Canadian Underwriter July 2011 by Annex Business Media

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Honey, I Shrunk the Market by David Gambrill

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VOL. 79, NO. 7, July 2011 Canada’s Insurance and Risk Magazine. Published by Business Information Group

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Cover Story

Honey, I Shrunk the Market

Early this year, analysts said it would take an extraordinary sequence of catastrophic events to shrink capacity enough to turn the global reinsurance market. But after a horrible first two quarters in 2011, including disasters in New Zealand, Japan, the United States and Canada, it looks like reinsurers in Canada are contemplating the previously unthinkable — rate increases. By David Gambrill

features

What is an Auto?

Fishing for Profit

In the interconnected worlds of law and insurance, this simple question does not have a straightforward answer.

Canadian insurers are using a variety of different strategies to reel in a greater market share in Canada’s profitable commercial lines.

By Craig Harris

By Brenda Rose

18 The Road Ahead Two key issues facing Canada’s property and casualty industry include earthquake response and the regulator’s increasing focus on capital. By Sharon Ludlow

26 Intact’s Big Splash Canada’s middle commercial market figured prominently in Intact’s decision to purchase Canada’s Number 6 P&C insurer, AXA Canada. By David Gambrill

40 Challenging Convention Speakers at the 7th Annual Canadian Captives & Corporate Insurance Strategies Summit discussed the need to re-examine ‘Old World’ ways of thinking about captive formation, collateral and combined ratios. By David Gambrill and Vanessa Mariga

46 The Direct Approach Technology is the driving force behind the strong presence of the direct channel in Canada. By Sylvie Paquette

Aftershock! Canadian adjusters who helped adjust the earthquakes in New Zealand warn that ‘The Big One’ may in fact be ‘The Big Many.’ By David Gambrill

Claims Control Self-insurance gives policyholders a greater say in the claims process because they are taking a piece of the action. By Gary Tobin

July 2011 Canadian Underwriter

VOL. 79, NO. 7, July 2011 profile

CANADIAN UNDERWRITER Art Director Pylon.ca, Sascha Hass

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

10 Rugged Terrain Greg Merrithew, poised to become the incoming president of the Canadian Independent Adjustersâ&#x20AC;&#x2122; Association (CIAA), is used to dealing with unique, difficult and territorial challenges. By vanessa mariga

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Canadian Underwriter July 2011

editorial

Push and Pull

David Gambrill Editor david@canadianunderwriter.ca

EDITORIAL

It is jarring to see arbitration decisions emanating from FSCO that continue to expand the definition of “arising from use and operation” of a motor vehicle. David Gambrill, Editor david@canadianunderwriter.ca

nadianunderwriter.ca • March 2008

Canadian Underwriter July 2011

The New Class of Disab

pparently the Court of the Queen’s Bench of Alberta treatment of the victims who has carved out a new category of ‘disabled’ people — nent and catastrophic — in those who have suffered minor whiplash injuries in For this class of people wit A strange, paradoxical trend is But in light of this cominsurance coverage would car collisions —auto. who have mitment, apparently litigation evolving in Ontario it isbeen jarringdiscriminated to protectCdn$4,000 against slip and fall cap do against in ways in which see other marginalized in Oneasofthis. the main differen The province’s insurance arbitration decisionsgroups incidents such regulator, Financial emanating from FSCO that The whole question of victims is th Canadianthesociety can only imagine. of auto collision Services Commission of continue to expand the defigetting out of a car, getWitness this passage from Court of the Queen’s Bench ‘disability’ is more often tha Ontario (FSCO), is laudably nition of “arising from use ting off the bus, etc., really Associate Chief Justice Neil Whittmann, who recently oblitercatastrophic cases, the injuri cracking down on fraud, takand operation” of a motor should be better defined in ated Alberta’s Cdn$4,000 cap on damages for minor injuries nent disfigurement and/or d ing some serious and immedi- vehicle. This trend effectivelegislation. Are you really sustained intocar collisions: evidence and the severity of ate measures curb abuse. “The ly exposes the before Ontario me autosuggests “using disability or operating a vestrongly thatvery minor particularly those the victim makes the differen Alas, at the sameinjury time, victims, product to claims that aresuffering hicle” after you have walked FSCO’s arbitrators are continumore appropriately classified several steps away from it? from a whiplash associated disorder, are subjected to stereoIt’s doubtful an ordinary ing to expand the definition bodily injury tort claims. If a person has two feet on typing and prejudice. In sum,asthey are often viewed as malinstitutionally unjust or ‘discri of what constitutes an auto In Daphna Webb and the ground and has taken a gerers who exaggerate their injuries or their effects in an effort these two classes of victim “accident,” thereby increasing Wawanesa Mutual Insurance few steps beyond a vehicle, to gain financially. Thetofact that these FSCO injuries are often not example, minor injury opportunities for insureds Company, effectively it seems strange tothat think objectively verifiable may contribute to this perception.” financial compensation as c collect auto insurance benefits. expanded the meaning of that if he or she gets hurt, The property andstereotype casualty come the “use and operation” of accordthe insured was would involvedargue in How did this to pass? Apparently, no one that ca insurance industry is duly a motor vehicle to include some kind of “motor vehicle ing to the court, proof by assertion is all it takes to be a minor- be subject to a Cdn$4,000 lit and justifiably impressed a slip and fall around the accident” engaging accident ity group suffering Charter discrimination. “I would simply Where the Alberta Court with FSCO’s recent crackperimeter of a vehicle. This benefits. note that the existence of a stereotype does not require that it pare the right down on fraudulent auto is an especially perplexing It is well known thesegroups. And n be universally accepted,” Whittmann thatare willin be raised on insurance claims. These decision. wrote. Maybe so, but kinds ofpoints decisions measures include of newnegative reguOn its face, the decision keeping with a regulatory more evidence stereotyping should exist than Insurers and politicians lations allowing to that stands mandate to make sure insurmerely victims insurers declarating it is for so. the proposition policy reasons, the court no withhold benefits from claim- that the auto insurance ance companies treat people Regardless, Alberta’s Cdn$4,000 minor auto injury dam- keep everyone’s auto insura ants who have not provided product should answer if fairly. But erring on the side age cap is no more — swept away as unconstitutional because of the minor injury victims, requested documentation. a person cannot get out of of the consumer, as FSCO it discriminates against a new sub-category of people with Butopens the court says this do Also, industry scuttlebutt his or her car safely. Fair did in Webb, the door disabilities. Never the enough. fact that against mino suggests we can lookmind forward Butthe if acourt person,incorrectly to morediscrimination decisions that exto a new system of adminisas in this case, turns off pand the public’s access compared minor whiplash victims to a supposedly analogous claims costs aren’ttothe only fa trative penalties her car, getshave out of her car,rightsaccident benefits — management a trend group of injury sometime victims who apparently Charter to about cycle as in the near future, perhaps walks around to the front of that runs counter to what the sue insurers for more money. “Simply put,” Whittmann logic goes, minor injury vic before the October election. her car, avoids a snow bank regulators and politicians are wrote, “the FSCO’s [appropriate] of those by insurance companies tha Definitely, actions comparator by placinggroup a foot consists on a shovattempting to accomplish by accident injury victims injuries are icy not—within ness fraud. decisions when it come on auto insurance reform whoseeled — albeit accessthe defeliminating and the government’s actions point to a sidewalk, it’s difRules around the “use inition of minor injury.” Whatever one thinks of towards tackling fraudulent ficult to see how this could and operation” of a vehicle Alas, the learned judge seems to have a better grasp of the about predictability of cost auto claims has signaled an a “car accident.” should be tightened and population of this category be than most. Exactly who is this their claims go from pred interest by the public authoriIn this instance, the claimclarified so that the intergroup of people covered under Alberta’s legislative unpredictable Cdn$21,000 a ties in reducing thenot number ant should be suing under regime pretations are more in line for minor auto injuries, but who nevertheless could have sued no real sense of of expensive and problematic the homeowner policy of the with the overall goal thathow high the automore insurance for person who failed to clear the regulator andapoliticians for thanclaims Cdn$4,000? without cap are heard. Th insurers. The only additional the walk properly, or under seek — a stable, predictIt’s quite possible the court decision here is conflating impossible for the Alberta go comment to be added here is: a municipality’s liability able, affordable auto insurinjury classes. Is the court saying, for example, that the comout how high these damage a Keep up the good work. insurance policy. Either way, ance product. parator class includes catastrophic injury victims? Why would might go, resulting in rate it be appropriate to compare the treatment and legal rights province. afforded to these two distinct classes of auto collision injury The interesting thing wil victims? ing to trial in Atlantic Canad Indeed, the point of Alberta’s 2004 auto reforms was to and say minor injury victim differentiate the treatment of the pain and suffering of under the Charter because o “minor” auto collision victims, as defined in law, with the to make it to the Supreme C

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marketplace

Regulation OSFI calls for global insurance capital standards Global insurance capital standards would prevent the possibility of companies taking advantage of differences between capital charges across regulatory jurisdictions, according to Canada’s solvency regulator. Julie Dickson, superintendent of the Office of the Superintendent of Financial Institutions (OSFI), made the observation in a speech to the International Insurance Society 47th Annual Seminar in Toronto on June 21. “At this moment, we have no international agreement on some key aspects of insurance regulation, nor do we have a road map to get there,” Dickson said. “In fact, there is no international agreement on basic issues, such as specific capital standards on diversifiable risks.” Meanwhile, OSFI is hearing stories about “regulatory arbitrage” occurring in the insurance industry. This is when a company has a capital charge for a risk, and is able to reinsure it with another company that has a lower capital requirement for the same risk. “Sometimes you can see this practice allowed within the same conglomerate, most notably through the captive insurance structure,” Dickson said. “This is not something we condone.” 8

Canadian Underwriter July 2011

CCIR seeks public input on potential issues related to credit scoring The Canadian Council of Insurance Regulators (CCIR) is seeking further discussion about seven potential risks to consumers identified in a CCIR paper on the use of credit scores by insurers. The CCIR said it issued its June 2011 issues paper on credit scoring because it wants to hear from stakeholders about whether its list of identified risks is complete; whether the identified risks do in fact represent a potential harm to consumers; and whether current law addresses some of the risks already. The seven potential risks identified in the CCIR paper are: inadequate consent; unreliable credit data; availability and affordability of insurance; insufficient disclosure; undue impact on certain groups; privacy breaches; and a lack of consumer understanding.

certain information from treatment providers, who will have 10 business days to produce it after receiving the request. Requested information may include: • the originals of any treatment confirmation form, treatment and assessment plan, assessment of attendant care needs and other documents giving rise to the claim for payment; • a statutory declaration as to the circumstances that give rise to the invoice, including particulars of the goods and services provided; and • the name and full address of the provider, and of every provider that provided any of the goods or services referred to in the invoice. Should a provider fail to comply, the amount payable by an insurer under an invoice is not overdue and no interest accrues on it.

Canadian Market

Ontario regulation allows insurers to challenge claims suspected to be fraudulent

Alberta consumers increasingly disgruntled with insurance rates, despite decreases

An amendment to Ontario’s Insurance Act will essentially allow insurers to challenge claims suspected to be fraudulent by refusing to pay for treatment plans until the treatment providers produce reasonable information. Ontario Regulation 194/11 took effect on July 1, 2011. The regulation gives insurers the authority to request

Alberta consumers are increasingly disgruntled about their auto insurance, even though premiums are not increasing significantly yearover-year, a consumer survey by the Alberta Insurance Rate Board (AIRB) has found. The AIRB contracted an independent marketing research company to conduct a telephone survey with 800

insurance consumers across the province and a Web survey with 214 insurance consumers regarding their perception of auto insurance. Of the consumers surveyed by telephone, 54% agreed with the statement that “insurance premiums are fair and reasonable.” This marks a drop from the 70% who agreed with the statement when the survey was conducted in 2010. Between 2004 and 2010, the government and the AIRB ordered premium reductions on mandatory auto insurance coverage totaling 23%. This includes a 5% premium reduction ordered by the AIRB in 2010.

IBC believes New Brunswick insurance market could sustain modest cap increase The Insurance Bureau of Canada (IBC) believes the New Brunswick insurance market could sustain a “modest, one-time” increase to the province’s $2,500 minor injury cap. It does not suggest a specific dollar amount, but it does suggest indexing the cap annually to inflation. Also, IBC recommends changing New Brunswick’s definition of a minor injury to mirror that of Alberta’s definition. The trade association representing Canada’s home, auto and business insurers made its recommendations in connection with New Brunswick’s current review of the province’s minor auto injury cap and minor injury definition.

marketplace

IBC made its recommendations to the New Brunswick Auto Insurance Working Group, which recently held seven Town Hall meetings around the province. The minor injury cap in New Brunswick applies to damages for pain and suffering. It does not apply to the amount an insured can receive in compensation for medical and rehabilitative services, lost income or other costs incurred as a result of the minor injury.

Risk Management Company finance personnel taking on more risk management responsibilities Changes in the business and regulatory landscape are driving more companies to expand the role of finance departments to take on financial risk management responsibilities, according to a study by Protiviti. Protiviti polled nearly 200 finance executives from around the world, both in person and through online surveys. Participants were asked to assess their skills and professional development priorities. More than 100 questions covered three major categories. In the process capabilities area (financial analysis, financial risk management and financial transactions), respondents felt they most needed to improve in financial risk management.

Claims

for the period between 1990 and 2010, an Aon Benfield report says. Severe weather damage Insured losses during the in U.S. in 2011 triples the two-month period in 2011 are 20-year average between estimated at $15 billion. Total 1990 and 2010 economic losses during the Damage caused by severe same time frame are estiweather in the United States mated at $21.65 billion. during April and May this year The report, United States nearly tripled the annual aver- April and May 2011 Severe age for severe weather losses Weather Outbreak, examines

the active stretch of severe weather that occurred across areas east of the Rocky Mountains. At least eight separate timeframes saw widespread severe weather activity, including five separate outbreaks with losses in excess of $1 billion. The period between Apr. 2228 included 334 separate tornado touchdowns.

