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
M AY 20 0 9 A Business Information Group Publication #40069240
Ontario’s Ailing Auto Insurance by David Gambrill
Crash Test Repairs By David Zuby
Grading Solvency By Vanessa Mariga
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VOL. 76, NO.5, MAY 2009 CANADA’S INSURANCE AND RISK MAGAZINE. PUBLISHED BY BUSINESS INFORMATION GROUP
www.canadianunderwriter.ca
Critical Care
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Ontario auto insurers are in a sickly state after disastrous 2008 Q4 results, driven in part by high claims costs on the accident benefits side of the auto insurance product. The industry was looking to the province’s regulator for a robust diagnosis and treatment. The regulator responded with the right diagnosis, but insurers say the proposed treatment has left the industry dealing with a chronic financial pain. BY DAVID GAMBRILL
FEATURES
20
36
Crash Tests
Measure of Strength
How is it that people in the United States are still dying in vehicles that have received good safety ratings? The Insurance Institute for Highway Safety says the crash tests may be in need of change.
Brokers and insurers are relying on the grades of financial ratings agencies to prove their solvency during bad financial times, but what do all of these grades really mean?
BY DAVID ZUBY
BY VANESSA MARIGA
12 Putting People First The Insurance Bureau of Canada (IBC) says the perpetual need to reform Ontario’s auto insurance would be a thing of the past if the consumer’s need for a stable, affordable and available product started to come first. BY DON FORGERON
16 Branding Repair Like insurers, collision repair centres may also benefit from undertaking a concerted branding effort to increase name recognition. BY LISA MERCANTI-LADD
34 Protecting Intangibles Risk managers at the 2009 RIMS Conference say they expect to see many more lawsuits arising out of intellectual property and reputational risks, but there needs to be more dedicated insurance options available to handle these types of liability. BY VANESSA MARIGA
40 Financial Losses The Insurance Bureau of Canada (IBC) released its financial data for 2008, and insurers’ fourth-quarter results proved to be just as ugly as anticipated. BY DAVID GAMBRILL AND VANESSA MARIGA
May 2009 Canadian Underwriter
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VOL. 76, NO.5, MAY 2009
PROFILE
10 Towards Harmony Danielle Boulet has been named the new chair of the Canadian Council of Insurance Regulators (CCIR), and her international experience may be a key asset in achieving harmonization in Canada’s insurance regulatory regimes. BY DAVID GAMBRILL
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
6
Editorial
8
Marketplace
44 Moves & Views 46 Gallery
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EDITORIAL
All for One, and One for All
A national forum would provide an opportunity for the entire insurance industry to speak in the voice of a collective whole, rather than as individual actors in a production lacking overall choreography. David Gambrill, Editor david@canadianunderwriter.ca
6
Canadian Underwriter May 2009
In an age in which the consumer has taken the lead role in his or her own personalized shopping experience, it is somewhat of an anachronism to see the insurance industry still predicated on consumer relationships with intermediaries. These days, when intermediaries are part of the equation, excellent communication is required to make the relationships with consumers work. It is more important than ever, therefore, that all of the industry’s main players be on the same page with each other and with consumers. Depending on the nature of a claim, for example, consumers may be called upon to deal with insurance brokers, insurance company agents, insurance adjusters, car collision repair people, risk managers and/or insurance company claims representatives. All of these people, in turn, will be affected by their dealings with each other, as well as with reinsurers and outside vendors such as software developers. Given the number of people who make an impact on a consumer’s claims experience, it seems unusual there isn’t really a single “voice” or forum in which all of these various facets of the insurance industry come together as a collective to represent their best efforts on behalf of the consumer. Yes, individual associations represent insurers (IBC), brokers (IBAC and its provincial associations), adjusters (the CIAA and its various provincial associations), reinsurers (RCC) and risk managers (RIMS).
But in one way, this only serves to illustrate the lack of cohesion within the industry when it comes to solving broad issues affecting both consumers and the industry as a whole. The insurance-to-value (ITV) issue is a prime example of the need for the industry to take a more coordinated approach to resolving an industry-wide problem affecting consumers. Very simply stated, ITV is a problem related to underinsurance. If policyholders are not insured to the full value of their homes, for whatever reason, then insurers are not going to be collecting enough premium to cover reconstruction costs when damaged homes are rebuilt. It means consumers paying full value for their insurance are subsidizing those who aren’t paying for the full value of theirs. ITV affects every facet of the insurance industry, and it affects consumers as well, because their premiums will be based on the outcome. Everyone has a stake in resolving the problem, including re/insurers, brokers, adjusters, third-party software vendors (and in the case of a commercial property claim, the risk managers), etc. And so it would make sense to see a single, consolidated forum in which the various industry players could resolve this dilemma. But there isn’t such a forum, and that has proved to be awkward for the industry. True, the individual associations mentioned above are working among themselves to sort out a solution to the ITV prob-
lem. But at the end of the day, that activity does not necessarily include certain actors critical to the resolution of the problem. The relationships between associations, for example, does not include a trade body representing the third-party software vendors that manage reconstruction cost data (mainly because there isn’t such a body). And, at the end of the day, if the individual associations run against any principle they don’t like, there’s nothing to stop any one of them from ending the discussions and playing ball in their own separate corners while the issue remains unresolved. So what kind of solution is proposed here? Well, one could imagine a kind of non-binding, national confederacy or forum with a mandate to discuss issues that broadly affect the insurance industry as a whole. Members of the body, representing all conceivable parts of the industry, could decide on what forms part of its own agenda. Rather than be used for the purpose of ratifying decisions binding upon all, it would provide a place for discussion of and education about issues that hopefully would inform the industry as a whole on best practices or the need for certain forms of behaviour modification. If nothing else, such a national forum would provide an opportunity for the entire insurance industry to speak in the voice of a collective whole, rather than as individual actors in a production lacking overall choreography — sometimes to the detriment of consumers.
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Claims ONTARIO JURY SETS FUTURE CARE COSTS BAR AT CDN$13.9 MILLION The Court of Appeal for Ontario has upheld a jury award in an automobile brain injury case of roughly Cdn$17 million — including a record Cdn$13.9 million for future cost of care. In Marcoccia v. Ford Credit Canada Ltd., Ford Credit appealed a number of aspects of the jury award, describing the future care costs portion of the award as “perverse and wholly unreasonable.” “This amount represented approximately 96% of the maximum amount claimed by the respondent,” the court observed in its decision. “The appellant [Ford Credit] submits this amount is ‘perverse and wholly unreasonable’ and greatly exceeds any known award for future care costs in a brain damage or personal injury case in Canada, including cases that involve full paraplegic plaintiffs.” But the court disagreed, noting that counsel for Marcoccia submitted a range of between Cdn$9-14 million for the award, whereas counsel representing Ford Credit said “a lower award in the range of Cdn$11 million would have been reasonable, albeit at the upper range of the range of reasonableness.” “In our view, the jury’s assessment of damages in this
8
Canadian Underwriter May 2009
case was not ‘plainly unjust and unreasonable,’” the court found.
ices in non-catastrophic cases from the categories of protected claims should stand,” he wrote.
HOUSEKEEPING EXPENSES NOT SUBJECT TO ONTARIO’S THRESHOLD: COURT
Regulation
Auto accident claims for housekeeping and home maintenance expenses in Ontario are not subject to the province’s legislative threshold that restricts payments to those claimants who suffer from “serious and permanent” impairments, the Ontario Superior Court of Justice has ruled in Sabourin v. Dominion of Canada General Insurance. The province’s Insurance Act does protect insurers from certain liability in auto accidents (a series of protections commonly known as “the threshold”), but the court said housekeeping and home maintenance “are conspicuously absent from those sections of the Act.” Ontario Superior Court Justice George Valin further observed that had the Ontario government meant to include housekeeping and home maintenance within the scope of the threshold, “it could easily have added those claims to the categories of protected claims when it enacted Bill 198 [which introduced the threshold]. “It is reasonable to infer that, by not having done so, the legislature intended that the exclusion of claims for future loss of housekeeping and home maintenance serv-
STRICT RATE REGULATION HAS INDIRECT ROLE IN INSOLVENCIES: PACICC Inadequate pricing is the primary reason why insurers fail, and strict rate regulation is among several contributors to inadequate pricing, the Property and Casualty Insurance Compensation Corporation (PACICC) says in its recently released report, Why Insurers Fail: Inadequately Pricing the Promise of Insurance. PACICC’s most recent publication, the third in a series of reports on why insurers fail, identifies several factors leading to inadequate pricing. Among them, strict rate regulation threatens to delink the relationship between insurance premium pricing and the insurers’ claims costs. PACICC’s report clarifies that rate regulation is not in itself a direct cause of inadequate pricing. Rather, rate regulation can adversely affect an insurer’s ability to respond to changes in claims trends. “Risk increases if claims costs increase at a rate faster than can be accommodated under the rate regime, requiring an insurer to draw down its capital,” the report says. “Insurers with less capital
and/or greater rate inadequacy are therefore less likely to achieve rate adequacy before the onset of financial distress… “Put simply, price controls that de-link prices from claims costs for an already stressed insurer can have a detrimental effect on the company’s solvency.”
QUEBEC REGULATOR SAYS AUTO DEALER GUARANTEES COUNT AS “INSURANCE” The Autorité des marchés financiers (AMF) considers a motor vehicle replacement guarantee offered by car dealers to be an insurance product subject to AMF oversight. “Motor vehicle replacement guarantees must therefore be issued by insurers, whose regulatory framework — administered by the AMF — gives consumers better protection against the risks of insolvency,” the AMF says in a bulletin on its Web site. “Consumers will now be able to contact the AMF to ask for information about motor vehicle replacement guarantees, file a complaint and benefit from mediation services.” AMF said its oversight over guarantees would cause contracts to be standardized, thus clarifying the roles and responsibilities of each party involved. Quebec brokers have been urging the AMF to consider motor vehicle replacement
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guarantees — available at point of sale from car dealers — to be insurance products, so that only those licensed to sell insurance can offer the product. The AMF said it “considers it advisable to provide the main network stakeholders with a 12-month time period to carry out the changes needed for compliance with the act respecting the distribution of financial products and services. “During this period, the AMF will work with the main stakeholders to ensure a harmonious transition and the protection of consumers’ interests.”
changes from FSCO, the Top 5, as ranked by 2007 market share, had the following rates approved: • The Dominion of Canada General Insurance Company C had a change of -0.82%;
• The Co-operators General Insurance Company had a change of 3.42%; • The Wawanesa Mutual Insurance Company had a change of 4.94%; • Personal Insurance Com-
pany had no change; and • Unifund Assurance Company had a 5.34% change. Rate changes approved in 2009 Q1 become effective in 2009 Q1 or later for renewal business.
Your Right Choice for Quality Claims Solutions Jacques Beland, CIP District Manager, Quebec
Canadian Marketplace ONTARIO AUTO RATES INCREASE IN 2009 Q1 BY ABOUT 1% Auto rate applications approved by the Financial Services Commission of Ontario (FSCO) for 2009 Q1 averaged +0.95% based on the entire market. In 2009 Q1, the average rate change was +3.09% for the 30.91% of the market that had approved changes when weighted by market share, according to FSCO. Rate changes approved for the entire market were +5.59% in 2008 and +0.55% in 2007. Among the companies requesting 2009 Q1 rate
At Cunningham Lindsey, we offer you more than just claims handling know-how. You’ll receive customized solutions unique to your claim or program requirements; online claims tracking and comprehensive management reporting; an expanded network of skilled adjusting professionals both here and abroad; and the highest level of service in the industry with performance reports to prove it. We’re working hard to make your choice for the right claims partner that much easier. Visit our website at www.cunninghamlindseycanada.com or email us at corpservices@cl-na.com.
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PROFILE
Achieving Harmony David Gambrill Editor
Danielle Boulet, the new chair of the Canadian Council of Insurance Regulators (CCIR), has 16 years of international experience that is well-suited to her new role. Danielle Boulet, the newly appointed chair of the Canadian Council of Insurance Regulators (CCIR), has a unique cross-cultural professional experience that appears well suited to harmonize aspects of the different financial regulatory regimes in Canada. Boulet spent the early part of her career, from 1990 to 2000, at the National Bank of Canada, where she ultimately became the vice president compliance and operational risk management officer in 1999-2000. In her many roles at the National Bank of Canada, she had extensive contact with many aspects of the bank’s operations in New York. Among other things, she helped establish the bank’s U.S. compliance department and reorganized its U.S. internal audit department.
