsible for Ontario.
11
York Fire and Casualty Insurance has teamed with the Canadian Council of Snowmobile Organizations (CCSO) to create a snowmobile insurance product. Power Sports Insurance Solutions provides personal sled insurance protection through local brokers and is ready to launch in Ontario. Over the next year or two, the program will be available across Canada. It will also offer coverage for motorcycles, ATVs, boats and RVs.
12
The Canadian Ski Patrol System (CSPS) presented an Outstanding Contribution Award to the Insurance Brokers Association of Canada (IBAC) at the CSPS annual conference and awards banquet on May 23. The award recognized IBAC for providing and delivering thousands of blankets to ski patrols across the country over the past two years. “IBAC has helped the CSPS to improve its ability to deliver rescue services to skiers in need,” a joint press release says. “Additionally, the [insurance broker] association’s efforts in promoting this relationship have increased the image of the ski patrol in all parts of the industry nationally.”
July 2009 Canadian Underwriter
51
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APPOINTMENT
GALLERY
F. Lyle Beaman, B.A., CRM Claims Manager for Canada
Ecclesiastical Insurance Office plc is a specialist insurer that seeks to advise and protect those who enrich the lives of others. We are dedicated to serving the needs of our customers and their communities. Through the independent broker network, we offer customized insurance solutions to faith and related not-for-profit organizations, retirement communities, education facilities, unique properties, registered charities, and select commercial enterprises. Jacinta Whyte, General Manager and Chief Agent for Canada, is pleased to announce the appointment of Lyle Beaman to the role of Claims Manager for Canada. Before joining Ecclesiastical in 2007 as Casualty Underwriting Manager, Lyle gained extensive experience in risk and claims management, commercial liability and property underwriting, and portfolio management, through senior positions with major international insurers. Lyle will leverage his background and experience to lead Ecclesiastical’s claims organization and build upon our solid foundation and reputation of claims service excellence. Ecclesiastical Insurance was established in England in 1887. The Canadian branch opened in 1972. Owned by a charitable trust, group profits are returned to our owner for distribution to charitable initiatives.
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Canadian Underwriter July 2009
The Toa Reinsurance Company of America celebrated its 10th Anniversary Reception at the Carlu in Toronto on June 17. The evening featured music, drinks, mingling and an appearance by a sketch artist. The many guests included ToaRe’s immediate past chief agent in Canada, David Wilmot.
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GALLERY
A generous donation by 10 Winmar locations will mean years of fun for countless children at The Hospital for Sick Children in Toronto. The first annual Wish Upon a Star Charity Golf Tournament, held Oct. 8, 2008, raised Cdn$35,000 for the Starlight Children’s Foundation. Due to Winmar’s Cdn$5,000 donation at the tournament, the Starlight Foundation was able to purchase a new Fun Centre for Sick Kids hospital. The Starlight Fun Centre is a mobile entertainment unit featuring a Sharp AQUOS flat-screen television, a DVD player, a Nintendo Wii gaming system and a wide variety of Wii games.
Maya M. Cote-Johnson, CIP The Wawanesa Mutual Insurance Company announces the recent appointment of Maya M. CoteJohnson as Vice President, Southern Alberta Region. Ms. Cote-Johnson joined the Prairie Region in Wawanesa, Manitoba in 1984. Over the years, she assumed roles of increasing responsibility in both the Underwriting and Claims areas. In 1999, she was appointed Personal Lines/Farm Manager, Prairie Region. In 2002, she relocated to the company’s Southern Alberta Region based in Calgary, Alberta. Since that time, she has held roles in the Claims and Marketing areas. In 2005, she was appointed Senior Marketing Representative. Ms. Cote-Johnson has earned the Chartered Insurance Professional (CIP) designation. The Wawanesa, established in 1896, is a Canadian-owned leader in the insurance industry. The Company conducts business throughout Canada, California and Oregon and has combined assets of over $4 billion and annual premiums exceeding $1.8 billion.
