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
DECEM B ER 2 0 1 0 A Business Information Group Publication #40069240
Keeping the Wolves at Bay Primary Insurance Market 2011 Outlook
Insuring Overland Flood By Paul Kovacs and Sharon Ludlow
Analytics 2.0 By Marlowe Leibensperger
P ict
ure by O age 4, so wen, Aviv a em n of ploy Laur ee a Fr anci s
Season’s greetings from our family to yours Thank you to all our Broker Partners for another year of service and commitment to your customers. Have a safe and happy holiday season and best wishes for the New Year.
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VOL. 77, NO.12, DECEMBER 2010 CANADA’S INSURANCE AND RISK MAGAZINE. PUBLISHED BY BUSINESS INFORMATION GROUP
www.canadianunderwriter.ca
COVER STORY
Primary Insurance Market 2011 Outlook Primary insurers in Canada’s P&C market see an increasing number of wolves at the edge of the woods. Escalating water damage claims and the uncertain status of the Ontario auto reforms are typical dangers threatening the bottom line. But now insurers are cautious not only about a shrinking economy (with its low interest rates), but an expanding economy (with inflationary pressures on claims costs).
30 FEATURES
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Staged Collisions
Investigating AB Claims
Choreographing fraudulent car crashes to extract accident benefits payments from Ontario’s auto insurance system is a key concern for insurers and politicians alike.
As accident benefits fraud takes a place in the political spotlight, insurers and adjusters need to be thorough in their investigations of AB personal injury claims.
BY RALPH PALUMBO
BY DONNA FORD
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16 Cell Phones
54 Facility Association
Inconclusive science investigating a link between regular cell phone use and brain cancer has left insurers cautious, but not panicked. Should insurers be concerned about a potential wave of claims?
Ontario’s Facility Association Residual Market (FARM) has not seen an anticipated increase in its numbers, but Risk Sharing Pool (RSP) numbers are unexpectedly on the increase.
BY CRAIG HARRIS
BY DAVID J. SIMPSON
26 Emergence of Mergers 58 It’s a Date! RSA Canada recently acquired GCAN Insurance. Reflecting on the deal, RSA Canada’s president and CEO, Rowan Saunders, says conditions are right for future M&A activity in Canada’s P&C marketplace.
Canada’s solvency regulator and Ontario’s insurance regulator established solid timelines for reinsurance guidelines and Ontario auto reforms, respectively, during IBC’s 10th Annual Regulatory Affairs Symposium.
BY DAVID GAMBRILL
BY DAVID GAMBRILL
Overland Flood
Analytics 2.0
46 Customer Satisfaction
The Institute for Catastrophic Loss Reduction (ICLR) and Swiss Re have jointly published a paper encouraging the Canadian P&C industry to consider insuring overland flood for Canadian homeowners.
Machine learning analytic methods, fused with traditional actuarial and statistical methods, can help optimize an insurer’s ratings analysis by picking out the truly predictive data points and correlations.
J.D. Power surveys indicate consumers are increasingly pleased with the service they are getting from Canada’s property and casualty industry.
BY PAUL KOVACS AND SHARON LUDLOW
BY MARLOWE LEIBENSPERGER
BY LUBO LI
December 2010 Canadian Underwriter
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VOL. 77, NO.12, DECEMBER 2010
PROFILE
10 Lifelong Learning Tina Gardiner joins the ranks of those she considers mentors and teachers upon receiving the prestigious 2010 Donald M. Stuart Award. BY VANESSA MARIGA
SPECIAL FOCUS
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Editorial
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62 Moves & Views 64 Gallery
Editor David Gambrill david@canadianunderwriter.ca (416) 510-6796
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Advertising Sales Christine Giovis christine@canadianunderwriter.ca (416) 510-5114
President Bruce Creighton Vice President Alex Papanou
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Canadian Underwriter December 2010
The forces of nature can strike at any time. Let’s discuss how to plug our defenses. As the Earth’s climate is changing, so are the frequency and intensity of floods and storms. What’s the answer: retreat from the most hazardous locations? Protect vulnerable areas with sea walls, drainage systems and better building codes? Or take measures to transfer the financial risk and rebuild? All we know at Swiss Re is that, as our climate changes, we must adapt apace. Which is why we’re helping countries and communities develop strategies to protect themselves against the forces of nature. Risk is the raw material we work with; what we create for our clients is opportunity. Plug into www.swissre.com
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EDITORIAL
e-Insurance
One day insureds will be clicking buttons to purchase, review, store, change, obtain advice or endorsements, and text and/or instant message service representatives about their policies. David Gambrill, Editor david@canadianunderwriter.ca
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A long time ago, when I was still typing university papers on an electronic word processor, the Internet was something about which only the U.S. Department of Defence knew. In its nascent stages, the online experience amounted to scanning static Web pages that displayed only the most basic information. The early Internet experience was very much like wandering through a glorified online incarnation of the Yellow Pages. There was a lot of hype back then about how the medium was going to democratize personal expression. In the early going, there weren’t many rules about what people could post by way of content. Early Web pages didn’t have the ‘form template’ — including the navigational tab structures we now all know and love. They used to be primitive, anarchic and creative. In those days, it was still up for grabs whether you could use the Internet to do anything beyond communicating. The Net made it quicker to find a company’s phone number, but that was about it. Those days have changed. The economy is defined by how people exchange goods and services, and so it’s to be expected that business ultimately ends up where the people are. The people started living on the Net, and so it was no surprise the Internet ultimately went corporate. Decades later, social networking is a big business now. Facebook is reportedly valued at about $41 billion. Twitter
was valued at about $1.4 billion in 2009 and LinkedIn was supposedly worth $2.3 billion as of July 2010. Also, consumers are purchasing more online: eBay, for example, is valued at about $39 billion. In today’s business environment, social networking is about more than just gaining another means of access to a youth market segment. The Internet has transcended its first evolutionary stage, which was simple access to information and ‘users.’ People are now actually conducting their business online. And it will be imperative for insurers and brokers of any channel to adapt to this transformation in the way of doing business. One day, if this hasn’t happened already, insureds will be clicking buttons to purchase, review, store, change, obtain endorsements or advice, and text and/or instant message service representatives about their insurance policies. They will not be reading letters mailed to them by snail mail, they will not be showing police officers the pink slips of paper they received in the mail, they will not be faxing signatures back and forth, they will not be talking to representatives at call centres to change or update policy information. They will be able to do all of this while on their mobile devices at the village marina or while hiking in Sudan. Earthquake victims will be texting their insurance company to make a claim when all but their mobile devices go up in smoke.
To the extent insurers and brokers can change their business models to adapt to this digital transformation, they can be assured of their long-term survival. It’s a tough time for insurers, to be sure, because right now they are catering to multiple generations, some of which still long for the traditional way of doing things — handshakes, signatures on paper documents, phone calls. The Internet is gaining popularity as the model by which business will be transacted in the future. One look at the moment of terror I see on my teenage stepson’s face whenever he discovers the computer isn’t working — that is, before he flips open his cell phone and texts his friends — tells me that as long as the Internet is available, he isn’t likely going to consume anything requiring more than a click of a button. Like it or not, he is a representative of the future generation; cyberspace is where he lives, and he and his peer group will be the future consumers of insurance products. For the insurance industry, it’s no longer a matter of figuring out how to use the Internet to communicate information about product ideas. It’s a matter of evolutionary business survival. Simply put: in 10 years, you won’t be making any money if you can’t reach out to the younger generation — and right now, they are living (and will be doing their business) in cyberspace.
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MARKETPLACE
Canadian Market BANKS TAKE LONG-TERM VIEW ON LOBBYING FOR RIGHT TO SELL, MARKET INSURANCE Banks are predictably lobbying the federal government during the 2012 Bank Act review to lift restrictions preventing banks from marketing and selling insurance products in their branches. But a recent Canadian Bankers Association (CBA) submission suggests banks see this more of a long-term than a shortterm project. For example, a CBA submission to the Department of Finance Canada contemplates a post-review scenario in which the restrictions remain. “In the period following the 2012 review, we would look forward to having an opportunity to engage the government and other stakeholders in discussions on enhancing consumer choice by removing unnecessary restrictions on the sale and marketing of insurance products,” the submission reads. By statute, the current mandatory Bank Act review needs to be completed by no later than Apr. 20, 2012.
CANADA TAKES AIM AT AUTO THEFT AND TRAFFICKING IN STOLEN CARS Parliament has passed new legislation aimed at getting tougher on auto theft and trafficking in stolen property such as cars. The new legislation con-
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Canadian Underwriter December 2010
tains provisions that: • create a separate offence of “theft of a motor vehicle,” which carries a mandatory prison sentence of six months for conviction of a third or subsequent offence when the prosecutor proceeds by indictment; • establish a new offence for altering, destroying or removing a vehicle identification number (VIN); • make it an offence to traffic in property obtained by crime; and, • make it an offence to possess such property for the purpose of trafficking. In addition, the act would allow the Canada Border Services Agency to detain suspected stolen property before it is exported from the country, which is intended to reduce the exportation of stolen vehicles from Canada by organized crime.
NEW BRUNSWICK BEGINS PROMISED REVIEW OF THE PROVINCE’S $2,500 MINOR INJURY CAP New Brunswick is officially pressing ahead with its promised review of the province’s $2,500 cap on minor auto injuries. A task force is expected to engage in public consultation and then issue a report sometime around May 2011. The working group will carry out its review and conduct consultations in two specific areas: • the adequacy of the $2,500 cap and the impact of an increase to the cap comparable to neighbouring jurisdictions on average premiums; and • the current definition applied to soft-tissue damage
and the effects of any recommended changes that might be made. The province announced on Nov. 4 that it is responding to concerns about the $2,500 cap on awards for accident victims and the legal definition of softtissue injury by creating a working group tasked with ensuring the current legislation is fair and reasonable. The chair of the working group will be selected by the provincial government and is expected to hand in a final report within six months.
Risk Management IMPACT OF SOLVENCY II ON GLOBAL INSURERS WILL BE “PROFOUND”: WILLIS RE The impact of Solvency II will be “profound” on the global (re)insurance market, and most companies will likely find their regulatory capital constrained for the first time, according to Willis Re. The fifth and final quantitative impact study (QIS5) of Solvency II was launched in August 2010, Willis Re notes in its report, QIS5: Solvency II Nears the Finishing Line. QIS5 forms the core of the standard solvency capital requirement calculation when Solvency II comes into force. The capital requirements under QIS5 are significantly higher and more rigourous than those set out in the previous impact study, QIS4, said the Willis Re report. And QIS4 requirements were no picnic.
“Currently few firms in Europe are regulatory capital constrained under Solvency I regulations,” the report says. “The QIS4 exercise in 2008 was completed by more than 1,400 firms across the European Economic Area. Of these, 11% failed to meet the solvency capital requirement and QIS5 is expected to produce higher failure rates.”
CRA CLARIFIES TAX CONFUSION AROUND “EXEMPT INSURANCE COMPANIES” IN BARBADOS Clarifying confusion in risk management circles, the Canada Revenue Agency (CRA) has confirmed business income earned by “exempt insurance companies” (EICs) in Barbados may generally be repatriated to Canada free of Canadian tax. An EIC is a company licensed under the Barbados Exempt Insurance Act (BEIA) to carry on “exempt insurance business,” defined as “the business of insuring risks located outside Barbados in respect of which premiums originate outside Barbados,” according to a Nov. 12, 2010 online posting by the Osler Tax Group. Under Canada’s Income Tax Act, “exempt surplus” dividends from a foreign affiliate may generally be received by a Canadian corporate shareholder free of Canadian tax, as long as the foreign affiliate is “resident” in a designated treaty country. Under the Canada-Barbados Tax Treaty, residency depends in part on whether
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MARKETPLACE
or not the company is liable to pay taxes in Barbados. Initially, the CRA held an EIC was effectively exempt from taxation in Barbados for a guaranteed period of 30 years, and thus not a “resident” under the Canada-Barbados Tax Treaty. But the CRA’s most recent clarification now agrees that EICs are “liable to tax” in Barbados within the meaning of the countries’ tax treaty.
Reinsurance
quiet period in the 1970s. “The research showed that this was at least partly because of external factors like greenhouse gases and aerosols and natural variations of solar radiation and volcanic activity,” Smith said.
PREDICTING EARTHQUAKE RISK SOONER Researchers in Canada are closer to predicting increased earthquake risk over periods as short as five to 10 years. A new physics-based method suggests potential
seismic activity over the next five years near Ottawa, Montreal and Quebec City. Over the next eight years, it suggests potentially significant seismic activity in British Columbia in Richmond, Delta and north of Vancouver.
Cunningham Lindsey offers expert claims handling for the most complex and specialized losses. To access our team of experts, write to us at corpservices@cl-na.com for a copy of our new Specialty Services Directory.
CLIMATE MODELS CAPABLE OF PREDICTING HURRICANE FREQUENCY AS FAR AS 10 YEARS AHEAD Climate models may be able to predict the frequency of North Atlantic hurricanes as far as 10 years ahead, well beyond the current seasonal timescale, Lloyd’s of London has reported. Lloyd’s awarded its inaugural Science of Risk Prize to Doug Smith of the U.K.’s Met Office for the finding. Smith’s research paper, Skilful Multi-year Predictions of Atlantic Hurricane Frequency, was published in the journal Nature Geoscience. “Our study is important for understanding the mechanisms of multi-year hurricane variability, and for the first time, we demonstrate a capability to make skilful predictions of hurricane frequency beyond the next season.” The research noted a dramatic increase in hurricane activity since the mid1990s, compared with a
www.cunninghamlindsey.com
December 2010 Canadian Underwriter
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PROFILE
Lifelong Learning Vanessa Mariga Associate Editor
When Tina Gardiner received the prestigious 2010 Donald M. Stuart Award, she joined the ranks of those she considers to be mentors and teachers. Tina Gardiner was a risk manager before she even knew risk management existed. The insurance and risk manager for the Regional Municipality of York and recent recipient of the prestigious Don Stuart Award recalls all the way back when she was a kid on the playground, warning kids swinging sticks around that they “would poke someone’s eye out with that.” “It’s like risk management was there and I just didn’t know what it was,” says Gardiner. “So when I found it, a switch went on and I became very passionate about it. I just wanted to absorb as much as I could, learn as much as I could and get involved as much as I could.”
10 Canadian Underwriter December 2010
A native of Peterborough, Ontario, Gardiner graduated with a Bachelor of Science degree from Wilfrid Laurier University. The route to her career in risk management took a meandering — but nonetheless interesting — path, during which she learned many things about many different aspects of the business. After graduation, she worked briefly for the Minister of the Environment testing soil lead levels. She then went on to work for Liberty Mutual in its loss prevention department. Her job required her to go out into the field and evaluate risks on behalf of the underwriters and make recommendations to clients on how they might improve their loss prevention programs. The experience, she says, allowed her to dip her toe in all sorts of industries, learning about each one. She began to focus on the transportation sector, where she got a firsthand training in risk. On one occasion she went to a truck operator training centre, where she got to jackknife a trailer on a skid pad. “All of the stuff we would put our trucking clients through, I got to do,” she says. “It was an amazing experience to actually jackknife a big rig, even just a small amount, in a controlled environment with an instructor alongside.”