10 Canadian Underwriter May 2009
It therefore seemed a natural progression in her professional career to start doing compliance work for organizations based in New York, including Credit Agricole Indosuez from 200003 and Dexia Credit Local from 2003-04. In 2005-06, also based in New York, she oversaw the anti-money laundering unit of Banco Chile. There, she managed a number of other financial departments related to financial oversight and investigation. In addition, she acted as a liaison between Banco Chile and U.S. regulatory authorities such as the Federal Reserve, OCC and Florida State Banking. “Basically I was dealing with regulators and this is what I was doing for the 16 years that I was in the United States,” she said, summarizing her experiences. “I was working for different financial institutions and some of them had almost terminal problems with regulators.” But while you can take Boulet out of Quebec, you can’t really take Quebec out of Boulet. She said as much as she liked Quebec, she never really imagined she would be able to return to her home province. But when the opportunity arose, it was a high-profile position as superintendent of solvency for the province’s financial regulator, the Autorité des marchés financiers (AMF).
Boulet’s experience at the AMF draws not only upon her professional expertise in banking, but also her experience in the insurance industry as well. “Insurance was always in the background,” Boulet says of her career experience. “If you look at a conglomerate such as Dexia, which was a financial holding company in the States, I dealt with insurance brokers and insurance companies, so I was always exposed to insurance. My background serves my current situation.” Clearly her experience in the area was much sought after, because she was appointed to become the chair of Canada’s insurance market conduct regulator, the CCIR. It is perhaps no surprise, given her strong background in solvency, that the CCIR has been forging a closer relationship with the country’s solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI). “We’re talking about harmonizing with the provinces, but also with OSFI, the federal regulator,” she said. “At CCIR, the provinces and territories are members, but OSFI is also part of CCIR as an associate member… We need to plan [together] and make sure we are all going in the same direction.” Certainly now is a busy time for financial regulators, as
Canada finishes up the second quarter of a global recession with no obvious end date in sight. “Right now, the timing [to be in the business of regulation] couldn’t be better, with everything that’s happening in the market,” she said. “It keeps us on our toes. It forces us to think a little bit outside of the box, because none of us have seen or witnessed what’s going on right now in the market. It is exciting and it is challenging.” In these times, the Canadian insurance industry is debating whether companies can expect to see more or less rules-based regulation as a consequence of the questionable use of credit derivatives in the United States, which precipitated the recession. Some predict regulators will rely more often on predictable rules-based regulation as a means to steer companies through the current financial crisis. Others say regulators will shy away from rules-based regulation since it is perceived to have contributed to the current global crisis in the first place. Boulet said “you can never say never” when it comes to regulators using rule-based methods. But as a more general course, regulators remain focused on transitioning to principles-based regulation — even in these times of financial
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crisis. Under principles-based regulation, the burden of regulation falls upon those companies that practice riskier market behaviours. “I agree that in a moment of panic, it would be tempting to go back to rules,” Boulet said. “It’s tempting because you feel much, much more in control as a regulator, but it’s a false impression. We are strong believers in principles-based regulation.”
Boulet says her next immediate course of action is to fulfill the organization’s mandate to harmonize some of the provincial regulations governing the country’s insurance industry. Harmonization includes re-examining the industry’s forms and templates for submitting company data to the regulators. The Minimum Capital Test (MCT) also is the subject of harmonization discussions to “ensure it remains a risk-based
test appropriate for the P&C industry, she said. “The changes to the accounting rules may necessitate changes to the MCT, so they [a CCIR committee looking into the issue] will work on it and bring it to the attention of the general CCIR.” The CCIR also wants to “facilitate informed consumer decision-making,” which entails a discussion about disclosure. This discussion comes at a time when the country’s guarantee fund, the Property and Casualty Insurance Compensation Corporation (PACICC) — which pays out claims to shareholders in the event of an insurance company insolvency — is calling for improved financial disclosure from provincially-regulated companies. A CCIR committee is looking into PACICC’s concerns, Boulet said. But this particular aspect of the broader issue of disclosure is a tricky one to resolve. And it’s not because provincial regulators are unwilling to require more and better disclosure. “I know here in Quebec, we have an issue and it’s a legal issue,” she said. “Each province has its own framework or statute that cannot be [changed] unless you have some kind of legal or provincial [legislative] change. Some provinces have agreed [to look at having more open disclosure], and others can’t for various reasons. It’s not because they aren’t
willing, it’s because they can’t.” Ultimately, as Boulet points out, the CCIR is “an association of the willing.” The council does not have a binding authority to enforce decisions upon its members. “We have no authority to force our views on jurisdictions or governments, but we’ve been very effective in bringing issue to governments and getting the industry to buy into our recommended courses of action,” she said. Certainly, though, Boulet’s professional experience with so many regulatory regimes through North America puts her in a good position to understand and appreciate the various local means to perform common regulatory tasks. The key, she says, is in being able to get these various regimes to talk to each other for the purpose of achieving a common sense of purpose. “I believe that the basis for harmonization is communication and sharing, and trying to avoid the silo effect,” she says. “The legal environment is maybe different from one province to another, but there’s a thread that has to be [found] in order for us to be able to exchange [ideas] and support each other to facilitate the business across all provinces... We are looking at what each [of the provincial regulators] is doing, to try to bring to all provinces the best of each system.”
May 2009 Canadian Underwriter
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Putting the
Consumer
FIRST Don Forgeron President & CEO, Insurance Bureau of Canada
This year marks the fifth time in 20 years that the Ontario auto insurance product will be reformed. But what truly needs to change is the cycle of crisis and reform that leads to escalating costs for insurers and higher rates for consumers. Like children caught between feuding parents, Ontario drivers can be made to feel like pawns caught between towering competing industries, each of whom insists it has the drivers’ best interests at heart. With a government review of auto insurance currently underway in Ontario, there seems to be a lot of discussion surrounding what insurers, lawyers or medical providers ‘hope to get’ rather than what consumers really need. As insurers, we routinely put the consumer front and centre. It’s in our best interest to do so. With more than 200 companies competing for business, no insurer can afford to have a reputation for poor service. For that very same reason, IBC has consistently put the interests of consumers first and foremost throughout the current Bill 198 review process.
12 Canadian Underwriter May 2009
The province’s insurance regulator, the Financial Services Commission of Ontario (FSCO), has just concluded its statutory, five-year review of the province’s auto insurance product; it has issued a report to the finance minister including 39 suggested recommendations for reform.Whether developing recommendations for FSCO, studying its report and making suggested possible improvements or speaking directly to the finance minister and other government officials, IBC is steadfast in presenting solutions that benefit consumers. So, what do consumers really need? In a nutshell, Ontarians need an affordable, available and stable auto insurance product.Their current product is highly regulated and under extreme duress. Growth in injury claim payouts has outstripped growth in premiums. This is not just a fact to which insurance companies can attest; it is a reality that FSCO acknowledges in its report. Unless the product is fundamentally reformed, affordable, available and stable auto insurance will continue to elude Ontarians. The prospect of rising auto insurance premiums pleases no one, including insurers and ordinary Ontarians who already pay 25% more for their auto insurance than drivers in any other province. One reason why Ontarians pay so much more is that their benefit package is the most generous in North America.
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Ontarians would like them to be — but not without a corresponding cost. If higher tort settlements are allowed, that means richer contingency fees for lawyers and therefore increased claims costs for insurers. If extravagant medical and rehabilitation benefits are allowed, that, too, means higher related claims costs for insurers. And as we know, claims costs are the main factor determining insurance premiums. Currently far too much of every premium dollar is spent on health assessment fees, legal fees and other service fees. IBC believes this money is better spent directly helping accident victims recover from their injuries and return to their normal daily lives. Auto insurance is a product with costs attached to it. The higher the costs, the more expensive the final product. As a result, expenses need to be controlled, not merely shuffled around. Costs need to be controlled so that consumers can enjoy a stable, affordable and available auto insurance product indefinitely. Despite the complexity of Ontario’s auto insurance legislation, it really is that simple. The challenge, then, is to develop a robust, competitively priced product that helps accident victims get the care they need while keeping premiums reasonable for all drivers. IBC’s recommenda-
tions to government do just that. In its submission to FSCO, IBC provides for a level of rehabilitation support that is competitive with the levels prescribed in other provinces. For the most seriously injured, the current limit of Cdn$1 million for medical rehabilitation services would remain unchanged. Taken in total, IBC’s recommendations outline with specificity how long-term affordability and stability in Ontario’s auto insurance system can be achieved. All that is required is meaningful action by government and an awareness to resist the quick fix. Anything less than meaningful reform will doom consumers to an auto insurance market that features instability and volatility. Ontario families are currently facing profound economic uncertainty. Although the government of Ontario can’t solve all of the province’s economic woes, it can control the factors that determine how much its citizens will end up paying for auto insurance. This year’s auto insurance review presents the government with a golden opportunity to return stability to the auto insurance system and give Ontario families a break when it comes to their auto insurance premiums. As insurance providers, we know this what Ontario consumers need. And it’s what they deserve.
CORRECTIONS
4. Ramesh Swamy, senior manager in Deloitte's Financial
B. In its profile of RIMS Canada Conference co-chairs
A. Unfortunately, due to technical reasons, the footnotes
Advisory Practice, as quoted in "Global financial crisis ripples
Marilyn Leonard and Betty Clarke, ‘Broadening the Horizon,"
and citations were inadvertently omitted from the March 2009
across Canada," Deloitte.com, Deloitte & Touche LLP,
Canadian Underwriter, March 2009, Canadian Underwriter
article ‘Private Protection in Turbulent Times.’ Canadian Under-
Canada (English).
Despite generous benefits and more involved treatment, no evidence shows people injured in auto collisions in Ontario are getting any better or faster than those injured elsewhere. Currently the average no-fault injury claim in Ontario is close to $38,000. By contrast, comparable claims average $11,700 in New Brunswick and $3,000 in Alberta. Clearly, something is out of sync in Ontario. Sadly, we have witnessed this sequence of events before. Soaring claims costs place the system in crisis. The system is closely examined. Interested parties present their arguments. The product is tweaked, but not fundamentally reformed. Cost pressures rebuild and, a few years later, another crisis emerges. This year’s auto insurance review will likely result in changes to the product once again. This would mark the fifth time in 20 years that the product has been renovated, but not rebuilt. Previous efforts have not produced long-term stability or affordability; only by truly placing consumers’ interests first, can this recurring pattern be halted. That’s why IBC has been tireless in its efforts to convince decision-makers that a problem for consumers exists and that it desperately needs to be fixed. It may sound trite, but it is true auto insurance benefits can be as generous as
writer apologizes to the author of the article, Rob Bickerton, and the co-contributor Glenn Woodard. The footnotes, as well as the intended placement of the footnotes are included below:
First Placement: Page 48, first full paragraph, end of paragraph. Second Reference: Page 48, Paragraph 2, end of
published some statements requiring correction and clarification. Betty Clarke accepted a management position with the Insurance Corporation of Newfoundland, but she was never
1. The Private Company D&O Market, PLUS and CPCU Joint
paragraph.
the manager of the corporation, as stated in the article.
Program, April 11, 2007.
5. Private companies and the financial crisis," Deloitte.com,
Clarke was involved to some degree with sales at Anthonys,
Deloitte & Touche LLP
but was not directly accountable for the sales numbers. She
Placement: Page 46, Paragraph 3, end of sentence three. 2. "Private-Company D&O Insurance: 'Too Broad' Coverage Can Be Risky," Professional Liability Underwriters Society (PLUS) Journal, October 2007, Vol. XX, Number 10. Placement: Page 46, Paragraph 3, end of sentence four. 3. "Directors Liability in Canada," Specialty Technical Publishers, Page 11-6. Placement: Page 46, Paragraph 4, end of the paragraph.