July 2009 Canadian Underwriter
53
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Announcement
Don Forgeron Rowan Saunders, Chair of Insurance Bureau of Canada’s (IBC’s) Board of Directors, is pleased to announce the appointment of Don Forgeron as President and Chief Executive Officer. Mr. Forgeron joined IBC in July 1993 and served as both Vice-President, Atlantic, and Vice-President, Ontario. He has been instrumental in supporting IBC’s work with government and other stakeholders. During the 1990s, Mr. Forgeron was an active proponent of graduated driver licensing legislation, which has now passed in eight provinces in Canada. Before joining IBC, Mr. Forgeron held positions with the Alberta government, the National Research Council and the Personal Insurance Company of Canada. Under Mr. Forgeron’s leadership, IBC will be focused on showcasing the vital role P&C insurers play in the lives of Canadians. IBC will continue to take a leadership role in working with governments across the country as well as key stakeholders to build a strong and stable industry – one that will be there when Canadians need it most. Insurance Bureau of Canada is the national industry association representing Canada’s private home, car and business insurers. Its member companies represent nearly 95% of the property and casualty (P&C) insurance market in Canada. The P&C insurance industry employs over 110,000 Canadians, pays more than $6 billion in taxes to the federal, provincial and municipal governments, and has a total premium base of $38 billion.
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Canadian Underwriter July 2009
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GALLERY
The Ontario Insurance Adjusters Association (OIAA) took its Out-of-Town Meeting to Kingston, Ontario on May 28. More than 600 people attended the trade show, which showcased more than 90 booths. Delegates managed to mix business with pleasure, updating their knowledge of case law before attending dinners and being entertainmented by the likes of a hypnotist and a live band.
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Announcement
Terry Denomme, CIP Walter Leszkowicz, Ontario Regional Vice President of The Economical Insurance GroupŽ is pleased to announce the appointment of Terry Denomme, CIP, to the position of Branch Manager, Kitchener-Waterloo Branch. Over his 25-year career with The Economical Insurance Group, Terry has successfully taken on roles of increased leadership accountability in the Kitchener-Waterloo Branch. In 1993, he was appointed as the K-W Branch Claims Manager, followed by an appointment to Marketing Manager in 1996 and then, to Branch Manager in 2003. Terry then moved on to lead the execution of the Perth Insurance strategic plan on a national basis. The Economical Insurance Group is one of the largest property and casualty insurers in Canada with $1.9 billion in annual premium volume and $4.4 billion in assets. Based in Waterloo, Ontario, this Canadian-owned and operated company services customers’ needs through branches and service offices across Canada and in the United States.
July 2009 Canadian Underwriter
55
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APPOINTMENT
GALLERY
Robin Spencer Board Chair of PACICC
Robin Spencer, President and Chief Executive Officer of Aviva Canada Inc. has been appointed Chair of the Board of Directors of the Property and Casualty Insurance Compensation Corporation (PACICC). PACICC is a not-for-profit entity, established in 1989 to serve as Canada’s industry-funded financial guarantee corporation for the property and casualty (P&C) insurance industry. PACICC’s mission is to protect eligible policyholders from undue financial loss in the event that a member insurer becomes insolvent, to minimize the costs of insurer insolvencies and to help maintain a high level of consumer and business confidence in Canada’s P&C insurance industry. PACICC has more than two hundred member insurers. As President and CEO of Aviva Canada, Robin Spencer leads and provides strategic direction for Aviva’s business in Canada and represents Canada on the Aviva North America regional executive team. Robin is also a member of the Board of Directors of the Insurance Bureau of Canada (IBC). Prior to becoming CEO of Aviva Canada, Robin was chief financial officer (CFO) and executive vice president (EVP) of Aviva Canada, a role he assumed in January 2005. Prior to his appointment to CFO, Robin was global finance transformation director for the Aviva group. Before that, he worked in Aviva’s group finance team in London, England and held numerous senior finance roles with Norwich Union Insurance, including finance director for London & Edinburgh, a subsidiary of Aviva. Prior to joining Aviva in 1995, Robin spent five years with Proctor & Gamble in the UK. Robin is a Chartered Management Accountant (ACMA) and holds an M.A. degree in Economics.