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July 2011 Canadian Underwriter

profile

Overcoming Rugged Terrain Vanessa Mariga Associate Editor

Greg Merrithew, poised to become the incoming president of the Canadian Independent Adjusters’ Association (CIAA), is used to dealing with unique, difficult and territorial challenges. Greg Merrithew, managing director of Arctic West Adjusters Ltd., operates his Northwest Territories-based business in a rugged, challenging environment. You might say he is used to covering a vast amount of territory. He also has experience in tackling unique situations. His background serves him well for the next frontier of his professional career. As it stands now, when the Canadian Independent Adjusters’ Association (CIAA) meets for its annual meeting in August 2011, it seems likely Merrithew will be acclaimed as the CIAA’s president for 2011-12. This is barring the emergence of any challengers, of course. [As of press time, no one else was in the running.]

10 Canadian Underwriter July 2011

If Merrithew becomes CIAA president, he said he plans to further the association’s education program and build stronger relationships between the adjuster and broker communities. Also, he intends to help bridge licensing requirements across jurisdictions, creating a temporary license so that adjusters can lend support in the event of a catastrophic event in another province or territory. Merrithew’s experience as an independent adjuster in northern Canada is unique when compared with his counterparts to the south. He spent his formative years in the Ottawa Valley, about 35 kilometres outside of Canada’s capital city. He grew up in a military family and moved frequently around the world and Canada. As a young adult, he joined the armed forces and was stationed for five years in Inuvik, in the Northwest Territories. “I completed my five-year commitment to the military, took my release in the Northwest Territories and had no intention of leaving,” he said. “I was about 21 years old at that time. I found what I guess you might call my geographical niche. I just loved living in the North. And to this day, I love living in the North. I have no intention of ever moving.”

Merrithew eventually moved from Inuvik down to Yellowknife. Upon arriving in the town, he checked the local federal government job board. The board had one posting —for an insurance adjuster trainee. “I didn’t even know what being an adjuster meant,” he says. “I thought it would entail adjusting premiums. I’m okay at math, and it was the only job in town, so I thought I may as well apply.” Dave Buzzeo, a past CIAA president, interviewed Merrithew and filled him in on the position. As

Merrithew learned about the role, he became increasingly intrigued. Buzzeo gave Merrithew the job. In 1981, he started with Central Adjusters Ltd. in Yellowknife. Eventually, he made partner. By 1987, he and his wife took full ownership. The firm had a substantial change in ownership in 1985, at which point it was redubbed Arctic West Adjusters. Today the firm has six adjusters in total, including Merrithew, and two support staff. The physical size of the firm is small, but it covers a vast geographic

profile

area — all three of Canada’s northern territories. The logistics of running his firm in this environment are unique. For example, Arctic West Adjusters is the sole independent adjusting firm operating in both Nunavut and the Northwest Territories. Arctic West also operates in the Yukon, where there are two independent adjusting firms (including Arctic West). Merrithew said he is often called in to the Yukon to avoid a situation in which the other firm is handling both sides of a claims dispute. In addition, the sheer span of the terrain presents a whole new set of challenges. Many communities are accessible only by air; some are accessible by sea in the months of August and September. Unlike in major urban areas, flights into these communities are typically once or twice a week. They often require connections to flights with similarly infrequent schedules. “The challenge is this: for one assignment, we will have one member out of the office for a full week,” Merrithew said. “It’s difficult to schedule this travel, because with a claim, there’s no notice. We have to get someone en route on the next available flight so that they can undertake a rapid investigation of a claim. The longer

a damaged property sits, the harder it becomes to investigate or the worse the damage can become.” Initiating the investigation of a fire claim, particularly when it occurs during the eight-month-long winter, is particularly challenging. Typically the power is shut

Our mantra up here (in the territories) is that we look for unique solutions for unique challenges. off, so the adjuster is forced to work in darkness in temperatures dipping below -30 C. Even getting photography equipment to function is a challenge. “A lot of the staff training at the firm centres around overcoming these types of field investigation obstacles,” he said. Once the assessment is done, the next hurdle is rebuilding or repairing. These small communities may not have a resident contractor with the necessary skill set. Likewise, building materials may be scarce (and hence expensive). If it’s a partial loss, chances are good the materials can be airlifted in. But for

a total loss, materials need to come in by barge. So, for a total fire loss in November in a small isolated community, re-building cannot commence until August of the following year. As a result, claims files tend to have a much longer life. Also, they tend to be much more severe than those of their southern counterparts. “Our mantra up here is that we look for unique solutions for unique challenges,” he said.

The Year Ahead Merrithew’s challenges as incoming president of CIAA may be somewhat more ordinary by contrast. He plans to continue with the implementation of the association’s strategic plan, which was developed roughly two years ago to tackle the issues affecting adjusters across the country. The plan includes ongoing adjuster education, the creation of a professional designation specific to CIAA members, raising the profile of the association and harmonizing licensing requirements across jurisdictions. “I would like to conclude the education plan by the end of my term,” he said. “Part of the education plan would lead to the acquisition of a Chartered Loss Adjuster (CLA) designation.”

The association is also working with provincial and territorial regulators to develop a temporary licence form. The temporary licence would allow adjusters based in a different province to do adjusting work in a different jurisdiction in the event of a catastrophe. Getting 13 separate jurisdictions — each with its own ideas about what should be included in the temporary licencing agreement — to agree on a common framework has been challenging, Merrithew said. An additional difficulty is that the issue doesn’t seem to rank high enough on any of the regulators’ radars to really push it through. However, issues around climate change, in addition to recent events like the wildfires in Slave Lake, Alberta, have drawn some much-needed attention to the matter, he said. Merrithew also intends to work on improving the CIAA’s name recognition in both the wider community and the claims insurance industry. The CIAA’s editorial committee has developed a brochure that will be given to the public in the event of a claim. “It’s a public relations tool, one of a number that we’re pulling together.” And Merrithew plans to reach out to the independent broker community to build and foster a stronger relationship.

July 2011 Canadian Underwriter

What is an

Automobile? It’s a simple question, with complicated answers depending on the province and the legislation at hand. Once thought uninsurable, golf carts and pocket motorcycles may now qualify for auto insurance coverage in some provinces. There’s an adage that a “camel is a horse designed by committee.” So what is an automobile defined by multiple pieces of legislation in various provinces? A golf cart? A pocket motorcycle? A go-kart? An e-bike? These questions have been recently put before courts and arbitrators to determine what precisely is an “automobile” for insurance. In every Canadian province, multiple statutes govern the definition of an automobile, including legislation for highway traffic, insurance (also 12 Canadian Underwriter July 2011

compulsory auto insurance) and off-road vehicles, in addition to the federal Motor Vehicle Safety Act. In many cases, more than one definition may apply.

Uncertainty of Auto Legislation In Ontario, an arbitrator for the Financial Services Commission of Ontario (FSCO) ruled in February that a woman, Wilhelmina Margaret Buckle, who was injured in Ontario while driving a golf cart illegally on a public highway, was eligible for accident benefits under an auto insurance policy. Arbitrator Robert Kominar ruled the golf cart fit the provincial Highway Traffic Act definition of a motor vehicle as “any other vehicle propelled or driven otherwise than by muscular power.” Ontario’s Compulsory Automobile Insurance Act also states: “all motor vehicles shall be insured under a policy of insurance when operating on a highway.” Thus, the golf cart was involved in a motor vehicle accident and the driver qualified for insurance benefits. “If you look at the Buckle case, there was a lot of subjectivity in the interpretation,” says

Illustration by Remy Simard / www.i2iart.com

Craig Harris Freelance Writer

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Bryan Yetman, chairman of the board for the Insurance Brokers Association of Ontario. “If the arbitrator rules that golf carts are motorized vehicles for insurance purposes, can insurers collect premiums to offset this exposure? The answer right now is, no. Clearly, there is no intent on the part of insurers in Ontario to cover golf carts under an auto insurance policy.”

Doug O’Toole, an associate with law firm Pacquette Travers & Deutschmann, argued the case before FSCO on Buckle’s behalf. O’Toole says there is “a fair bit of congruence” on the definition of an automobile, with the government “trying to thread the definition through various pieces of legislation to keep it as broad as possible.” The uncertainty lies in the intent of the various statutes. “The hard part is that the definition of what is a motor vehicle is applied in different acts,” O’Toole says. “These acts have different goals and purposes, sometimes working at cross-purposes. For example, the police would look at a golf cart in a different context under the Highway Traffic Act. Our purpose in this case was to ask if the golf cart was an auto under the Insurance Act and, if so, was coverage available?” The Court of Queen’s Bench heard a similar case in Manitoba in 2010. Jeff Hruska was injured while a passenger in a golf cart driven on a golf course. 14 Canadian Underwriter July 2011

He filed a negligence claim against the golf club, which, in turn, said Part II of the Manitoba Public Insurance Corporation (MPIC) Act covered Hruska’s injury. In Hruska v. Bridges Golf Club Ltd., the court held the bodily injury was caused by an accident involving an automobile as defined in the MPIC Act. The plaintiff was thus entitled to no-fault compensatory benefits under an auto insurance policy. Jim Hylands, vice president of Simmlands Insurance Services Ltd., specializes in wholesaling specialty insurance products, including to the golf industry. He says the court’s ruling in Manitoba essentially means that golf carts are now vehicles in that province and entitled to first-party insurance coverage. But that doesn’t necessarily provide clarity across Canada. “The current situation with regard to golf carts, maintenance vehicles and various pieces of mobile equipment is absolutely ridiculous and varies from province to province,” Hyland says. “This situation is made worse by the fact that multiple pieces of legislation apply to these vehicles, exceptions abound and, due to the complexity, the authorities themselves can’t keep track of all the rules. So, many of the regulations are just not enforced or followed.” In Ontario, courts have developed a three-part test to “address the maze of regulations to be considered in defining an automobile,” according to Jennifer Pereira, a lawyer with Robertson Stromberg Pedersen. The test, applied in Adams v. Pineland Amusements Ltd. (2007), asks: • Is the vehicle an “automobile” in ordinary parlance? • Is the vehicle defined as an “automobile” in the wording of the insurance policy? • Does the vehicle fall within any e larged definition of “automobile” in any relevant statute? Any affirmative answer would qualify the vehicle as an automobile. In the Adams v. Pineland case, a motions court judge originally ruled that a gokart operated on a private track was

an automobile for insurance purposes. That decision was later overturned by the Ontario Court of Appeal. “Needless to say that, whenever the courts are required to create a test to decipher the definition of a term, facts can be manipulated to suit an outcome that fits the court’s goal of achieving fairness,” Pereira observes. “I suspect that achieving such fairness will come at a cost to insurers.”

Insuring Autos Indeed, many sources say recent decisions have left the insurance industry in a quandary when it comes to the definition of an automobile. Brokers and insurers cannot insure or collect premiums for certain types of vehicles due to safety requirements set out by legislation, yet they are potentially on the hook for claims. “The question is, how are we going to address these differences and the uncertainty?” says Yetman, adding he has

The hard part is that the definition of a motor vehicle is applied in different acts. These acts have different goals and purposes, sometimes working at cross-purposes. not heard from brokers that this is an “epidemic” issue. “One way is to have stricter definitions under the auto insurance policy, including specific exclusions. The other is to standardize regulations. Right now, there is not a clear, standard definition of what an automobile is.” In British Columbia, the provincial auto insurer has taken the step of requiring licensing and insurance for golf carts and other types of vehicles in certain situations, particularly when they are used on or around high-

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ways and on islands not accessible by bridge or scheduled ferry service. In that sense, the Insurance Corporation of British Columbia (ICBC) is collecting premiums to offset the exposure. Maurice Poulin, president of the Insurance Brokers Association of British Columbia, says one benefit in B.C. is that ”there is a much closer relationship between insurance and vehicle registration through ICBC. There are strict definitions of what is and what is not an automobile. In certain island communities, golf carts are an acceptable form of transportation, but there are safety requirements for these vehicles.” In its golf cart requirements, ICBC classified the public parking lots of golf courses as “highways,” creating con-

fusion for golf course owners about licensing and insuring their fleet of carts, according to Hylands. However, in a May 19 press release, the insurer announced it would no longer require golf course owners to “register, license or insure their golf carts and utility vehicles through ICBC to operate in parking lots or cross public roads.”

New Forms of Transport The issue of how to define an automobile is not restricted to golf carts. As newer types of transportation — such as e-bikes, low-speed electric vehicles and segways — become more prominent, what is the interpretation when the inevitable accidents occur? What about pocket bikes, motorized scooters or battery-operated toys?