14 Canadian Underwriter May 2009
First Placement: Page 48, Paragraph 3, end of second sentence.
did travel to meet contacts in Toronto for Anthonys, but not
Second reference: Page 48, Paragraph 3, end of
"frequently," as stated in the article. Also, Betty Clarke is a
paragraph. Third reference: Page 48, Paragraph 4, end of first sentence. Fourth reference: Page 48, Paragraph 4, end of fourth sentence.
member of the National Education Committee of RIMS Canada (the committee does not have a president), and is the immediate past president of the Insurance Institute of Newfoundland. Canadian Underwriter apologizes to Betty Clarke for these errors.
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Backing up
The Brand
Lisa Mercanti-Ladd
Director of Marketing and Client Services, CARSTAR Automotive Canada Inc.
Insurers have entered the brand name game in a big way, and the auto collision repair industry plays a key role in delivering the value proposition to the brand name in a claim situation.
Branding is a hot topic in the insurance industry these days. Several insurers have poured millions of dollars into advertising with the express purpose of establishing awareness, trust and recognition of their brand in the consumer’s mind. This is a positive development for the industry — in fact, some might say it is long overdue. An argument could be made that, within the context of the broader financial services industry, property and casualty insurance companies were slow off the mark in emphasizing the distinctiveness of their brand and carving out a unique identity. “I think insurance companies in general are relative newcomers to the world of branding,” says Dr. Alan Middleton, assistant professor of marketing at the Schulich School of Business, York University, and a recognized expert in Canada on branding. “If you look back even a few years ago, the sign may as well have read ‘premises vacated’ when it came to brand identity of insurance companies. I think there is a growing recognition that the old methods don’t work any longer.” Middleton says he is encouraged by the recent branding efforts of leading insurers, because it shows they realize now that a highly visible brand
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is not just nice to have, but a fundamental driver of corporate value.
BRAND = CORPORATE ASSET The international research and consulting firm Interbrand does an annual ranking of the Top 100 global brands. It evaluates brand value in the same way any other corporate asset is valued: on the basis of how much it is likely to earn for the company in the future. In its most recent global study published for 2008, Interbrand rated Coca Cola as the world’s most valuable brand, with an estimated value of US$67 billion. Rounding out the top three were IBM (US$59 billion in brand value) and Microsoft (US$59 billion). Another Interbrand study, also published in 2008, ranked the top 25 brands in Canada. Not a single property and casualty insurance company made the list this time round. “Strong brands create value and are business assets, but their impact is actually much broader,” Interbrand notes in its Canadian study. “The company itself, employees, investors, consumers, suppliers, government and the general public all share the rewards. And success breeds success.” Clearly many property and casualty insurers have to play catch-up if they want to compete in the big leagues of branding. But while companies continue to spend a great deal of time and money defining and refining their messages in all available media to reach consumers, there are some potential gaps in ensuring that the brand promise consistently meets customer expectations. Look at the claims experience. Many insurers promise their customers that they will respond quickly, courteously and fairly to any loss covered
pg 17 Zurich
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Insurance Risk Management
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One global insurance program for your expanding business. Even for places you’ve never been. Zurich HelpPoint is here when you need more than just insurance. So we offer the Zurich Multinational Insurance Proposition (MIP)*. It helps you keep global insurance programs compliant when you expand your business to a new market and expose yourself to new risks. The strength of Zurich MIP lies in a transparent and thorough set of solutions for writing and maintaining global insurance programs in over 170 countries. Our game-changing solution can help you sleep better at night, no matter the time zone. For more details about Zurich HelpPoint, visit www.zurich.com
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in the policy, such as a damaged car, for example. But several questions are implicit in this promise: • How do they control the actual customer claims experience? • How do they deal with a repair industry that shows a spectrum of variability in quality, service and capability? • How can insurers know their brand promise is upheld throughout the claims experience? The very real risk is that their brand is compromised by poor repair or poor service. Simply put, a poor experience diminishes the brand. Branding has to be about consistency in expectations and consistency in delivery. In this sense, branding is about much more than simply advertising: it means insurers must have a repair network completely in tune with their brand promise and capable of managing the experience at all customer touch-points. As Middleton notes: “The brand company is responsible for all aspects of the customer experience. So if something does not go right with a service supplier or intermediary, the stain goes on the branded company.”
CONSISTENCY IN BRAND DELIVERY Auto repair claims represent a huge opportunity for insurance companies to deliver on their brand promise and reinforce trust in the mind of the consumer at the retail level. When there is mutual respect between the insurer and repair network, the repairers can become the best ambassadors and advocates of that brand — better than any television or radio ad. Currently, insurers are all over the map when it comes to how they handle repair claims. Some use a wide array of car repair facilities — everything from nationally branded, multiple-location centres to the small shop around the corner. Many insurers have moved towards a closer relationship with fewer repair facilities through direct repair or preferred vendor programs. This latter approach represents a growing trend towards a partnershipbased program with a limited number of nationally recognized repair networks.The goal is to ensure consistent customer experience, not to mention the achievement
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other performance-based metrics that might result in significant financial benefits for the insurance partner. According to a national survey by the research firm Synovate, seven out of 10 Canadians want to be recommended to a repair centre that has a brand name.The repair network has a responsibility to build and establish that brand name, especially in an industry in which consumer trust is an issue.This has to be far more than just delivering a company brochure when the customer leaves the repair centre. For broker-driven insurance companies, the branded repair networks should support the broker community and understand how important this part of the business is to the insurer. Take another example: car rentals. Let’s say a customer gets involved in an accident and needs a replacement car for one week.The insurance company finds a location and sets the customer up with “Joe’s Car Rental.” The office is a bit dingy, the service is slow and the client finds out he can’t get the vehicle he wants. Is that a brand promise delivered? The focus on the customer experience is one of the main reasons insurers have moved to a much closer partnership with major branded car rental companies. The same trend will likely follow into auto repair. Some insurance companies have been reluctant to make specific referrals to clients, although that trend is changing rapidly. More consumers, especially within the younger generations, are comfortable getting referred to a repair centre by their insurance company. In the findings of a recent survey, more than 60% of consumers under the age of 34 want to be referred to a repair centre that is part of a national brand with multiple locations. Whatever you want to label these consumers, be it “Generation Y” or the “Facebook Generation,” it’s clear these consumers want the referral process to become a much more visible, automated part of the insurer-client relationship. And with social networking technology, tools such as a branded Web site for a repair network are a necessity. For these consumers, if you are not on the Web, you don’t exist.
CHANGING REFERRAL PROCESS In fact, insurers that ignore the referral process may be doing irreparable harm to their brand image. In the Synovate survey, more than 83% of Canadians said they would think negatively of their insurance company if the vehicle repair centre they recommended provided poor service or repairs. The emphasis is on delivering the brand promise, with the repair network acting as the natural extension of the customer experience. In other words, customers should have as much trust in the branded name of the repair facility as in the insurance company. In fact, one visible trend in many other industries may be on its way to the insurance sector: co-branding.This concept is simply the linking of two strong brands to create a complete customer experience in complementary products or services. The goal is to pair existing brands that have powerful images in the hopes of linking these positive images with their products or service offerings. Think Chapters/Starbucks, Intel/Dell (and others), Tim Hortons/Wendy’s and the numerous co-branding initiatives of credit cards with business offerings. Is there any reason why co-branding of a strong brand name insurer and a trusted car repair network could not work just as well? To deliver brand value in the true customer experience requires collaboration across the extended supply chain. Reputation and brand value are among a company's principal assets. One parameter that can have a positive influence on corporate reputation and share price is whether the company’s supply chain performance is accountable and measurable. A strong partnership with key supply chain vendors can significantly enhance brand value, customer satisfaction and sales figures for insurance companies. The big question is this:Which car repair networks will make ideal partners for insurers to fulfill their brand promise? That question will be answered in the months ahead by companies committed to consistent brand delivery in the claims experience of customers.
this June
join WICC at Relay For Life Everyone in the insurance industry is invited to join WICC at the Canadian Cancer Society’s biggest cancer event – Relay For Life.
the details WHERE: WICC HQ event at Esther Shiner Stadium in North York as well WHEN: WHY: HOW: RSVP:
as other community sites across the province and country Friday, June 19, from 7:00 p.m. until 7:00 a.m. Support WICC’s goal of 100 teams participating in RFL Get your team of 10 together – invite your colleagues, family members, friends, clients. Or join an existing team. By signing up your team @ www.wicc.ca
More than a fundraiser, Relay For Life is a unique, inspirational, outdoor community event that brings family and friends together for 12 hours of fun, friendship and remembrance.
join Team WICC in 6 easy steps! 1. If signing up a new team, assume or assign the role of Team Captain. 2. Start at www.wicc.ca. Click on the Relay For Life icon at ‘join team WICC’. 3. Go to ‘Join WICC at Relay For Life’ and find the event you want to join. This takes you to the RFL site for registration. It costs $10 to register your team. 4. Select your Ontario RFL community event location from the drop-down listing. North York is the WICC HQ, and there are other WICC designated sites. 5. When registering your team, you create a Team Name and a Team Company. It is important to select WICC as your ‘Team Company’ from the drop-down box to ensure that your team’s pledges are included in our industry challenge. Remember: PICK WICC! 6. You’re ready to go. As team captain, you can recruit members to join your team, use prepared letters to seek pledges, and encourage your team to use the website to fundraise. Each member is asked to raise a minimum of $100.
Design compliments of
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Full Frontal Crashes
Senior Vice President, Vehicle Research, Insurance Institute for Highway Safety
The new vehicles on the road today are safer than ever. They have been designed to be much more crashworthy than the vehicles sold just a few years ago. But fatal crashes still occur in vehicles that earn good ratings in frontal crash tests. Some real-world crashes don’t always mirror tests. Researchers at the Insurance Institute for Highway Safety recently looked at how people are dying in crashes of vehicles that earn good frontal ratings. In doing so, they have uncovered injury patterns and crash factors that could be used to develop new programs to help make vehicles even more crashworthy. Based on patterns of damage to the vehicles in which people died or were seriously injured, researchers identified five frontal crash modes: • full-width crashes that resemble the U.S. federal government’s 35 mp-h consumer tests; • moderate overlap offset crashes like those the Institute conducts; • offset crashes with a smaller overlap than the Institute’s test; • center impacts into narrow objects like poles, and
20 Canadian Underwriter May 2009
• underride crashes with medium and heavy trucks, SUVs and pickups. To understand what problems a new test program should address, researchers also sorted the frontal crashes according to whether the injuries appeared related more to intrusion, restraint factors or occupant factors.
RESEARCH AND RESULTS Researchers analyzed 2000-06 case files from the National Automotive Sampling System/Crashworthiness Data System on frontal crashes in which 116 drivers and right front passengers were seriously injured or killed despite using safety belts.The vehicles had to have good frontal crashworthiness ratings in the Institute’s offset test; all but one earned 4 or 5 star ratings out of the maximum 5 in the government’s 35 mph fullwidth New Car Assessment Program (NCAP) test. The Institute found a lot of frontal crashes are happening in configurations that aren’t represented in the crash tests being conducted right now, either by the Institute or the National Highway Traffic Safety Administration. Automakers design vehicles to perform well in these tests, so researchers wanted to explore if other kinds of frontal tests could address the life-threatening injuries that occur in the field. Some of the crashes in the study were so extreme that the deaths and injuries probably can’t be addressed in crash tests. Some involved very high speeds or unusual conditions. In one fatal case, a car went off an open drawbridge.
Illustration © Sarah Beetson/www.i2iart.com
David Zuby
The Insurance Institute for Highway Safety is analyzing the way crash tests are conducted to help explain why fatal crashes still occur in vehicles with good crash test ratings.
pg 29 Assured 5/5/09 8:56 AM Page 53 Assured 4-AB-CUW 5/5/09 7:39 AM Page 1
REST ASSURED
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Outperform with Assured!
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One of the biggest crash groups in the study involved people killed or injured in vehicles with safety cages that collapsed despite good test ratings. In other instances, the vehicles’ safety cages did a good job of managing crash forces, but people died because factors such as their age, health, weight or stature increased their vulnerability. In other situations, the restraints weren’t ideally suited for the occupants and the crashes, either allowing an occupant to hit something inside a vehicle or holding an occupant tightly enough to cause injury.