Because she was technically in the insurance industry, she began to take her CIP courses and work towards a designation. One of her clients at Liberty Mutual, the risk manager for the University of Toronto, encouraged her to consider pursuing risk management too. “He sparked an interest in me, so I started taking my CRM
I’m still absorbing tons of stuff from my coaches and my mentors, but now I’m starting to give some back. courses simultaneously as my CIP and juggling them back and forth,” she says. “Oh, I was also a newlywed and a new mom at the time.” It wasn’t long before Thrifty Car Rentals poached her and asked her to form a risk management department there. The company was comprised of independent franchise owners, so it had a very entrepreneurial spirit. “We had a pool that we did insurance through, so it was a bit like having a mini- insurance company,” she said. “I would buy coverage and supply it to all of the independent owners, and I would do the
underwriting, rating and loss prevention training.” When her second daughter was born and she was on mat leave, Hertz approached her. That organization, she said, had more of a corporate structure; it wanted its Canadian claims office run like a third party claims administrator out of the United States. “So, at Hertz I became a bit of a claims guru,” she says. As if Gardiner didn’t already have enough designations, she obtained her broker’s license and became a broker at Morris & Mackenzie. “I had to get RIBO’d,” she laughs. She spent 18 months with the firm, developing new business and helping it through a re-branding initiative. “One of the areas I explored while I was working with Morris & Mackenzie was municipal,” she says, foreshadowing her next career move. “It really fascinated me. There are so many different things I could get into working in the municipal sector.” Once, while out on a client call, she drove past a municipal building in Newmarket — now her current office — and thought to herself: “I’m going to work there one day.” Lo and behold, she’s now in her eighth year with the municipality of York. At the same time she ex-
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plored different careers within the field, Gardiner also immersed herself into the profession as a volunteer. She spent seven years working on the insurance committee of the United Church of Canada’s head office. The committee “brought together some pretty big heavy-hitters,” she says. “I was so lucky to work with that committee, because it brought together some people with lots and lots of experience — Don Stuart, Robert Patzelt and Lloyd Hackett, among many others, for example.” Gardiner also joined the Ontario chapter of the Risk and Insurance Management Society (ORIMS). “I was put in charge of editing the chapter’s newsletter,” she says. “And when the director of the publicity portfolio took another job in another city, I stepped in and filled the position. “From there, I just worked my way through the board. I had never been on a board before, and I thought it was quite cool.” Gardiner ended up being president of ORIMS during her second maternity leave. That “was great because it kept me in the loop and allowed me to have adult conversations,” she quips. She continued the adult conversations while co-chairing the 1997 RIMS Canada Con-
Photo: Jeanne Craig
PROFILE
ference. The experiences and connections she made through her involvement with RIMS and ORIMS opened up a lot of doors, she says. “I have met a ton of people and have been able to navigate the industry just from the networking I’ve been able to do through volunteering. Through my involvement, I got to know my colleagues and peers in the industry, so there’s always
someone to call whenever I have a question.” Gardiner says she has gained so much from her experiences, but her peers and colleagues clearly feel she has given at least as much back. The industry formally acknowledged Gardiner’s many hours of volunteer service in September 2010. At the RIMS Canada Conference in Edmonton, Alberta, RIMS honoured Gardiner
with the Donald M. Stuart Award, basically recognizing her as Canada’s risk manager of the year. Gardiner describes receiving the award as “overwhelming.” She recalls helping ORIMS with its 50th anniversary earlier this year. Part of the promotion for the celebration involved running a series of ‘Did You Know?’ ads. One of the ads listed the previous winners of the Donald M. Stuart Award. “As I was typing up the list, I was thinking: ‘These are all great people,’” Gardiner says. “Two weeks later, I got a phone call. It was overwhelming that my name is now on that list.” Like many award recipients before her, Gardiner is now taking on mentoring roles, both in her workplace and with ORIMS. “I’m still absorbing tons of stuff from my coaches and my mentors, but now I’m starting to give some back,” she says. Moving forward, Gardiner says she would like risk management to evolve hand-inhand with sustainability. “Sustainability sits so well with enterprise risk management and it seems like the next extension to me,” she says. “I think the world is going towards being sustainable, so I think risk management has to go there, too.”
December 2010 Canadian Underwriter
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The
“F” Collisions staged to extract fraudulent accident benefits payments from Ontario’s auto insurance system is a key concern for insurers and politicians alike. Ralph Palumbo
Much has been said and written about Ontario’s Vice-President, Ontario, auto insurance reforms that came into effect on Insurance Bureau of Sept. 1, 2010. Changes to the system were imCanada plemented to help control continually escalating claims costs and stabilize premiums. We all know Ontario’s auto insurance system offers unusually generous accident benefits. Unfortunately, this reality attracts unscrupulous individuals determined to defraud the system. Insurance fraud includes all manner of activities including exaggerating a claim, but the problem with Ontario’s auto insurance system extends far beyond claiming a few extra massages. In fact, the problem leads right into the arms of organized crime. Insurers have always been aware of how fraud contributes to undermining insurance systems.
12 Canadian Underwriter December 2010
Only recently, however, has fraud become a central theme of the Ontario reforms, voiced by politicians and journalists alike. Despite the pervasiveness of the problem, insurers usually don’t like to talk publicly about fraud because it is difficult to determine its exact toll. Some reports have suggested that at least one third of all accident benefits claims contain some element of fraud. The issue of insurance fraud is also sensitive to legitimate claimants who don’t want to be tarnished by the actions of defrauders. That having been said, insurance fraud does exist and it costs insurers, and therefore policyholders, millions of dollars every year.The exact cost of insurance fraud across the country and across lines remains unknown, but Insurance Bureau of Canada (IBC) intends to find out in a study to be launched in 2011. There is little doubt that all insurance fraud — and prevailing attitudes towards it — must be addressed if the problem is to be corrected. Insurance fraud is costly, cheats honest policyholders and erodes confidence in the industry. However, some types of insurance fraud are not just costly, but also dangerous. Such is the case with organized staged collision rings.
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STAGED COLLISIONS Staged collisions are well-orchestrated events that willfully endanger public safety. Participants deliberately create auto collisions in order to file false auto insurance claims and collect generous accident benefits. Often, innocent motorists are tricked into participating. Given the richness of Ontario’s auto insurance system, it’s no wonder that organized staged collision rings are flourishing in the province, particularly around the Greater Toronto Area. Add to this the fact that staging collisions is a low-risk (for the criminals), high-profit crime and it’s not hard to see why it has become a multi-million dollar industry. In order to stage a collision, an organizer is required. Like the director of a play, the organizer hires the players, assigns various roles and supervises the action. First, the organizer must find participants willing to stage a collision, file false reports and submit false insurance claims. In addition to the driver — or drivers, in situations in which multiple vehicles are used — cars are often stuffed with passengers who are also willing to file false serious bodily injury claims. Some of these “passengers” may not even be in a vehicle at the time of a collision. Nevertheless, they will claim that they were, by reading from a carefully prepared script. A conveniently placed eyewitness may also be recruited. Along with these key players, the scheme also relies upon the participation of crooked supply chain providers. These may include tow truck operators instantly appearing to tow vehicles to certain auto body shops; auto body shop owners or employees willing to submit phony invoices. They may also include health care practitioners or clinic owners also willing to submit invoices for exaggerated medical services or for services never rendered. In the latter instance, some legitimate health care providers have found their identities stolen and used by clinic owners who submit false billings under their name. Sometimes it’s hard for investigators to determine who is in on the action and who has been duped.
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The staged collision players all receive money for their participation. However, the real money is made when the “victims” file claims for their injuries. Even though a staged collision may have occurred at low speed, those involved routinely claim for severe soft tissue injuries that are difficult to disprove and can generate a flood of examinations and assessments. A quick look at the state of Ontario auto over the latter part of this past decade clearly reveals the damaging
Project 92 uncovered 50 staged collisions with insurance exposure totaling more than $10 million. To date, nearly 300 criminal charges have been laid. effect of such crimes on the system. Although accident benefit costs steadily increased in all areas from 2004 to 2009, costs for assessments and treatment plans nearly quadrupled. In fact, the problem of over-assessment was a key contributor to the near-crippling of the system. Trimming Ontario’s overly-generous auto insurance accident benefits is a good first step, but will only go so far in curbing abuse of the system by organized criminals. Many of these individuals are as clever as they are greedy and have already found ways to milk the reformed system.The only thing that will truly stop them is tougher penalties and a greater risk of getting caught.
RESPONSES TO FRAUD Penalties for those found guilty of insurance crime are traditionally weak. This fact is as frustrating to individual insurers as it is to IBC’s investigative services staff who have been battling the bad guys for decades. Insurance crime involving staged collisions and accident benefits (or personal injury) fraud is more than an insurance issue: it’s a serious policing and public safety issue. Fortunately, IBC’s investigative services department has a history of cooperative partnerships with law enforcement and community safety organizations across the country. Earlier this year, one of those collaborations, dubbed Project 92, resulted in unprecedented criminal charges against participants involved in an organized staged collision ring in Ontario. For the first time in relation to any insurance crime investigation, six individuals were charged with committing and/or directing offences for a criminal organization. This represents an important step forward in publicly recognizing the sophisticated level of criminal involvement in certain areas of insurance crime. Project 92 uncovered 50 staged collisions with insurance exposure totaling more than $10 million.To date, with the support of two dedicated prosecutors, nearly 300 criminal charges have been laid and 22 individuals convicted. The action of assigning dedicated prosecutors is also significant: it reduces unreasonable delay in the prosecution of a case and shows the Crown acknowledges the seriousness of the offences. To repeat the success of Project 92, IBC is working towards the establishment of a permanent Ontario Joint Task Force made up of police, IBC investigators and dedicated prosecutors to address organized staged collision rings and accident benefits fraud. Organized insurance crime is costly and endangers public safety. Insurance fraud of any kind weakens the system, but the actions of organized criminals deliver the worst blow. Insurers, government and law enforcement must work together and strike back to ensure that accident benefits are there for honest policyholders when they need them.
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Cellular
Risk Craig Harris Freelance Writer
The inconclusive science around a link between regular cell phone use and brain cancer has left insurers cautious, but not panicked. Should insurers be concerned about a potential wave of claims? Scientific studies into whether cell phone use increases the risk of brain cancer and other illnesses have produced uncertain and at times contradictory findings, often yielding far more questions than answers for insurance companies. Is this an emerging risk insurers should carefully monitor or an overblown public health scare? Are cell phone-related tumours the next surge of unexpected claims (like asbestos), or is the technology perfectly safe and properly regulated? Given that there are more than 4.3 billion cell phone users worldwide, and more than 21 million in Canada alone, these questions bear a significant weight for the country’s property and casualty insurance industry.
16 Canadian Underwriter December 2010
COVERED OR NOT COVERED? This uncertainty has permeated the world of insurance, with several sources claiming insurance companies are now restricting coverage for cell phone manufacturers and mobile networks. For example, in a book released in September 2010 called Disconnect: The Truth About Cell Phone Radiation, U.S. author and cancer specialist Devra Davis states: “many insurance companies are no longer providing coverage for health damage from cell phones.” Similarly, in a Sept. 21 report by CBC, the network cited two (unnamed) brokers from two of the largest global insurance firms saying “about 60% of underwriters now refuse to cover cell phone companies for health care claims.” These assertions do not appear to be supported by any public statements issued by insurance companies, brokers or reinsurers.The only official announcement of an underwriter refusing to insure cell phone manufacturers against the risk of damage to users’ health was that of Lloyd’s of London underwriting syndicate Stirling — in 1999. Bart Nash, spokesperson for Lloyd’s, warns about using information from underwriting decisions more than 10 years old. He notes the market has 86 syndicates operating on an annual basis with different risk appetites. “We’re not aware of this (restrictions or exclusions on cell
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phone companies) occurring now,” he says. “The issue regarding insurance (and cell phones) is that I don’t believe a precedent has yet been set, which would mean no insurance claims.” In November 2010, Lloyd’s released a report on the issue, Electro-Magnetic Fields from Mobile Phones: Recent Developments. It concluded caution is needed, but not alarm. “With regards to the implication to insurance, as the current scientific evidence stands, it is unlikely that insurers will be liable for compensation for bodily injury on product liability policies,” the report notes. Sources contacted for this article conveyed a similarly cautious but not overly active stance. None could identify any widespread restrictions on coverage for cell phone companies, mobile networks or service providers. “We have seen a small number of underwriters put exclusionary wordings in place for electro-magnetic frequency (EMF) risks,” says Mike Petersen, industry leader of Marsh Canada’s communications, media and technology practice. “In most of these cases, based on an informal survey of our clients and brokers across Canada, these exclusions are negotiable. We are aware of few clients who have these exclusions on their policies.” Will Eustace, senior vice president of Marsh’s U.S. casualty practice, notes insurance companies can potentially restrict coverage in other ways. For example, they can make policy forms available on a claims-made basis only or they might add “anti-stacking” endorsements, intended to avoid the application of multiple sets of deductibles or multiple sets of limits to a single loss event. There is little evidence of a pervasive use of these tools by underwriters for cell phone and telecommunication companies, he adds. “We are not currently underwriting cell phone use as a risk factor . . . since the information currently available does not provide definite proof that cell phone use is directly responsible for an increase in brain tumours,” Munich Re Canada said in a statement. “However, we continue to closely monitor this topic as additional information becomes available.”
18 Canadian Underwriter December 2010
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POTENTIAL HEALTH EFFECTS Cell phones operate on microwaves, sent and received by antennas on the back of the devices. As such, they emit radiofrequency (RF) electromagnetic energy. Some of the RF energy emitted by cell phones is absorbed into the body, specifically in the small area of the skull near the handset.That is why most research into cell phones and brain cancer focuses on intracranial tumours such as glioma,meningioma and acoustic neuroma. As Lloyd’s EMF report notes, the science investigating any link between cell phones and brain cancer is mainly divided into three areas: epidemiological (population-based), in vivo experiments (on lab animals) and in vitro experiments (on cell cultures).
We have seen a small number of underwriters put exclusionary wordings in place for electro-magnetic frequency (EMF) risks. In most of these cases, based on an informal survey of our clients and brokers across Canada, these exclusions are negotiable. We are aware of a few clients who have these exclusions on their policies. In Canada, Health Canada develops guidelines for safe exposure to RF energy. These guidelines, commonly known as Safety Code 6, set out safety requirements for the use of RF devices operating in the frequency range from 3KHz to 300 GHz. For example, it is known the body will absorb some of the RF emitted by a cell phone, known as the Specific Absorption Rate (SAR). In Canada, the maximum SAR allowed for cell phones and portable devices is 1.6 watts per kilogram, the same as in the United States. “The amount of energy you absorb depends on many factors, such as how close you hold the cell phone to your body and how strong the signal is,” according to Health Canada’s Web site.