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“With new types of transportation, such as e-bikes, many people look to the Highway Traffic Act for the definition of what is an automobile,” says Yetman. “I view an e-bike as an automobile under that act, but it does not need to be licensed or insured. It is a catch-22: how do you rate for something that is not covered?” In provincial jurisdictions, certain vehicles — such as pocket bikes, dirt bikes, dune buggies and motorized scooters — are prohibited from traveling on roads and highways because they don’t meet federal or provincial safety standards. Nevertheless, if they venture onto public roads and are involved in an accident, they might fall under the definition of “any other vehicle propelled or driven otherwise than by muscular

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power.” It is far from clear which types of vehicles could be potentially classified as an “automobile.” “I think the government has tried to stay on top of these new methods of conveyance,” O’Toole says. “But there is potential for holes in the legislation. There is room for new vehicles to slip through the cracks.” A case in point was the January 2011 ruling from FSCO arbitrator Denise Ashby that a pocket bike or miniature motorcycle met the definition of an automobile. In this case, a woman, Cassondra Bouchard, was riding a pocket bike on a friend’s property when she collided with another pocket bike, sustaining injuries. Bouchard applied to her insurance company for accident benefits. The insurer denied the claim on the grounds that a pocket bike is not an automobile. The two statutes governing this case were the Ontario Insurance Act and the OffRoad Vehicles Act. Section 224(1)(a) of the Insurance Act says a vehicle is an automobile if it is required to be insured by any act. Bouchard argued the pocket bike is an off-road vehicle as defined in Section 1 of the Off-RoadVehicles Act. Section 15 of this act requires an off-road vehicle to be insured under a motor vehicle liability policy pursuant to the Insurance Act unless driven on land occupied by the owner. The FSCO arbitrator agreed the pocket bike thus fit this enlarged definition of an automobile for insurance purposes. “Decisions such as Bouchard v. Motors Insurance Corp illustrate how insurance companies may have to pay for losses they never contemplated — and likely did not collect premiums for as well,” notes Pereira. Hylands says automobile definitions could also become a dangerous issue for brokers when it comes to recommending coverage. “Obviously brokers and agents should be concerned,” he says. “Failure to provide or recommend the appropriate type of coverage for all of the various vehicles poses an errors and omissions exposure to these professionals.” Courts and arbitrators will no doubt continue to rule on which types of

vehicles meet the definition of an automobile using what one judge described as “legal gymnastics.” But Hylands says a simpler solution may be available today. “Unfortunately, the solution to these questions would require a major leap of thought at the provincial government level,” Hylands says. “Stop the outdated practice of insuring ‘vehicles’ COMMERCIAL & MISC SURETY island

and start insuring ‘licensed drivers.’ When auto insurance was introduced in the 1930s and 1940s, motorized vehicles came in limited forms. If a family owned a vehicle, it was invariably driven by one person in that family. Vehicles and drivers were inseparable. That’s not the case today. And it is going to get worse as technology creates new types of vehicles.” 3/2/11

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July 2011 Canadian Underwriter

Opinion/Analysis

Sharon Ludlow

President , CEO, Swiss Re in Canada

Two key issues facing Canada’s property and casualty industry include earthquake response and the regulator’s increasing focus on capital. Earthquake Response: Lessons from Japan Tragic disasters like the earthquake that hit Japan earlier this year serve as a reminder of why our industry exists. The tragedy in Japan also showed the difference that planning and preparation can make. Japan is a world leader in understanding perils and had plans and prevention measures in place. Those measures undoubtedly helped save lives and Canada can learn some lessons. As a nation and as an industry, we have to expect the unexpected. January’s ‘The Great British Columbia Shake Out’ is the type of disaster planning that can help reduce the consequences of a quake strike in Canada. More than 420,000 people participated in that earthquake drill. The event was held on the 311th anniversary of the

18 Canadian Underwriter July 2011

largest quake in Canadian history — a Magnitude 9 quake that hit B.C. in 1700. We can do more to educate people on what they should do in that kind of situation today. Swiss Re also sees ways for the public and private sectors to work together to ensure the best response should a major earthquake hit Canada. The financial cost of natural disasters has increased five-fold over the past 30 years — from an annual average of $25 billion in the 1980s to $130 billion in the decade leading up to 2010. Economic development, population growth and a higher concentration of assets in exposed areas each have contributed to this dramatic increase. At the same time, the financial capacity of the public sector to deal with new burdens is severely strained. Swiss Re has a global partnerships team that delivers innovative risk financing solutions to governments to help them get back on their feet quickly following a natural catastrophe. This strategy has been successful in other areas of the world. The Caribbean, for example, has been hit by a number of major natural disasters in recent years. In addition to the suffering caused by these events, regional govern-

The financial cost of natural disasters has increased five-fold over the past 30 years — from an annual average of $25 billion in the 1980s to $130 billion in the decade leading up to 2010. At the same time, the financial capacity of the public sector to deal with new burdens is severely strained.

ments had to confront the challenge of financing recovery. This not only included expenses for relief activities in the aftermath of the event, but also the medium- to long-term impacts of lower tax revenues, economic revitalization costs and reconstruction. The World Bank began to look for a mechanism that would enable an effective response to future catastrophic events. The solution, launched in 2007, was the Caribbean Catastrophe Risk Insurance Facility (CCRIF), of which Swiss Re is a partner. The CCRIF is the first multinational parametric insurance facility. It is set up like a captive, owned and operated by Caribbean governments. The parametric insurance policies it issues to the region’s governments provide quick payouts, based on wind speed and seismic activity. In June this year, the Microinsurance Catastrophe Risk Organisation (MiCRO), of which Swiss Re is an integral part, announced the release from Swiss Re of a large round of parametric insurance proceeds in Haiti following major rainfall in the south of the country. The rains resulted in widespread flooding, mudslides and loss of life, but the quick payout helped with the rescue, recovery and rebuilding efforts. These types of solutions are now being successfully implemented in developed economies as well. Last July, Swiss Re completed a parametric insurance transaction with the state of Alabama in the United States, the first time a government in an industrialized country has used such solutions. 20 Canadian Underwriter July 2011

Changing Regulatory Focus Following the global financial crisis, international regulators have increased their focus on risk, both in terms of mandating that insurers have appropriate risk management frameworks as well as adequate capital. European entities are moving closer to Solvency II implementation, and the United States is moving toward implementation of the Dodd-Frank Act.

P&C companies have recently been required to complete the 2011 round of sensitivity training, with stress factors being applied to interest yields, equity and real estate values, small catastrophic events and stagnant premium growth. Similarly, OSFI’s recent and upcoming changes have a strong risk focus. The new reinsurance guidelines, issued at the end of 2010, outline more formal requirements for ceding companies to assess their current reinsurance program — including counterparty exposure, contract provisions and contract enforceability. In addition, companies are required to obtain a legal opinion regarding their rights to collateral offered by unlicensed reinsurers in order to continue to take capital/asset credit.

In proposed changes to the Minimum Capital Test (MCT) ratios for 2012, insurance companies will have additional capital requirements to the extent that they have interest rate or foreign exchange mismatches. There are also changes in the factors that need to be applied for both assets and collateral based on the rating and term to maturity. The market should expect a continued focus on risk-based capital testing in future years, with measures including updating the shock factor to be applied to interest rate mismatches, as well as potentially updated factors for equity risk and catastrophe risk. P&C companies have recently been required to complete the 2011 round of sensitivity testing, with stress factors being applied to interest yields, credit default assumptions (for both assets and reinsurance exposure), equity and real estate values, small catastrophe events and stagnant premium growth. OSFI has indicated these stress tests will continue in the future. Also, on June 17, OSFI issued their guideline on internal target capital ratios, requiring an internal target capital ratio that considers an insurer’s risk appetite and risk profile. The regulatory and industry focus on risk underlines the need for insurers to have appropriate models or methods for assessing their various risk exposures, as well as fulsome consideration of various risk mitigation strategies in both the near and long-term future. These strategies will likely involve elements of changing asset mixes, increasing or implementing hedging programs and increased or different use of reinsurance.

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Fishing for Commercial Market Share

Brenda Rose

Vice President, Firstbrook Cassie & Anderson Ltd.

Canadian companies are using a variety of different strategies to reel in a greater market share in Canada’s profitable commercial lines. Some truths we just accept. We know death and taxes are ultimately unavoidable. Most of us allow that the moon is not made of green cheese, and we’re reasonably sure the sun will rise tomorrow. And we all know the insurance business is cyclical, that soft markets inevitably harden and vice-versa. But occasionally facts contradict our beliefs and we have to adjust our thinking. Certainly, the current Canadian insurance market would challenge any assumptions about an inevitable hardening. That long-awaited event just has not occurred. Instead, insurers must rely on other strategies to grow their top lines. This spring, many appear to have focused their plans in the same area: one insurer after another has signaled a renewed appetite for commercial lines. Some factors driving the revived interest are obvious. While investment income, increasingly regulated, still languishes, the necessity of an underwriting profit becomes increasingly clear. Commercial lines can certainly be profitable for insurers that get the formula right. Within Canada’s commercial market, which is currently made up of some $10 billion of written premium, the average 2010 loss ratios for commercial property and commercial liability were 41.5% and 54.9% respectively.1

22 Canadian Underwriter July 2011

This contrasts starkly with Ontario automobile direct loss ratios (99.5% in 2010 and 90.6% in 20092), which comprise an overpowering fraction of the Canadian market. Common sense compels insurers to have at least a share of the most profitable lines. Although the market is already divided among dozens of competitors, new investment capital, drawn by potential profits, is still arriving. Byron Hindle, Intact’s senior vice president of commercial lines, sees irony in some of the competition for market share — particularly in the West and Quebec, where it can be “almost self-defeating because of the competitive pricing,” he says. “Bidding down prices to the point that a general margin is no longer available.” Yet another wild card is the influence of technology. Commercial lines have largely resisted automation, clinging to paper files, Word documents and hand-written notes. Consequently, there is greater scope for change. Insurers eye the potential for gains in underwriting, analytics and process. But they must make hard choices about technology even while it evolves at lightning speed. With so many factors in play, and no hard market in sight, insurer strategies must go much further than simple price-slashing to ensure success. Carriers are deliberately taking radical new approaches in their efforts to differentiate themselves.

Growth by Acquisition Intact’s recent blockbuster deal to absorb AXA Canada makes plain a growth strategy by acquisition. However, Hindle says “regenerating their

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approach” to commercial lines goes back some years, to a time when Intact’s commercial market share had decreased slightly. Although the portfolio was still profitable, the company deliberately focused on reversing that trend, investing in training and communications to convey their eagerness to write commercial business on an account-centric basis. Competitive pricing is also a factor, but Hindle maintains the importance of underwriter judgment in establishing ultimate ‘walk-away’ points. Those choices might be aided by new information tools and pricing models, but Hindle says Intact still ultimately relies on quality underwriting. Hindle sees a measured use of technology, balanced finely with old-fashioned experience and relationships. Observing that both Intact and Axa are among the very few insurers currently growing profitably, he confirms they have indeed reversed previous trends. He looks to the new merger to “broaden their offering” even further, with “holistic, customer-centric solutions for our brokers.”

Integration into One Brand Northbridge revealed its own new approach to the Canadian market in a June 20 announcement. Previously, three of its broker company subsidiaries — Lombard, Markel and Commonwealth — operated separately. Beginning Jan. 1, 2012, they will all integrate into one brand, Northbridge Insurance. The company sees this as an opportunity to leverage many aspects of their business, including product differentiation, access to products and underwriting expertise, training and development, marketing support and overall business efficiencies. Mark LeBlanc, senior vice president for Central Region at Lombard Canada, explains that “scale produces competitive advantage, and gives an organization the ability to invest,” notably in technology. Northbridge’s restructuring will pool financial, data and talent resources and allow even greater focus on high-level strategy going forward. 24 Canadian Underwriter July 2011

Beyond gaining initial efficiencies, however, Leblanc emphasizes the advantages the enhanced data that their combined forces will provide, largely through data mining. Northbridge expects to gain better understanding of customer segments, permitting a focus

on sectors “business by business.” Risk selection tools used with the larger data pool will allow underwriters to choose “best of class” and determine specific pricing. Further, LeBlanc sees developing that same rich pool of information into value-added risk-management tools for clients.

Segmentation Strategy Aviva’s strategy, in comparison, is all about segmentation. The goal for commercial lines, as articulated by Joe Vachon, executive director for national commercial lines and Ontario GTA, is to be “dominant” across Canada. Analyzing their own portfolio as well as the general marketplace, Aviva observes that different business segments — national, mid-market, and small business — have different insurance requirements.Therefore, Aviva is offering different, enhanced solutions specifically targeted to each sector. The company also recognizes that for specialized sectors, the “business (that) is highly expert,” regional offices spread across the country can be challenged to provide needed levels of service. Aviva has therefore undertaken to build out their national business unit with centralized resources. On this unit, Aviva says, the company is “investing and going deep on expertise.” Vachon further explains that segmentation extends to brokers, since “not everyone needs the same things from us.” Aviva has developed detailed “bro-

ker value propositions” to recognize requirements from brokers of any size — national, regional or local. Large national houses may not require assistance with perpetuation planning or co-op marketing, but these “value propositions” might be very useful to some local brokerages. In addition, some brokers might have an appetite for manuscript wordings or complex claims management programs. Aviva intends to deliver broker services in customized combinations, all intended to support communication and to ease the flow of business across segments. Importantly, the plan includes a “significant investment in our commercial lines platform, to enable brokers and underwriters,” Vachon says. Insurers agree technology benefits for commercial lines are still largely untapped. The industry is just beginning to realize the value to be extracted from aggregated data through predictive underwriting and data mining. Countless efficiencies are possible for rating, data collection, document sharing and risk management. However, some broker frustrations, familiar from personal lines, arise when proprietary insurer solutions require duplicate entry or unique processes that counter efficiencies. Sheldon Wasylenko, technology champion for the Insurance Brokers Association of Canada, cautions that when that data moves between brokers and insurers, certain principles must apply if both parties are to benefit. “Brokers must extract electronic information from their own systems to communicate seamlessly to insurers without being forced to input additional, unrecorded data into insurer systems or portals,” he says. Broker and insurer systems need to speak the same language, using CSIO standards that allow data to be handled consistently. Recent development of CSIO commercial forms and standards has flagged, but demand is again increasing because of new attention to commercial lines automation. 1 2

Source: MSA Research MSA/Baron Outlook Report, Q4-2010

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Big Market Splash Intact’s

David Gambrill Editor

Intact’s acquisition of Canada’s sixth-largest insurer, AXA Canada, was motivated by a desire to expand into the country’s commercial mid-market. Canada’s desirable commercial mid-market figured prominently in a blockbuster deal in which Canada’s Number 1 property and casualty insurer, Intact Financial Corporation, acquired Canada’s Number 6 property and casualty insurer, AXA Canada, for $2.6 billion in cash. As a result of the deal, Intact will expand its market share in Canada up to 16.5%, by increasing its direct written premiums from $4.5 billion to more than $6.5 billion. Intact has made no secret of its interest in growth through acquisition, and it was all ears when Paris-based AXA Group stepped forward with an offer about three months ago to sell