FINDINGS BY CRASH CONFIGURATION Centre Impacts Nineteen per cent of crashes in the study were centre impacts into trees, poles or posts. In all but two of these cases, the vehicle structure prevented substantial intrusion. Almost half of the vehicles hit something else before running off the road and striking a narrow object. Researchers identified 10 of the centre crashes as having restraint factors that contributed to occupant injuries; seven had occupant factors or both restraint and occupant factors. Neither the Institute nor the government includes frontal pole tests in their consumer information programs. For research purposes, the Institute has conducted some frontal tests into a 10-inch diameter pole using vehicles rated ‘Good,’ but the injury risk concerns these tests raised didn’t seem to match the chest and abdominal injuries real people sustain in similar crash modes. The dummies used in frontal crash tests and the chest injury criteria may need to be revised to better reflect injury risks. This work also has prompted the Institute to consider how the position of occupants and the performance of their restraints are influenced by off-road excursions like tree impacts. Full-Width Crashes Only 6% of the occupants were in fullwidth impacts like those simulated in NCAP tests. None of the occupants died, and the vehicles had little or no intrusion. 22 Canadian Underwriter May 2009
Based on this sample of cases, relatively few restrained occupants seriously injured in frontal crashes are in impacts resembling the NCAP test set-up.This likely wouldn’t have been the case 20 or 30 years ago, back in the early days of the testing program and before safety became a sales strategy. Since most vehicles now earn top marks for frontal crashworthiness in NCAP tests, it’s clear this program has done a good job of influencing designs that protect people in head-on, full-width crashes; the realworld crashes the Institute studied bear this out.
Moderate Overlaps The configuration of the Institute’s offset test is a moderate, 40% overlap of the driver’s side of the vehicle. This type of crash accounted for 24% of the cases studied. About half of the belted people seriously injured in moderate overlap crashes were in vehicles that otherwise held up pretty well, so other factors besides vehicle structure came into play. In the other half of the moderate overlap crashes studied, the vehicles’ safety cages allowed substantial intrusion into the occupant compartments, which likely contributed to injuries.These intrusion crashes also occurred at much higher speeds than the Institute’s test, so the conditions were more severe. Manufacturers design cars, minivans, SUVs and pickups to do well in the Institute’s offset test. But these real-world crashes with intrusion show that for some vehicles at least, occupant protection drops off as frontal impacts become more severe. Small Overlaps Another 24% of the study cases were small overlaps. That is, they didn’t involve very much of the vehicles’ front ends. These were most common among crashes in which intrusion contributed to injuries. Forty-three per cent of crashes with a lot of intrusion were small overlaps involving around 20% or less of the vehicles’ front ends. The Institute’s current offset test isn’t intended to evaluate crashworthiness in such cases.
Few vehicles have energy-absorbing structures that extend to the edges of the front end, and this may be why so many small overlap crashes involved intrusion into the occupant space. Instead, more metal is concentrated toward the centres of vehicles, which helps limit intrusion in centre impacts with things like trees, posts and utility poles. Based on results of this study, small overlap tests have good potential to improve the crashworthiness of new vehicles. This would help spur vehicle designs with beefed up structural protection across the full width of the front, including the outer corners. It also would result in better protection for some occupants in moderate overlap and full-width crashes.
Crashes Involving Underride These are when passenger vehicles go partially or all the way under a larger vehicle such as a truck rig. After small overlap crashes, underrides accounted for the most impacts in which intrusion was an injury factor. Eight of the underride crashes involved heavy-duty truck rigs or medium trucks. The other six involved impacts with pickups or SUVs. Half of these 14 underride cases were fatal. Underrides that involve SUVs and pickup trucks have been addressed to some extent by the voluntary work auto manufacturers are doing to alleviate the incompatibility in crashes between these large passenger vehicles and cars. Still the prevalence of truck underride crashes suggests a need for improved guards on large trucks.This isn’t a new idea. In fact, a 1997 Institute study estimated about half of all fatal crashes between large trucks and cars involved front, side or rear underride. The insurance industry measures the success of its 14-year-old frontal crash test program by the vehicles that earn good overall ratings and the lives saved by improved designs. Still, thousands of people die each year in frontal crashes. This compels us to focus on these deaths and new crash test programs that might encourage vehicle designs to help prevent them.
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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.
Ontario’s Ailing Auto Insurance
Ontario insurers looked to the Ontario regulator to diagnose and cure the province’s ailing auto insurance product. And while they hail the province’s diagnosis, the treatment, they say, isn’t strong enough to keep insurers from having to raise consumers’ auto insurance rates. By DAviD GAMBRILL Editor
24 Canadian Underwriter May 2009
Imagine
a person involved
in a car collision getting transported to the local hospital’s intensive care unit with serious injuries. The doctors in the room look over the patient’s various charts, MRI results, x-rays and correctly diagnose the injuries down to the final detail. In the operating room, a doctor takes out a bottle of regular strength pain reliever and gives the patient two pills and a glass of water. “Take two of these and call me in the morning,” says the doctor, and the surgical team leaves the room. This is a classic case of a treatment not meeting expectations, especially in light of the seriousness of the original diagnosis. The patient’s resultant confusion and disappointment is an apt metaphor for how the province’s insurance industry is responding to the diagnosis and treatment prescribed by Ontario’s insurance regulator, the Financial Services Commission of Ontario (FSCO), to cure the province’s ailing auto insurance system. Overall, the insurance industry believes the regulator lost its focus somewhere between its diagnosis and the treatment it prescribed in a report concluding its five-year review of the auto insurance product. “There was a bit of a dichotomy we saw with respect to the [FSCO] report,” said Don Forgeron, president and CEO of the Insurance Bureau of Canada (IBC). “The diagnosis FSCO supplies is very accurate. They clearly recognized the seriousness of the cost problems within the system. But the cure it prescribed is inconsistent with the diagnosis. It’s similar to saying, ‘You have a migraine headache and you need strong medicine, but just take one aspirin and we’ll see what happens.’ That’s a little unfortunate, from our perspective.
May 2009 Canadian Underwriter 25
COVER STORY
Critical Care The Illness and Symptoms Ontario’s auto insurance system is ill. On this point, all of the stakeholders and the regulator agree. The patient is a hybrid system that includes both a firstparty accident benefits (AB) regime to pay injured claimants and a tort (court) system for delivering accident benefits. The system is too complex, nobody understands or wants to fill out the paperwork, there are too many health professionals’ assessments for minor injuries, most of the insurers’ money is propping up the system (including cottage industries for assessment) rather than going to the claimants, the system disproportionately caters to minor injury claimants, etc. etc. For insurers, the claims costs associated with many of the problems mentioned above directly (and negatively) affect their bottom lines. The magnitude of the problems with Ontario’s private auto insurance system for the insurance industry is clearly represented in the financial figures the Insurance Bureau of Canada (IBC) presented at the 2009 Swiss Re breakfast in early April. IBC presented the industry’s 2008 numbers just one day before FSCO concluded its mandated five-year review of the provinces’ auto insurance system. FSCO has since issued its final report to Ontario Finance Minister Dwight Duncan. In its report, FSCO made 39 recommendations to Duncan to reform the auto insurance product, if in fact the minister chooses to make any changes to the system at all. IBC’s numbers suggest some kind of change will be necessary, because the losses the province’s auto insurers suffered in 2008 Q4 are quite simply unsustainable. Overall, the industry lost capital in 2008 for only the third time in 33 years, with a total of more than half of the country’s primary insurers reporting an underwriting loss of Cdn$290 million. [The loss was flattered by a Cdn$1.4-billion release of reserve funds.] Ontario auto was a major driver of the loss, IBC said, noting Ontario auto represents 27.2% of primary insurers’ net premiums earned in the entire country. IBC estimated 26 Canadian Underwriter May 2009
auto losses in Ontario in 2008 would hit Cdn$390 million. In 2007 Q4, insurers’ loss ratios in the accident benefits area — roughly translated as the insurers’ claims payments divided by the premium they collected, with numbers above 100% representing a loss — were between
The current SABS is estimated to be 40% longer than the Bill 164 SABS, introduced in 1994, which stakeholders used to refer to as “bloated.” 103% and 124%. One year later, in 2008 Q4, Canadian auto insurers posted loss ratios in the AB side on the order of between 130% and 179%. In other words, primary insurers were paying out between $1.30 and $1.79 in accident benefits claims costs for each $1 worth of insurance premium they collected from consumers. Seen from the perspective of reinsurers (who insure the insurance companies), the system as a whole is suffering. “Most of our exposure [on the reinsurance side] tends to be excess of loss, and what we’ve seen over the last several years is that the AB claims have really been skyrocketing,” says André Frédette, the vice president and general manager of Caisse Centrale de Reassurance (CCR). “So when you see
$2-million, $3-million, $4-million, $5-million or $6-million claims, it’s not unusual anymore. I think a lot of companies have big net retentions [i.e. primary companies will choose to pay large claims on their books instead of paying reinsurers a premium to make claims payments on their behalf that exceed a certain threshold] — some $2 million, $3 million, and some $5 million. They’re taking it on the nose, big-time.” As primary insurers’ claims costs on the AB side escalated, so, too, did their expectations that the regulator would make recommendations to help reduce their claims costs. “There’s a lot of high expectation, because I think there was a general belief that because the results had deteriorated so rapidly, we really needed quite a surgical response to the issue,” said Irene Bianchi, vice president of claims for RSA. “In Ontario, in accident benefits, the loss ratio is running as high as 179%. You just can’t sustain that. You can’t sustain that for a couple of quarters. There was a huge expectation that FSCO would understand the issues and to come up with recommendations that were pretty prescriptive and address this issue.” FSCO’s diagnosis And so with the insurance industry’s expectations weighing down upon it, not to mention the additional expectations of consumers, trial lawyers and health care providers, FSCO spent the better part of a year looking over the 90 submissions it received during the consultation period of its five-year review. In early April 2009, the regulator submitted to the minister a 72-page report featuring 39 recommendations to reform the system. Its detailed recommendations address a variety of issues raised by all stakeholders represented in the consultation process, including consumers, health care providers, trial lawyers and insurers. The full report is available at FSCO’s Web site: www.fsco. gov.on.ca/. In terms of a diagnosis, FSCO echoed the concerns of almost everyone that the existing accident benefits system is far too complicated for experts to sort
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CONGRATULATIONS MAKING PARTNER GRADUATES! RSA congratulates the second group of brokers to complete the RSA Making Partner Program at Queen’s Executive Development Centre. The Making Partner Program provides essential leadership and business skills to brokers with high potential for senior management and who aspire to ‘make partner’ in their brokerages. The Making Partner Program – one more example of RSA’s commitment to brokers.
Front Row: Nancy Au, Gloria Corkum, Richard E. McKenzie, Scott McDermott, Ryan Mitchell, Laura Bolster, Lindsay Yaciuk, Scott Huntington Back Row: Luc Caissie, John Hubbard, Steve Earle, Rob Vosseler, Lawrence Kennedy,Vincent Gaudreau, Jason Sharpe, Alex Meier, Mike Raes RSA is a registered trade name of Royal & Sun Alliance Insurance Company of Canada.“RSA” and the RSA logo are trademarks used under license from RSA Insurance Group plc
COVER STORY
Critical Care through, let lone the average layperson. “Virtually every stakeholder commented on the complexity of the existing accident benefits system,” FSCO noted, after spending a few pages of its report tracing the origin and evolution of the Statutory Accident Benefits Schedule (SABS), the legislation that governs the accident benefits system in Ontario. “A number of stakeholders compared [SABS] to the Income Tax Act. To provide some context to the issue, the current SABS is estimated to be six times the length of the schedule that was introduced under Bill 68 [in 1990]. The current SABS is also estimated to be 40% longer than the Bill 164 SABS [introduced in 1994], which stakeholders used to refer to as ‘bloated.’ An argument could be made that SABS has increased the regulatory burden on both consumers and the insurance industry.” FSCO’s report acknowledges the complexity of the system has led to what the regulator describes as “the overutilization of assessments in the auto insurance system.” It then cites 10 examples of abusive assessment situations, including, among others: • “‘assessment mills’ operating in the auto insurance system and providing claimants with inappropriate or unnecessary assessments given either the diagnosis and/or the stage of recovery;” • “multiple requests for assessments being sent to insurers in order to overwhelm company adjusters;” • “assessments being conducted by facilities not involved in a claimant’s treatment;” and • “costs of these assessments are out of line with the benefit to the claimant or insurer.” FSCO then notes the costs of these assessments to the insurance system, citing IBC statistics for 2007. “The IBC submitted that in 2007, based on incurred losses (paid claims plus reserves), for every dollar spent on treatment, another 60 to 80 cents were spent on assessments,” the report says. “For minor claims (between Cdn$1,000 and Cdn$20,000) they suggest that assessment costs were 28 Canadian Underwriter May 2009
between 70 and 80 cents for every dollar of treatment. This level of assessment activity is reported to be inconsistent with other jurisdictions including the public health care system.” FSCO goes on to recognize the impact of the system’s various inefficiencies on insurers’ overall AB costs. Citing IBC data,
Accident benefits rose by 16.3% since 2003, but since 2004 the increase has been 34.6%... But the insurance sector reports significant rate inadequacy in the system. the report notes accident benefits loss costs in Ontario went up from Cdn$331 per vehicle in 2003 to Cdn$385 per vehicle in 2007. “Loss costs for accident benefits saw the largest relative increases during the past five years,” FSCO said. “Accident benefits rose by 16.3% since 2003 but since 2004, the increase has been 34.6%...Rising loss costs have resulted in the upward swing of rate changes approved by FSCO. However, rate increases have not kept pace with rising loss costs and the insurance sector reports significant rate inadequacy in the system. Consumers will likely see their premiums increase significantly in 2009 and 2010 without some structural changes to the auto insurance product to reduce and stabilize costs in the system.”