“So far, the weight of evidence from animal, cell culture and human studies does not indicate that the energy emitted by cell phones is strong enough to cause serious health effects.” The trade association for the cell phone industry often refers to Health Canada’s regulations as proof that wireless devices are safe. “There is no convincing scientific evidence of adverse health effects from exposures to EMF at levels below the levels outlined in Canada’s Safety Code 6,” says Bernard Lord, president of the Canadian Wireless Telecommunications Association. Against this backdrop of official consensus concerning the safety of cell phones, several scientists and public health experts have warned of new dangers from EMF. In general, the concerns involve charges that epidemiological (and other) studies are often funded by the telecommunications industry and prone to bias, government regulations are outdated and emerging science into “non-thermal” effects of regular cell phone use is not properly taken into account when investigating cancer risks. The thermal effects are well known. Microwave radiation emitted by cell phones has the potential to heat up human tissue in the area of our head where the phone is pressed. Safety and regulatory guidelines in many countries assume this is the main way in which RF fields could cause damage. But several studies have shown cell phones can have non-thermal biological effects, such as blood-brain barrier leaks, broken strands of DNA and changes to heat shock proteins. In a 2009 report commissioned by the Austrian Social Insurance for Occupational Risks (AUVA), a workers’ compensation body, researchers from the University of Vienna discovered that EMF fields from cell phone radiation have non-thermal effects on the brain (central nervous system), immune system and protein synthesis. It is perhaps not surprising, therefore, that the first workers’ compensation claim related to brain cancer and cell phone use was allowed in Europe — to an Italian executive.The Italian Labour Insurance Board
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Several insurers contested whether there was a duty to defend electromagnetic frequency (EMF) cases, contending that the actions did not sufficiently allege claims of ‘bodily injury’ and ‘damages’ due to bodily injury. recognized the occupational origin of Innocenzo Marcolini’s brain tumour in December 2009, after acknowledging that he worked constantly for years with a cell and cordless phone. According to reports, this is the first time a judgment has recognized a causal link between a disability and occupational exposure to EMF.
LEGAL RESPONSE TO EMF Although there are no reported workers’ compensation claims in North America for brain cancer and wireless devices, several lawsuits against cell phone manufacturers have been filed in U.S. courts. Murray v. Motorola (2009) and Farina v. Nokia (2010) are two of the most prominent. Both lawsuits are amalgamations of several individual actions; each alleges cell phone companies knew or should have known of numerous studies pointing to harmful thermal and non-thermal effects of EMF from wireless devices. In both cases, appellate courts hearing the issues ultimately ruled the issue of potential cell phone health hazards must be sorted out through the U.S. Federal Communications Commission (FCC) and not through product liability lawsuits in court. Judges in both cases held the FCC has the exclusive power to regulate all aspects of the cell phone industry, including RF emission levels. According to U.S. Circuit Judge Anthony Scirica, ruling in the Nokia case, the FCC “is in a better position to monitor and assess the science behind RF radiation than juries in individual cases.” (In the Motorola case, the District of Columbia Court of Appeals ruled the claims could proceed if the cell phones in question were manufactured before FCC standards were enacted in 1996, or if the cell phones did not meet the RF radiation standards adopted by the FCC.) Interestingly, in the above-noted law-
20 Canadian Underwriter December 2010
suits, cell phone companies turned to their CGL policies for coverage. Several insurers contested whether there was a duty to defend, contending that the actions did not sufficiently allege claims of “bodily injury” and “damages” due to bodily injury. U.S. appeals courts in Texas and Louisiana ruled that insurance companies, such as Zurich,Trinity Universal Insurance Co. and Federal Insurance Co., did have a duty to defend these actions.
POLITICAL RESPONSE TO EMF Beyond litigation, some regional and national governments have been active in reviewing safety guidelines or warnings about cell phones. San Francisco has become the first jurisdiction requiring cell phone retailers to post radiation
Even though there doesn’t seem to be an imminent wave of insurance claims related to cell phone radiofrequency and brain cancer, some are willing to make the link between asbestos and wireless devices. emission data, or SAR levels, on devices, effective February 2011. Also, Ohio Congressman Dennis Kucinich is currently preparing a U.S. federal bill requiring manufacturers to note on packaging how much radiation models emit. The bill would also would create a national research program to determine what levels should be deemed safe. In Ontario, New Democratic Party MPP France Gelinas recently introduced a private member’s bill in the provincial legislature that would require storeowners to post radiation levels of the wireless devices they sell.
Similar political activity is taking place in Europe. In 2008, the European Parliament voted 522 to 16 to recommend tighter safety standards for cell phones. “In light of the growing body of scientific evidence implicating cell phone use with brain tumors,” the Parliament said, "the limits on exposure to electromagnetic fields [EMFs] which have been set for the general public are obsolete." Even though there doesn’t appear to be an imminent wave of insurance claims related to cell phone RF and brain cancer, some insurance sources are willing to make the link between asbestos and wireless devices. “Many comparisons can be drawn between EMF and asbestos, and it is useful to look at the history of asbestos and the implications to the insurance industry to see what could happen with mobile phones if the prove to be harmful,” Lloyd’s states in its EMF report. It notes the definition of injury, the apportioning of liability and the trigger of the insurance contract all affected asbestos litigation – and will likely apply to EMF if claims do occur. “As asbestos has shown, new scientific developments coupled with a small number of key legal cases can change the situation very rapidly,” Lloyd’s concludes. Scientists researching EMF and brain cancer are still pursuing the question of how long it might take the situation to change — or whether it will at all. As Davis notes: “Cancer can take a long time to develop. After the Hiroshima bomb fell, there was no increase in brain cancer for 10 years, even 20 years afterward. Forty years later, there was a significant increase in brain cancer in people who survived the bombing.” By comparison, our current experiment with near-ubiquitous cell phone use is just at the beginning stages.
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A study conducted by the Institute for Catastrophic Loss Reduction (ICLR) and Swiss Re concludes overland flood is insurable for Canadian homeowners. Paul Kovacs
Executive Director, Institute for Catastrophic Loss Reduction
Sharon Ludlow CEO, Swiss Re in Canada
Insurance companies have provided coverage against fire and other perils in Canada for more than 200 years, yet consistently they have chosen not to provide flood insurance to homeowners. Businesses in Canada buy flood coverage. Homeowners have the option of buying flood insurance in the United States, Japan, Germany, the United Kingdom and France. What is needed to make flood insurable for Canadian homeowners? Flooding accounts for almost half of the disasters in Canada. Insurance is available for other perils in Canada — earthquake, tornado, hurricane, wildfire, winter storms, lightning and hail — but not overland flood. Relief programs offered by government agencies and charitable groups reduce the hardship for flood victims, but funding to support immediate, basic needs is not insurance.
22 Canadian Underwriter December 2010
Joint research by the Institute for Catastrophic Loss Reduction (ICLR) and Swiss Re assessed flood insurance models operating around the world to identify what would be needed to make flood insurable for Canadian homeowners. Our proposal would be unique to Canada, while largely adopting the system presently in place in the United Kingdom.The essence of the proposal involves forging a partnership. Governments provide mapping, flood defense and restricted development in flood zones. The insurance industry commits to include flood coverage for all property owners that purchase fire and theft insurance, assuming the property is located outside of the zone where the government should not permit development. Private insurers are responsible for the business of insurance, such as paying flood damage losses and accurate pricing of this risk. Government is responsible for providing the information that insurers, homeowners and local governments need to manage the risk of flooding. In addition, the government is responsible for risks associated with allowing some homes to locate in zones of high risk. This proposal will be attractive to insurers to the extent they are successful in negotiating
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commitments from the government that provide confidence that maps, defense structures and development will be appropriately managed, and insurers are free to ensure adequate prices for the coverage provided. This proposal will be attractive for governments when flood insurance becomes available for most Canadian homeowners. Insurance companies have been providing bundled flood insurance coverage to homeowners in the United Kingdom for almost 50 years. The ICLR and Swiss Re believe many aspects of this model may be effective in Canada. We believe governments in Canada should provide stronger commitments to insurers about mapping, defense and development. Also, there need to be strong incentives to involve homeowners directly in flood risk reduction. In particular, homeowners failing to take certain protective actions should pay accordingly through deductibles and appropriate rates.
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Insurance companies have been providing bundled flood insurance coverage to homeowners in the United Kingdom for almost 50 years. The ICLR and Swiss Re believe many aspects of this model may be effective in Canada.
ers do not choose to purchase flood coverage. Poor take-up presents serious challenges for the government and insurers following major flood events. Flood relief paid to homeowners who do not buy insurance further erodes efforts by private insurers to sell coverage.
France In France, the government has established a program covering losses that
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OVERLAND FLOOD COVERAGE MODELS Our research identified many models for providing flood insurance.
United States In the United States, public officials determine prices and coverage; homeowners are offered basic flood coverage as an option that can be added to fire and theft coverage. Flood damage claims paid in the United States have exceeded revenues by almost $20 billion; despite this public subsidy, the vast majority of homeowners choose not to purchase flood coverage. We are not aware of any country that has copied the troubled and ever changing American flood insurance program, nor should Canada. Germany In Germany, private insurance companies offer coverage to homeowners as an optional addition to their fire and theft coverage. Generally, pricing has been sufficient to cover claims over the longer term. However, most homeown-
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result from flood, earthquake and a number of other natural hazards. All homeowners purchasing fire and theft insurance are required to participate. The price of coverage is set by the government and is uniform across the country, so it does not reflect the actual risk of loss. Political processes are used to determine specific events that trigger the payment of claims.The program has been successful in securing broad participation, but this model provides no incentives to property owners to participate in damage risk reduction: it transfers risk, but does not also reduce the risk of damage. A number of other flood insurance models are in place around the world. All involve an active and continuing relationship between the insurance industry and government agencies responsible for flood risk reduction.
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coverage is introduced for homeowners following the partnership model identified by the ICLR and Swiss Re. In particular, the provision of flood coverage should: • eliminate a significant misunderstanding (70% of Canadian homeowners currently believe their insurance policy includes flood cover);
CANADIAN CHALLENGES One special challenge in the Canadian environment is the many different government agencies involved in flood management. Issues like mapping, flood defense and zoning are provincial responsibilities or municipal concerns under provincial guidance, so the Canadian insurance industry would need to establish several partnerships to bring flood insurance to homeowners across Canada. The federal government withdrew from the Flood Damage Reduction Program more than 15 years ago; since then, it has had little role in flood management. The state of flood mapping and defense differs from province to province. Our research focused on the four provinces with the largest populations — 85% of Canadian homes are located in Ontario, Quebec, British Columbia and Alberta. In many respects, Quebec has sustained the strongest commitment to flood risk reduction, perhaps presenting a jurisdiction where the insurance industry could first look to explore the idea of a partnership model in Canada. There would be a number of potential benefits for Canada’s insurers if flood
24 Canadian Underwriter December 2010
Issues like mapping, flood defence and zoning are provincial responsibilities or municipal concerns under provincial guidance, so the Canadian insurance industry would need to establish several partnerships to bring flood insurance to homeowners across Canada. • remove the need for complex policy wordings detailing coverage available for sewer back-up and other water damage, excluding overland flooding; • engage consumers in loss prevention, potentially through the introduction of significant deductibles for homeowners that fail to protect their property; • launch a partnership with government that clarifies the role of insurance and the role of government in disaster risk
management, particularly the financial role; • extend coverage to include the natural peril most commonly experienced by Canadians, yet is not currently part of basic homeowners coverage; • enhance the insurance industry’s capacity to continue to provide commercial flood coverage by securing mapping, flood defense and zoning information; • bring Canadian homeowner coverage more in line with property insurance coverage available in the other major insurance markets around the world; • anticipate the needs of consumers, since climate change is increasingly expected to influence the future coverage requirements of homeowners; • clarify that governments are responsible for helping property owners allowed to locate in zones of high risk, as this risk is uninsurable; and • expand the product offering by insurers for consumers. ICLR and Swiss Re research finds it is possible for flood to become insurable for homeowners in Canada.We need to establish a partnership involving insurers, governments and homeowners jointly working to manage the risk of flood damage. The next step toward making flood an insurable peril for Canadian homeowners would involve debate among insurance companies to determine if there is a consensus to address this issue. Should the insurance industry choose to take this issue to governments, we believe the initial discussion would focus on one or two provinces. It will likely take many years before a national flood insurance program could be secured. The ICLR and Swiss Re are available to support this effort, and we have set out our joint research in the publication Making Flood Insurable for Canadian Homeowners. Canada’s insurers must immediately address issues that include restoring profitability in auto and property coverages, insurance to value and increasing water damage claims. Nevertheless, this appears to be an excellent time to launch a discussion about flood insurance. It is possible for flood to become insurable for Canadian homeowners.
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Acquisitions Emergence of
David Gambrill Editor
RSA Canada recently acquired GCAN Insurance for $420 million. Reflecting on the deal, RSA Canada’s president and CEO, Rowan Saunders, says conditions are right for future M&A activity in Canada’s property and casualty marketplace.
For the better part of five years, insurance industry commentators have asserted the inevitability of consolidation in the Canadian property and casualty industry. Several observe the industry is fragmented, with many insurance companies competing for relatively small pieces of Canada’s premium pie. The conditions are right for market consolidation, they argue. And yet, relative to these high expectations, very few market-changing mergers and acquisitions have happened in the Canadian P&C marketplace over the past three or four years. Some have described the lack of activity as a byproduct of high valuations and marketplace condi-
26 Canadian Underwriter December 2010
tions that favoured sellers, not buyers. In this context, it will be interesting to see whether RSA Canada’s recent $420million acquisition of GCAN Insurance represents a break in the M&A logjam. In talking to Canadian Underwriter about the deal, the secondlargest merger in the Canadian P&C marketplace over the past decade, RSA Canada president and CEO Rowan Saunders says he sees a confluence of market conditions that may portend more opportunities for companies to grow through mergers and acquisitions. “If you have a clear strategy and you have a good balance sheet and access to capital, this is actually a good time to grow, both organically and by acquisitions, so I do think that there will be more acquisition opportunities coming,” Saunders says in a sit-down interview to discuss the GCAN merger specifically, as well as the more general topic of M&A activity in the Canadian marketplace.
TIME IS RIGHT FOR M&A ACTIVITY Speaking generally about the Canadian P&C marketplace, Saunders said he sees a number of factors that, taken together, could create opportunities for increased M&A activity. First among them is an economic and soft market environment in which it is difficult for insurance companies to grow their business.