26 Canadian Underwriter July 2011

its Canadian operations. Of particular interest to Intact was AXA Canada’s suite of products related to the commercial lines mid-market. “AXA has a different product suite than us, mainly in commercial lines,” Intact Insurance President Louis Gagnon told Canadian Underwriter in an interview about two weeks after the announcement of the deal. “They have a very, very strong base of commercial lines market product and a relationship with brokers. Also, it was in our plan to expand our commercial lines appetite. We wanted to do it with the right expertise, and that’s what AXA brings.” In particular, AXA has an underwriting appetite in the middle commercial market, including oil and gas, errors and omissions and directors and officers insurance and surety. The commercial mid-market is a segment that Intact has targeted for expansion. In addition to diversifying its suite of products, Intact will also be strengthening its geographical diversity, including a new presence in

the Newfoundland market. “It makes us a strong player in Quebec, in Ontario, in Alberta and in B.C., where we are already a pretty strong player,” Gagnon said. “Also we are entering Newfoundland. We’re well positioned now in New Brunswick. So when you look at that, it creates a lot of good diversification by region, by product. Now we have close to $2 billion in commercial lines.” AXA also brought to Intact the groundwork for a solid financial performance. AXA’s three largest subsidiaries, AXA Assurances inc., AXA Insurance (Canada) and AXA Pacific Insurance Company, had combined ratios in 2010 of 93.1%, 95.2% and 92.2%, respectively. These three subsidiaries combined for a profit of more than $300 million in 2010, according to MSA Research/Baron data. “We were looking at AXA and they have great financial results,” Gagnon said. “They had great success. They were outperforming the industry. So their risk selection process, their underwriting, their way of looking at segmentation are all elements that have a lot of interest for us. Combined with us, I think there will be a great marriage between both organizations with those strengths.” The “I dos” now declared, the wedding guests in Canada’s marketplace are now waiting for the paperwork to be filled out. As of the interview date in mid-June, the deal is expected to be consummated in between 60 to 120 days. Within six months, by agreement between the two companies, Intact will cease using the AXA Canada brand name actively. And 12-18 months after the formal closing of the deal, the company expects to be using one common IT platform. The real question, of course, is how the two companies and their broker forces will blend their resources in the new marital home. “This is one of the biggest challenges when you do an acquisition, to put two different ways of doing business (together) — two different cultures, two different ways 28 Canadian Underwriter July 2011

of managing processes,” Gagnon said. “We’ve started our integration process. I think when you do this, you have to find the similarities and the differences. We are at that stage right now. But the objective of the integration is pretty clear: In 12-18 months, we’re going to use one IT platform, we want to share offices and locations between

AXA has a different product suite than us, mainly in commercial lines. They have a very, very strong base of commercial lines product and it was in our plan to expand our commercial lines appetite. the two organizations, we want to pay the employees on the same basis for both organizations. And importantly, we want to share our values.” Brokers and others in the industry have many questions about how the market will look with this new behemoth on the block. Gagnon fielded such questions when he appeared in June at the Insurance Brokers Association of Ontario (IBAO)’s 7th annual Young Broker Council conference in Niagara Falls. One broker queried about his brokerage’s status, noting that his brokerage was an AXA brokerage, but did not have Intact as one of its markets. “You’re an Intact broker now,” Gagnon responded simply. He went on to promise brokers at the conference that integration with AXA would not change Intact’s relationships with brokers in any way. “One thing is for sure, we are not going to cut anything that is related to writing an insurance policy or settling a claim,” he said, in answer to a question of whether the acquisition would involve cost-cutting deci-

sions. “Underwriters are going to stay. Claim adjusters are going to stay.... “There is going to be no cut in [broker] commissions... There is going to be no change in how AXA is looking at portfolios and how we [at Intact] would look at a portfolio. We will try to use the best of the two. So there is going to be no change in how we deal with the broker.” Gagnon noted further that Intact would be doing 80% to 90% of its business through the broker channel after the deal, representing $5 billion in volume. Gagnon says he recognizes brokers’ anxiety about losing a major market like AXA as a result of the consolidation. “I acknowledge the fact that it’s one less market for brokers,” he said. “There’s no doubt about that. But [the acquisition] creates for brokers a very, very strong player. Our objective is to build a world-class, Canadianowned organization. I think it’s very important for brokers that we are in Canada and that the decision process is in Canada. While we will be a large organization, we have regional offices all across the country.” Intact’s strength and stability following the deal should be helpful to the broker channel in meeting the challenge of competing with new market entrants, Gagnon pointed out. A new market entrant from the United States has long been rumoured, but no intelligence suggests it is imminent. Still, companies these days have to be prepared for anything, Gagnon said. “We need a very strong broker company to support the broker financially, to support the broker in their growth, but also to make sure the broker channel is ready to face existing competition and new competition that may come into play from direct writers or from other sources,” he said. “I think that because of our diversification, because of our large suite of products, it’s going to make us more stable. We will be there in good and bad times. And I think it’s key for brokers to count on a very stable organization.”

Honey, I Shrunk the Market Canada no longer seems insulated from global catastrophes that have shrunk the reinsurersâ&#x20AC;&#x2122; pool of capital worldwide over the past two quarters. As a result, primary insurers in Canada may be looking at reinsurance rate increases as of Jan. 1, 2012 renewal season. By DAVID GAMBRILL

30 Canadian Underwriter July 2011

lobal and domestic natural catastrophes are expected to catch up to the Canadian reinsurance market as of the January 2012 renewal season, when primary insurers may potentially see catastrophe rate increases for the first time in a few years. The global and Canadian reinsurance markets may see capital shrink somewhat in 2011, hammered by record-setting global catastrophe losses in the first two quarters and at least two or three major claims events in Canada over the past year — including the May 2011 wildfires in Slave Lake, which have cost the country’s insurance industry up to $700 million, according to recent figures. These events have caused Canadian reinsurers to contemplate rate increases in catastrophe and retrocession lines of cover — ‘retro’ cover is when reinsurers purchase insurance from each other — for the next major renewal in Canada, which is Jan. 1, 2012. And if reinsurance capital hasn’t shrunk as a result of these disasters, the number of major players in Canada’s primary market certainly has. Most recently, Intact Financial Corporation announced its acquisition of AXA Canada in late May 2011. This follows the acquisition last year of GCAN by RSA Canada. The muchanticipated consolidation of several large primary insurers in Canada has finally taken place. Theoretically, this would mean the number of reinsurance buyers has shrunk. But paradoxically, reinsurers also see consolidation as an opportunity to expand their reinsurance businesses.

July 2011 Canadian Underwriter 31

COVER STORY

Honey, I Shrunk the Market Canada’s Reinsurance Market It should be noted this is not a Chicken Little, ‘the-sky-is-falling’ story. Despite many catastrophes that have taken place in the world and within Canada over the past six months, no one is predicting a sudden, drastic turn towards a hard market in Canadian reinsurance. Canada’s reinsurance market — which provides insurance to the country’s primary insurance companies — has remained steady and solid since 2006. With a comparatively small reinsurance market, Canada has been blessed recently with the perception of being a good place for global reinsurers to park their capital, knowing that the country is relatively safe from major catastrophic loss exposure (earthquake risk in B.C., Ontario and Quebec notwithstanding). Canada’s reinsurers have not seen a lot of growth, writing roughly between $1.5 billion and $2.2 billion in premium each year over the past decade. But claims costs have been steady as well. Net claims costs for the 12 full members of the Reinsurance Research Council (RRC) are roughly the same in 2011 Q1 ($149.2 million) as they were in 2010 Q1 ($150.6 million), according to data from Canada’s solvency regulator. Generally speaking, Canada’s reinsurance market has been relatively “soft” over the past three years, meaning primary insurers have received more reinsurance premium rate decreases than increases, largely because capital has been plentiful. “At face value, our data shows that licensed reinsurers in Canada had about $3.2 billion in capital at the end of 2010,” says Joel Baker, president and CEO of MSA Research Inc. “They wrote $1.3 billion of NPW [net premiums written] on this capital. It is conceivable that they could grow their assumptions by $700 million to $1 billion without requiring much or any additional capital.” However, Baker cautions, “precisely measuring excess capacity in the Canadian market is not possible, as the capital reinsurers place in Canada can grow if opportunities present themselves.” To put the $3.2-billion number into perspective, Canada’s largest claims event — the 1998 Ice Storm in eastern 32 Canadian Underwriter July 2011

Ontario and Quebec — cost the insurance industry somewhere in the ballpark of $1.8 billion, based on damage to 660,000 properties. Relative to this record-setting disaster, $3.2 billion in capital seems like plenty. The Quarters from Hell In fact, as recently as Jan. 2, 2011, risk management firms and analysts made frequent reference to excess capacity in the global re/insurance marketplace as well. Advisen reported in January the global marketplace could sustain a

The reinsurers don’t want to wait until they’ve used up everything in the kitty. They’re going to start to react before that. You’re not going to wait until the bank is dry before you start doing something. $74-billion hit before pricing decreases might turn into increases. And reinsurance broker Guy Carpenter said back in November 2011 that it would take $150-billion worth of loss events to turn the global reinsurance market. At the time, these numbers seemed laughably large. It seemed a remote possibility that they might be attained in a year — much less in a financial quarter. But along came 2011 Q1. It started with a Magnitude-6.3 ‘aftershock’ earthquake that hit Christchurch, New

Zealand on Feb. 22, 2011. This quake was less powerful than a Magnitude 7.0 earthquake that hit the same area in September 2010. But it did more insured damage because of the weakened state of some of the buildings following the September event. Catastrophe modeling firms estimated damages from the September 2010 earthquake might result in insured losses of up to $4.5 billion. For the February 2011 quake, the same modelers predicted a further $8 billion in insured damages. About two months later, a Magnitude-9.1 earthquake hit Honshu, Japan. The earthquake triggered a 37-metrehigh tsunami that swept through Sendai and other Pacific coastline areas, killing tens of thousands of people. Catastrophe modelers EQECAT, RMS and AIR Worldwide all showed initial insured damage estimates in the range of between $22 billion and $39 billion arising out of the Japan quake and tsunami. The second quarter of 2011 started much like the first. Suddenly, the winds started to blow in the United States. In late May, extremely powerful thunderstorms and tornadoes ripped through several areas in the southern United States. Catastrophe modelers counted the damage as a result of these May storms to be between $2 billion and $7 billion. Overall, Aon Benfield reports, these and other severe weather losses in the United States over the past two months have totaled $15 billion. And the ground in Christchurch shifted once again in June. This time, cat modeler EQECAT said the damage would be between $3 billion and $5 billion. Some reinsurers dispute this claim, it should be noted, because of the difficulty in sorting out what counts as damage done in June and what was done in previous earthquakes. Nevertheless, EQECAT stands by its numbers. Tallying the estimated insured damage caused just by these global events alone (there have been others), the total is somewhere in the range of $48 billion to $67 billion. And that’s before the start of the 2011 hurricane season. Suddenly, the $74-billion to $150-billion figures seem to be well within reach.

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COVER STORY

Honey, I Shrunk the Market Impact on Canada The key question is: with global reinsurers having to pay off all of these big global catastrophe losses, will Canadian reinsurers be raising their rates in order to adjust? The short answer is, theoretically, yes. “Buying cat cover is a global business and it’s going to be affected on a global scale,” says Henry Klecan Jr., managing director of SCOR’s operations in the Americas. “If you address cat cover on a local basis, you’re never going to get those cats paid off in a million years. Forget about it. So it’s going to be represented across the board on a global basis. In some areas, it may be more. In some areas, it may be less. But to say it won’t have an effect [in Canada] would be a simplification. I would expect some sort of repercussion.” Andrew Aldwinckle, senior underwriter of casualty reinsurance at Ark Syndicate Management Limited, a Lloyd’s syndicate based in London, elaborates. “Reinsurer risk appetites are being re-assessed,” he notes. “Many parts of the world — Canada, New Zealand, Australia and to a lesser extent Japan — are all seen as diversifying exposures to the peak zones within the United States. As such, alongside the mantra of the losses of the few are paid for by the premiums of the many, Canadian portfolios will be helping to cover the cost.” But buyers might not be noticing it right away. “What we’ve seen to date is that the Canadian market is still insulated in the context of these global events,” says Sharon Ludlow, president and CEO of Swiss Re in Canada. “What I mean by that is, there is no direct correlation between a catastrophe in another jurisdiction and Canadian pricing.” Reinsurance purchasers have noticed reinsurers are inquiring more pointedly about their clients’ global exposures. And quoted (as opposed to bound) reinsurance rates are less frequently decreases. Still, the impact of global catastrophes hasn’t filtered down into the Canadian reinsurance market in the form of dramatically increased pricing. 34 Canadian Underwriter July 2011

“Because of the recent catastrophes, we don’t see as many reductions,” said Charles Paré, chief underwriting officer of Zurich Canada. “But it’s not like we are seeing double-digit increases either. A lot of reinsurers are still quantifying their losses, particularly on the global side. We’ve seen some impact in terms of reinsurers asking more questions and

Typically you would see a high risk retention or cat retention with a lot of mergers. But I think in this particular case, what you are seeing is higher collective cat exposure — especially with the West Coast and Quebec business that Intact has assumed from AXA Canada. Both of those are subject to earthquake exposure. not quoting rate reductions anymore, but it’s not a drastic shift.” This tepid market response is partly explained by the fact that Canadian reinsurance doesn’t renew in mid-season. “There’s very little reinsurance renewal activity between now and January 1st., so I don’t think we’ve seen the impact in any significant way,” says Lambert Morvan, senior vice president and chief agent in Canada for Odyssey Reinsurance Company. “But there are a lot of discussions on how the market is going to

react. I think there is going to be some reaction, but the magnitude of it will be dependent on whether there is any significant U.S. hurricane activity in the third quarter. If it’s quiet there, maybe it will be a bit calmer and we will see less of an impact in Canada.” In the Bermuda reinsurance market, during mid-season renewals, reinsurance catastrophe and property cover increased by as much as 10% to 15%. In Canada, insurance companies can likely expect to see modest premium increases on catastrophe lines of business during the January 2012 renewals, according to most Canadian reinsurer executives contacted for this story. “My own thought is, those treaties that have been hit with losses will definitely get a price increase,” says André Fredette, senior vice president at Caisse Centrale de Réassurance (CCR). “Other ones, probably zero to 5%.” Reinsurers say they expect retrocessional cover will increase by approximately 5% in Canada. “There’s no question that retrocessional pricing is being impacted because of global events,” says Ludlow. “But that doesn’t necessarily mean all of the trickle-down pricing is changing at the same time…. In the best of all worlds, you would have the immediate correlation in pricing at the primary, reinsurer and retrocessional levels.” But capacity remains abundant in the Canadian market, many observe. Pricing in Canadian commercial lines remain soft at the primary level, and primary companies are still retaining a lot of their own exposure, electing to keep operating costs down by purchasing less reinsurance. Some analysts say such capital abundance means the need to raise rates is debatable. Fredette doesn’t subscribe to that way of thinking. “I’m saying, ‘Yeah, but the reinsurers don’t want to wait until they’ve used up everything in the kitty,’” he says. “They’re going to start to react before that. You’re not going to wait until the bank is dry before you start doing something. So I think there will be a tendency towards cat rates going up. And remember, we haven’t even had the hurricane season yet.”

