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C A N A D A’ S I N S U R A N C E A N D R I S K M A G A Z I N E . C A N A D I A N U N D E R W R I T E R . C A
JULY 2 0 1 6
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CANADIAN UNDERWRITER
VOL. 83, NO. 7, July 2016
Canada’s Insurance and Risk Magazine.
Published by
newcom business media inc.
www.canadianunderwriter.ca
Cover Story
Catastrophe Modelling
22
Some reinsurers use the
Cat models of third-party
vendors; others develop
their own internal models.
But despite improvements
in data collection and
computing power, there is
a level of uncertainty in
models, especially those
trying to predict losses from
human-induced disasters.
By greg meckbach
features
31
12
Pricing Cycle
Reinsurance Trends
With the excess capital glut
in the global p&c insurance
industry, concentrated in
reinsurance, is the historical
pricing cycle broken?
Surveyed reinsurers have
finally reached the technology
tipping point, with digitization
now regarded as key to any
changes that unfold.
By Sean van Zyl
By Richard Clark
16
Aviation War Risk Liability
18 Fort McMurray
Wildfire
34 Replacement Cost
Endorsement
What is pegged to become
Canada’s largest insured loss
event, the Fort McMurray
wildfire, may become known
for something positive:
how early and collaborative
insurance industry response
can help advance recovery.
A recent decision by a British
Columbia court makes
clear that strict compliance
with replacement cost
endorsement is expected.
The requirement to replace
with “due diligence and
dispatch” clearly remains.
By Bill Adams
By Owen Jones
36
Audit Committees
The deadline for Ottawa to
provide war risk indemnity
has passed. Canadian air
carriers and aircraft operators
must obtain war risk coverage
on the commercial market.
Audit committees must
remain “up to speed” to
address the widening universe
of strategic, financial,
business, operational and
reputational risks.
By Lisha Li
By Kristy Carscallen
July 2016 Canadian Underwriter
3
Editor
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VOL.
. 2, FEBRUARY 2014
VOL. 81,
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NO. 2,
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an Effective Digital Strategy
Going Digital: Cultural Disruption
Ben Isotta-Riches, CIO, Aviva Canada
Joseph Cooper, Global Technology Executive
Joe will underscore key digital elements impacting
insurers, and the dramatic pace of change they face.
Omnichannel Communications for
Seamless Customer Experience
Avi Greenfield, HP Exstream
Multichannel communications is an integral component
of digital transformation; helping to increase customer
satisfaction, grow new business and improve retention.
Insuring the Sharing Economy
Tim Attia, CEO, Slice, Mike Fitzgerald, Senior Analyst Insurance, Celent
Transforming a “legacy” organization to compete
like a “born digital” company requires a significant
cultural shift. Ben will share experiences in driving
business change.
Bridging the Online Gap:
Gathering Data and Engaging Consumers
Michael Shostak, Chief Marketing Officer, and Alice Keung,
Chief Information Officer, Economical Insurance.
Executives from Sonnet - Economical’s first digital
direct offering - will describe the path taken,
challenges encountered, and future outlook for its
customer-experience driven offerings.
Digital Psychology: Evoking Emotion to Sell Insurance
The Digital Evolution of Healthcare
Michael Weber, Director of Imaging Sales, Philips Health Care
Dr. Brian Cugelman, PhD, Senior Scientist & Director, AlterSpark
and Andrew Lo, Chief Operating Officer, Kanetix Ltd.
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editorial
Business of Security
Results suggest
industrialization
of cyber crime is
disrupting digital
enterprises, thereby
making it tough for
businesses to exploit
digital technologies
that may help spur
growth and profit.
Angela Stelmakowich
Editor
astelmakowich@
canadianunderwriter.ca
6
What can one get for $6
nowadays?
A fancy coffee? Half of a
movie ticket? Or, maybe, access to a compromised server
to wreak whatever havoc suits
one’s financial aspirations.
Cyber security firm
Kaspersky Lab reported in
June that its researchers had
uncovered a global forum
that allows cyber criminals to
buy and sell access to compromised servers for what
amounts to spare change.
Many servers host or provide
access to popular consumer
websites and services.
At the time of Kaspersky’s
announcement, the xDedic
marketplace — complete
with live technical support,
special tools to patch hacked
servers and profiling aids —
listed 70,624 hacked remote
desktop protocol servers for
sale from 416 unique sellers
in 173 countries.
It may simply be a sign
of the times — a time
when data is king, service
is embedded in crime and
entrepreneurial endeavours
are not always above board.