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“I do think the economic downturn and the fact that the economy has been flat to negative has had an impact [on insurers],” he says. “In commercial lines, [business has] been very much impacted, because revenues are down and exposures are down. An example would be: there were 17 trucks on the road last year or a couple of years ago, and you’ve got 14 this year. A few years ago, your inventory was piled to the rafters; now you have just-in-time production. Revenues are down, etc. So that has actually taken some exposure out of the marketplace, which does make it difficult for [insurers] to grow.” Secondly, this low-growth environment has played a part in suppressing valuations for some companies, which makes them more attractive targets for acquisition.This essentially enables potential buyers. “You’ve been in some pretty tough trading conditions,” Saunders observes. “It’s been hard to grow the top line because of the downturn. From a pricing perspective, there’s been very little rate over the last couple of years. In fact, rates have been down over much of the past five years. So that does make it a difficult environment in which to grow. We’ve also contended that with tough auto environments and a significant increase in severe weather, as a result. the industry earnings haven’t been good, and I do think that has suppressed some companies’ book value. So valuations, in aggregate, are actually more affordable than they have been for some time.” And thirdly, despite the tough growth conditions, the industry is not lacking for available capital. In fact, the industry in commercial lines “is very well capitalized and it’s still profitable,” said Saunders. “We’re at the stage now where the industry ROEs have not been great for the past couple of years, and there has been some very significant divergence in performance,” Saunders says. “Some insurers are growing, and doing so comfortably, with very attractive combined ratios. Other insurers really are in quite a state of distress — either they have dif-
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ficulty holding their business, but mostly they have some very unprofitable portfolios. When you have had that situation in the past, normally the whole industry is under a bit of stress and there isn’t capital to take advantage of that. What’s different today is that you have that divergence [in company capital levels], and you actually have people who have capacity and capital to take advantage of the situation.” Thus, three factors are conspiring to drive future M&A activity: a low-growth environment, suppressed company valuations and the presence of capital in the market.
What’s different today is that you have that divergence in company capital levels and you actually have people who have the capacity and capital to take advantage of the situation through mergers and acquisitions. Of course, there has been capital in the market for awhile now, and while companies such as Intact Financial Corporation have publicly declared their “war chest” of $1.1 billion in 2009, and their concomitant desire to entertain appropriate deals, not much has actually happened. But Saunders thinks the contemporary situation, which features an uneven distribution of capital between Canadian P&C companies, differentiates this period from others in which little M&A activity occurred.
RSA ACQUIRES GCAN RSA Canada itself took advantage of this scenario when it made the move to acquire GCAN Insurance in October 2010. Pending the official closing of the acquisition, the Ontario Teachers’ Pension Plan Board owns GCAN. A commercial lines insurer, GCAN wrote annual premiums of approximately $255 million in 2009.The company employs 148 people in four locations across
Canada, and partners with a network of 130 brokers. The company had a combined operating ratio (COR) of 81% in 2009 and an average COR of 77% over the past five years. Essentially, the transfer of GCAN’s ownership from the teachers to RSA Canada gives GCAN underwriters more capacity with which to operate. For RSA Canada, the deal adds greater depth to its commercial lines segment. Prior to the deal, RSA Canada had about $500 million in commercial business, with a significant amount of presence in the small and mid-markets. The company focused on capability in certain segments, such as manufacturing and construction, as well as in specialty segments such as marine and boiler and machinery. GCAN, on the other hand, does more of its commercial business in the large and complex risk area, and writes more liability business than RSA. “What GCAN does for us is that in some segments it adds more scale, it adds geographic diversification,” Saunders says of the deal. “GCAN has over half their business with the global brokers and large brokers, which is important because those are the brokers that really are in control of all of our large and complex specialty business. That was positive. Most of their business is either mid-market or large, complex industrial risk. They’ve got specialty lines that we were very interested to be able to add to our repertoire of products, such as errors and omissions [E&O], and for-profit directors and officers [D&O]. And then there’s some overlap in marine and EBI [equipment breakdown and boiler & machinery]. We are now the market leader in both of those product lines. The large, complex business is really the interesting, complimentary piece that we get. What the GCAN acquisition does for us now is that it will put us in a unique position in commercial insurance in Canada in that RSA will now have propositions and significant presence in the entire spectrum of commercial, from small, to mid-size to large industrial, to the global risk-managed accounts.”
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Keeping the Wolves at Bay Many things are keeping primary insurance company senior executives awake at night, including the familiar wolves in the woods: water damage and the uncertain outcome of Ontario’s auto insurance reforms. Add to this the ongoing volatility of global markets — with suppressed interest rates hitting P&C insurers’ investment income — and even the specter of inflation related to economic recovery and you can see why insurers face many sleepless nights to come.
When
insurers lose sleep at night, they often worry about water damage and the escalating costs of Ontario auto insurance claims. But the lasting impact of the world’s 2008-09 global financial meltdown has added a new dimension to the terrors potentially wrought on Canadian primary insurers’ balance sheets. Now insurers must not only must face escalating costs related to more severe weather events and auto insurance claims, but they must do so without heavy reliance on an important tool in their financial arsenal — investment income. Despite the economy’s partial recovery, insurers still anticipate shrinking investment margins arising from suppressed interest rates. Governments throughout the world have kept interest rates low in response to ongoing market turmoil, thus giving insurers much less wiggle room to deal with escalating claims costs. Increasingly, insurers will not be able to afford to use investment money to shore up lax underwriting results. Underwriting profit is now key. To increase growth objectives, companies are increasingly focusing on investing in new technology to improve their reach to consumers. But just when insurers think it’s safe to go back to the theatres, a new danger seems ready to emerge — inflation. Inflation is anticipated as the economic engine finally starts to roar again, putting new pressure on claims costs. These trends emerged in our Primary Insurance Market 2011 Outlook, in which we asked senior executives of Canadian property and casualty insurers: ‘What do you see as emerging financial and/or claims trends in the upcoming two years?’ Their answers are listed below, in alphabetical order by last name.
December 2010 Canadian Underwriter
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COVER STORY
Keeping the Wolves at Bay
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Kathy Bardswick, President, CEO, The Co-operators Group Ltd.
The industry will be closely following different claims developments in different parts of the country in 2011, and generally I am cautiously optimistic about the prospect of some improvement this year. The trend of increasing costs related to weather is not going to be reversed anytime soon. However, I am encouraged by the amount of attention the issue of flooding is beginning to receive. I am hopeful the momentum will continue and ultimately lead to real solutions through which we can bring some form of flood response to homeowners. In southern Ontario, clearly all eyes will be on how well the auto insurance reforms implemented this past September will actually help control claims costs. I expect interest rates will increase somewhat in 2011. The benefit for claims reserves and market yield adjustment, however, will be more than offset by the loss of value on bond portfolios. Also, given OSFI is contemplating having equities require substantially more capital support for MCT, some companies’ capital ratios may be affected quite considerably.
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Barbara Bellissimo Senior Vice President, State Farm Insurance Canada
At State Farm, we’ll be closely analyzing the impact and evolution of Ontario auto reform. This is essential to improving our financial performance and providing an affordable auto product to our customers. In particular, we need to understand how these reforms will mitigate the increasing costs of accident benefit claims and how they will stem the tide of fraudulent claims activity. We have reacted to the increase in fraud by stepping up our efforts internally, adhering to our strict guidelines and introducing additional dedicated resources, primarily in the interests of safety and providing a continuously affordable auto product. Regarding personal property, we continue to see an increase in the fre32 Canadian Underwriter December 2010
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The trend of increasing costs related to weather is not going to be reversed anytime soon. quency of water losses. Together we need to cooperate with municipalities to ensure the evolution of adequate infrastructure and provide research and feedback on the next generation of lossresistant construction materials and techniques. These efforts will considerably help to mitigate future large-scale loss and community disruption. Another significant area is our commitment to engaging our customers via new communication technologies.
Our organization and agency force will continue to make ourselves available to our customers via social media to ensure we are accessible to them when they need us most. This makes it easier for them to stay in touch and contact us when they need us; it is paramount to maintaining the utmost in customer service. Social media technologies align well with State Farm’s core brand values, which center on people, relationships and personal service.
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Jean-Francois Blais President, CEO, AXA Canada
What do the fashion industry and the insurance industry have in common? We both use models and try to find the next trend. We all know finding and understanding new trends is very valuable. Trends are key to the insurance industry because of the nature of our business. We collect premiums now and we pay claims later. The cash flow model is very strong, but trends create risks. Nowadays, the general trend is de-risking the corporate balance sheets. On the assets side, regulators, with the support of governments, are pushing hard to reduce risk in banks and insurance companies after the financial crisis of 2008. Regulators are pushing for better-quality assets and more liquidity. In the real world, this translates into lower returns from everyone’s investment portfolio. On the liabilities side, you find claim revenues where you forecast future inflation. Two trends easily identified but very difficult to measure include inflation coming from bodily injury claims and weather-related events. On the capital side, the story is similar: regulators want more capital to support the business. All these trends are putting enormous pressure on underwriting performance. Mastering pricing, underwriting and claims will be more important than ever to be successful in the next decade. Let’s hope it will make insurance more “fashionable” to attract the right talent we need in the years to come.
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COVER STORY
Keeping the Wolves at Bay
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Charles Brindamour President, CEO, Intact Financial Corporation
As industry conditions gradually improve, primarily in personal lines, we remain cautious about the prospects of the industry. The uncertainties and concerns about the slower pace of the global economic recovery and the fragility of the international financial markets are mounting. The reduced growth prospects of the North American economy, the dire financial position of a number of European countries and the initiatives of countries with emerging economies to better control their inflation will exacerbate the volatility on the financial markets. These conditions not only lead to pressure on financial institutions here and abroad but also translate in an interest rate environment at historical low levels for the foreseeable future. As a result, the investment performance of the industry will dampen and affect its overall profitability. With the industry return currently under pressure, this calls for discipline. The consumer is likely to see another year of financial pressure and experience material changes both in home insurance and in automobile insurance, particularly in Ontario. This will be another trying year in terms of the consumers’ perception of our industry. This is why insurance companies need to learn from the brokers’ customerdriven mindset in adapting their ways of operating to the evolving needs of consumers. We strongly believe this environment will create opportunities for entrepreneurs, be they brokers or insurers, with a strong customer-driven mindset and a solid financial foundation.
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Alister Campbell Chief Agent, CEO, Zurich in Canada
Earlier this year I gave a speech entitled “95 is the new 100.” I meant that if interest rates remained at atypical, historic lows for any sustained period, traditional metrics like a 100% combined ratio just wouldn’t apply 34 Canadian Underwriter December 2010
our economy is contributing to the issue). Our industry generates almost 100% of total profits over any cycle through investment results. But in this new low-interest-rate world, an underwriting profit is not a luxury anymore — it’s mandatory. Last year in this magazine, I argued for the merits of “doing the boring things well.” (‘Boring is Beautiful,’ Canadian Underwriter, July 2009). It remains good counsel. For companies, it is of critical importance to invest in sophisticated technical pricing models and rigorous risk inspection and selection. For brokers, the discipline of maintaining a strong new business pipeline, keeping an eye on receivables and investing in good customer service will matter more than ever. For both companies and brokers, picking the right partners for the future will be the difference. Oh yeah, one year from now I might be writing about the risk of inflation. And you thought deflation was bad for the industry!
anymore. Eleven months later, this warning is turning into blunt, unvarnished reality. Yields on fixed income securities — especially secure, government-backed ones — are at record lows, and governments worldwide are working hard to keep them that way (a slow-motion recovery of
George L. Cooke President, CEO, The Dominion of Canada General Insurance Company
Heading into 2011, North American economies are sluggish. They will likely continue that way for some time, intensifying the pressure on the operating performance of all insurers and brokers. With the dependability of investment returns and economic cycles in question, cementing sustainable operating profit will increasingly be the focus. The continuously evolving backdrop of reform, weather patterns and consumer expectations only adds further complexity. The individual company response in the last few years has been directed inward, with a tendency to focus on developing unique competitive advantages. In doing so, we have likely neglected the piece that may matter the most. A transparent marketplace working in the best interest of the consumer will define the market structure and ul-
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COVER STORY
Keeping the Wolves at Bay timately determine our profitability in the years to come. In an age when consumers are more savvy, more educated, and where the exchange of knowledge is immediate among them, the need to establish and maintain trust and confidence in the services we all provide becomes paramount to individual corporate objectives. We need to evolve the rules at play in the industry; more importantly, we need to evolve our collective willingness to support and adhere to those rules. With the threat of inflation on the horizon, pressure from consumers will intensify. They will demand transparency; they will want to know exactly how far their insurance dollar goes. We had better be ready to explain — with one voice.
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William Goings President, CEO, TD General Insurance Company
Over the next two years, I think we’re going to continue to feel the impact of many of the same global trends that are already affecting our industry. The sluggish economic recovery continues to take its toll and we expect to see slow economic growth and low interest rates as a result. On the claims side, I think the home and auto industry will continue to feel the effects of weather and climate hazards. Ten years ago, fire and theft were the two main causes of home insurance claims; now we’re seeing water damage as the main culprit. Fraud also continues to be a growing area of concern industry-wide, and we expect this will likely have an impact on claims in the coming years. Considering the combined impact of these financial and claims trends, I think the insurance industry will feel more pressure from consumers for competitive and affordable insurance options. Our clients are already asking for insurance that’s simple, convenient and easy to understand. For TD Insurance, the next two years — and beyond — will continue to be about good service and providing consumers with the products they want, from a name they trust. 36 Canadian Underwriter December 2010
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The impact and evolution of Ontario auto reform is essential to improving our financial performance and providing an affordable auto product to our customers. In particular, we need to understand how these reforms will mitigate the increasing costs of accident benefit claims and how they will stem the tide of fraudulent claims activity.
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Christopher R. Kiah President, CEO, Allstate Insurance Company of Canada
Ontario automobile insurance is the biggest challenge and greatest opportunity facing our industry over the next two years. Ontario results have a tremendous impact on the rest of Canada, placing a significant responsibility on one market and one regulatory system. It is too early to tell whether the
most recent Ontario auto product reforms will succeed in addressing cost pressures and abuse in the system. Of particular concern are the catastrophic impairment definition and the minor injury guideline (MIG). The industry should be an active participant in the catastrophic impairment review and, to be effective, the new definition must be scientific and research-based. A new minor injury treatment protocol is expected to replace the current MIG, but not until 2013. Allstate will continue to monitor the performance of the MIG closely and our industry must urge the government to make changes in the likely event that anticipated cost savings are not met. Property results continue to be under pressure across the country for several reasons, including more extreme weather patterns, aging infrastructure and insurance-to-value challenges. This may be a relatively recent trend, but it appears to be here for the foreseeable future. Personal property insurance has evolved considerably over time and now provides comprehensive protection for a customer’s home and personal belongings. Water losses, though covered throughout recent history, were never thought to be such a costly area for the homeowner line. As an industry, we may need to consider tightening the definitions around the product. Otherwise, loss ratios and prices will continue to rise.