FSCO’s treatment plan So how to cure this ailing system? Out of FSCO’s 39 recommendations, arguably two-thirds of them directly address escalating first-party AB costs. The others deal with tort (third-party bodily injury claims made in court) or other reforms. To help insurers control costs, FSCO in some instances recommended caps on expenses; in others, they recommended converting some of the mandatory AB benefits into optional benefits. In other words, consumers would be given the option to pay a higher premium for additional coverage that is now available to them under the basic, mandatory package. The following of FSCO’s suggestions, in no particular order, have generated discussion within the insurance industry: • Recommendation #10: Further consultation with experts in the field is needed to amend the definition of “catastrophic impairment” (in the defining regulation). The goal for this review should be to ensure that the most seriously injured accident victims are treated fairly. • Recommendation #11: Expenses related to s. 24 SABS assessments should be subject to the same maximum monetary and time limits that apply to medical and rehabilitation benefits under s. 19 of the SABS. • Recommendation #12: The fee for completing forms, including any assessment required to complete the form, should be capped at Cdn$200. The cost of all other assessments should be capped at Cdn$2,000. • Recommendation #15: Consider having assessment requests — and treatment plans, if Recommendation #21 were to be adopted —subject to a referral made by the health professional primarily responsible for the claimant’s rehabilitation (in most cases a family physician). • Recommendation #22: Reduce the cap for medical and rehabilitation benefits for non-catastrophic claims to Cdn$25,000. Introduce a Cdn $100,000 optional medical and rehabilitation benefit along with the existing Cdn$1-million optional benefit.
pg 31 WICC Sponsor
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WICC Announces Two New National Sponsors at the Platinum Level WICC is delighted to announce two recent additions at the Platinum Level to its National Sponsorship Program, representing a commitment of $45,000 over three years for each sponsor:
Wawanesa Insurance saw a close fit with WICC and our philanthropic donation program, according to George Bass, VP, General Counsel and Secretary of Wawanesa. WICC is expanding nationally which fits for us as a Canadian insurer with national presence. WICC is a good match for us in other ways from a philanthropic standpoint we look for programs with broad community benefit and wide community support. WICC, with its continually developing presence in insurance communities, and through its partnership with Canadian Cancer Society, which receives 100% of funds raised, is completely in sync with our values and goals of philanthropic giving.
Supreme Collision is honoured to become the first collision network in Canada to endorse WICC as a National Sponsor at the Platinum Level according to Marty Reddick, President of Supreme Collision. As an organization, Supreme has always supported a variety of charities within our respective communities. In 2009, we decided we wanted to associate our organization with a charity that shared our core values and was capable of helping people on a national level. Knowing that 40% of women and 45% of men will develop cancer during their lifetime and that 166,000 new cases are recorded each year, was a significant factor in our decision.
These two companies are now a part of a very special group of WICC National Sponsors at the Platinum Level. WICC is extremely thankful to this group of organizations which share the vision and desire to put an end to cancer! WICC National Sponsors at the Platinum Level also include:
Design compliments of
COVER STORY
Critical Care • Recommendation #29: Make housekeeping and home maintenance expenses and caregiver benefits optional. On the tort side, Recommendation #31, which would open up access to justice for third-party tort claims, is significant to insurers. It addresses comments made by former Ontario associate chief justice Coulter Osborne in his Civil Justice Review completed in November 2007. In his report, Osborne notes two methods used in court to limit insurers’ tort liability costs (particularly for minor claims). The first is a set of deductibles — Cdn$30,000 and Cdn$15,000 — that are immediately subtracted from any court award for a claimant worth less than Cdn$100,000. The second is a “verbal threshold” that defines whether a claim is “catastrophic” and therefore not subject to the deductibles. As did Osborne, FSCO viewed the two methods as being redundant, and therefore made the following recommendation: • Recommendation #31: The government should consider reducing the deductibles to $20,000 and $10,000, eliminating the deductibles for fatal claims and revoking the definition of serious and permanent impairment set out in Regulation 461/96. A closed claim study would assist in determining the impact of further tort changes being considered [i.e. elimination of the verbal threshold].
Mandatory to optional benefits George Cooke, president and CEO of The Dominion, said he was happy to see FSCO recommend the conversion of some mandatory benefits to optional benefits. At the same time, however, he believes FSCO should have applied this approach more consistently than it did.
Rehab for the AB system As far as the specific recommendations related to AB are concerned, two aspects of FSCO’s general approach have generated discussion within the industry. To help contain insurers’ costs, FSCO has recommended either caps in some areas or converting mandatory benefits to optional benefits. And while the industry predominantly appreciates these efforts to minimize their costs, it’s difficult to say whether they will actually transform the system or simply produce cost savings in some areas while increasing costs elsewhere.
Like Cooke, Philippa Samworth, a partner at Dutton Brock, sees an immediate benefit to insurers in terms of reducing their claims costs. “The elimination of housekeeping as a benefit only knocks out $100/week, but you’ve got to think about the collateral costs that go with that, which is a series of in-home assessments,” says Samworth. “It is a benefit that everybody asks for. It’s a highly abused benefit, because it’s always a family member [who does the housekeeping or caregiving]. Lots of time surveillance is used to look at that type of issue. So some of the costs that
30 Canadian Underwriter May 2009
The transfer of some mandatory benefits would put a “tremendous onus of responsibility on brokers and brokers’ errors and omissions... I think it’s going to open that door up [to litigation against brokers], and I think that’s very dangerous.”
insurers spend to look at that issue and fight that issue would be gone….All of that litigation goes away, and the insurer doesn’t have to worry about that.” But this cost containment measure doesn’t come without unintended consequences. For instance, how would the broker channel explain these changes to consumers? “It’s going to put a tremendous onus of responsibility on brokers and brokers’ Errors and Omissions,” observes Steve Smith, president and CEO of the Farm Mutual Reinsurance Plan. “I think it’s going to open that door up [to litigation against brokers], and I think that’s very dangerous. This is a very complicated legislation. People are being asked to make decisions on whether or not they want accident benefits in the event of an injury. Basically [brokers] are saying [to consumers]: ‘We can save you money if you don’t want these coverages.’ People will not understand the ramifications of choosing or not choosing that coverage at the time of application. They’ll be simply focused on the premiums. And if they don’t understand the ramifications fully, you’re going to get people saying: ‘Well gee, I didn’t understand that. I didn’t know I’d be faced with those kinds of hardships in the event of a claim.’ Brokers’ Errors and Omissions [insurance] is fully exposed on this. It’s just the wrong way to go.” Others, like Rocco Neglia, vice president of claims for The Economical Insurance Group, see the recommendation as an opportunity for brokers rather than a liability (so to speak). “I think brokers would welcome the opportunity to provide that extra service to their clients by saying this is a complicated product, it’s not as much of a commodity as you think it is, and these are the reasons why you need a broker to help explain,” he says. In fact, brokers in Ontario are already explaining the difference between mandatory and optional benefits to consumers as part of the everyday course of their business, says Randy Carroll, the CEO for the Insurance Brokers Association of Ontario (IBAO). Brokers already have workflows and systems
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COVER STORY
Critical Care in place to explain the differences between mandatory and optional benefits to consumers. And Carroll implies FSCO’s recommendation would in fact save costs for insurers, since consumers often decide not to buy optional benefits. “From a consumer’s point of view, it’s looked at as an additional cost,” he says. “I don’t have to have it, so I won’t take it. Ninety-nine per cent of the consumers that brokers talk to now about optional accident benefits decline.” The trick for brokers would be in how to explain to consumers who already have housekeeping and caregiving benefits as part of their mandatory coverage, for example, that these benefits are no longer part of their existing coverage. Consumers would have to pay additional premium costs to retain these benefits. “The concern I would have is: How will it be presented to the consumer who has the benefits now?” says Carroll. “Every time you turn around and change your product, where you are taking things away, that’s where the large exposure comes through. “If I have you come into my office as a new client, I can sit down with you and talk to you in regard to what coverage is available and about what optional coverages you may want to consider. You can then make an informed decision during the process of that conversation. But if I’m…sending out a renewal in which benefits were included before and now they have been taken away, there is a concern in regard to how you actually [help the consumer] make the transition…” One way out of the dilemma might be for the industry to include the optional coverages upon first renewal, Carroll suggested, thus putting the consumer in a situation in which he or she would actively have to opt of out the coverages that would be converted into optional benefits. “At least it forces the conversation between the consumer and the intermediary, regardless who the intermediary is, so that the consumer understands he or she is making an informed decision to remove something, versus just having it taken away,” he said. 32 Canadian Underwriter May 2009
Caps Both Cooke and Samworth, who has worked very closely with the auto insurance reform file in the past, make the point that caps or “ceilings” can have the dual effect of increasing lower costs as well as decreasing higher ones. “The reduction of the med-rehab cap
Whatever cap you put on [assessment costs] then becomes the new low... While there might be a [cost] decreases initially, I think in some cases... what you’re going to see is that most reports will come in at the maximum. to Cdn$25,000 in and of itself makes a lot of sense,” said Cooke, who noted the industry has argued for such a cap, but didn’t get it, in several previous rounds of reform. “But the problem you’ve got to worry about there is that you don’t want to push the cost for the guy that should be at $5,000 up to a $25,000 claim…. What you have to do is to accompany it with controls so that you keep the $5,000 as a $5,000, and you still have some position for the one that should be at a $45,000 [claim] to get the incremental $20,000.” Similarly with the cap on assessment costs at $2,000, the danger is that lower costs will be scaled upward to meet the $2,000 cap. “Whatever cap you put on it then becomes the new low,” Samworth says. “I do see a lot of insurers’ reports come in at $1,000 and $1,200, $1,500 – all of those individuals now know that they can ultimately bill for $3,000. So now the new report cost will be $2,000. While there might be a [cost] decrease initially, I think in some cases…what you’re going to see is that most reports will come in at the maximum.”