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COVER STORY

Honey, I Shrunk the Market Canadian Catastrophes Canada has also seen its fair share of catastrophes thus far. “Aside from some fairly significant man-made losses, some of what we refer to as climatic losses have not gone unnoticed,” Klecan says. “Slave Lake [in Alberta] was quite a substantial fire. It will leave a fairly good dent in the market. Floods have been a real problem in this particular year, in various places in Quebec and Central Canada.” Slave Lake Wildfires Dry conditions and very high winds contributed to wildfires converging together outside of Slave Lake, Alberta in May 2011. The winds caused the fire to jump a fireguard and descend upon the town of 7,000 residents in just two hours. Insurers arrived quickly on the scene, and damages are still being estimated. Data from PCS-Canada, a catastrophe information service, suggests damage due to the wildfires in the Slave Lake area might be as high as $700 million. Overall, will Slave Lake have an impact on reinsurance pricing in Canada? Yes, but perhaps on a qualified basis. “I think with Slave Lake, some of the impact will be regional,” says Caroline Kane, senior vice president and chief agent at Toa Reinsurance Company of America. “So you may have some smaller regional companies whose cat programs have been hit, where they are also buying reinstatement covers. I think the pricing will go up on some of those programs. It’s more experience-driven, though, as opposed to exposure-driven.” Slave Lake may in fact re-kindle a debate about guaranteed replacement costs. A similar discussion began when several hundred homes burned down in Kelowna, B.C. in 2003. “We do this crazy thing in Canada, we give out guaranteed replacement costs without a cap on it,” says Fredette. “I know in California, at State Farm, they cap it at 25%. And so, if you had $400,000 on your house, [State Farm would] give you another 25% or $100,000 more. You’d get $500,000 back to rebuild your house. 36 Canadian Underwriter July 2011

“It puts some onus back on the client and on the broker to make sure those values are kept up to date and they are sufficient. When you have a catastrophe like Slave Lake, where you now have to import contractors and house them, if there’s no cap, [then] we’ve given a blank cheque out there to rebuild no matter what the cost. Remember how in Kelowna those $500,000 homes

A lot of reinsurers are still quantifying their losses, particularly on the global side. We’ve seen some impact in terms of reinsurers asking more questions and not quoting rate reductions anymore, but it’s not a drastic shift. cost about $800,000 to rebuild? I imagine you will see the same numbers [in Slave Lake].” Slave Lake may also have reinsurers paying more attention to the economic ‘boom towns’ that are developing alongside Canada’s economic hot spots. “Slave Lake as a town had a lot of recent development, mainly as a result of the oil sands,” says Morvan. “We have to think about that, too. Are there other towns in the country that have seen a lot of housing and business development in what are called unprotected fire areas? Maybe we need to pay a bit more attention to that.”

Severe Weather Events Last year at this time, Calgary endured a major hailstorm that caused recordsetting insured damages of $500 million. This year, water damage remains at the forefront of concern for Canadian reinsurers. For example, a recordsetting rainfall struck parts of Ontario and Quebec on March 5 to 7, causing about $50 million in damage. This damage was spread about equally between the two provinces, according to PCS-Canada data, as reported by the Insurance Bureau of Canada. Man-Made Catastrophes And it’s not just natural disasters at work, according to reinsurance industry executives. Canadian Natural Resources Ltd. reported an oil refinery fire at its Horizon oilsands site in January 2011. The fire injured five workers and halted production, which averaged 83,700 barrels a day. The company issued a press release in February 2011 saying the damage to repair the equipment itself was not anticipated to cost more than $250 million. But this doesn’t include potential business interruption losses. “Canadian Natural maintains a US$2-billion umbrella insurance package for the Horizon facility, which should cover a substantial portion of the cost to repair damaged parts and equipment and which provides business interruption insurance to effectively cover ongoing operating costs incurred on the site after 90 days,” the company reported in January. One reinsurance agent in Canada said the oil refinery fire prompted some queries from Canada’s solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI), about reinsurers’ capital positions. Such an interest after a specific event is “unusual,” the source said, and reflects OSFI’s general focus on the overall state of Canada’s reinsurance marketplace. Certainly paying for all of these claims events comes at a time when reinsurers are still suffering from the ill economic effects of the global recession in 200809. “I think the losses are compounded by the redeemed investment returns,”

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COVER STORY

Honey, I Shrunk the Market says Steve Smith, president and CEO of Farm Mutual Reinsurance Plan Inc. “I think the reinsurers are really going to be struggling to make sure they get any sense of return at all. So they are going to have to get the rates up to offset the compounded effect of losses and loss of investment return. I think we’re certainly going to see a flattening [of rates]. You’re not going to see any potential decreases at all. I think there’s going to be marginal increases.” Honey, I Shrunk the Market On top of all this, market consolidation has finally become a reality for Canadian reinsurers. Canada’s biggest players started to make major acquisitions in 2010-11, strengthening their share in the marketplace. RSA Canada bought GCAN Insurance Company and its parent, Glenstone Capital Incorporated, from the Ontario Teachers’ Pension Plan Board in October 2010 for approximately $420 million. The deal moved RSA up to the fourth-largest general insurer in Canada, and was projected to increase RSA Canada’s premium base from $1.9 billion (based on 2009 figures) up to $2.2 billion. Intact Financial Corporation followed suit in May 2011, announcing it was buying AXA Canada for $2.6 billion. That deal solidifies Intact’s Number 1 position in the Canadian market, giving Canada’s largest insurer a 16.5% market share. How does market consolidation affect reinsurers generally? Most say consolidation can be viewed as a glass that is both half-empty and half-full. “Intact’s acquisition of AXA creates challenges and opportunities for the local reinsurance market,” Baker says. “As Intact grows, it will be able to retain more risk and cede less to the reinsurance market. However, AXA Canada tended to use global facilities for much of its reinsurance needs. With the acquisition, much more of the business will be ceded in the local market. In addition, Intact might decide to buy additional covers due to elevated concentration risk in some regions as a result of the purchase.” 38 Canadian Underwriter July 2011

Canada’s reinsurers each note the paradoxical effects of consolidation. Frank Rueckert, senior vice president of the Canadian treaty department of Hannover Re, describes the glass-ishalf-empty concept without necessarily subscribing to it. He noted merged companies typically have bigger balance sheets as the result of a merger and therefore will be able to retain more risk exposure. As a result, they will less likely call upon reinsurers for lower layers of excess-of-loss insurance. (When primary insurers buy excess-of-loss insurance coverage, reinsurers start to pay claims when the primary compa-

Slave Lake will leave a fairly good dent in the market. ny’s insured losses reach a certain level “or layer.”) By definition, lower layers of reinsurance cover claims events that aren’t as large, unpredictable or volatile as risks covered by the upper layers. For Rueckert and others, a long-term concern about consolidation would be as follows: if Canada’s consolidated primary insurance companies get bigger and retain more exposure, would global reinsurers be squeezed into the higher, more volatile layers of excess-of-loss cover, thus dampening their interest in the Canadian market? But consolidation might also suggest a glass half-full. “At the end of the day, both insurance and reinsurance markets

need fewer participants in order to reduce capacity and therefore see the pricing discipline returning,” says Ardwinckle. Also, such deals create new opportunities for reinsurers. “I would say that Intact and AXA are very, very adept at their risk management, and so they are going to be looking at their concentration when they put their two books together on a combined basis,” says Ludlow. “They’ll do their own assessment as to whether they have the right reinsurance coverage once they have that consolidated view. And that often will lead to a different solution than what they have today. Does that mean that there is opportunity? Absolutely. Are pieces of it likely to shrink? I think the answer is yes. But are there opportunities there as well? I think the answer is yes there, too.” Specifically, Klecan notes Intact’s purchase of AXA “may be a little more interesting, because AXA wasn’t a buyer [of reinsurance] in the Canadian market. Most of it was placed by their parent [located it France]. So this may provide an opportunity for the Canadian market to step up, when Intact absorbs everything.” Also, by getting bigger, Intact now has more risk exposure spread across the country — and thus more reinusrance might be an option. “Typically you would see a high risk retention or cat retention with a lot of mergers,” says Smith. “But I think in this particular case, what you are seeing is higher collective cat exposure — especially with the West Coast and Quebec business [that Intact has assumed]. Both of those are subject to earthquake exposure.” More generally, Ludlow sees opportunity in using reinsurance to unlock capital for a company to explore a future acquisition. “There is always the opportunity for an acquiring company to look to a reinsurer to support M&A as well,” she says. “For [primary] companies that perhaps don’t have as easy access to capital in the market, I can see that M&A or consolidation can provide opportunities for reinsurers to support the transaction as well as the ongoing protection.”

CICMA A.C.D.S.A. Canadian Insurance Claims Managers’ Association

ANNUAL GENERAL MEETING September 19, 2011

The Ontario Chapter (Toronto) of the C.I.C.M.A. is honoured to host this years AGM, welcoming delegates from across the country. This year’s program will be a panel of senior claims executives focusing on claims issues of National interest. Annual General Meeting: 10:00 • Claims Executive Panel: 11:00 Lunch Noon CICMA MEMBERS FREE – On a first come basis Guest $50.00 (if space permits) The International Centre 6900 Airport Road Mississauga, Ontario Northeast corner of Airport Road and Derry Road. www.internationalcentre.com Members are encouraged to join us! Please e-mail you intention to attend to Vita Bulovas, vbulovas@ibc.ca Space is limited so act quickly to reserve your spot.

Challenging 7th Annual Canadian Captives & Corporate Insurance Strategies Summit

David Gambrill

Conventional Wisdom

Speakers at the 7th Annual Canadian Captives & Corporate Insurance Strategies Summit discussed the need to re-examine ‘Old World’ ways of thinking about captive formation, collateral and combined ratios.

Editor

Vanessa Mariga

Associate Editor

New ways of thinking about captives, collateral and combined ratios dominated the 7th Annual Canadian Captives & Corporate Insurance Strategies Summit, held in Toronto on June 1. Several speakers challenged the conventional wisdom that a company should consider forming a captive primarily to benefit from tax advantages offered in other jurisdictions. Rather, the emphasis should be on whether forming a captive might allow the company to gain any kind of operational advantages or efficiencies, speakers said. Others observed that the rising cost of credit in contemporary financial markets could open the door for alternative forms of collateral — such as captive trusts, for example. And in a background presentation on the current financial state of the property and casualty insurance industry, the traditional notion that a 100% combined ratio is a reliable indicator of solid financial performance was subject to debate.

40 Canadian Underwriter July 2011

Creating Captives Companies should not be establishing captive insurance entities simply to capitalize on tax advantages, a number of speakers cautioned at the summit meeting. “We’d like to emphasize that we would never ask you to start a captive because it might save you tax,” said Mal Leighl, executive director of financial services and insurance for Ernst & Young LLP. “It never would.” Certainly tax advantages might help determine a captive’s domicile, but tax considerations should never be the reason for forming the captive in the first place, echoed conference chair Bill Morgan, managing director of Aon Insurance Managers. “There’s a real risk service for creating and transferring risk to a captive,” added Tom Tsiopoulos, partner and head of transfer pricing at Ernst & Young LLP. “That is the point, to ask if there are any real operational benefits.” In a case study illustrating non-tax-related reasons to form a captive, John Shelonko, vice president of risk management at Lafarge North America, said his company’s decision to form a captive helped centralize and augment its analysis of risk. Lafarge is the largest diversified supplier of construction materials in the United States and Canada. As a result of creating a captive in B.C. in 1998, Lafarge was able to concentrate its energies on the development and implementation of loss control initiatives, thus minimizing its claims costs. This helped reduce the company’s insurance premi-

ums at a time when the market pricing was increasing during a hard market. One central decision the captive made was to keep “skin in the game,” Shelonko said. This meant keeping a substantial retention of risk within the captive, thus taking the company out of the higher layers of insurance. This also provided the captive with the incentive to develop its loss control measures. By analyzing comprehensive claims data, the captive was able to make recommendations that vastly reduced the company’s exposure to workers’ compensation claims. Shelonko noted the company’s exposure went from 1,000 claims (for 6,000 employees) in 1999 down to 165 claims (for 7,000 employees) in 2010. Having reduced its losses thus, the company benefited from a drastic reduction in insurance premiums, despite a hardening market. Captive Trusts Given the increasing cost of credit in today’s market, the cost of letters of credit (LOCs) has become prohibitive for captives relying on them for collateral, Robert Quinn, a vice president at Wells Fargo, told people attending the captives conference. As of 2010, roughly 70% of captives use LOCs to fund their lines and programs, Quinn said. However, since the 2008-09 financial crisis, the cost of LOCs has increased dramatically. Captives would therefore do well to search out alternative sources of collateral — such as a captive trust, said Quinn, who sells capital trusts. Prior to the 2008 financial crisis, the cost of LOCs on a cash collateralized basis ranged between 15 basis points and 45 basis points. “I would say the norm you are going to see for a letter of credit today is between 45 to 100 basis points,” Quinn said, “with 75 basis points appearing to be the sweet spot for these collateralized LOCs for captives.” The business implications for captive and corporate insurance programs are huge, he continued. “If you were pay-

ing 25 basis points for collateral on $10 million, and now you’re paying 75 basis points, your cost of collateral just tripled. Therefore, the cost of your whole program just went up considerably.” Captive owners would do well to consider a captive trust, he said. In this arrangement, the captive, the insurance carrier and the lender enter into a tripartite agreement in which the lender is named as the trustee, the captive is