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Kevin McNeil President, CEO, Gore Mutual Insurance Company
We will continue to operate in an environment of escalating claims costs in the upcoming years. Several factors are contributing to this, including more severe weather patterns, benefit-rich products and vendor consolidation. Gore Mutual has invested in technology in the claims area to control expenses and improve workflows for our broker partners and their clients. In an age when consumers expect immediate responses, our industry needs to raise the bar. Brokers require direct
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COVER STORY
Keeping the Wolves at Bay connectivity with insurers and vendors. With the launch of Gore Mutual’s Claims Connection, brokers can access real-time claims information to provide immediate and accurate responses to their clients. Technology is also paving the way for improved statistical claims data. We look forward to our industry benefiting from the Health Claims for Auto Insurance (HCAI) project. Gore Mutual was the first company to complete the technical integration and was one of two insurers to go live when HCAI was introduced. HCAI will act as an early warning system in identifying claims trends so our industry can respond quickly. As claims costs continue to rise, it will be necessary for insurers and brokers alike to leverage technology if we are to provide a stable market and improve customers’ experience at the same time.
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Ellen Moore President, CEO, Chubb Insurance Company of Canada
In 2011, we expect to see a continuation of the trends and conditions we have seen in the last few years. Excess capital will continue to support soft market conditions, despite significant evidence of profit deterioration. Consolidation among insurers and brokers will continue, affecting the ability for insurers to grow top line. Regulatory pressures will increase with the implementation of legislative changes. Lastly will be the impact of the global economy in which we operate. Although Canada remains a relatively stable environment, global influences are challenging our industry’s ability to grow and stay financially strong. Success in 2011 will require more diligence than ever. The volatility of financial markets will make financial strength and stability much more important to consumers. Managing our balance sheet and our underwriting profit remains our top priority. As always, managing distribution relationships will be critical. We remain committed to our network of strong, independent brokers. A healthy, competitive market means a well-served customer. Improving the customer experience is at the top of our ‘to do’ list for 2011. 38 Canadian Underwriter December 2010
Regulators are pushing for better-quality assets and more liquidity. In the real world, this translates into lower returns from everyone’s investment portfolio.
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Gary J. Owcar President, Chief Operating Officer, CNA Canada
Over the past few years, the calendaryear financial results of many companies have benefited from significant favorable reserve adjustments for prior years. With the general expectation that there is not much left in the way of redundant reserves, the industry has to tackle the following claim issues to ensure continued profitability.
First, it must manage continued increase in claims handling and legal costs due to: • insureds being named as plaintiffs in more and varied types of claims. The duty to defend adds legal costs regardless of indemnification; • taxation changes have increased claim costs (HST in Ontario) and; • claims-handling infrastructure must meet consumers’ 24/7 demand for service. Second, the industry must manage an increase in indemnification dollars due to: • the increasingly litigious environment in Canada, including the emergence of class action suits and growing damage awards; • expanded general, special and heads of damage on claims, increasing potential award amounts; and • the continued erosion of the auto threshold in Ontario and increasing catastrophe costs. Proactive companies need to consider technology solutions to reduce costs and increase efficiency. Procurement management is also a key cost reduction tool for both ongoing claims and catastrophe support. Vendor incentives to meet specific corporate objectives such as customer service or close times would give vendors more “skin in the game,” producing a better loss result. As another year of thin pricing appears on the horizon, managing loss costs and general expenses will be more important than ever.
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Sylvie Paquette President, Chief Operating Officer, Desjardins General Insurance Group
From a financial perspective, I think we can expect more of the same: a slowgrowth economy, very low interest rates and uncertain, even jittery equity markets. This means insurers must focus even more on the insurance fundamentals: pricing, underwriting and claims. However, in a slow economy, with some provincial election cycles coming up, it may be difficult to gain approval for needed auto rate increases. Insurers unable to generate underwriting profits
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COVER STORY
Keeping the Wolves at Bay may find themselves in serious financial difficulty. As far as claims trends are concerned, we are alarmed by the degree of organized fraud that continues, particularly in the Greater Toronto Area and some other large cities. The trend towards caused accidents, which involve innocent third parties, is of particular concern because they are dangerous and difficult to prove. That being said, the industry is being more proactive and police and government are beginning to take the issue seriously, so there is some hope. Another trend concerning us is the increasing frequency of catastrophic events. Severe and unpredictable weather events, coupled with aging infrastructure in so many communities across the country, makes for a deadly — or at least costly — combination. Overall in claims, the challenge is to become much more sophisticated in managing catastrophic and other complex claims through better techniques, technology, staff training, and client education.
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George Petropoulos President, CEO, Travelers Canada
The Canadian economy has fared better than most of the global economy, but the Canadian insurance marketplace continues to face challenges. The sector continues to be competitive and is seeing new capacity. Additionally, there are increasing claims costs, partially driven by the new Harmonized Sales Tax (HST) in Ontario and British Columbia. Due to marketplace dynamics, our industry may be challenged to achieve historical returns and may lag the economic recovery seen outside the industry. To address this, Travelers intends to remain disciplined in pricing, segmentation and underwriting. We think brokers and insureds will look to align themselves closely with insurers who can offer the financial strength to pay claims when they arise and who are committed to taking a long-term view of the Cana40 Canadian Underwriter December 2010
dian insurance marketplace. Travelers Canada, comprising St. Paul Fire and Marine and Travelers Guarantee, has been well positioned to manage the issues that have impacted the industry over the last few years. We remain focused on providing quality products and services to our customers, while building long-term and mutually beneficial relationships with our brokers. We are also significantly investing in our systems and employees to better support our brokers and customers in the future.
One year from now I might be writing about the risk of inflation. And you thought deflation was bad for the industry!
Rowan Saunders President, CEO, RSA Canada
At RSA, we’ve long held the view that consolidation is necessary in our industry. In 2010, we’ve seen some assertive mergers and acquisitions (M&A) activity. I believe we will see a fundamental restructuring of the industry over the next couple of years. It’s RSA’s intention to be at the forefront. Half-year industry results have improved in 2009 and 2010, but there is still quite a divergence in results between companies. This is going to drive consolidation, since companies with strong balance sheets and strong cash flow are in a position to acquire. The 30-year industry average ROE is about 10%, and we’ve seen far lower returns over the past three years — 5.9% in 2008, 7.9% for 2009, and 8.7% at the half-year of 2010, indicating the pressure several players are facing. In commercial lines, premium growth is modest, reflecting the impact of the economic downturn and the competitive stage of the cycle, though we are seeing a slight but definite increase in rate. Insurers with a heavy focus on specialized commercial portfolios and sophisticated underwriting and pricing strategies will continue to see stronger results than those focusing on general personal lines. Personal property portfolios are struggling to adjust to increased rate and obtain insurance-to-value accuracy. At the same time, they must adjust to
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COVER STORY
Keeping the Wolves at Bay intense weather events driven in part by our changing climate. Significant claims trends continue to be dealing with intense weather and ever-evolving auto reforms. As if dealing with these trends is not enough, what I find particularly interesting on the claims side is the change we’re seeing in customer expectations. A consumer expects 24/7 service, an easy experience and a quickly-settled claim. The claims area is a significant point of differentiation for RSA and I think we’re going to see insurers put a lot of emphasis on enhancing their claims proposition in the next 12 months.
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Maurice Tulloch President, CEO, Aviva Canada
On the financial side, no one can dispute the ongoing pressures on Canadian property and casualty insurers including declining bond yields, the threat of inflation and the cost of increased regulation. These are significant, but we have successfully dealt with similar economic and financial challenges in the past. However, on the claims side, the potential unknowns of climate change could be game-changing for our industry. Weather patterns and events have always been a significant factor in the
We commit to being a part of that effort and working with our broker partners to help Canadians adapt to climate change and stay protected. 15
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property and casualty business. But as loss statistics show, that risk is clearly growing, the effect is severe and the trend is not expected to abate. The country’s aging infrastructure and the response capabilities of all governments, our industry and Canadian propertyowners are being tested. Consumers expect our help. They expect us to understand, prepare for, provide coverage and effectively respond to these events with support when they need it. To deliver on this, the industry must continue working with municipalities to understand thoroughly the current state of infrastructure and its maintenance. At Aviva, we are continuing to provide coverage in high-risk areas, at the right price, guaranteeing product availability. We are also working with brokers to increase consumer awareness of their coverage so they can understand how climate change affects them. Aviva supports the strong leadership the industry has shown on this issue.
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Noel Walpole President, CEO, The Economical Insurance Group
In the financial arena, regulators will want companies to take a more conservative approach to capitalization. We don’t anticipate much change in interest rates or yields on the investment side, so investment income will remain negligible compared to past years. All of this places a higher demand for an operational profit through underwriting. From a claims perspective, we expect a continuation of the same weather-related losses over the next two years, with water damage being the primary loss. We expect to experience temporary relief from inflationary escalation of Ontario auto claims. After 24 months, we’ll start to see an erosion of cost containment because of challenges made to the Sept. 1 auto reforms. The years 2010 and 2011 may show improvements for the industry in Ontario auto, but unless rate adequacy is achieved, this improving trend will not continue.
Insurers with a heavy focus on specialized commercial portfolios and sophisticated underwriting and pricing strategies will continue to see stronger results than those focusing on general personal lines.
42 Canadian Underwriter December 2010
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Investigating AB Claims Accident benefit (AB) claims adjusters in Ontario can reduce payment of fraudulent claims and also help to fight organized crime. Here are a few tips for investigating these claims.
IRB CLAIM QUESTIONS
Donna Ford Licensed Private Investigator, Northwood and Associates
Generally speaking, get the clinical notes and records of the pre-accident family doctor as quickly as possible. Sections 33 and 53 of the Statutory Accident Benefits Schedule (SABS) — which relate to insurer examinations and the termination of benefits due to material misrepresentation, respectively — are your best friends in a bogus claim. In a questionable income replacement benefit (IRB) claim, if you telephone the alleged employer, I suggest you ask the following questions: • Is the claimant working now? • What was the last day worked? The first day worked? • Was a payment made by cheque, cash or direct deposit? • Were pay stubs provided that show deductions for tax or CPP? • Are there time cards? • Was the claimant an employee or self-employed
44 Canadian Underwriter December 2010
contractor? (This question is not asked of the employer on the Employer’s Confirmation of Income.) • Is the claimant a relative or friend of employer? (Ordering a corporate search before contacting the employer often gives useful information in this regard.) • What were the pay periods and amounts? • What was the claimant’s job title and description? • Was a Notice of Termination issued? • Was claimant’s name included on WSIB forms? If you visit the employer, I suggest you take a pre-printed form with you and then you can just fill in the blanks.You will need to get basic information about work dates, benefits, job description and wages. But you will also want to know what percentage of time the employee spent doing essential tasks and sub-tasks of employment, such as sitting, standing, bending over, lifting or carrying. You will want to review the employee file and all payroll and other records. If the employer refuses to sign the completed form, consider sending a letter confirming the information. I suggest you ask for a Statement of Post Acci-
Illustration by Ian Phillips/www.i2iart.com
At a time when auto insurance fraud is appearing in the contemporary spotlight, it is important for insurers and adjusters to be thorough in their investigations of AB personal injury claims.
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dent Earnings to be completed and signed by the claimant (all requests should be pursuant to Section 33 of the SABS.) If you arrange for surveillance and discover the claimant is working (but the OCF 13 indicates no post-accident income), consider whether or not you have enough evidence to deny the benefit under Section 53 of the SABS.The basis for denial would be that the claimant has willfully misrepresented facts.
DECEPTION AND DISCREPANCIES Some self-employed claimants try to pass themselves off as employees (usually of a company owned by a relative because they want fast money). They don’t want you to find out where they are actually working, and they don’t want you to see their income tax returns. If you have any question about the legitimacy of the income claim, then I suggest you set out the discrepancies and issues in a letter or Explanation of Benefits (EOB). Also, ask for income tax returns with enclosures and notices of assessment, copies of the back and front of pay cheques and bank records. You can ask the claimant to explain the discrepancies in a statutory declaration; this is in addition to the statement that you will want to take from the insured covering all of the issues. Section 4(5) of the Statutory Accident Benefits Schedule (SABS) says you don’t have to consider income on which tax is not being paid. Honest claimants will have no problem providing you with tax returns.
INVESTIGATING INCURRED EXPENSES When the Ontario government implemented auto insurance reforms on Sept. 1, 2010, the definition of “incurred expenses” changed. The amended definition of incurred expenses relates to goods and services such as housekeeping, caregiving and attendant care. The new definition says the insurer is required to pay for a claimant’s incurred expenses only if the service provider was rendering the services in the course of his or her regular occupation or, as in the example of family members
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providing the service, if the service provider sustained an economic loss as a result of providing the goods or services. The service provider’s name, address and telephone number should appear on their invoices along with details of work done. I suggest you do reverse phone and address searches to find out the name and address of the person to whom the phone is registered. By doing so, you may discover a relative is trying to pass himself off as a professional housekeeper. In addition, do a Google
payments/balance owing? If you do a telephone interview with service providers who supply information suggesting the bills are not legitimate, you should ask to meet with them to review their records and take a statement. If they refuse, you can send a confirming letter stating what they told you. Ask for an opportunity to meet to take a statement, particularly if they disagree with the contents of your confirming letter. Depending on the information you have, you could deny the provider claim outright; you could also compile the discrepancies in a letter to the insured and ask the insured to provide a statutory declaration to clarify the issue. In my experience, I have found many service providers have been paid much less than the insurer has already paid for alleged services, sometimes thousands of dollars less. The extra money is potentially going to the insured or being divvied up between the insureds and their legal representatives. This is fraud.
CALL TO ARMS map search to find the distance between the insured’s and the service provider’s homes, as well as the routes by car and public transit. This will give you potential areas of questioning when you do your interviews. Before conducting an interview with a questionable service provider, I suggest you review the insured’s statement, the bills, assessments and other reports dealing with that issue. Also, find out how much the insurer has already paid for the services of that particular person. In a telephone interview with a questionable provider, you should ask key questions first, since they usually try to brush you off quickly.These questions might include: • What was the payment agreement? • What has been paid to date in total? (Ask for an approximation or range if he or she cannot give you an exact figure.) • How much is now owing to the service provider? • Is the payment for services made by cheque, cash or direct deposit? • Does the service provider keep any records of dates worked/times/duties/
Insurers can do a number of things to help reduce fraud and fight organized crime. Interview service providers, both during the claim and after it has closed and payments have been issued.Take note of legal representatives or service providers involved in fraudulent claims and provide this information to the Insurance Bureau of Canada’s investigative service division (IBC-ISD). The Unfair or Deceptive Acts or Practices regulation deals with the failure to disclose a conflict of interest to the insured and the insurer. Without question, undisclosed conflicts lead to overtreatment and overbilling.They can also be an indicator of staged accidents and organized crime. If you see patterns of association between legal representatives, rehabilitation clinics, assessment companies, body shops and tow truck drivers, I suggest you write to all of them at the beginning of a claim and ask if there is any conflict of interest. Make sure you raise those letters at mediation, arbitration and trial. Also notify IBC-ISD of your letters and any responses.