Combine that with today’s
reliance on technology,
automated systems and
interconnectedness, as well
as the slippery challenge of
estimating how big cyber risk
truly is or could be, and today may not seem a friendly
time for organizations looking
to keep information secure.
A recent survey from
British Telecommunications
plc and KPMG LLP shows
that while 94% of polled IT
decision-makers are aware
that criminal entrepreneurs
are blackmailing and bribing
employees to gain access to
organizations, 47% admit
they do not have a strategy
in place to prevent it.
Results suggest industrialization of cyber crime is
disrupting digital enterprises,
thereby making it tough for
businesses to exploit digital
technologies that may help
spur growth and profit.
The report cites emerging
threats from profit-orientated
and highly organized cyber
criminal enterprises. The
21st-century “cyber criminal
is a ruthless and efficient
entrepreneur, supported by a
highly developed and rapidly
evolving black market,” says
Mark Hughes, BT’s chief
executive officer of security.
It is a sobering message,
perhaps more so because of
the current state of readiness
and preparedness. Earlier
this year, Cisco reported just
45% of polled organizations
worldwide are confident in
their security posture given
cyber attackers’ ability to now
launch more sophisticated,
bold and resilient campaigns.
And given the amount of
time needed to detect cyber
crime (survey respondents
report 100 to 200 days),
plenty of damage can be
done while business is
continuing as usual.
Here at home, Deloitte
Canada reported in December
that only one in five polled
Canadian companies report
being prepared to effectively
respond to a cyber attack.
Add to that that just 36%
of respondents say their
businesses have in place
effective procedures and
technologies to protect
critical assets.
Nothing is perfect, true,
but tools and practices are
available to combat the
threat. Use of both — coupled with equal portions of
common sense and vigilance
— can certainly help.
Beyond that, education,
especially on the front lines
and among those who may be
targeted for social engineering, is critically important.
“If the company views
cyber security as an IT or a
technology-only issue, they
leave themselves open to that
first line of defence — their
employees, their contractors,
their customers — to that
area of vulnerability,” David
Craig, a partner in PwC
Canada’s cyber security
and privacy practice, told
Canadian Underwriter at an
event earlier this year.
Wombat Security
Technologies emphasizes the
need to use employees — in
a positive way. Having staff
become advocates of cyber
security would help reduce
associated risks and better
protect the businesses for
which they work, suggests
president and chief executive
officer Joe Ferrara.
“As more and more organizations work to educate their
employees about the dangers
of poor cyber hygiene, we will
begin to see more and more
consumers who are betterequipped to identify cyber
threats,” Ferrara predicts.
That could only help to
ensure all concerned are, in
fact, a little more secure.
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ALBERTA TO REVIEW FORT
MAC WILDFIRE RESPONSE
Alberta’s Ministry of
Agriculture and Forestry has
reported it is reviewing its
response to the Fort
McMurray wildfire.
The review will look at the
ministry’s wildfire preparation
and readiness up to May 31,
2016, and the steps taken
to respond to fight the Horse
River wildfire. The review will
also include an assessment
of the weather and fuel
conditions that led to the
early spring wildfire season.
The ministry reports a
request for proposals, which
closes August 5, has been
issued to select a suitable
contractor to do the review. A
final report is expected to be
delivered to government by
the end of the year.
DISASTERS IN MAY SPUR
US$7 BILLION IN CLAIMS
Global disasters in May
have resulted in at least
US$7 billion in claims,
including anticipated
insured losses in excess of
US$3.1 billion from the Fort
McMurray wildfire, notes
Aon Benfield’s Global
Catastrophe Recap for May.
The report states insured
losses — including physical
damage and business
interruption — from the
Alberta wildfire are expected
to be in excess of $4 billion.
The fire destroyed at least
10% of Fort McMurray,
including more than 2,400
homes and other structures.
8
“Since this is just the sixth
individual global wildfire to
surpass the billion-dollar
threshold for insurers, there
is not a lot of precedent for a
fire event of this magnitude,”
says Adam Podlaha, global
head of Impact Forecasting.
Regulation
change adaptation by July
2016 for the 2015-2020
code cycle, with completion
anticipated by 2020.
And starting this year, NRC
code staff will work with
other federal departments
to obtain the latest data and
trends so these values are incorporated into deliberations
and technical solutions.
NATIONAL MODEL BUILDING
CODE SHOULD ACCOUNT
FOR CLIMATE CHANGE
SASKATCHEWAN TABLES
20-PLUS AMENDMENTS TO
AUTO INSURANCE PROGRAM
The National Research
Council of Canada (NRC)
should “incorporate climate
change trends” when
developing structural design
provisions in the model
building code, environment
and sustainable development
commissioner Julie Gelfand
suggested in a recent report.