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Canadian Underwriter July 2009
The Young Brokers Council (YBC) held its 5th Annual Conference in Niagara Falls, Ontario between June 3 and 5. Delegates enjoyed a sportsthemed trade show, a miniIBAO regional meeting, educational seminars and the chance to network. Debates over credit scoring, possible breaches of the Bank Act and the retailing of insurance on bank Web sites heated up the conference. Delegates cooled down with some live music, entertainment and dinner.
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Announcement
Robert Rice, BA, CIP Walter Leszkowicz, Ontario Regional Vice President of The Economical Insurance GroupŽ is pleased to announce the appointment of Robert Rice, BA, CIP, to the position of Branch Manager, London Branch. Robert brings over 10 years of diverse insurance experience including roles in Commercial and Personal lines underwriting, business development and branch leadership. He is the recipient of two company awards recognizing high performance. In this role, Robert is responsible for managing the London branch operations, developing sound business and branch strategies to produce profitable business growth, and maintaining service standards to meet the needs of our brokers and policyholders. The Economical Insurance Group is one of the largest property and casualty insurers in Canada with $1.9 billion in annual premium volume and $4.4 billion in assets. Based in Waterloo, Ontario, this Canadianowned and operated company services customers’ needs through branches and service offices across Canada and in the United States.
July 2009 Canadian Underwriter
57
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GALLERY
ADVERTISERS’ INDEX ACE INA Insurance
2 (IFC)
Applied Systems Canada Inc.
25
Cunningham Lindsey Canada
9
The Economical Insurance Group FirstOnSite Restoration The Guarantee Company of North America Great American Insurance Group i-hire.ca Insurance Institute of Canada Intact Insurance instouch McLarens Canada
21 16, 17 15 23, 59 (IBC) 35 31, 42 60 (OBC) 10,11 5
Paul Davis Systems (PDS)
47
Starlight Starbright Insurance Golf Tournament
33
Swiss Reinsurance Company Canada
7
WINMAR
37
Zurich Canada
29
58
Canadian Underwriter July 2009
Totten Group Insurance’s Toronto office kick-started the summer by building 28 bicycles to be donated to children between the ages of eight and 10. Fourteen teams assembled the bikes, had them safety checked and outfitted each cycle with a bell, helmet and lock. Twenty-two students of Holy Angels School were presented with a bike; another two bikes went to the school for a draw to celebrate its 50th anniversary. Two bikes went to St. Dorothy School in Rexdale, where a social worker will distribute them. Two bikes went to The Angel Foundation, a charity affiliated with the Toronto Catholic District School Board, where the chief social worker will distribute them. In addition, the following Totten offices will also be distributing bikes to the charities of their choice: Moncton, Montreal, London and Winnipeg.
pg 23 American
5/11/09
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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.
The Property & Inland Marine Division of
Property & Inland Marine Division
Great American Insurance Company / Canadian Branch www.GreatAmericanInsurance.com 330 Bay Street, Suite 800 Toronto, ON M5H 2S8 Scotia Plaza, Suite 2100 40 King Street West Toronto, ON M5H 3C2
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.
The wonderful thing about common ground is what you can build on it.
As a broker you’re successful because your priority is satisfying your customers. We get that. We admire that. It’s one of the important things we have in common. And why we’re so excited about our future together. Like you we believe insurance isn’t about things, insurance is about people. It’s a clarifying belief. The kind that’s generating new thinking around here. We want to help build your business by building on our common ground; our proud Canadian roots and our shared focus on putting the customer first. It’s the right thing to do. And it’s the right course for an exciting and successful future together. And we really do mean together. Because when you succeed we succeed.
HOME CAR BUSINESS
The BIP logo is a registered trademark of the Insurance Brokers Association of Canada (IBAC). All other trademarks are property of Intact Financial Corporation used under license. © 2009, Intact Insurance Company.
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