December 2010 Canadian Underwriter
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sa
io n
sf a c t
ti
Guaranteed J.D. Power surveys suggest consumers are increasingly pleased with the service they are getting from Canada’s property and casualty industry. Lubo Li
Senior Director, Canadian Financial Services and Insurance Practice Leader, J.D. Power and Associates
Canada’s property and casualty industry has experienced dramatic changes in the past decade, with the emergence of direct insurers and growing consumer willingness to purchase and service their insurance policies online. Increasingly, the industry is shedding its commodity business mentality and adopting a customer-oriented philosophy. Customer experience is not only featured prominently in many insurers’ brand promises, but it is also embedded in their business processes at every “touch point,” a term used to describe ways in which customers interact with their policy providers. Examples of touch points would be consumer contact with brokers, agents, call centres, claims departments or the statements consumers receive from their insurers and/or brokers. This transformation is certainly yielding positive results, according to two studies J.D. Power
46 Canadian Underwriter December 2010
and Associates released in August and September — the 2010 Canadian Auto Insurance Customer Satisfaction Study and Canadian Home Insurance Customer Satisfaction Study.
IMPROVING CUSTOMER SATISFACTION LEVELS Since 2008, when J.D. Power began conducting these studies in Canada, customer satisfaction with Canadian property and casualty insurers has steadily improved. Table 1 (please see Page 48) shows customer satisfaction, measured as a Customer Satisfaction Index (CSI) score that ranges from 100 to 1,000 points. Auto insurance CSI has achieved steady improvement each year, and across each of the three segments — Quebec Private, Crown Insurers and Private Full Coverage (which includes insurers in Alberta, Ontario and Atlantic Canada).The biggest improvement is in the Quebec private segment, followed by Crown insurers. Private full coverage has experienced slower improvement relative to other segments. These results are quite impressive considering the premium increase in most jurisdictions, particularly in Ontario, where auto premiums have increased by double digits on average in the past two years. It also provides further proof that the
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industry’s investment in upgrading its technology and customer-facing processes and service standards have resulted in a system-wide improvement in customer experience. It is interesting to note that although customer experience has improved across all segments, a notable gap remains among the three auto insurance segments. Companies in the Quebec private segment lead the industry, while Crown insurers trail by a sizeable margin. Furthermore, J.D. Power industry benchmark studies indicate that customer satisfaction with property and casualty insurance still lags that of many other industries, including vehicle sales and service and retail banking. Although insurers typically benchmark against each other within their own industry, customers do not necessarily do so.The other customer experiences of policyholders — in industries such as banks, hotels and vehicle dealerships — shape their expectations of what good customer service with their
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insurance provider should include.These expectations influence their interaction with their insurer. Customer satisfaction is a moving target. It is the sum of customers’ experiences minus their pre-existing expectations. To meet and exceed these expectations, insurers not only must continuously improve their products and services, but also learn from the best practices of customer-oriented organizations both within and outside their own industry.
KEY DRIVERS OF CUSTOMER SATISFACTION J.D. Power and Associates’ customer satisfaction measurement operates on two fundamental premises. First, it must measure an insurer’s individual performance in a competitive context. Second, it must reflect what is important to the customer. Evaluating specific customer experience at various touch points and their impact on driving over-
all satisfaction helps determine the relative importance of such drivers. Based on survey responses from more than 40,000 auto and home insurance policyholders for the 2010 studies, five key factors or drivers of customer satisfaction have been identified: • interaction; • price/premium; • policy offerings; • billing/payment; and • claims. As Table 2 (please see Page 48) shows, interaction is the most important factor in customer satisfaction.The local agent or broker accounts for nearly half of customers’ interaction, while call centre service representatives account for another 40%. Given the relatively low incidence of online policy servicing, the Web site has a lower impact relative to the other two channels. In addition to interaction, the other top factors or drivers include price/ premium and policy offerings.
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Claims have the least impact on satisfaction among the five drivers. Although claims represent the biggest expense of any insurer and determine where resources will be dedicated, it is still a low-incidence activity — nearly 10% of customers file an auto-related claim with their primary insurer. Although insurers need to take care of claimants, they also need to ensure the other 90% of their customers also receive the best service possible. Among claimants, the claims factor is indeed the most important driver. This pattern is the same for both auto and home insurance customers.
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Table 1
Auto Insurance CSI (Customer Satisfaction Index)
The industry’s success in moving to a customer-centric philosophy is evident in its performance on the key drivers identified earlier. As Table 3 shows, not only has the industry improved on every key driver, but it also scores the highest on interaction, the most important of the five drivers. The year-over-year improvement is most significant in interaction, price/ premium and claims, all critical factors relative to a policyholder’s relationship with their insurer. One key insight J.D. Power has shared with the industry in the past few years is the need to be proactive in communicating premium changes. Ideally, this should be done through personalized means such as contacting customers by phone or via e-mail. Many insurers have made this communication practice part of their agent/broker or call centre customer outreach program requirements. These efforts are paying off: customers are more satisfied with their premium levels, even though more of them have received premium increases, particularly in Ontario. Customer satisfaction is a continuous journey. Results here suggest the property and casualty industry overall has achieved significant progress along this journey. But it still has a long way to go to match that of many other industries and, most importantly, to meet and exceed their customers’ expectations.
48 Canadian Underwriter December 2010
728
727
AB/ON/Atlantic Quebec Private Crown Insurers
692
701
2008 701 772 601
2009 703 773 615
737
735
2009 717 728 767
2010 711 706 788
H
2010 718 823 642
West Ontario East
2008 707 719 759
2
K
INDUSTRY PERFORMANCE ON KEY DRIVERS
Home Insurance CSI (Customer Satisfaction Index)
i
Table 2
Key Drivers and Importance of Auto Insurance Customer Satisfaction P 49.2% Local Agent or Broker
25.6% Interaction
41.9% Call Centre Service Representative
24.4% Price/Premium Overall Satisfaction Index
I
9.0% Website
21.4% Policy Offerings
15.6% Billing and Payment 13.0%
Table 3
Claims
F
Factor-Level Performance for Auto Insurance Industry Overall Factor CSI 2009 vs 2010 900
2009 779
800 700
2010
744 701
727
717 718 736
760
745 719
656 607
600 Overall
Interaction
Price/ Policy Premium Offerings
Billing and Payment
Claims
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Analytics
2.0 The property and casualty insurance industry’s underlying analytics, mathematics and statistics have been stable for some time, denying individual companies the opportunity to deploy significant commercial advantage based on analytics. More recently, an important series of technological breakthroughs in the analytics field known as machine learning have gained substantial attention.These technological advances, when applied to insurance data, can enable insurers to establish commercial advantages across their operations — from more sophisticated rating and underwriting (including the replacement of credit scores) to improved customer conversion/retention and the more effective optimization of insurance customer portfolios.
ness. The concept of variable exposures introduces further complexity. As opposed to nearly all other non-insurance data, where data points are each identical in their weights, insurance data yields data points with one day, a few days, one year, etc. as the exposure basis. These are a few main factors differentiating insurance data from the conditions found in traditional datasets used to develop relevant mathematical and statistical methodologies. Furthermore, insurance has a set of issues that make deployment of advanced analytics a required competence for sustained profitability. Most notably, the ultimate cost of goods sold on any particular policy is not known at the time of sale. Insurance pricing is an exercise in predicting the future. It involves building predictive models that leverage past history. Information known at the time of the sale is used to predict the probability of the insured experiencing a loss, as well as the likely size of that loss. Since no past individual policy truly represents the probable cost of the policy being sold, past policies are grouped together to make credible forecasts of cost and price.
UNIQUE ANALYTICAL CHALLENGES
CURRENT ANALYTICAL STANDARD
Insurance is a special case in terms of data and data analysis, very different from typical datasets encountered by mathematicians and statisticians. By its very nature, insurance data is extremely noisy and variable: claims frequency is relatively low and claims severity is volatile, and both metrics are variable by insurance line of busi-
Traditional insurance analytics based on actuarial science is based primarily on a range of linear models, with the more advanced linear model being the Generalized Linear Model (GLM-1975). From a traditional statistical perspective, these methods provide a solid baseline approach, providing a powerful and flexible
Machine learning analytic methods, when combined with traditional actuarial and statistical methods, can help pick out the truly predictive data points and correlations. Marlowe Leibensperger
Senior Vice President, EagleEye Analytics
50 Canadian Underwriter December 2010
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framework for understanding the predictive power of multiple variables and an output form convenient to forming new or adjusting existing rate plans. These methods are limiting, however, because insurance data exhibits nonlinear effects that have been shown to be very significant. Additionally, the nature of insurance data requires the application of assumptions regarding error functions, typically Poisson (claims frequency) and Gamma (claims severity), which have been proven to be imperfect when applied to fitting insurance data. This is particularly true in claims severity modeling. In the absence of something better, these assumptions deliver a useable result, but the real distributions are often different from model assumptions. These challenges, individually and collectively, present an opportunity to derive new, complementary approaches to augment model development and performance.
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ial and statistical methods. Once the problems associated with the matching of base machine learning methods and the complexity of insurance data have been addressed, substantial levels of predictive signal can be extracted from insurance data above and beyond the level achieved using current methods. Fusion machine learning methods op-
erate on both classification and regression problems, allowing insurance business operations to exploit this additional signal in a number of critical areas. The main benefits from the new fusion methods are found in the form of superior model performance (lift/consistency), improved analytical productivity/speed to results and enhanced ease of implementation.
Raising the Analytical Bar In contrast to traditional analytical techniques, machine learning makes no assumptions about linearity or the shape of the underlying error distributions. Machine learning searches the solution space of the data and lets the data speak for itself. The results derived from machine learning methods are a pure, unadulterated representation of the predictive signal. Like traditional methods, machine learning methods were developed outside the insurance industry; in their raw form, they suffer a number of the same challenges presented by insurance data. Illustrative of this fact, most machine learning methods have been publicly available over the past couple of decades and have had a minimal impact in the insurance industry. In their raw form, machine learning methods are generally difficult to apply to insurance problems effectively. To apply machine learning methods to insurance data efficiently, substantial research and development is necessary — including the fusion of machine learning and traditional actuar-
December 2010 Canadian Underwriter
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Superior model performance Underwriting insurance policies is a very complex task at the best of times. For some time, underwriting has become much more difficult, since the linear methods have established rates in such a way that the signal from individual variables has been captured in rates. (For example, looking at any single variable such as the age of driver, the underwriter is able to accept all risks, since the rates compensate for the appropriate level of risk.) This is also becoming true of a number of two-way interactions such as sex and marital status in auto insurance. If the single one-way and two-way interactions are successfully addressed in rates, how does the personal lines underwriter discover and discriminate good and bad risks? The answer is to use fusion-based machine learning methods that break portfolios into a controllable number of subdivisions based on variations in rate adequacy (loss ratio) with each subdivision described by a simple intersection of variables. For example, a subdivision might include an intersection of variables such as a vehicle older than 1998, combined with a rated driver male over 35 and a minimum operator age of 16 to 19. This approach has proven to uncover significant rate subsidies in current classification plans, ranging from -50% to 100% or more. Applying these methods to insurance portfolios will provide the underwriter with new, empirically driven knowledge, promoting the acceptance of previously unidentified good risks and the rejection of previously accepted poor risks.Tools like this enable underwriters, in combination with their own valuable and specific knowledge, to improve their performance. In many North American insurance markets, the continuing use of credit score as an underwriting or rating variable is under scrutiny. Given that credit score has such a strong effect when applied using current methods, the possibility of its disappearance is distressing to many companies. For many others, examining the removal of credit score from underwriting or rating is on the 52 Canadian Underwriter December 2010
Page 30
forefront of their corporate agendas as they look to take social or public policy stands, or eliminate operational costs or procedures, related to consumer consent. Credit score is very effective due to the stability of the underlying methods used in underwriting or rating, with much of the recent success coming from the introduction of new variables. The introduction of fusion-based machine learning methods has dramatically altered this scenario: the new methods can deliver more predictive signal using fewer variables. For example, recent research proved the fusion methods delivered a stronger signal
using only six of an insurer’s existing rating variables (excluding credit score) compared to traditional methods using 15 variables including credit score. Additionally, the newly derived model was found to be completely uncorrelated with credit score, removing the concerns of regulators. Fusion methods have consistently demonstrated an ability to find signal that improves the performance of the underlying model — demonstrating amplified dispersion, improved strength of fit relative to the historical data and better generalization of results on unseen data.
Increased analytical productivity A key factor in developing and deploying any commercial strategy is the time it takes to complete the process.The application of fusion machine learning methods — from data processing, model development and subsequent de-
ployment of a solution — takes a fraction of the time taken to develop and deploy traditional methods. This shortened timeline yields a reduction of cost, both in terms of research costs and the opportunity cost of realizing benefits. This accelerated result is achieved by the methods’ ability to handle data with minimum manipulation, as well as requiring no underlying assumptions on the distributions of the data. Flowing from these points, a large amount of manual, iterative work is removed from the modeling process. This far reduces the time and effort taken to execute these fusion machine learning models successfully when compared to the resources consumed using traditional methods. The use of fusion methods has been proven to accelerate the socialization, adoption and realization of benefits of advanced analytics within insurance carriers, all the while increasing an insurer’s analytical productivity and ability to investigate a number of currently unaddressed issues.
Enhanced ease of implementation Traditionally, operational departments have had issues with analytics in terms of the clarity (or incomprehensibility) of results. Market research points to a sizable chasm between modeling units and business folks, each speaking different languages related to statistically valid and useable business results. The introduction of a wide range of new methods allows these issues to be addressed in many circumstances. The simplest example is the previously discussed underwriting example, in which an unprofitable niche was detected and described to the underwriter with a commercially definable result. Results from fusion methods have been proven to enhance the dialogue regarding analytical results among insurance company stakeholders, including internal (i.e., non-modeling business units) and external (i.e., agents/brokers) parties. This transparency has resulted in improved collective buy-in and support, ultimately positioning the associated actions for greater acceptance and probability for success.
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Minding the
FARM Viewed in terms of marketplace stability, the smaller Ontario Facility Association Residual Market (FARM) and larger Risk Sharing Pool (RSP) volumes can be considered David J. Simpson “a good thing.” But will President, CEO, those RSP numbers spill Facility Association into the FARM? “It’s different this time” is an infamous phrase heard in investment banking community circles. I referred to this expression when kicking off a panel discussion on automobile insurance residual markets at the National Insurance Conference of Canada (NICC) in October 2009. It’s said to be the most expensive phrase in investment banking history. At the NICC, I wondered aloud whether it might be in our arena too. In the months leading up to the NICC, I had some discussions with conference organizer Joel Baker, president of MSA Research.We asked each
54 Canadian Underwriter December 2010
other if we believed auto insurance in Ontario, and auto insurance residual marks in particular, were really “different this time.” If not, were we on the verge of another explosion in residual market volumes similar to what we had seen earlier in the decade?