Good-bye AB costs, hello tort Trial lawyers appear to believe FSCO came to the right balance between decreasing insurers’ costs on the AB side while simultaneously opening up access to justice for consumers on the tort/bodily injury side. Going into the review, trial lawyers, who represent claimants in court for third-party bodily injury claims, asked FSCO to lower the $30,000/$15,000 deductibles applied to court awards less than $100,000. Their request to FSCO was to reduce them down to $15,000 or eliminate them entirely. FSCO did not go that far, but Richard Halpern, chair of the Ontario Bar Association’s automobile insurance working group, said he could certainly live with FSCO’s recommendation to reduce the deductible to $25,000/ $15,000. “The important thing about the deductible is to consider what FSCO has proposed for the second stage, which is a closed claims study to whether or not the threshold should be eliminated entirely,” said Halpern. “In the face of that, I’m content with the deductible level because there is some prospect that the threshold will be eliminated entirely.” The verbal threshold defines what constitutes a “catastrophic” injury, to which the deductibles do not apply. Insurers aren’t as happy with the tort reforms. They see the opening up of tort as increasing their claims costs on the bodily injury side, even while their AB costs are getting capped. “My concern is that the positive side [of what FSCO is recommending] is absolutely destroyed by the negative of the pieces we are starting to see around the tort side,” says Bianchi. “There was a meeting of the IBC’s industry advisory group [in April 2009] and everybody rated this whole proposition. I think the highest score was between a six and a seven. The lowest was between a two and a four out of 10. So nobody is really happy with it.” Samworth adds the dissatisfaction is rooted in the math: “If every accident claim right now is subject to a $30,000 deductible, and if you take $5,000 off of that,
then for every claim [going forward] there’s going to be an additional $5,000 that’s going to be paid out.There has to be a cost.” And that cost will be passed onto the consumer in the form of higher auto insurance premiums, which already represent 5% of Ontarians’ disposable income — the highest such percentage in the country. “Our current claims trends are on the upward swing and we view the recommendations in the report to be at best neutral in controlling the costs,” says Mark Feeney, vice president of personal lines and packaged products for the Co-operators General Insurance Company. “Much will depend on the details and which recommendations are implemented, but our view is that if these are implemented, premiums will continue to rise.” Halpern says he doesn’t accept this conclusion. He says insurers’ increased costs on the tort side would be balanced out by FSCO’s recommendations on the AB side. “What [FSCO] did in terms of saving costs, the most significant thing, would be the reduction of the medical rehabilitation benefit for non-catastrophic cases from $100,000 to $25,000 and the introduction of optional coverage,” says Halpern. “So you can buy up to $100,000 or even up to $1 million, if you choose. But basic coverage will be $25,000 for med rehab. That alone represents hundreds of millions of dollars in savings to the insurance industry.” Immediate prognosis The prognosis of all of this remains unclear. IBC says it is unable to cost all of FSCO’s recommendations because some of them are based on further study or discussion. Various sources have critiqued the insubstantial nature of some of the reforms as “airy fairy,” “lacking in crispness” and “not immediately implementable.” Cooke is especially blunt in his assessment. “Where is this going to go?” he asks. “When you look at the report in total, there’s some stuff in here that clearly reduces costs, there’s some stuff
in here that clearly increases costs, there’s some stuff in here that I don’t know what the hell it does, but stuff that needs further study or it’s fuzzy. At best, you might say it’s cost-neutral. If that’s the case, there’s an inadequacy in existing rate levels that needs to be dealt with, and quite frankly I believe that this
product currently costs too much… It costs too much because the amount of money going toward low-end injuries, and the transaction costs associated with
managing low-end injuries, are too high. They need to be reduced.” If the end result of the whole exercise is a wash, then don’t expect insurers to be rushing to the finance minister to encourage the recommendations to pass. In terms of a lobbying position, the industry is caught between a rock and a hard place — either it can either carry on with an unacceptable status quo, or it can implement future reforms that may not make a difference. Faced with the proverbial ‘Sophie’s Choice,’ IBC has subtly suggested the best action to take in this case might be to take no action. “We have to continue to make the case that the net effect of these changes is no effect,” says Forgeron. “We still have a problem, consumers still have a problem, that costs are growing much faster than premiums and costs continue to grow. If the net effect of all of this is to have no effect, the old adage ‘to do nothing is to do something’ very much applies here.” That would be too bad, Halpern says. “I think quite frankly that it’s in the interests of the insurance industry that the minister does [act on FSCO’s report],” he said. “The industry doesn’t see it that way, but I think the industry is making a mistake in not coming out more in support of this comprehensive package of reform, and working with those who are interested in reform to get this thing done in a way that ensures we get better access to justice, but also that the insurers get a reasonable profit for the risks that they undertake.” The minister’s office did not return phone calls requesting an interview. Two insurers who have spoken to the minister have suggested he does plan to act in June; based on these discussions, it appears the minister has some definite ideas in mind. Public notices have been put out saying the minister will seek further comment from stakeholders in May, and will make some type of decision about acting on the report in June. Assuming he does act quickly on the file, most believe the reform package is not a strong enough remedy for a patient that is in critical care. May 2009 Canadian Underwriter 33
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Guarding Against RIMS 2009 Conference
Vanessa Mariga Associate Editor
the Unseen Panelists at the RIMS 2009 Conference in Orlando, Florida discussed the need for a more focussed approach to insuring intellectual property and reputation risks. Guarding against intangible risks — reputation risk and the protection of intellectual property, for example — served as a hot topic at the 2009 Risk and Insurance Management Society Conference in Orlando, Florida. Technology is evolving and affecting communication at an alarming pace, speakers at the conference said. And if risk managers fail to keep up, they could be facing multi-million dollar lawsuits, damaged brands and faltering stock values. The stakes are high with these types of risks, but there is rarely a clear-cut risk transfer program to help insure against these losses, conference panelists said.
34 Canadian Underwriter May 2009
PROTECTING IDEAS Risk managers must increasingly grapple with finding coverage for their organizations’ intellectual property (IP) in the absence of an insurance product specifically dedicated to IP infringement, said Chris Casper, director of management, liability and surety at Tave Risk Management. The importance of IP assets has increased significantly over the past 30 years, he said. Less than 25% of companies’ assets were IP-related in 1975, but that number skyrocketed to between 70% and 80% in 2008. “What does that mean?” said Casper. “It means companies are generating more and more of their revenue through IP. It also means companies are much more likely to be aggressive in the protection of their IP, including bringing suit against those that infringe upon their assets.” Patent claims significantly outpaced shareholder class action claims in the United States in 2008, he noted. Last year, 1,448 patent claims were brought forth in the United States,
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compared to only 210 shareholder claims (which marked a 40-year high). “The frequency for patent claims far outpaces the frequency for D&O claims, but if you look at the D&O space, there is an entire industry based around managing the liability of that area,” Casper said. “The insurance community has yet to embrace, on a relative basis, the IP world.” Although no insurance product is specifically dedicated to the protection of IP, risk managers can explore four different types of coverage to protect their IP from infringement (and against accusations that their organization is infringing on another’s IP). Robert Fletcher, president and CEO of Intellectual Property Insurance Services Corporation, listed the coverage options as follows: • Abatement: a policy that pays outside legal expenses incurred to enforce IP against alleged infringers; • Defence insurance: a policy that pays outside legal expenses incurred to defend against charges of IP infringement; • Multi-peril: a policy providing firstparty coverage for loss of value because of an adverse consequence related to the loss of an IP infringement lawsuit; and • Asset-backed IP insurance: A policy that allows the owner to use his or her intellectual property as collateral for a loan. Only the last of the options require a valuation of the patent, Fletcher said. The first three coverage options require “the amount in controversy” in order for the IP to be underwritten. The amount in controversy is the sum of the patent holder’s recovery of investment, the potential loss of market share and the increased risk of peril because of the increased litigation factor (the more your product is out on the market, the greater the chance of IP infringement).
MANAGING REPUTATION The speed of communication and news distribution has changed dramatically in the past few years, and risk managers need to increase the speed with which
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they react to a reputation-damaging event by reaching out to the media immediately, said panellist Richard Levick, president and CEO of Levick Strategic Communications. In order to better guard against public relations disasters and reputation risk in the Internet age, risk managers need to familiarize themselves with the “highauthority bloggers” that track their industries, Levick said. He defined a high-authority blogger as “someone who blogs, but has someone with credibility that links to them.” Examples include, thedeal.com, which is linked to the New York Times, or the HuffingtonPost.com. “They are the early-warning signs [of a public relations issue],” Levick said,
High-authority bloggers “are the early warning signs [of a public relations issue],” Richard Levick said. “And they are also the people who tell journalists what stories to cover... Ignore the blogosphere at your peril.” referring to the well-connected bloggers. “And they are also the people who tell journalists what stories to cover.” Risk managers and their organizations can no longer rely solely on newspapers or television news networks to tell them whether or not they have a public relations problem on their hands within the first 24 hours of a potentially damaging event, he said. Levick pointed to a recent incident at a pizza chain, in which employees videotaped one another tampering with the food and then posted the video on their blogs. Within the first 24 hours of the event, only 7,000 people had seen the blog. But over the next 24 hours, more than 250,000 people watched the video, severely damaging the pizza chain’s reputation. Millions of other viewers have since seen the posted video.
“The speed at which communication now works is far faster than our ability to comprehend or deal with,” Levick said. “The race between newspaper and television news and the blogosphere is over. Ignore the blogosphere at your peril.” The traditional response to a crisis has been to “duck and run” Levick said. But that approach will only lead to more damage, he stressed. During the peanut crisis earlier this year, in which the peanuts being processed at a Georgia plant were tainted with salmonella, a viral video of sick grandmothers and children found its way onto the Internet, Levick said. “Do you know how long it took to put that video up [from the point in time when the crisis broke]? Less than 24 hours,” he said. “Do you know who put it up? Two plaintiff lawyers in California.” By ducking and running, organizations are “guaranteed to lose,” he stressed. “Your stock price will go down, your brand will be marred and there will be a higher likelihood of class action litigation.” Levick said every crisis is a Shakespearean tragedy of sorts. “There is a hero and a villain,” he said. “Those are the only two roles.”The party that moves first gets to choose the role it plays, he added. “The plaintiff bar and the regulators are already moving at a speed in which they are anticipating crises, so that means they’re already taking the hero role.” By communicating very quickly with these groups during the early stage of a crisis, and by cooperating with regulators, an organization can become part of the solution, Levick said. The company at the centre of a public relations storm doesn’t necessarily have to assume the role of the villain. “One of the things you can do in these situations is cooperate, cooperate, cooperate [with the regulator]. If you cooperate, then [the regulators] will make you a part of the solution. You do not want them as an adversary.”
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Finding the Vanessa Mariga Associate Editor
Black Sheep
Brokers are now acutely aware of the importance of accurately assessing the financial strength of their markets. But what are they to make of the various measurements of a company’s solvency during these recessionary times? In the current economic climate, brokers and risk managers are finding themselves awash in information from ratings agencies, regulators and news outlets. Making sense of the facts and opinions has always been a key feature of their due diligence, but now, perhaps more than ever, brokers and risk managers are reportedly investing more time and energy into monitoring the financial health of Canadian property and casualty insurers.
36 Canadian Underwriter May 2009
Questions abound as to the credibility, quality and timeliness of available information. Are there factors in a rating that should be given more consideration than others? Is a financial strength rating (FSR) a better barometer of resilience than a minimum capital test (MCT)? If a company has a good financial strength rating (FSR) but a negative outlook, at what point is the gamble too great to bind a policy with the insurer? What other red flags serve to warn a risk manager or broker that an apparently solid carrier may now be showing signs of erosion? And if the parent company of an insurer shows signs of stress but its Canadian branch remains strong, what affect does the parent company have on the Canadian operation’s future?
FSR v. MCT The two main regulatory solvency tests applied to property and casualty insurers in Canada are the MCT and the Branch Adequacy of Assets Test (the BAAT, used for branches of foreign companies), says Joel Baker, president of MSA Research Inc.
Illustration Š Sarah Beetson/www.i2iart.com
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“Both of these tests are quantitative, insofar as they are calculated using riskbased factors and other formulae,” he says. Exceeding regulatory thresholds for these tests is critical. “Companies that fall below the threshold of 150% will in effect be taken over by regulators,” Baker says. “OSFI often sets higher targets than 150 for companies, depending on their risk profiles, lines of business or financial structure. Risk managers and brokers should be aware of company MCT/BAAT levels and any trending in that metric.” Foster Cheng, an associate at Standard &Poor’s (S&P’s), says the MCT scores of Canadian property and casualty insurers currently average closer to 200%. FSRs, on the other hand, are the opinions of rating agency analysts on the insurers’ ability to meet its claims-paying obligations, says Joseph Burtone, assistant vice president at the A.M. Best ratings agency. With an interactive rating, the FSR will include criteria such as capitalization and underwriting performance in addition to other publicly available information. But, the analyst’s opinion will also be shaped by the insurer’s competitive position in the marketplace, as well as interaction with the insurer’s management on risk management practices and growth strategy. In its recent report, Interpreting Financial Strength Ratings in Light of Improving Insurer Supervision, S&P’s argues that the FSR is more relevant than a capital test. That’s because the FSR is based on an ongoing discussion that takes into account more than just the pure mathematical factors of the equation, whereas a capital requirement test is a point-in-time measurement. “In our opinion, historic capital adequacy is a poor lead indicator of insurer failure,” S&P’s says in its report. “We believe categories such as competitive position, ERM, management/corporate strategy, financial flexibility and operating performance are better leading indicators of long-term financial strength.”