We would never ask you to start a captive because it might save you tax. It never would. the grantor and the insurance fronting carrier is the beneficiary. In a handout accompanying his presentation, Quinn explained the trust is usually funded with the assets in the collateral account for the letter of credit. The trust is then pledged to the fronting insurance carrier as the sole beneficiary. Benefits of the approach include: • much lower fees than a LOC; • the income from the trust is the property of the depositor; • the assets in the trust generally remain on the books of the corporation; • the trust does not need to be renewed each year; and • the trust can often replace multiple LOCs posted to the same carrier. 100% Combined “Doesn’t Cut It” A combined ratio (COR) of 100% no longer generates sufficient return on equity in today’s depressed investment environment, according to Urs Uhlmann, senior vice president and head of Zurich Global Corporate. “At the beginning, I said one hundred just doesn’t cut it anymore,” Uhlmann said, referencing a slide in his presentation that showed historical returns on equity (ROE) based on the U.S. P&C industry’s combined ra-

tios. “No it doesn’t. “A combined ratio of 100[%] in 2009-10 generated about 7.5% return on equity — certainly not enough — compared to in the mid-2000s. In 2005, a 100 [per cent] combined [ratio] was about a 10% ROE.” Uhlmann was asked to speak about emerging trends for property and casualty insurance companies in the current economic climate. “Clearly, the investment environment is hampering the generation of the results,” Uhlmann said, referencing low interest rates, and hence lower investment yields for insurers. “If you want to know the impact of a change of 1% on the investment return on your combined ratio, it’s actually quite significant.” For example, based on 2008 invested assets and earned premiums, a U.S. insurer had to reduce its combined ratio by 1.8% in personal lines — or by 3.6% in commercial lines — to offset a 1% decline in investment yield, in order to maintain a constant ROE. Basically put, an insurer’s combined ratio (COR) is derived from dividing claims costs by premium collected. A number more than 100% indicates an insurer is losing money. A number below 100% suggests an insurance company is profitable, because more premiums have been collected than claims paid out. Up until recently, a 100% COR suggested a break-even point for property and casualty insurers. With a 100% COR, U.S. insurers used to be able to generate a return on equity (ROE) of between 9% and 16%. But Uhlmann’s presentation slides showed a 99.7% COR in 2010 Q3, aided by lower catastrophe losses and more reserve releases, nevertheless produced a comparatively meager ROE of only 7.7%. And in 2009, a 99.5% COR generated a return on equity of only 7.3% In comparison, a 100.6% COR in 1979 generated an ROE as high as 15.9%, and in 2005 a COR of 100.1% resulted in an ROE of 9.6%

July 2011 Canadian Underwriter

Aftershock Editor

Ongoing earthquake aftershocks in Christchurch, New Zealand have local and global re/insurers wondering how to keep damage from each earthquake event ‘separate.’ Cunningham Lindsey claims inspector Jordan Legg remembers literally bouncing along in his car while returning from a site near Christchurch, New Zealand on Tuesday morning, Feb. 22, 2011. He had been inspecting a site that sustained some minor damage during the September 2010 earthquake in Christchurch. “I was coming from outside of the city, in a little place called Rolleston, which is pretty close to where the [earthquake] epicenter was in September,” says Legg, who went to Christchurch from Cunningham Lindsey’s Ottawa office. “I was just going there to take a look at some stuff. He had some damage to the house, but it wasn’t too, too bad. So I’m coming back into the city, and I was about maybe two or three kilometres outside of the city centre. I was actually driving in my car when it [the February 2011 earthquake] struck. My car, actually, was bouncing on the street. When it initially happened, I was thinking: ‘What’s going on with this car?’ Maybe it was stalling or misfiring or something. And then I looked at the cars next to me, and then you start looking at the buildings around you, and you’re trying to see where your escape plan is. Luckily everybody was okay.”

42 Canadian Underwriter July 2011

Cunningham Lindsey adjuster Denisse Cumby of Barrie, Ontario was also working in Christchurch at the time. When the 6.3 Mw ‘aftershock’ earthquake hit Christchurch on Feb. 22, she was taking a lunch break while working on files related to Christchurch’s September 2010 earthquake. “When the [February] earthquake hit, I happened to be at a McDonald’s actually,” she says. “Everything started rattling. Everyone started running out and I thought, ‘I guess I’d better run out with them, too,’ so I went outside the building following along everybody else. Then it stopped. And so we all looked around and went back in. I got my order, sat down and ate. It [the tremor] wasn’t anything big, but once the aftershocks continue, that’s when it really plays on you and you think, ‘This is way worse than what I expected.’ The February earthquake may have been smaller than the initial September quake, but it did more damage because it hit at a time of day when more people were in the city. Also, the second quake magnified damage to buildings already weakened in 2010. Catastrophe modeler EQECAT estimated the September 2010 quake in Christchurch caused about $3

Illustration by Remy Simard / www.i2iart.com

David Gambrill

“Cycle for Wishes” Toronto to Ottawa Rally

en route to RIMS Canada Conference 2011

Insurance and Risk Industry professionals are participating in a 500Km ride from Toronto to Ottawa – as a Fundraiser for Make-A-Wish® Canada. Make-A-Wish Canada grants the wishes of children living with life-threatening medical conditions to enrich the human experiences with hope, strength and joy.

Ride departs Toronto on September 14, arrives Ottawa on September 17 Finish Line: the “Highlander Pub”, 115 Rideau Street, Ottawa – in the ByWard Market RIDERS

David Tran- Ironshore, TO

Support Team:

Debbie Oleskiw- Zurich, TO

Mark Rankin - Integro, TO

Jane Stokes- Westport, TO

Kelly Tomenson- Chartis, TO

John Clements- Integro, USA

Daniel Lee- Ironshore, TO

Michel Quatrale- Liberty, TO

Ron Whyte- Integro, London

Valerie and Rod York

Mike Wills- Ironshore, TO

John Haas- Integro, TO - Team Leader

Dane Hambrook- Ironshore, TO

Albert Bosch, Allianz, TO

Our Goal: To raise $20,000 for Make-A-Wish® Canada Please help us reach our goal and sponsor our team online at Make-A-Wish Canada: “Cycle for Wishes” Toronto to Ottawa rally: http://bit.ly/cycle4wishes11 Route assistance provided by Bike On Tours www.bikeontours.on.ca and www.bicycleontario.ca

Design + Space compliments of:

billion in insured damage. In contrast, the smaller February 2011 earthquake caused between $3 billion and $8 billion in damage. In June 2011, another aftershock quake hit Christchurch — this time a 6.0 Mw tremor. For Cumby, the June 2011 quake came as no surprise. “For me, the continuous aftershocks after the initial one, after some time, start to get to you, because they are just continuing and continuing,” she says. “You know it is causing more and more damage everywhere. It’s just the continuous part after that affected me the most.” The aftershocks continue to affect the global re/insurance industry as well. The June 13, 2011 earthquake caused further estimated insured damage of between $3 billion and $5 billion, according to catastrophe modeler EQECAT, although this figure has come under scrutiny. Legg says the ‘aftershock’ phenomenon has stirred discussions within the local insurance industry about what counts as ‘separate’ earthquake events. The concept isn’t so clear when there are so many related aftershocks. “There was a lot of talk with the insurers and reinsurers about: ‘How are we going to separate these events?’” Legg says of his experience in February. “There are a lot of big earthquakes and each one of them was separately defined as a specific event. So there was a lot of separation between what constituted an ‘aftershock’ and what constitutes a separate earthquake.” For adjusters working on the scene, the continuous aftershocks highlighted the need for meticulous, detailed measurement of the initial damage. “Our loose instruction [from insurers in February] was: hopefully you [adjusters] did a very detailed account of what was damaged [in September], because we [insurers] want to try and make some separation.” In some instances, this may be easier said than done. Take, for example, a situation in which an adjuster recommends replacing a sheet of drywall after the September quake, and the February quake made the crack big44 Canadian Underwriter July 2011

ger. In this situation, the adjuster’s initial assessment didn’t actually change as a result of the second quake, since the sheet of drywall was subject to be replaced anyway. For an insurer, this means the damage is counted as part of the insured damage of the September quake and not the February quake. “There was that differentiation, which got very complicated,” Legg said. The job was made easier by having access to detailed adjuster notes and pictures from the first quake. But different adjusters work in varying degrees of detail. And if a detailed assessment by an adjuster was not available after the original September quake,

adjusters had to rely on reports by property owners to help them differentiate the damage. “Sometimes with the cracks on pathways and driveways, you can tell [which quake caused the damage], because stuff will start growing through it — weeds and so forth,” Cumby says. “You can tell [the crack] has been there for awhile since the previous [September earthquake]. With interior damage, it’s harder. You can’t really say what cracked in the first one, what cracked in the second one. And the cracks got larger from the second one than they did the first time, right? So you work with the insured when you don’t have the information from the previous inspection.” Certainly the whole phenomenon of costing damage in an area continuously damaged by aftershocks is of concern to the local and global re/insurance industry. After the June 2011 quake, the Insurance Council of New Zealand (ICNZ) expressed concern about the long-term effect of continuing earth-

quake aftershocks in the Christchurch area. The ICNZ estimates the industry will pay almost $8 billion into the Canterbury economy and the rebuilding of Canterbury and Christchurch generally following the June earthquake. “The insurance industry has indicated the continued aftershocks in Canterbury are being viewed with increasing concern by reinsurers and international insurers,” the ICNZ said in a statement posted online. “The aftershocks raise the level of risk seen in New Zealand and may have a significant impact on insurance and reinsurance policies in the future.” The long-term impact may see increases in premiums and excesses, or even a questioning of the level of insurability for earthquakes that New Zealand receives, ICNZ says. Will the ongoing aftershocks in Christchurch have any lessons for Canada, where earthquake risk is present in Vancouver, Ottawa/Montreal and in Atlantic Canada? Often when earthquake risk is discussed in Canada, it is not explicit if the risk is a one-timeonly risk of a quake, or whether there is additional risk of aftershock effects. Legg says it is wise to consider the example of Christchurch, which means discussing the possibility that one major quake may be followed by others. “It’s something we haven’t seen before [in Canada],” he says. “But as far as the lesson [to be learned from Christchurch] goes, when you get a huge earthquake like this, you just have to anticipate that there are going to be more. You have to anticipate that there are going to be aftershocks of the same — or sometimes even higher — magnitude and you just have to prepare for that. You have to keep that in mind where adjusting is concerned. When you are adjusting the claim, you have to be adamant in keeping track of what’s been damaged and how it relates to that specific incident, just in case another one comes around and you’re going to need to do a further assessment on it and separate the two.”

You’re Invited to a Classic

‘Night at the Races’ Woodbine Racetrack Event - in Support of WICC …with Fine Dining and Thoroughbred Horse Racing

Your Hosts: Fred De Francesco and Bill Blakeney In support of WICC (Women in Insurance Cancer Crusade)

Special invited guest: Rob Ford, Mayor of the City of Toronto

Enjoy the evening with the excitement of the races in an outdoor setting. The evening will begin with cocktails, followed by a multi-course dinner and then casual conversation with our many guests during the evening’s Thoroughbred races.

Wednesday, September 7, 2011 At Woodbine Racetrack 555 Rexdale Blvd., Rexdale, ON

To Order Tickets please complete Order Form PDF (download here): http://bit.ly/racesorder11

Cocktails 5:55 p.m. Dinner 6:30 p.m.

Email: fairviewinsurance@bellnet.ca Fax: (905) 270-4720

Follow Hwy 27 entrance to trackside tent parking

Thoroughbred Racing throughout the evening.

Ticket $160 or Corporate Sponsor (table of 10) $1,600

Or Phone Fred De Francesco (905) 270-4727 or Bill Blakeney (416) 408-4225 for more information.

Thank you for supporting WICC!

wicc Design + Space compliments of:

Direct Approach The

Opinion/Analysis

Sylvie Paquette

President, Chief Operating Officer, Desjardins General Insurance Group

Technology is the driving force behind the strong contemporary presence of the direct channel. Desjardins General Insurance Group purchased the home and auto insurance operations of CIBC General Insurance just over 10 years ago. We made that big investment because we were confident the direct distribution model we introduced in Quebec would prove just as potent in the other provincial markets. What’s our view a decade later? Do we still believe the direct channel will play as big a role in personal lines distribution in Canada as it does in the United States, Great Britain and many parts of Europe? The answer is an unequivocal yes. Why so confident? After all, broker-based companies still account for 57% of the personal lines market in Canada, versus 30% for direct writers and 13% for the captive agent companies. In Quebec, the situation is just the opposite, with the directs at 61% market share in personal lines, and the broker companies at 39%.

46 Canadian Underwriter July 2011

Numbers don’t always tell the whole story. It is increasingly difficult to understand what is happening in the Canadian market, because players are transforming “traditional” distribution channels. How, for example, do you classify volume written by broker-based insurers through BrokerLink, Johnson Inc., Cypher Insurance Group and Grey Power? Is it broker or direct, or do we have to invent a new name? For the moment, it’s classified as broker. Even if the categories and numbers are a little cloudy, brokers still have a lot of the market. But how sustainable is that over the long term, given the combination of relatively simple, commoditized personal lines products and growing consumer use of Internet and mobile tools to research, compare and purchase products and services? The trend towards direct distribution in personal lines is clear. A recent survey by PwC Canada found the broker channel lost approximately 0.81% market share in auto insurance and 1.27% in property insurance per year to the direct channel over the past decade. There is good reason to believe the trend will accelerate. The simple reason is that the direct

model offers what many consumers care about today: price, convenience and empowerment. And this is being driven by technology that is radically changing consumer attitudes and shopping habits.

price/Cost Advantages In terms of costs, direct companies already have an advantage when it comes to expense ratios. It’s much easier to automate centralized processes, thereby bringing about internal efficiencies. Direct insurers also benefit from economies of scale, since everything they develop for their sales force is amortized over a large volume. The same is true for the development of Internet sites. A bigger issue is loss ratios, mainly in relation to the highly regulated and difficult Ontario market. In markets like Quebec or the United States, where directs are allowed to manage risks appropriately, the loss ratio of most direct providers is very competitive. Even in Ontario, direct providers are making headway: they are becoming more sophisticated operators, and the province’s auto insurance market is showing some signs of improvement following the most recent reforms. Convenience Direct providers also have a big advantage in terms of the customer experience. As both a manufacturer and distributor of the insurance product, they control the end-to-end process. When you own the customer relationship, you can manage the customer experience and use technology to build loyalty to the brand. It’s having one system, one set of products and providing agents with exactly the same training, goals and expectations. It’s also about providing the convenient and immediate service consumers expect. You don’t have to make an appointment. The call is answered right away. And because of our integrated systems, the customer can have the quote within minutes, and the policy mailed the next day. And, of course,

with hundreds of agents and sophisticated Web sites, direct companies can provide weekend coverage or extended-hours service — hours that are convenient for customers. In addition, and this is key, Internet sales and services are a much more natural fit to direct insurers, which is why the direct companies like GEICO in the United States and Direct Line in Brit-

Canadians are going online and using smartphone applications to manage their bank accounts, their Visa bills, their mortgages and their investments. To somehow imagine the insurance business will escape this trend is not realistic. ain are leading the transition to online sales. Clearly the investment in brand awareness, key to the success of direct companies, provides them with a big advantage when competing online. But the biggest gains from technology are for the consumers: 24/7 access, comparison shopping, self-updating and monitoring files online, external database links to simplify everything, and of course the new mobile applications.