LOSS TRENDS In the years leading up to 2009, when Joel and I had our discussions, a trend of escalating loss ratios paralleled a similar trend during the earlier part of the decade.The earlier manifestation of this trend foreshadowed an unstable auto insurance product, which also featured rising claims costs that outpaced premium growth. Industry-wide private passenger car loss ratios for 1998-2008 looked like this: (Please see Table 1 on Page 56.): As it happened, the 88.9% loss ratio in 2009 was well in keeping with the trend of increasing loss ratios. In the first part of the decade, the response to the trend was classic: business flooded into the Facility Association Residual Market (or FARM). At the beginning of 2002, the FARM private
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Table 1
Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Earned Incurred Loss Ratio 78.4 92.6 100.9 99.5 97.1 76.9 61.5 66.2 72.0 79.8 82.8
passenger vehicle (PPV) written vehicle count was just under 16,000. It peaked at 226,000 in March 2004. Meanwhile, in Ontario’s other residual market mechanism, the Risk Sharing Pool (RSP) — to which companies cede risks at their own filed rates (presumably because the risk is a money-losing proposition at that rate) — changes in volume were marginal. Written vehicle counts increased from 112,000 in 2002 to 116,000 in 2004. Moving forward to 2006-09, we witnessed another deterioration in the Ontario auto insurance marketplace, in which claims costs were outpacing premiums once again. This time, however, the response from a residual market perspective has been the opposite of the earlier experience. In the FARM, PPV written vehicle volumes have dropped by roughly two-thirds, from 26,500 at the beginning of 2007 to just below 8,000 at the end of October. But in the RSP, it’s an entirely different story: written vehicle counts increased from 136,000 at the beginning of 2007 to 204,000 as at the end of October 2010. So what changed? What is different this time?
DIFFERENT THIS TIME? I would suggest a number of factors are in play. From our perspective, we at Facility Association have paid far more attention to two things: 1) seeking approval for adequate rates and 2) the
56 Canadian Underwriter December 2010
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relationship between our prices and the prices charged by voluntary market companies willing to write the business that would otherwise come to us. Our goal in this regard, consistent with our role as the “market of last resort,” is to ensure we are not inadvertently attractive to consumers from a pricing standpoint. We have also worked with our servicing carriers to be much more stringent in the enforcement of the declination rule. This ensures the business coming our way is truly eligible for the FARM. Other factors include: • more than adequate capital in the industry; • a relative consolidation of the private passenger insurance market in Ontario; • intermediaries working harder to keep business out of the FARM (including the use of the OPCF 28—Reducing Coverage for Named Persons endorsement); and perhaps even • an increase in consumer branding in our industry, which presumably means increased reputational risk is associated with significant non-renewal activity by insurers.
SMALLER FARM, BIGGER RSP Viewed in terms of marketplace stability (not to mention public optics), the smaller FARM and larger RSP volumes can be considered a “good thing.” That is to say we haven’t had a repeat of the 2002-04 experience, in which thousands of drivers found themselves insured through the FARM at premium levels often two to three times higher than what they’d been paying — with no change in their underlying risk profile whatsoever. This is not to say the impact of the contemporary residual markets on the industry has been particularly benign. In fact, it has been anything but. On a financial statements basis (which does not cover the full impact of the RSP results in the members’ hands), the annual deficits for the Ontario RSP just keep mounting.The Ontario RSP deficit was $70 million in 2007. This grew to $140 million in 2008 and $226 million in 2009. As this article goes to press, it
appears the projected 2010 Ontario RSP deficit will continue the worsening trend.This could be the result of the analytical sophistication companies employ to cede business to the RSP. Such sophistication may be keeping some business out of the FARM, for example, because companies are confident they know which risks are adequately priced for their own book. Unfortunately the trend noted above leads to the risk arising that at some
If a company cedes a risk to the RSP in the first place because they believe it to be a losing proposition, and it becomes even more of a losing proposition when they send it to the RSP, what then? Potentially, those risks will ultimately go to the FARM. point (don’t ask me when), the negative performance of the RSP will be such that it will not make financial sense for a company to transfer some money-losing risks to the RSP; this is because of the share of the results it will attract back to them. If they ceded the risk to RSP in the first place because they believe it to be a losing proposition, and it becomes more of a losing proposition when they send it to the RSP, what then? There’s a great deal of potential those risks will ultimately find their way to the FARM. That would certainly reinforce the view that the RSP is a leading indicator and the FARM a lagging indicator of marketplace distress. Of course they might not find their way to the FARM — especially as the recently introduced product reforms and positive pricing changes companies have pursued over the past 12 to 24 months gain traction. However, given that some estimates have the 2010 industry-wide combined ratio for Ontario auto looking like it could come in around 110%, I am only willing to say: “It’s different this time — so far.”
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It’s a
Date!
IBC’s 10th Annual Regulatory Affairs Symposium
David Gambrill Editor
Canada’s solvency regulator and Ontario’s insurance regulator establish timelines for two key files — reinsurance guidelines and Ontario auto reforms. For regulators and the Canadian property and casualty industry, it was all about setting a date. Canada’s solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI), and Ontario’s insurance regulator, the Financial Services Commission of Ontario (FSCO), made announcements concerning timelines related to two key files — the implementation of a new guideline on reinsurance practices and Ontario auto. The dates were penciled into re/insurers’ calendars at the Insurance Bureau of Canada (IBC)’s 10th Annual Regulatory Affairs Symposium, held in Toronto on Nov. 4, 2010. The symposium also featured a spirited defence by OSFI of reinsurers performing due diligence.
REINSURER GUIDELINES: SIX-MONTH GRACE PERIOD OSFI announced at the symposium that it would be granting the reinsurance industry a six-month extension to prepare for new guidelines on sound reinsurance practices and reinsurance security agreements.
58 Canadian Underwriter December 2010
“What we have in mind now is July 1 [2011],” said OSFI director of legislation and policy initiatives Philipe Sarrazin. Sarrazin said the proposed July 1, 2011 implementation date would be discussed with OSFI senior executives first. But the original implementation date of “Jan. 1 [2011] is very much off the map,” he confirmed. “I have concurrence of senior executives on this one. So you are looking at a bit more breathing room and a better Christmas time.” As of press time, OSFI had confirmed the new July 1, 2011 date for implementation. OSFI released a draft of Guideline B-3-Sound Reinsurance Practices and Procedures on Aug. 6, 2010. The guideline outlines four key principles for reviewing the practices and processes of reinsurers, including: • a sound risk management plan; • a sufficient level of due diligence; • clear terms and conditions in reinsurance contracts; and • taking care to ensure policyholders are not adversely affected by the terms and conditions of a reinsurance contract. OSFI also released in August 2010 its Draft Guidance for Reinsurance Security Agreements.This document establishes the new regime for obtaining a capital/asset credit in connection with unregistered reinsurance. The final version of the security agreements guideline is to be posted on OSFI’s Web site by Dec. 31, 2010.
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Putting the pieces together.
Events and Seminars Calendar You work hard to protect your clients’ property. Now, it’s time to ensure that you apply the same kind of energy and commitment to your own success. CIP Society Events and Seminars give you the opportunity to learn, to network, to catch up on industry developments and to think about your career.
CIP Society Events and Seminars Charlottetown – Annual CIP Society Meet and Greet . . . . . . . . . . . . . . . . . .December 16
Toronto – Fellows’Reception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .February 3
London – Knights vs Sarnia Sting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .January 1
Vancouver – New Insurance Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .February 3
Vancouver – Flood & Fire Investigations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .January 11
Victoria – Strata Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .February 3
Vancouver – Slips Trips and Falls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .January 11
Saskatoon – Introduction to Surety Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .February 9
London – Leading Insurance & Liability Cases 2009-2010 . . . . . . . . . . . . . . .January 11
Charlottetown – Annual Curling Bonspiel . . . . . . . . . . . . . . . . . . . . . . . . . . . .February 11
Saskatoon – Interview and Statement Techniques . . . . . . . . . . . . . . . . . . . . . .January 12
Vancouver – CIP Society “Battle of the Insurance Bands” . . . . . . . . . . . . . . . .February 17
Toronto – Annual Industry Trends Breakfast Featuring Phil Cook . . . . . . . . . . .January 13
London – Annual Volleyball Tournament . . . . . . . . . . . . . . . . . . . . . . . . . . . . .February 18
Regina – Interview and Statement Techniques . . . . . . . . . . . . . . . . . . . . . . . . .January 19
Regina – Introduction to Surety Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .February 24
St. John’s – CIP Society Bowling Event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .January 21
Ottawa – Leading Insurance & Liability Cases 2009-2010 . . . . . . . . . . . . . . .February 24
Ottawa – PROedge Winter Luncheon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .January 27 Keeping you at the forefront of the P&C industry. The CIP Society. MEMBERS BENEFIT. www.insuranceinstitute.ca/cipsociety
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FSCO’S CONSULTATION PLAN Ontario implemented its auto insurance reforms on Sept. 1, 2010 along with an IOU.The reforms are still missing three key ingredients: a new catastrophic impairment definition; a minor injury treatment protocol without an “interim” prefix; and a claims cost study intended to peg a number to the true tort costs related to the province’s hybrid no-fault/tort accident benefits system. At the IBC symposium, Ontario’s insurance regulator announced clear timelines for completing the catastrophic impairment definition and its proposed Minor Injury Treatment Protocol. It also announced the timeline for completing its proposed closed claims study on tort costs and a project to develop new health assessment standards. Philip Howell, CEO and superintendent of financial services at FSCO, announced a timeline for the much-anticipated review of the province’s catastrophic injury definition. His estimated timeline would see the review finished sometime between April and June of 2011. “Given the specialized nature of the issues involved, FSCO is assembling a panel of medical experts to make recommendations on what should be included [in the new catastrophic impairment definition],” Howell announced. “As in the case of the Minor Injury Treatment Protocol project, the work of this group will be scientifically evidence-based. Once the definition is developed, the panel will also propose required qualifications for assessors making assessments of catastrophic injury….The project will also include a consultation process where stakeholders will be invited to comment on the panel’s recommendations. Again, we expect stakeholder input to focus on scientific evidence.” Work is also underway on the Minor Injury Treatment Protocol, which is intended to replace the current, interim Minor Injury Guideline (MIG).The new protocol is expected to take between two-and-a-half and three years to develop, Howell said, with a final completion date set for 2013.
“The Treatment Protocol will focus on treatment outcomes and a set of milestones to help health care providers and adjusters measure a claimant’s progress,” Howell said. “It will also include a clinical prediction tool that will allow clinicians and insurers to screen patients with a higher likelihood of developing chronic pain and disability. The goal is to provide better outcomes for people injured in auto accidents.” Finally, Howell said FSCO will be conducting a closed claims study in conjunction with the IBC on the current cost structure of tort claims and how they interact with the Statutory Accident Benefits system. “The last closed
I am told we [OSFI] went overboard, but we don’t think it’s unreasonable to perform due diligence on multi-milliondollar contracts. claims study in Ontario was conducted in 1988,” Howell said. “I think we all agree that Ontario’s auto insurance system has changed a good deal since then. This work will begin in the first half of 2011and take approximately six months to complete.” Howell also announced work will soon be underway on a process to develop standards for third party medical exams. “During our Five Year Review consultations, a significant number of stakeholders expressed concern about the quality of insurer examination reports and the qualifications of providers conducting these exams,” he said. “It has been suggested that this is specialized work and practitioners should have an appropriate set of qualifications and operate in compliance with appropriate standards.”
OSFI ON DUE DILIGENCE OSFI may have granted Canada’s reinsurance community some leeway concerning the date for implementing the regulator’s Guideline B-3-Sound Reinsurance
Practices and Procedures, but OSFI is not wavering on its commitment to due diligence. At the IBC symposium, Sarrazin acknowledged OSFI “created a lot of stir” within Canada’s reinsurance community because of its guideline, which states insurers should be performing a sufficient level of due diligence on reinsurance counterparties. But he insisted the principle of “due diligence” is not overly prescriptive and is still very much in keeping with a flexible principlesbased approach. “I am told we went overboard, but we don’t think it’s unreasonable, honestly, to perform due diligence on multi-million-dollar contracts,” he said. “There is a lot of due diligence that goes on in much smaller transactions...” Sarrazin flatly disagrees with critics who have argued that OSFI expects an unrealistic amount of effort to comply with the guideline. “Read the words,” he said. “We want due diligence performed commensurate with an institution’s exposure. So, tailor it to your needs.Tailor it to how much reinsurance is being used... “If a counterparty is selling you [financial] strength, shouldn’t you be allowed to verify it’s true that the strength is going to be there, and the payments are really going to be on time when you really want to call on your reinsurer counterparty? “To us, it's obvious. For some, it's asking way too much. But we think it's fair and reasonable to perform due diligence on contracts.” Sarrazin said OSFI’s guidance should not be interpreted to mean brokers or ratings agencies could not be consulted as outside sources when performing due diligence on counterparties. But they should not be the only sources, Sarrazin said. “What we are saying is, proper due diligence requires that you ask the right questions and you form your own opinion.We’re not restricting the use of outside sources, but we’re saying you need to ask questions.” Consulting OSFI itself is no substitute for due diligence, 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
Katherine A. Mabe will succeed Noel Walpole as president and CEO of The Economical Insurance Group (TEIG). She starts at The Group on Nov. 15, 2010. Prior to accepting her role at TEIG, Mabe was president of the specialty products division of Nationwide Insurance Company of America. In addition, she was president and CEO of Titan Insurance Company and Victoria Insurance Company (Nationwide subsidiaries). Mabe has more than 32 years of experience in the property and casualty industry.
2
Policy Works Inc. and SGI Canada have enabled straight-through processing of commercial lines data between a desktop application and an insurer’s underwriting system. Policy Works v2010.1 is the first mechanism to achieve this, a Policy Works release says. Brokers are able to send submissions to and receive quotations from SGI Canada’s underwriting system directly, without ever having to leave their Policy Works desktop application, according to a company release. “Policy Works also entered into an agreement with L’Union Canadienne to deliver a commercial lines data
62 Canadian Underwriter December 2010
exchange solution, integrating Policy Works’ commercial management system (CMS) and L’Union Canadienne’s underwriting system. This solution offers pure notouch processing, enabling brokers to send submissions and receive quotations electronically without a Web portal, which means no new portal or system for brokers to learn. The integration is expected to be completed by the fall of 2011.”
3
Esporta Wash Systems Inc. no longer has an exclusivity agreement with WINMAR Property Restoration Specialists and Disaster Kleenup Canada (DKC). WINMAR and DKC signed an agreement with Esporta Wash Systems in 2007, giving the two Canadian restoration contractors exclusive rights to use the Esporta technology for the restoration of soft contents. Esporta Wash Systems’ patented and proprietary technology helps restore large amounts of the soft contents traditionally cashed out by insurance companies, thus requiring fewer damaged goods to be transported to landfill sites. “The Esporta Wash System technology has provided us with the benefits of reduced
4 loss costs, as well as being more sustainable,” said Glen Oxford, national property claims manager for Cooperators Insurance. “The end to the Canadian exclusivity is important to us, because it makes the technology available to more contractors and other organizations who can bring the benefits of the Esporta to a greater number of our clients.”