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But FSRs have challenges as well. Baker suggests some FSR ratings suffer from some inherent conflicts, the first being that the rated insurer pays for the rating. “Sometimes insurers decide to stop being rated once their rating falls below a certain level,” he says.
“A congregation of ratings around the ‘A-’ level, I think, is because the companies that we interact with understand what our criteria and methodologies are and they operate their companies in a way to continue to support those ratings,” says Charles Huber, senior financial analyst at A.M. Best. “It is difficult to move from a ‘B++’ to an ‘A-’ just because, as you get into the higher levels of rating, the criteria becomes more stringent. If your company is run-of-the-mill and there isn’t anything that stands out, then you’re probably going to cluster around where the majority of other companies are rated.”
BALANCING THE GOOD WITH THE BAD
In tough times, many ratings are clustered around the ‘A-’ level. Once a rating falls into the ‘B’ level, the decline is rapid and climbing back out is very difficult. This rating cliff phenomenon is very unfortunate. As well, Baker says buyers inadvertently create what are known as “rating cliffs.” “That is, rating agencies are hesitant to drop company ratings below the ‘A’ level out of concern that buyers will abandon the insurer,” Baker says. “So in tough times, many ratings are clustered around the ‘A-’ level. Once a rating falls into the ‘B’ level, the decline is rapid and climbing back out is very difficult. This rating cliff phenomenon is unfortunate.” A.M. Best says there is no such thing as a “ratings cliff,” adding that companies merit whatever ratings they are assigned.
In recent months, many companies — as well as entire sectors of the property and casualty industry — have been given negative outlooks by various rating agencies, despite strong FSRs. This poses another question: If a company has received a strong FSR, but has a negative outlook, how does a broker or risk manager balance the current strength against the potential for problems in the near future? Donald Chu, director of financial institution ratings at S&P’s Canadian branch, explains his agency has two options if it feels a rating may change. The agency may issue an outlook on the credit (and these days, negative outlooks tend to outpace the positive outlooks), or it may put the credit on CreditWatch negative. “Typically, if we were odds makers — and it’s never a perfect world — but let’s say there was a 1-in-3 likelihood of a ratings action over the next two years, then that’s an outlook change,” Chu says. Conversely, “a CreditWatch placement means that there is a 1-in-2 likelihood that we would do a downgrade on the credit over the next 90 days. “The point here is that the time horizon [for a CreditWatch placement] is shorter and the likelihood of movement on the rating is shorter as well.” A.M. Best outlooks indicate there is a
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potential rating change over the intermediate term, generally 12 to 36 months, Burtone says.Analysts take into consideration any trends that occur over a longer period, he explains. “If you see a trend where capitalization has declined three years in a row, and the company is projecting that it’s going to decline even further, well, now it’s a trend.Year 2008 was a terrible year for several different aspects. Is it a trend? No. But in Canada we did see some deterioration in 2007 that continued into 2008, not just from the underwriting perspective, and now you throw in the investment performance and you have three years in Canada of deteriorating operating results and some companies with declining capitalization — at this point, the trend is beginning to shape.” Huber says it’s critical for the broker and risk manager to understand the meaning of each level of rating and the criteria for each when weighing the FSR against any outlooks or projections. “If it’s an ‘A++’ rating, but the outlook is negative, the rating may only come down to ‘A+’ and it’s still a superior company in our opinion. Just not as superior as it once was.”
RED FLAGS AND BEACONS OF STRENGTH These days, brokers and risk managers are trying to absorb as much information as possible when making their decisions. Many are taking into consideration more than just the FSR and MCT. “I think if I were to choose an additional area that brokers and risk managers should investigate, I would say that claims development exhibits would be most important,” Baker says. “Companies that under-reserve are at a much higher risk of running into trouble. Sustained adverse development over time can erode capital and signal that reserving is chronically inadequate. Inadequate reserving often goes hand-in-hand with under-pricing.” Huber also suggests monitoring growth strategies as an indicator of health or stress. “We’ve done some statis-
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pressure on the company and could impact the results and create an issue with the rating.”
PARENTAL INFLUENCE
One of the major reasons why a company fails is because it grows too fast — especially in a soft market. Its products get under-priced, its reserves are inadequate and the infrastructure is not built into the company so that it is able to support all of the business that it’s taking on. tical study on why companies have failed,” he says. “One of the major reasons why a company fails is because it grows too fast — especially in a soft market. “Its product gets under-priced, its reserves are inadequate and the infrastructure is not built into the company, so that it is able to support all of the business that it’s taking on.That is one of the major reasons why a company fails.” Burtone says the signs of growth should not always be interpreted as a red flag, though. “Growth is not always a bad thing,” he says. “If you are growing into lines of business that you have expertise in, then we’re not concerned. But if you’re going into lines of business that you do not have expertise in, or that you do not have the infrastructure to handle, that puts
Many Canadian property and casualty insurers are outposts of larger parent companies. Thus, even though a Canadian branch may operate within one of the world’s more stringent regulatory environments, and even though it may be among the most conservative players on the investment portfolio front, it may still bear the weight of its struggling parent company receiving a bailout from a foreign government or receiving a downgrade from ratings agency analysts. “I guess from the broker perspective, the best way to look at this is that the Canadian subsidiaries are a separate operation from the group and they are regulated by the Canadian regulator,” Chu says. “So, technically speaking, if the Canadian regulator wanted to re-assess the [insurer’s] assets they could.” Hypothetically, when an insurance company is part of a larger financial institution, any one of the group’s subsidiaries’ ratings are tied to the larger group. But “when we generally look at a credit, we look at it on a standalone basis,” Chu says. For example, an S&P analyst would look at a Canadian subsidiary on its own without any of the benefits of the parent company. But the rating in the public domain includes the benefit of the large and strong group in general. “Often what we’ll do is take that standalone rating and raise it a couple of notches depending on how involved or supportive the group is to those specific operations,” Chu continues. “That’s the other thing to balance out: the only thing that you see is the final rating. As the strength of the parent continues to weaken and decline, that is going to be reflected in the Canadian rating. But what you don’t see is the standalone rating of those Canadian operations all by itself. Ultimately we speak to the financial strength rating of the company based on everything that we know to date.”
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Editor
Vanessa Mariga Associate Editor
Page 12
Wild Ride
2009 Swiss Re Breakfast
David Gambrill
9:42 PM
After two years of record profits in 2006-07, the rollercoaster plunged downwards in 2008 Q4, and expect the ride in 2009 to be scary as well. For the Canadian property and casualty insurance industry, the year 2008 represented a number of dubious achievements. It was the first time, for example, the industry saw its combined ratio increase by more than 7% over the course of a single year, which it did between 2007 and 2008. It was the first time the industry reported an overall underwriting loss since 2002 (a Cdn$290million loss, to be exact). It was the first time since 2001-02 that industry capital fell. (This has happened only three times since 1975, when such capital statistics were recorded.) To keep this last point in perspective, though, industry capital in 2007 was at its highest level
40 Canadian Underwriter May 2009
since capital amounts were first tracked in 1975; at more than Cdn$30 billion, it remains at the second-highest level in 33 years. The Insurance Bureau of Canada (IBC) observed all of these sobering trends upon opening the 2009 edition of the Swiss Re Breakfast, held on Apr. 2 this year at the National Club in Toronto. “Looking at summary ratios, it’s clear that the big story in 2008 is the story of claims costs running ahead of premium levels,” said Barbara Sulzenko-Laurie, IBC’s vice president of policy. The summary ratios compiled by the IBC pretty much summed up the general financial trend for the industry after the U.S. market shakedown in September of 2008. In most of the meaningful financial categories, 2008 represented a tough year. Even though Canada was not affected as significantly by the U.S. market crisis last year as its American counterparts, the combined ratio of Canada’s property and casualty industry nevertheless increased from 93.8% in 2007 to 101.3% in 2008. Over the same period, the loss ratio went from 64.1% to 71.1%. The industry’s overall return on equity (ROE) plunged from 15.3% to 6.1%, although there was a wide range of varia-
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tion between individual companies in this regard. And minimal capital test (MCT) scores declined from 234.1% in 2007 to 219.4% in 2008. IBC noted the severity of the bad news was somewhat blunted by the fact that primary insurers released Cdn$1.42 billion in reserves in 2008.Adjusting for the release of reserves, Canadian primary property and casualty insurers suffered an underwriting loss of Cdn$1.71 billion, the worst such loss since 1995.
CONTRIBUTING FACTORS IBC linked the 2008 results to four primary factors: the constitutional challenges in Alberta and the Maritime provinces, the lack of government action on Ontario auto in 2008, climate change and the credit crisis and recession. Among the four factors listed, the state of the auto product in Canada dominated the discussion. [Within days of the Swiss Re breakfast, Ontario’s insurance regulator, the Financial Services Commission of Ontario (FSCO), released a long-awaited report on its mandatory five-year review of the province’s auto insurance product. For industry comment on the review, please see the cover story on page 24.) Turning to the constitutional status of caps on claims for minor auto injuries, IBC noted the direct impact of the court decisions in Alberta and Nova Scotia on primary insurers’ auto liability loss ratios. In Alberta, where the province’s Cdn$4,000 cap on minor auto injuries was declared to be unconstitutional and eliminated, insurers’ auto liability loss ratios were 25% higher in 2008 than they were in 2007 (jumping from just over 50% to just over 75%). In Nova Scotia, where the province’s Cdn$2,500 cap on claims payments for minor auto injuries was found to be constitutional (and since appealed), primary insurers in the province saw their loss ratios jump by 20 points. Similar constitutional challenges to caps in P.E.I. and New Brunswick are expected to be heard sometime in 2010; pending any decisions in these jurisdic-
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tions, IBC said, auto liability loss ratios in these two provinces are up, although not nearly to the degree as seen in P.E.I. (up six points) and New Brunswick (up two points). IBC also calculated the capital at risk from the constitutional challenges in both Alberta and Nova Scotia.At the time of the decision in Alberta, IBC estimated Cdn$425 million in unrecoverable costs from open claims would be at risk. Going forward, the IBC added, Alberta would see an additional Cdn$330 million of capital at risk each year until the
Ontario auto insurers anticipated a Cdn$390-million loss in auto insurance in 2008. Such a loss is particularly alarming because net earned premiums for Ontario’s auto insurance represent 27.2% of the Canadian P&C insurers’ net earned premiums for the entire country, across all lines. Supreme Court of Canada resolves the issue in the future. In Nova Scotia, Cdn$125 million of capital is at risk each year, assuming no appropriate premium adjustments are made in the interim. Estimates of capital at risk based on future cases in New Brunswick and P.E.I. were not available. In Ontario, the auto accident benefit loss ratio stood at 124.2%, more than double that of anywhere else in the country. Ontario auto insurers anticipated a Cdn$390-million loss in auto insurance in 2008. Such a loss is particularly alarming, Sulzenko-Laurie noted, because net earned premiums for Ontario’s auto insurance represent 27.2% of the Canadian P&C insurers’ net earned premiums for the entire country, across all lines. In terms of other challenges for 2009, IBC noted both climate change-related weather disasters — including a series of
rainstorms that drove up the frequency of property claims in Canada, in the absence of any single major storm — ranked high on the list. The ongoing credit crisis and recession also figured as a major event, with the global insurance industry collectively writing down more than US$200 billion as a result.