Empowerment It’s all about convenience and empowerment. Consumers can shop where they want and when it’s convenient for them. They can do their own research and make their own decisions. They are in control. Some people argue the Canadian market is different; that we’re more tied to the traditional, personal approach. That doesn’t make a lot of sense. Canadians are going online

and using smartphone applications to manage their bank accounts, their Visa bills, their mortgages and their investments. And they are booking their vacations online, without the help of a travel agent. To somehow imagine the insurance business will escape this trend is not realistic. It’s already happening in Great Britain, where the majority of auto insurance sales are now done over the Internet, powered by the myriad of insurance price comparison Web sites such as confused.com and comparethemarket.com. Online sales in the United States aren’t at quite the same level, but they are growing rapidly. Instead of price comparison Web sites, direct companies such as GEICO and Progressive are leading the online charge, using their brand power and massive advertising budgets to build acceptance. It’s not a hard sell for the affluent and for younger urban customers who grew up with Internet technology. Naturally, they expect to research and do business online. Other parts of the market — particularly older customers, those in rural areas, and those with more complex insurance needs — will probably take longer to make the transition. Admittedly, some may always prefer the traditional approach. And of course, most commercial customers will continue to rely on expert brokers to meet their insurance requirements. So the future of our industry is multi-channel distribution, with the direct approach playing an increasingly important role in personal lines. Customers will choose how they want to deal with their insurance providers — whether by using mobile applications, over the Internet, by phone or in person. They don’t care how this affects our industry or about the competition between distribution channels and companies. By making their own decisions, they’re calling the shots. The challenge to insurance providers is to respond, by seamlessly meeting the needs of all of our customers across the various channels.

July 2011 Canadian Underwriter

Controlling your Own Claims

Gary Tobin

Senior Specialist, Complex Risks, Aviva Canada

The alternative risk financing market is a truly unique challenge for the insurance industry. These transactions blur the lines between traditional insurance and the world of finance. The insurance contract is the same, but there is a secondary and equally important part of the transaction: a financial piece that helps coordinate and control the costs of both the policyholder and the insurer, mostly on third party liability and automobile exposures. Various reasons exist for a policyholder to move into the alternative risk financing market: reduction in premiums, changes in tax status, expanded insurance coverage and/or an increased focus on risk management. However, the most practical reason to self-insure is to have greater involvement and control in the claims process. Most companies that selfinsure expect claims to happen; there is often a moderate to high frequency of low-severity claims. No matter what technique is used â&#x20AC;&#x201D; be it a deductible, reimbursements, captives or other mechanisms â&#x20AC;&#x201D; self-insurance enables a policyholder to have a say in the claims process because they are taking a piece of the action. They will be paying some or all of claims subject to the terms and conditions of the policy. That involvement in the claims process creates an opportunity for the policyholder to consider and respond to the impact of the claims handling process on the business.

48 Canadian Underwriter July 2011

Roles of the Parties There are three main roles in the claims handling process. First, there is the claims handler. This might be an independent adjuster, an insurer or, in some circumstances, a policyholder might have their own claims handling area staffed with insurance professionals. Regardless of who it is, the job remains the same. Each claim must be investigated and negotiated according to the terms and conditions of the insurance contract and settled using normal industry claims handling procedures and standards. In some cases, insurers may compete with adjusting companies for claims handling responsibilities. The insurer, using funds provided by the policyholder, might set up a claims fund that the adjuster can use to pay claims. This is often called an imprest account or an escrow. If the claims handler is someone other than the insurer, then the insurer has a responsibility to oversee the claims handling process. The responsibility is a combination of claims examining, especially on large and unusual claims, and claims management (oversight of the portfolio). The insurerâ&#x20AC;&#x2122;s role in this scenario has two purposes. The first is to ensure proper handling and guidance on claims, providing direction to the primary claims handlers when required. The second responsibility is to act as the claims manager on behalf of a policyholder, providing expertise and a

Illustration by Remy Simard / www.i2iart.com

A primer on how to handle claims in a self-insurance market

single point of contact for any customer questions about any claim. That single point of contact is the main control the customer has over the account, and is often called the control adjuster. Not every customer has the resources to be able to appoint an internal claims manager. They might prefer to assign that responsibility to the risk manager or designate, perhaps even at an adjusting company. If the policyholder does have a claims manager, all claims should be coordinated with the insurer. The third role is one of audit. If the insurer is handling the claims, that audit function may simply be an internal function using the resources normally allocated to the process by the insurer. It may be a combination of self-audit, peer review and formal audit. If claims are handled by anyone other than the insurer, it is a regular audit process. The claims frequency and the line of business, along with past audit results, should dictate the frequency of audit. This process should be done jointly with the broker and a formal audit statement should be shared with the insured. All three functions are critical to the claims handling process and are a prudent part of any sound risk managed program.

Relationships in a Self-insurance Structure With the policyholder gaining a say in claims discussions, it would appear the roles in claims servicing might change a little. But they really don’t change all that much, especially for independent adjusters. The policyholder, along with the broker, might play a greater role in determining exactly who is going to be the primary service provider for claims. From a regulatory perspective, the insurer is responsible for all claims. Any claims in which the payments come directly from the insurer — or from a payment fund supplied by the insurer — are the responsibility of

the insurer, no matter who is actually negotiating or settling the claim. The insurer will also be responsible for recording all reserves from the first dollar. But the insurer can claim a reduction in liabilities for any amounts recoverable from the policyholder, as long as they can prove that the amounts are recoverable. This means having appropriate collateral in place, collateral that can be recorded on the insurer’s statutory filings. Without collateral, the insurer will have to hold capital against the reserves posted on behalf of policyholders. The only exception to the rule is when there is a true self-insured retention, where the insurer has no financial responsibility for amounts

The most practical reason to self-insure is to have greater involvement and control in the claims process. below the policy. In this scenario, the self-insured retention will be documented within the policy wording. Even with a payment structure in place negotiated (in some cases) by the policyholder, an independent adjuster — often referred to as a third party administrator — is still a representative of the insurer. The flow of financial transactions is that the insurer pays the claim and pays the adjuster, and then seeks recovery from the policyholder. Although linked, they are in fact two separate transactions. A unique part of the relationship between the parties is the use of the policyholder’s money to pay claims. As stated previously, the policyholder usually has some input into the settlement process. The insurer must make sure all claims are handled using normal industry practices, but has a fiduciary duty to the policyholder. Just like any other scenario in which someone

else’s money is involved, the insurer has to check first with the policyholder before spending their money. The insurer should also check with the policyholder on any controversial claim, just to ensure any potential business impact can be addressed. Denying a borderline claim to the policyholder’s highest-volume customer could have far-reaching consequences!

The Claims Handling Contract One significant difference between a standard insurance arrangement and an alternative risk arrangement is that in an alternative risk arrangement, a specific claims handling contract is usually in place outlining the terms, conditions, pricing and reporting requirements under the program. There are a couple of variations on the contract, depending whom is doing the day-to-day claims handling. No matter what, though, every contract of this type will have a few things in common. One way to structure contracts with a control adjuster is to qualify a number of independent adjusting firms in advance. Each adjusting company will meet a series of specifications, ranging from the fees charged to the amount of professional liability insurance each carries; a reporting structure through to a national accounts team; a general agreement about any escrow or imprest funds that are put into place (funds held by the adjuster to pay claims and then get topped up to a constant level, much like a petty cash fund); and a service agreement outlining target response times and audit provisions. Alternatively, an insurer might handle claims directly, without the involvement of an independent adjuster. In this case, the claims handling component might be included in any other legal agreement, such as an indemnity agreement, between the client and insurer. Once the adjuster is determined, be it an insurer or an independent, any new client will have a set of account July 2011 Canadian Underwriter

INSURANCE INTERNET DIRECTORY ASSOCIATIONS Canadian Independent Adjusters' Association (CIAA) "The voice of Independent Adjusters in Canada" www.ciaa-adjusters.ca Honourable Order of the Blue Goose—Ontario Pond Our fraternal organization has been dedicated to fellowship and charity since 1908. www.bluegooseontario.org The Insurance Institute of Canada The professional educational arm of the industry. www.insuranceinstitute.ca Risk & Insurance Management Society Inc. Dedicated to advancing the practice of effective risk management. www.rims.org

CLAIMS ADJUSTING FIRMS ClaimsPro Inc. Committed to providing leading-edge claims management services. www.scm.ca Crawford & Company (Canada) Inc. Enhancing the customer experience, every day. www.crawfordandcompany.com CRU Adjusters Calm in the face of a storm. www.cruadjusters.com Cunningham Lindsey International independent claims services. www.cunninghamlindsey.com Kernaghan Adjusters Doing What Is Right®. www.kernaghan.com McLarens Canada International Loss Adjusters and Surveyors. www.mclarens.ca

50 Canadian Underwriter Underwriter July May2011 2011 54 Canadian

PCA Adjusters Limited Adjusting to Meet your needs™ www.pca-adj.com Quelmec Loss Adjusters Identifying, Investigating, Resolving...for over a quarter century! www.quelmec.ca

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

CONSTRUCTION CONSULTANTS MKA Canada, Inc. Providing creative solutions to the Construction, Legal and Insurance Industries. www.mkainc.ca

Walters Forensic Engineering Inc. Providing scientific answers to complex engineering incidents. www.waltersforensic.com

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

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

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

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

INSURANCE COMPANIES Aviva Canada Inc. Home Auto and Business Assurance. www.avivacanada.com Catlin Canada Underwriting Ambition. www.catlincanada.com Chartis Insurance Company of Canada Your world, insured. www.chartisinsurance.com FM Global The leader in property loss prevention. www.fmglobal.com

DAMAGE COST CONSULTANTS SPECS Ltd. (Specialized Property Evaluation Control Services) Providing Innovative Solutions to Control Property Claim Costs www.specs.ca

INSURANCE LAW

Grain Insurance and Guarantee Company Commercial Lines Underwriters www.graininsurance.com RSA Leading car, home and business insurer. www.rsagroup.ca Sovereign General Insurance Company of Canada Since 1953 www.sovereigngeneral.com The Guarantee Company of North America “Specialized insurance products...professional service” www.gcna.com Wawanesa Insurance Earning your trust since 1896. www.wawanesa.com

INSURANCE SOFTWARE APPLICATIONS Keal Technologies Complete technology solutions for insurance brokers. www.keal.com

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

RESTORATION SERVICES WINMAR Property Restoration Specialists Coming Through For You! www.winmar.on.ca STRONE Your emergency & restoration professionals www.strone.ca

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

handling instructions issued specific to the account and the coverages. A handful of things are common to any adjuster. The client may have specific requirements for certain types of claims and may ask for special reporting in these cases. The insurer will require all category claims be reported as quickly as possible, requiring both the client and, if there is an independent adjuster in place, the independent to report as quickly as possible. Category claims are large or complex claims, mostly involving serious injury, minors or contentious claims — or possibly claims that draw significant media attention. The insurer might have further contractual reporting requirements to reinsurers in the event of one of these claims, and would prefer to know about them as soon as possible. Other contractual requirements include service provisions outlining the time in which the adjuster has to respond to a report of a claim. There might be different response times for different types of claims. For example, pollution claims might require an immediate response, whereas other, less serious claims might be able to wait until the next business day. Authorities of the adjuster will also be specified in the contract. In the claims handling contract, it is critical to detail the rules and procedures for any money held to pay claims. An imprest or escrow fund acts very much like a petty cash fund. The balance is usually a function of the normal monthly claims payout, usually a multiple (two or three times, for example), so money is always available. A billing requirement will be specified, monthly or quarterly (depending upon the imprest amount). The requirement will state the insurer or the client, whichever is holding the full payment fund for claims, must replenish the fund regularly to ensure the continuous payment of claims. There may also be provisions about when such money is to be returned, after a set number of years following

expiry of the policy (or after settlement of the last known claim). The final major component of this type of contract is the fee structure. Whether or not the structure includes flat fees, actual time and expenses incurred or some other scheduled amount, it is much better to determine the amounts to be charged for claims handling before the account is bound — especially if there is a known or expected claims frequency.

Reporting One of the most important services provided by claims is the claims bordereau or loss run. This is a detailed list of claims and claims expenses outstanding and paid by the reinsured during the reporting period. Whatever the frequency, this is a foundational piece of the underwriting process; it is an important component of any client’s risk management program. Inaccurate and incomplete information can paint a vastly different picture of an account and can have severe financial consequences, not only to the insurer but also to the client. The client will often define the key pieces of information they would like to see on each case. Some things are standard: date of loss, date reported, description of the loss, amounts paid as indemnity, expenses (perhaps even types of expenses) and the current status of the claim (open, closed or reopened). Reporting may be done directly by an adjuster or the insurer. The large national adjusting companies all have top-notch claims reporting functionality and are capable of preparing high-quality loss runs. Some insurers have difficulty with loss runs. This is mainly because their systems have been built for statistical and regulatory reporting, as opposed to reporting to clients. Clients will also look for individual claims reporting, especially when a large amount is involved. Just like any person, if someone else is spending your money, you probably want some

say in it — or at least would like to know exactly why it is being spent. Claims payments are contractually required. In some instances, a client may need a detailed explanation to help them understand when a payment has to be made, even if they think it is unwarranted. Clients will also look to be involved when the claimant is one of the key customers. This is because the client doesn’t want a business relationship imperilled by a claim.