4
Global insurance broker Willis Group Holdings (NYSE: WSH) has appointed Vic Krauze [4] as chairman and CEO of Willis North America. Krauze will report to Joe Plumeri, chairman and CEO of Willis Group, and will serve as a member of Willis' executive committee. Krauze, formerly president and chief operating officer of Willis North America, succeeds Don Bailey, who is leaving the company in December after a transi-
6 tion period to begin a new role for a major U.S. personal lines insurance carrier. Willis also appointed Todd Jones, formerly national partner for the Northeast Region, as president of Willis North America.
5
Duck Creek Technologies Inc. (Duck Creek), a provider of software and services for the insurance industry, has signed an agreement with B.C.’s public auto insurer, the Insurance Corporation of British Columbia (ICBC), to license Duck Creek Rating. Duck Creek Rating is a solution designed to modernize a company’s rating function, whether by means of replacing a legacy rating function or providing a rating solution for a new business line. ICBC sought the new rating technology to help improve its flexibility and speed to market for new products and rating changes to respond
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8 more quickly to customer needs. Recently, Gartner MarketScope for North American property and casualty insurance policy management modules gave Duck Creek a positive rating.
6
Swiss Re has appointed Jonathan Turner as chief financial officer of its Canadian operations, effective Nov. 22, 2010. Turner joins Swiss Re from Ernst & Young, where he specialized in both the property and casualty and life and health insurance sectors. He started his career with Ernst & Young in the United Kingdom and has been located in Toronto since 2001. He holds an ACA (UK Chartered Accountant) and is fluent in French.
7
Isabelle Perreault has been appointed executive director of the Regroupement des cabinets de courtage d'assurance du
9 Québec (RCCAQ). She was previously the director of communications and public affairs with the Chambre de l’assurance de dommages (ChAD) and the Coalition pour la promotion des professions en assurance de dommages. Perreault has 13 years of experience in public affairs, communications and public relations, including more than eight years as manager for a self-regulating organization in the financial sector.
8
Mathieu Brunet [8] has been selected president of L’Association de la relève en assurance du Québec (LARAQ), a nonprofit organization established to help young insurance professionals network and share professional resources. Now 10 years old, the association has more than 2,000 members across Quebec. The Association has three committees (Montreal, Quebec and Eastern Town-
ships), each of which organizes several events during the year. Brunet succeeds Simon Charbonneau as president. Also, LARAQ Montreal has selected new members of its board of directors for the period 2010-11. They include: Mathieu Brunet, Anne-Marie Deschênes, Marie-Helene Plourde, Caroline Cormier, Andréanne Paquet Vincent Lessard-Phillips, Geneviève Ducharme and Benoit Tessier.
9
Chesterfield Canada Inc., a specialist independent wholesale broker, is expanding its presence across Canada. The Lloyd’s broker has applied for and successfully obtained licenses to offer its wholesale products in Alberta and British Columbia. “We are very pleased that the regulatory authorities in both Alberta and British Columbia have seen fit to award us their licences to operate in their provinces, as it allows their brokers to access a broader range of insurance products for their insureds,” said Gary Hirst, Chesterfield’s director of business development. Chesterfield’s Toronto team will focus on the drive into British Columbia and Alberta, offering access to hardto-place property/liability,
sabotage and terrorism, host/ hospitality, builders’ risk and renewable energy power production classes of insurance.
10
SCM Risk Management Services (RMS), in partnership with the Insurance Brokers Association of British Columbia (IBABC), has launched the pilot of iClarify services in B.C. More than 50 brokerages across the province have been selected to take part in the test phase, which is expected to continue throughout the remainder of 2010. Province-wide release is targeted for 2011 Q1. iClarify is a validation tool providing brokers with information on specific residential properties, including 14 critical construction data elements, geo-coded streetscape and satellite imagery and valuation services. The product was first rolled out in Ontario earlier this year. “We’ve been watching with great interest the development of this product and its rollout in Ontario,” IBABC executive director Chuck Byrne says. “We’re now pleased that BC brokers get their chance to put it to the test in their daily operations. We’re looking forward to hearing what brokers have to say about it.”
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GALLERY See all photos from this event at www.canadianunderwriter.ca/gallery
Gilbertson Davis Emerson LLP hosted their annual fall reception on Sept. 30 at the National Club in Toronto. More than 130 clients and partners attended.
ADVERTISERS’ INDEX ACE INA Insurance Allstate Insurance Company of Canada Aviva Canada Inc. CICMA/CIAA Ontario Joint Conference CNA Canada Crawford & Company (Canada) Inc.
7 73 2 (IFC) 53 47, 67 15
Cunningham Lindsey Canada
9
Duck Creek Technologies, Inc.
35
The Economical Insurance Group The Guarantee Company of North America
13, 65 23
Great American Insurance Group 75 (IBC) GroupOne Underwriters
27
IBAO 90th Anniversary Publication
71
Impact Auto Auctions Insurance Institute of Canada Intact Insurance
41 43, 49,60 33, 76 (OBC)
McLarens Canada
19
OIAA Claims Conference
55
Ontario Insurance Directory
51
Pencross Financial Corporation
29
RSA – Royal & Sun Alliance Insurance Company of Canada
21
Swiss Reinsurance Company Canada
5
Transatlantic Reinsurance Company
37
The Ontario Broker magazine (IBAO) WICC
70 57, 59
WINMAR
25
XL Insurance
17
Zurich Canada
39
64
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GALLERY See all photos from this event at www.canadianunderwriter.ca/gallery
The Insurance Community 3rd Annual Wish Upon a Star Charity Golf Tournament was held in support of the Starlight Children’s Foundation on Oct. 6 at Deer Creek Golf and Country Club. Generous golfers at the sold-out event teed up to help make a difference in the life of children. Tournament organizers presented more than $46,500 to the Starlight Children’s Foundation. For more than 20 years, the foundation has committed itself to improving the quality of life for children with chronic and life-threatening illnesses and life-altering injuries. The foundation provides entertainment, education and family activities to help cope with any pain, fear and isolation associated with prolonged illness.
Kathrine A. Mabe CPCU, CLU, ChFC, MBA
Gerald Hooper, Chairman of the Board, is pleased to announce the appointment of Katherine A. Mabe as incoming President and Chief Executive Officer for The Economical Insurance Group® (TEIG®). Kathy possesses a significant track record of success in the industry. Prior to accepting her role at TEIG, Kathy was President of the Specialty Products Division of Nationwide Insurance Company of America, President and Chief Executive Officer of Titan Insurance Company and Victoria Insurance Company, subsidiaries of Nationwide. Kathy has over 32 years of experience in the property and casualty industry. She earned a Bachelor of Arts degree in Communications and a Master of Business Administration degree and holds several designations including: Chartered Property Casualty Underwriter (CPCU); Chartered Life Underwriter (CLU); Chartered Financial Consultant (ChFC); and Associate in Risk Management (ARM). The Economical Insurance Group is one of the largest property and casualty insurers in Canada with $4.6 billion in assets and a surplus of nearly $1.2 billion. 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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Crawford & Company (Canada) Inc. employees participated in their 2nd annual Global Day of Service on Oct. 2. Crawford employees from around the world volunteer for a charitable cause of their choice on Crawford’s Global Day of Service. This year, more than 1,200 Crawford employees, family members and friends around the world participated in more than 54 service projects in 19 countries. Here in Canada, events were held in Vancouver, Calgary, Windsor, Toronto, Kitchener and Ottawa. The various projects included volunteering in homeless and women’s shelters, planting trees, donating food and clothing to charitable organizations and volunteering with the Children’s Aid Society.
See all photos from this event at www.canadianunderwriter.ca/gallery
Rochon Engineering welcomed clients to their facility in Bolton, Ontario in September and October for hands-on seminars on origin-and-cause fire investigations as well as motor vehicle accident reconstruction. Attendees observed demonstrations in Rochon’s laboratory and 9,000-squarefoot warehouse.
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Ted Bellinger, vice president of business development at ENCON Group Inc., cycled from Vancouver to Halifax between Sept. 9 and 23 to raise funds for the Sears National Kids Cancer Ride (SNKCR). Bellinger personally raised more than $44,000 “to help children live with and beyond cancer” (fundraising continues at www.snkcr.com/tedbellinger). The 2010 ride team of 39 cyclists (of which Bellinger is one) together raised more than $1.4 million — and that total is still rising. The SNKCR has one, single-minded goal: to raise sustainable funding for children’s cancer research and pediatric oncology support programs in each and every one of the 17 hospitals across Canada that are licensed to perform services vital for keeping children suffering from cancer alive with a better quality of life.
Dan Nakonechny Gary J. Owcar, President & COO of CNA Canada, is pleased to announce the appointment of Dan Nakonechny to the position of AVP, Branch Manager Calgary. Dan began his career in 1997 with RSA in Calgary and moved through several underwriting and management positions of greater responsibility within the Calgary insurance market before transferring to Toronto. As the senior leader in the region, Mr. Nakonechny will report to the President and be responsible for the strategic development of the territory, driving profit and growth objectives through leadership, coaching and distribution management. His background in sales and distribution and his relationships with the region’s brokers will provide him with a solid foundation to lead and develop the Calgary branch operation. Mr. Nakonechny holds both a Bachelor of Arts and a Bachelor of Management degree and attended Stanford University’s executive management program. He is also a Fellow Chartered Insurance Professional and holds the Canadian Risk Management designation. Serving businesses and professionals since 1897, CNA is the North America’s seventh largest commercial insurance writer and the 13th largest property and casualty company. CNA’s insurance products include standard commercial lines, specialty lines, surety, marine and other property and casualty coverages. CNA’s services include underwriting, risk control and claims administration.CNA is a registered trademark of CNA Financial Corporation. For more information, please visit www.cnacanada.ca.
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More than 75 exhibitors were showcased at the Insurance Brokers Association of Ontario (IBAO)’s 90th Annual Convention and Exhibition in Niagara Falls on Oct. 20-21.
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IBAO Affiliate Achievement: Bryan Yetman, IBAO president (left), presents the honours to Greg Janes, Ottawa affiliate president (centre), and Gregg Luesby, Ottawa affiliate past president.
IBAO Brokerage of the Year: W. David Baxter, CEO of Thunder Bay Insurance Services Ltd. (left) receives the honour from IBAO president Bryan Yetman.
At its 90th Annual Convention, the Insurance Brokers Association of Ontario (IBAO) handed out its Awards of Excellence during its President’s Gala on Oct. 22. Members of the IBAO community shared in the achievements of colleagues and celebrated the association’s milestones over the past nine decades. Winners included: Affiliate Achievement: Ottawa Insurance Brokers Association. Brokerage of the Year: Thunder Bay Insurance Services Ltd. Broker of the Year: John Baizana, Baizana Insurance Brokers Ltd.
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$52 + gst Order today: TOB Subscriptions Department TOB@ibao.on.ca 70 Canadian Underwriter December 2010
IBAO Broker of the Year: John Baizana, principal broker and vice president of Baizana Insurance Brokers (right), recieves the award from IBAO president Bryan Yetman.
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Insurance Brokers Association of Ontario (IBAO) held its 90th Annual Convention and Exhibition in Niagara Falls on Oct. 20-22. The event included: 1) CEO Panel: (from left) Evan Solomon, moderator and CBC journalist; Jean-Francois Blais, president and CEO of Axa Canada; Louis Gagnon, president of Intact; Maurice Tulloch, president and CEO and Aviva Canada; Kevin McNeil, president and CEO of Gore Mutual; and George Cooke, president and CEO of The Dominion.
2) YBC members Traci Boland and Jason Famme host the college student luncheon. 3) IBAO president Bryan Yetman and IBAC president Fraser Lyle congratulate graduates of the Future Leaders program. 4) President Bryan Yetman and incoming president Peter Burns. 5) Incoming president Peter Burns makes his inaugural speech. 6) Crooner Matt Dusk provides entertainment during the President’s Gala. 7) Leader of the Ontario Progressive Conservative Party Tim Hudak delivers a keynote speech.
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Spring Fresh, a division of FirstOnSite Restoration, celebrated its 30th anniversary with an Open House on Oct. 15. Guests toured the new office and plant location in Grande Prairie, Alberta. The evening started with cocktails, followed by a tasty selection of food. Laurie Middaugh provided entertainment throughout the evening.
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GALLERY See all photos from this event at www.canadianunderwriter.ca/gallery
WICC Ontario Chapter held its annual Breakfast for Cancer on Nov. 3 at the Arcadian Court in Toronto. The sold-out event had more than 450 insurance industry supporters in attendance. They heard the personal and courageous story of ovarian cancer survivor and speaker Cynthia Bradburn. Despite her obstetrician/gynecologist’s belief that her rash of symptoms was caused by an ovarian cyst, Bradburn had a gut feeling it was something more serious. When she attended an Ovarian Cancer Canada Listen to the Whispers awareness presentation at her workplace, “I cried and came out of there convinced I had ovarian cancer,” she said. “Ovarian cancer may have changed my life, but I am determined to not let it ruin my life. I’ve learned that life has no guarantees, so I’m living each of my days to the fullest and I’m living without regrets. Anything that’s within my control, I’m going to take it and run with it.”
Carole Workman W. Guy Hill, Jr., Chairman, is pleased to announce the appointment of Carole Workman to the Board of Directors of Allstate Canada Group. Ms. Workman is a retired senior executive who most recently served as Executive Director of the Canadian Association of University Business Officers. Prior to that, Ms. Workman enjoyed a long and distinguished career with the University of Ottawa that culminated with her appointment as Vice President Finance and Administration, a position she held from 1991-2004. A graduate of Laurentian University with a Bachelor of Commerce degree, Ms. Workman also earned her Chartered Accountant designation and is a graduate of the Advanced Management Program at Harvard University. Ms. Workman currently serves on the board of The Ottawa Hospital, and has previously served on numerous boards including the University of Ottawa Heart Institute, Ottawa Hydro Holding Inc., Ottawa Health Sciences Centre, and Royal Ottawa Hospital. Allstate Canada Group of Companies including Allstate Insurance Company of Canada, Pembridge Insurance Company and Pafco Insurance Company is a wholly-owned subsidiary of Allstate Corporation of Northbrook, Illinois. Allstate Canada, with headquarters in Markham, Ontario was founded in 1953 and is a multi-channel producer and distributor of home and automobile insurance products, which are accessible through community-based agents, broker representatives, directly on-line, and at 1-800-ALLSTATE.
® Trademark used under licence by Allstate Insurance Company
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GCAN Insurance Company hosted their annual cocktail reception at the King Edward Hotel in Toronto on Oct. 14, 2010. GCAN staff from Toronto, Calgary and Montreal, spent an enjoyable evening mixing and mingled with broker partners, reinsurers and clients.
74 Canadian Underwriter December 2010
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HOME • AUTO • BUSINESS Certain conditions, restrictions and exclusions may apply. Services are not available in Saskatchewan or Newfoundland. The BIP logo is a registered trademark of the Insurance Brokers Association of Canada (IBAC) used with permission. All other trademarks are properties of Intact Financial Corporation used under license. © 2010, Intact Insurance Company. All rights reserved.