THE RISK OF INFLATION Brian Gray, chief underwriting officer at Swiss Re, said one upshot of the recession, low interest rates, might present another challenge for insurers to watch for in the future. Not to say that low interest rates are a problem during recessionary times, but interest rates are currently depressed to such an extent that they might pose a problem for insurers when they start to increase in the future. “For years insurers have benefited from the fact that year after year, as casualty claims unwind, inflation tends to be a little bit less than when the claim started,” Gray said. “That’s not likely over the next decade.” Nearly all of the values that are used as a basis to determine property damage are the function of values that increase with inflation — including wage and the cost of repairs or replacements for property damage. For the time being, interest rates do not present an immediate problem, Gray said. “But the challenge is that next year the business we’re writing now gets settled in the claims process about five or six years from now, and it would be settled according to whatever the value of the claim is then.” The challenge lies in the fact that insurers underwriting the policies now don’t know what claims inflation will look like in the future or what tort environment will exist, as governments get more lenient in terms of settlements given the economic situation. To protect themselves, insurers can invest in assets that are defensive against inflation, Gray suggested. They can also defend themselves through price, he added.”
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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
Don Forgeron [1] is taking over the helm as IBC’s new president and CEO. “I speak for the entire board of directors when I say I am delighted with today’s announcement,” said IBC board chairman Rowan Saunders, who is also president and CEO of RSA. “We conducted an exhaustive search for a leader with a passion for our industry and the right vision for its future. The search committee was impressed by the quantity and quality of applicants, specifically in terms of their backgrounds and their capacities for leadership at a senior level. From their ranks, Don emerged as the clear choice.” IBC’s board unanimously approved the selection of Forgeron, who immediately assumed the post. Forgeron has an extensive background in government relations. He is currently the organization’s vice president of Ontario. Prior to that, he was IBC’s vice president of the Atlantic region for 15 years. Forgeron has held leadership roles in IBC’s insurance fraud division and has managed an array of national files, including availability of insurance for the
44 Canadian Underwriter May 2009
commercial and not-for-profit sectors and rate regulation reform across the country.
2
Carla Blackmore, director of commercial programs at Zurich North America Canada, retired as of Apr. 30, 2009. Blackmore joined Zurich in 1975. Her career spanned many areas of the organization: she was a commercial regional manager and had experience in the organization’s sales and marketing and Canada segments, where she was most recently a programs manager. Blackmore has been an avid volunteer throughout her career, particularly with the Ontario chapter of the Women in Insurance Cancer Crusade (WICC) and the Starlight Insurance Gala.
3
Kingsway Financial Services Inc. has appointed Colin Simpson [3] as president and CEO. Serge Lavoie has been appointed president and CEO of Kingsway’s business in Canada. Simpson was previously the chief operating officer and executive in charge of the company’s transformation program. Lavoie has served as presi-
1 dent and CEO of Jevco for the past two years and has been with the company for 12 years. The appointments follow an announcement in early February that the company would be consolidating Kingsway Financial’s operations in Canada into a single operating unit. Immediately after its annual shareholders meeting, Larry J. Swets resigned as a director, paving the way for Joe Stilwell, principal of the Stilwell Group, to be appointed as a director.
4
Cunningham Lindsey Canada Claims Services Ltd has added two new members to its business development team. Ami Barilla [4a] was appointed director of sales and marketing for the western region. Andrew Rayner [4b] joined Cunningham Lindsey as the director of sales and marketing. “Both Ami and Andrew have proven abilities to de-
2
3 velop sales potential in new market areas while growing existing market share,” said Albert Poon, CL’s vice president of strategic business development and claims management services.
5
Supreme Collision has committed to being a National Sponsor at the Platinum Level of the Women in Insurance Cancer Crusade (WICC). This is the first time a collision repair centre has committed to being a major WICC sponsor, according to Jean Faulkner, WICC Ontario board co-chair. “As an organization we have
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rience, spanning underwriting (personal and commercial lines), business development and marketing, including senior management positions based in Ontario and Alberta.
4a
4b
5
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always supported a variety of charities within our respective communities,” Marty Reddick [5], president of Supreme Collision, said in a release. “It was important for Supreme Collision to support a charity that touched people of all ages and helped to reduce their suffering and still allow them to retain their dignity.”
6
York Fire & Casualty Insurance Company has appointed Martin Delage [6] to be its president and chief operating officer. “Delage is very familiar with York Fire,” the company said
in a press release. “He has been a key player as the liaison between York Fire and La Capitale General Insurance Company since La Capitale’s purchase of York Fire in October 2008.” Delage joined La Capitale in 1992 and has held progressive leadership positions in the areas of human resources and operations. Most recently he was vice president of strategic operations at La Capitale. In addition, York Fire announced the appointment of Dave Smiley as York Fire’s vice president of operations. Smiley has almost 20 years of extensive insurance expe-
7
Claudine Davoodi has been appointed director of claims operations in Montreal for Crawford & Company (Canada) Inc. Additionally, Richard Viau has been appointed director of Crawford & Company (Canada) Inc.’s global technical services division in Quebec. Davoodi will have operational responsibility for the claims operations in Montreal and will assist in leading and directing the growth and market strategies. She has more than 30 years of experience in the insurance industry and spent the majority of the past 15 years in senior claims management operations roles in both Ontario and Quebec. Viau has also qualified as a global technical services executive general adjuster. He has more than 35 years of claims and operational management experience. Licensed in all lines, he has particular expertise in commercial and industrial property losses.
8
SCM Insurance Services Inc. and CEO Larry Shumka have received the ‘Company of the Year’ award from the Edmonton Economic Development Corporation (EEDC). “This is a tremendous honour,” said Shumka “To receive this award from my peers, many of whom have outstanding accomplishments and achievements themselves, means a lot to me and to all of the employees of SCM.” Owned by the City of Edmonton, EEDC is a unique, autonomous company responsible for marketing Greater Edmonton’s economic opportunities to the world.
9
Totten Insurance Group Inc. has acquired Norac Intermediaries. Norac is an intermediary specializing in the placement of casualty business for brokers in the province of Quebec. Norac/Totten will now have enhanced markets, higher binding limits and new and broader liability facilities, both international and domestic, according to a release. “This joining of forces will also enable Totten to provide expanded casualty insurance offerings to the 2,000 brokers they deal with across Canada.”
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WICC Ontario held its 13th annual gala dinner — Zen Garden — on Apr. 8, 2009 at The Westin Harbour Castle Hotel in Toronto. WICC Dinner co-chair and evening emcee Michael Butler introduced WICC co-chairs Carolyn Horan and Jean Faulkner, who presented Peter Goodhand, president of the Canadian Cancer Society, Ontario Division, with a cheque from WICC for Cdn$250,000. Economical Mutual Insurance Company, Hallmark Insurance Group and Simmlands Insurance each received a Gold Flame Award. Enterprise Rent-aCar Canada received the Lew Dunn Memorial Award. The Honourable Order of the Blue Goose Ontario Pond received the WICC Hall of Flame Award. Marilyn Horrick, past-dinner chair, recognized WICC Tributes in a very moving presentation. It was also announced that the Canadian property and casualty insurance industry has raised more than Cdn$4 million for cancer research since WICC’s inception in 1996.
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Zurich Financial Services chief economist Daniel M. Hofmann travelled from Switzerland to meet with Canadian insurance industry leaders the week of Apr. 13. Hoffman presented to audiences in both Montreal and Toronto, and provided his outlook on the state of the economy and the impact of the financial crisis on our industry. Along with his role as Zurich’s chief economist, Hofmann teaches international monetary affairs at the Zurich Management School and has been published in a number of books and international journals.
See all of our Insurance Industry Event Photos Online within the
ONLINE PHOTO GALLERY at canadianunderwriter.ca/gallery
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Toronto’s financial district was filled with the sounds of Mark ‘Bird’ Stafford, as CCR celebrated its 8th Annual Blues Night. Guests, or ‘cats,’ shed their winter blues and welcomed spring while sampling hors d’oeuvres and bevies.
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Members and friends of the Risk and Insurance Management Society descended upon Orlando, Florida for the RIMS 2009 Conference on Apr. 19-23. Delegates kicked off the event at Epcot Centre for an around-theworld-themed Opening Reception. RIMS president (and proud Canadian) Joe Restoule offered words of welcome and acknowledged many colleagues were unable to attend the conference due to difficulties precipitated by the economic recession. Nevertheless, he remained confident the risk management community would emerge stronger than ever following the recovery of the economy. After that, it was down to business: delegates were able to choose from a plethora of educational seminars and peruse the more than 400 exhibitors that filled the exhibit hall.
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Crawford & Company (Canada) Inc. extended a warm Florida welcome to Canadian delegates of the Risk and Insurance Management Society in Orlando. The Moon Fish Restaurant set the stage for Crawford’s RIMS dinner, where delegates were treated to four courses with wine pairings.
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Marley Drainville, a risk manager at Enerplus Resources Fund, received the Ron Judd Heart of RIMS Award at the Risk and Insurance Management Society (RIMS)’s 2009 Annual Conference and Exhibition in Orlando, Florida. The award pays tribute to the legacy of Ron Judd, who served as RIMS executive director for 22 years. Individuals are nominated by chapters for outstanding performance in furthering risk management at the chapter level. “Words cannot possibly express my gratitude to RIMS, the board of directors and the nominating committee for this prestigious award,” Drainville said in her acceptance speech. “I never met Ron Judd, however his
Announcement
accomplishments and the mark he left on the risk management industry was obviously of great positive contribution and I feel extremely honoured to be included in such auspicious company.” Drainville recalled the meeting at which she found out she was both nominated for and won the award. “My colleagues and dear friends, Joe Restoule, our esteemed president of RIMS, Selina Lim, Angela Haywood and Phil Corbeil asked to meet with me,” she said. “I had no idea of their intent…By the time Joe finished explaining what they had done and the result, I was absolutely shocked, humbled, appreciative and completely overwhelmed!”
Giuliano Manazzone, FCIP, CRM Walter Leszkowicz, Ontario Regional Vice President, of The Economical Insurance Group® is pleased to announce the appointment of Giuliano Manazzone, FCIP, CRM, to the position of General Manager, Metro Toronto Operations. Giuliano brings over 19 years of insurance experience to this role. He has held several positions of increasing responsibility with two large insurers. Giuliano started with TEIG in 2002. During his time at TEIG, Guiliano has won several awards, recognizing his professional achievements. In his new role, under the umbrella of Metro Toronto Operations, Giuliano is responsible for leading and managing TEIG’s Metro Personal and Commercial Insurance operations. 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.
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Canadian industry representatives at the Risk and Insurance Management Society (RIMS)’s 2009 Conference in Orlando, Florida gathered for the RIMS Canada Council (RCC)’s Canada Night Reception at the Peabody Hotel for cocktails and hors d’oeuvres that included beaver tails. SCM Insurance Services and the Canadian Litigation Council sponsored the event. During the evening, The RCC donated Cdn$30,000 to the William H. McGannon Foundation. Following suit, SCM Insurance Services also announced a donation of Cdn$8,500 and the Canadian Litigation Council a donation of Cdn$1,500, bringing the total to Cdn$40,000.
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Cunningham Lindsey Canada held a cocktail reception on Apr. 23 in Toronto at Forte Bistro and Lounge. Cunningham Lindsey technical adjusters from across Canada were on hand to meet and greet more than 150 guests who attended, representing all sectors of the insurance and risk industry.
ADVERTISERS’ INDEX ACE INA Insurance
7
Applied Systems Canada, Inc.
2 (IFC)
Assured Automotive
21
Blouin, Dunn LLP
5
CARSTAR Automotive Canada
59 (IBC)
Cunningham Lindsey Canada
9
Great American Insurance Group
23
The Guarantee Company of North America Intact Insurance Company
49 60 (OBC)
Insurance Institute of Canada
15, 42
Peace Hills Insurance
13
RSA
27
Supreme Collision WICC
31 19, 29, 41
Zurich Canada
See all of our Insurance Industry Event Photos Online within the ONLINE PHOTO GALLERY at
canadianunderwriter.ca/gallery
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The Honourable Order of the Blue Goose International, Ontario Pond held its 9th Annual Scotch Nosing at the Rosewater Room in Toronto. More than 150 guests attended the sold-out event and were treated to some of Scotland’s rarest and finest single malts, along with a four-course meal. Ed Patrick, one of Scotland’s finest international scotch whiskey experts, was on hand to share his expertise. Proceeds of the event were donated to Women in Insurance Cancer Crusade and the event was sponsored by Blouin Dunn, Barristers & Solicitors, GIffen Koerth Smart Forensic, Hughes Amys LLP and Masterclean Contracting and Cleaning.
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The wonderful thing about common ground is what you can build on it.
As a broker you’re successful because your first priority is your only priority; 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.
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