Summary When it comes to alternative risk financing, there is a lot of focus on the additional financial responsibilities from an underwriting viewpoint. But the claims focus is an equally important part of the picture. Large accounts and accounts with self-insurance mechanisms may share similar policies with other commercial customers, but the service expectations are different. Some companies have claims that can act like an entire portfolio of business, with a high claims frequency and very specific reporting requirements. Increased reporting and fiduciary responsibilities are not part of the day-to-day workload on most portfolios of commercial business. Contracts guiding a broader range of counterparties can alter normal business relationships. It is mutually beneficial to have a clear understanding of the claims process and everyone’s role when entering into a self-insurance arrangement. July 2011 Canadian Underwriter

MOVES & VIEWS

upcoming events: for a complete list visit

www.canadianunderwriter.ca

and click ‘my events calendar’ on the home page

Karen Gavan [1a] has been appointed as the new president and CEO of The Economical Insurance Group (TEIG). She succeeds Katherine Mabe [1b], who is leaving the company for personal reasons. Gavan has been a director at the Economical Mutual Insurance Company since 2008. She has served as chair of the special committee with responsibility for the company’s demutualization since 2010. Gavan was formerly the chief operating officer and chief financial officer of Transamerica Life and AEGON Fund Management Inc. Prior to that, she held senior management positions with Imperial Life Assurance Company and with Canada Life Assurance Company during its demutualization. She is a chartered accountant, a fellow of the Institute of Chartered Accountants of Ontario and holds the ICD.D designation from the Institute of Corporate Directors.

The Office of the Superintendent of Financial Institutions (OSFI) has appointed Darrell Leadbetter as a director in its property and casualty insurance group. Leadbetter

52 Canadian Underwriter July 2011

most recently served as the Property and Casualty Insurance Compensation Corporation (PACICC)’s chief economist and vice president of financial analysis and regulatory affairs. He has led PACICC’s work in analyzing industry economic trends and the monitoring of member institutions since 2004. Prior to his work with PACICC, Leadbetter worked with the Insurance Bureau of Canada (IBC), where he was responsible for coordinating the insurance industry’s work on capital, accounting and competition issues. Leadbetter joined the Financial Services Commission of Ontario (FSCO) in 1993, when he was responsible for research and policy analysis on statutory provisions in property insurance contracts, risk-based market conduct supervision and the establishment of the General Insurance Statistical Agency.

Swiss Re Group has appointed J Eric Smith [3] as president and CEO of the Americas, effective July 11. Smith will replace Pierre Ozendo, who is retiring after more than 35 years in the insurance industry. Upon his retirement, Ozendo will join the board of

Swiss Re America Holding Corporation as a nonexecutive director. Smith, a 30-year insurance veteran, joins Swiss Re from USAA Life Insurance Co. In his new role, he will lead Swiss Re’s property and casualty and life and health reinsurance business in Canada, the United States, Latin America and the Caribbean.

hensive claims adjusting company from coast to coast,” a ClaimsPro release says.

ClaimsPro Inc. has inked a deal to acquire Brouwer Claims Canada, a Vancouverbased independent adjusting firm that has been serving Western Canada for over 25 years. The acquisition will provide ClaimsPro with an additional 20 branch offices. Combined, ClaimsPro and Brouwer will have a staff of more than 1,050 insurance professionals. “The transaction, to close shortly, aligns with ClaimsPro’s strategy to build out the most compre-

The Aviva Community Fund will return in Fall 2011 with a $1-million pledge to support community initiatives. Launched in the fall of 2009, the Aviva Community Fund competition has provided $1.5 million in funding to numerous charities, community groups, youth programs, animal shelters, public schools, camps and centres for those affected by disabilities or illness. Contestants submit their ideas on the competition’s Web site (www. avivacommunityfund.org). Visitors to the site are asked to vote for their favourite ideas so they can advance through to the competition’s final round. At that stage, they are evaluated by an independent judge.

MOVES & VIEWS

• Laura

CNA Financial Corporation has completed its acquisition of CNA Surety. CNA Surety is now a wholly owned indirect subsidiary of CNA Financial. CNA Financial and CNA Surety announced a merger agreement on Apr. 21, 2011. Under the terms of the merger, CNA Financial would purchase the shares of CNA Surety not already owned by CNA Financial and its subsidiaries. CNA Financial commenced a tender offer on May 11, 2011 to acquire all of the outstanding shares of common stock of CNA Surety not owned by CNA Financial or its subsidiaries. On June 10, 2011, Surety Acquisition Corporation merged with and into CNA Surety in accordance with the merger agreement.

Maurice Poulin of Poulin Agencies in Nelson, B.C. has been sworn in as the president of the Insurance Brokers Association of B.C. (IBABC). Poulin is the third-generation owner of Poulin Agencies Ltd., a single-office brokerage started in 1928. He is the second president in the history of IBABC to come from the Kootenay region. Joining him as elected officers of the IBABC are: • Andrew Tablotney, Legear Pelling Insurance Agencies Ltd. (first vice president); • Dianna Johnsen Zimmer, Weeks Insurance and Financial Services Inc. (second vice president); and • Rosemary Hruby, Advantage Insurance Services (treasurer). Also serving on IBABC’s executive committee are: • Richard Pindral, chairman of the board (immediate past president);

Bolster, president of the Victoria Insurance Brokers’ Association; • Linda Petrin, Vancouver area representative; and • Chuck Byrne, IBABC’s executive director and chief operating officer.

Canpro Global Services Inc. and King-Reed & Associates LP have amalgamated to create the largest full-service risk mitigation and investigation company in Canada. Canpro Global Services Inc. is headquartered in Vancouver and has 11 offices throughout Western Canada. With more than 300 employees, it produces risk mitigation services through its five subsidiaries — investigations, HR services, risk solutions, training resources and labour risk management. KingReed & Associates LP is an investigations firm headquartered in Toronto with a staff of more than 170. Since 1984, King-Reed has served the corporate, legal, insurance and financial markets, providing investigations in the areas of fraud, intellectual property, due diligence, surveillance, pre-employment screening, intelligence gathering services and threat risk assessments. The new

organization, Canpro KingReed LP, will have combined annual revenues in excess of $40 million. The merger is the result of the private equity investment in both firms by Granite Global Solutions.

Disaster Kleenup Canada has made new appointments to its vice president of sales and marketing, marketing and communications director and regional and national sales director positions. The appointments include: • Tony Passarelli, vice president of sales and marketing. Most recently he served as executive vice president of operations. • Justyna McCaig, marketing and communications director. She comes to the role from a marketing agency, where she was the senior manager of marketing and communications. • Liz Gilthorpe, national account director. She was previously the regional account director for DKC’s central region. • Andrew Rayner, regional account director (Central). Rayner was most recently Cunningham Lindsey Canada’s director of sales and marketing for its Environmental Solutions division.

July 2011 Canadian Underwriter

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A record turnout of more than 150 industry representatives attended the 52st Annual Reception of the Quarter Century Club on May 26 at the Hilton International in Toronto. The event was a roast for claims industry veteran Neno Cappadocio, senior vice president with Aon Canada. His career began 25 years ago with Travelers Canada, where he started out as a loss control consultant in the engineering division. Cappadocio eventually became the claims manager at Dale Intermediaries Ltd. Aon Reed Stenhouse acquired Dale in 1987, and Cappadocio has remained with Aon ever since.

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APPOINTMENT

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The Institute for Catastrophic Loss Reduction (ICLR) hosted a Basement Flooding Symposium on May 26, bringing together representatives of the insurance industry and municipalities. Held at The Board of Trade in Toronto, more than 140 industry stakeholders learned about the causes and complexities of basement flooding, mitigative best practices, how various municipalities have dealt with the increased frequency of floods and insurers’ concerns about the issue. Lunch speaker William Blakeney of Blakeney Henneberry Murphy & Galligan discussed the historical legal challenges of sewer backup claims.

Karen Gavan FCA, ICD.D

Gerald Hooper, Chairman of the Board of Directors, is pleased to announce the appointment of Karen Gavan as President and Chief Executive Officer of The Economical Insurance Group® (TEIG®). Ms. Gavan has been a Director of Economical Mutual Insurance Company since 2008 and served as Chair of the Special Committee with responsibility for the Company’s demutualization since 2010. She was formerly the Chief Operating Officer and Chief Financial Officer of Transamerica Life and AEGON Fund Management Inc. Prior to that, she held senior management positions with Imperial Life Assurance Company and with Canada Life Assurance Company during its demutualization. She is a Chartered Accountant, a Fellow of the Institute of Chartered Accountants of Ontario, and holds the ICD.D designation from the Institute of Corporate Directors. The Economical Insurance Group is one of the largest property and casualty insurers in Canada with $1.7 billion in annual premium volume and $4.6 billion in assets. Based in Waterloo, Ontario, this Canadian-owned and operated company services customers’ needs through branches and service offices across Canada and in the United States.

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The Timmins Porcupine Insurance Brokers Association held its Northern Ontario Brokers Convention on April 27 and 28. The event included a number of industry exhibitors. Photo credit: Pam de Boer FCIP CRM, business development director, Ontario, Paul Davis Systems of Canada.

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Canpro Global hosted its annual client appreciation Jazz Night on the rooftop pavilion of the Vancouver Art Gallery. The Scott Robertson Trio provided the smooth sounds of jazz while those attending enjoyed delicious food and drink. The evening was in support of Japan’s Earthquake and Tsunami Relief Fund. Proceeds from the Canpro Foundation went to the International Red Cross.

The Centre for Study of Insurance Operations (CSIO) presented its 2010 CSIO Annual Achievement Award to The Economical Insurance Group (TEIG) for the insurer’s Insurance on Demand solution. CSIO gives out an award each year to one of its members for the innovative use of CSIO standards. Kathryn Curran and Maureen Tomlinson accepted the award on behalf of The Economical at the CSIO’s annual general meeting in Toronto on May 11. Insurance On Demand allows customers to manage their insurance online, including home, auto, condo and tenant policies, directly through brokers’ Web sites. July 2011 Canadian Underwriter

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The Insurance Brokers of Toronto Region (IBTR) held its annual Friendship Night on May 3. The Spirale Banquet Hall in Toronto was once again the venue for the annual mix-and-mingle for brokers, CSRs, producers, insurers, underwriters and a wide spectrum of industry vendors and suppliers.

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Friends, family and colleagues of the late, great Doug Hurlbut came together for Dougstock III — a celebration of his life, friendship and much missed camaraderie. The event, La(r)ger Than Life, was held at the Pilot Tavern on June 3. Friends and colleagues were treated to stories and memories of Doug, as well as some live music in his honour.

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GALLERY More wishes will come true this year thanks to the 17th Annual Starlight Insurance Gala, held in support of Starlight Starbright Childrenâ&#x20AC;&#x2122;s Foundation. Themed Nights in Marrakesh, the black tie event held at the Carlu in Toronto raised $175,000 on May 7. About 450 tables represented all segments of the industry. With his mother at his side, Tobin Haas addressed the audience, recounting his courageous fight against cancer. He talked about the discovery of his malignant brain tumor, the surgeries, treatments, recurrence and continued battle against the cancer. He also described how, in the midst of tiring treatments, his Starlight Wish was granted: He was able to attend the 2010 Vancouver Olympics.

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July 2011 Canadian Underwriter

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Risk managers from across Ontario gathered at the Fairmont Royal York for the Annual General Meeting of the Ontario Chapter of the Risk and Insurance Management Society (ORIMS). During the dinner event, ORIMS 201011 president April Savchuk passed the torch to ORIMS 2011-12 president Roman Parzei. The event also served as a fundraiser for the Japan relief effort. ORIMS raised $500 through the sale of red bracelets. It then matched the sum, bringing the total amount of the proceeds to $1,000.

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More than 65 exhibitors turned out for the trade show and strolling dinner opening the Insurance Brokers Association of Alberta (IBAA)’s 2011 Annual Convention in Jasper, Alberta on May 15. The three-day event featured the IBAA’s annual general meeting, as well as a keynote address by Jeremy Gutsche of TrendHunter.com. Gutsche’s speech encouraged insurance industry representatives to find ways to innovate during times of change. Karen Rutherford, an insurance broker for 23 years and a consultant in adult education and risk management, led an education seminar on May 17, entitled Social Media: Should Brokers Be Pursuing Clients on Facebook?

64 Canadian Underwriter July 2011

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July 2011 Canadian Underwriter

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Key executives of the insurance industry attended the 2011 Canadian Insurance Financial Forum at Torontoâ&#x20AC;&#x2122;s Metro Convention Centre on May 26. Industry veteran Graham Segger, a recently retired partner at Deloitte & Touche, was the master of ceremonies. The high-level discussion focused on topics including perspectives on financial management, managing mergers and acquisitions, CFO challenges and optimizing investment portfolios. Chris Mathers, a crime, terrorism and money-laundering expert, riveted the crowd with his luncheon keynote address. Finally, delegates unwound at the end of the event with a networking and cocktail event.

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CIP Society Annual Ontario Golf Tournaments Join us in helping to support the John E. Lowes Insurance Education Fund and other local charities at the CIP Society Ontario Annual Golf Tournaments. Space is limited. Guarantee your spot by contacting us today.

Ottawa

GTA

Southwestern

September 9, 2011 Cedarhill Golf Course ottawamail@insuranceinstitute.ca

September 13, 2011 Wyndance Golf Club gtaevents@insuranceinstitute.ca

September 23, 2011 Pine Knot Golf & Country Club wbarbour@insuranceinstitute.ca

We would like to thank our sponsors for their generous support. Sponsorship opportunities are available for this event. Please contact your local chapter.

at 25.42°N 90.15°W, ACE insures progress

Property & Casualty | Accident & Health | Life

It takes the right people, a strong balance sheet, worldwide capabilities and a flexible approach to address the complexities of marine insurance. These are the strengths of ACE. We take on the responsibility of your risks so that you can take on the responsibility of making things happen. We call this insuring progress. Visit us at www.ace-ina-canada.com.