“Canada should incorporate
climate change trends into
the National Building Code’s
structural design provisions,
to take into account the expected increase in frequency
and severity of weather
events that can directly
affect buildings,” states the
Office of the Auditor General
report, released May 31.
Severe weather is defined
as “a naturally occurring
event that causes floods and
flash floods, thunder and
lightning storms, tornadoes,
drought, tropical cyclones,
thermal extremes, forest and
wildland fires, heavy rain or
snow, or strong winds.”
The Canadian Commission
on Building and Fire Codes,
an independent committee
of volunteers, is scheduled
to begin working on climate
More than 20 amendments to
Saskatchewan’s Automobile
Accident Insurance Act were
introduced in June to better
meet the needs of people
injured in vehicle collisions.
With respect to the reduced
no-fault coverage, new
optional injury coverage
available only to motorcycle
owners took effect April 1.
It is anticipated other draft
amendments will be passed
during the fall sitting of the
legislative assembly, with
changes to take effect January
1, 2017, notes Saskatchewan
Government Insurance (SGI).
Among other things, if
passed, an innocent party
or the family affected could
sue for pain and suffering or
bereavement damages when
an impaired driver causes a
collision and is killed; and
injured customers are eligible
for the current maximum
rehab benefit amount rather
than the amount in place
when the injury occurred.
Implementing the changes
will cost $12 million to
$17 million for the first year,
and $2 million to $5 million
annually thereafter, SGI notes.
Canadian
Market
PEMBRIDGE INSURANCE
RELEASES WATER DAMAGE
EXTENSION ENDORSEMENT
Pembridge Insurance Company
has announced the launch of
its enhanced Water Damage
Extension endorsement, an
all-in-one option providing
sewer back-up, overland
water and ground water coverage under one endorsement.
The endorsement has few
restrictions with no impact
on guaranteed replacement
cost or single limit coverage,
reports Pembridge Insurance.
The coverage is being
“read-in” for all existing
customers with the water
damage extension on their
policies, meaning as of June
15, eligible policyholders
will automatically receive the
coverage without having to
endorse their policies or pay
an additional premium upfront.
ENERGI OF CANADA energy
PROGRAMS IN WESTERN,
ATLANTIC CANADA
Companies in parts of
Western and Atlantic Canada
“with commitment to loss
prevention and implementation of industry best practices”
will have access to Energi of
Canada Ltd.’s new property
and casualty programs for
energy business.
Already available in
Ontario, the programs are
now being offered in Alberta,
British Columbia, Nova
Scotia, New Brunswick and
Prince Edward Island.
marketplace
The programs will provide
risk management solutions
and insurance offerings for
energy-related risks in fuel
distribution, fuel transportation, energy contractors,
renewable energy and
alternative energy solutions.
OPTIMUM GENERAL OFFERS
OVERLAND WATER DAMAGE
COVERAGE IN ONTARIO, B.C.
Montreal-based Optimum
General Inc. has launched
a residential policy endorsement in Ontario and British
Columbia that covers
overland water damages.
Optimum General policyholders can opt for a sewer
back-up endorsement, which
has been recently revised and
improved by adding coverage
to repair or replace damaged
service lines, as well as
coverage for the installation
of a sewer back-up prevention
device after a sewer back-up
claim, the company notes.
CHUBB ADDS CYBER
BULLYING COVERAGE FOR
CANADIAN HOMEOWNERS
Chubb has added cyber
bullying coverage to its
Canadian Masterpiece Family
Protection policy to help
cover clients and their families from expenses associated
with such an incident.
The coverage provides
as much as $60,000 in
compensation to clients and
family members for expenses
related to harassment and
intimidation committed via
personal computers, telephones or mobile devices.
Clients may recover costs
incurred when bullying results
in wrongful termination, false
arrest, wrongful discipline in
an educational institution, or
diagnosed debilitating shock,
mental anguish or mental
injury leading to the inability
of the client or a family
member to attend school or
work for more than a week.
It also provides compensation for psychiatric services,
rest and recuperation expenses,
lost salary, temporary
relocation services, education
expenses, professional public
relations services and cyber
security consultants.
Risk
$508 MILLION IN POLLUTION
LIABILITY FOR B.C.
British Columbia’s forests,
lands and natural resource
operations ministry recognized
$508 million in pollutionrelated liabilities associated
with property managed by the
Crown Contaminated Sites
Program as of March 31.
Under that program, the
province has “investigated
a total of 84 sites, which
includes 18 sites where
remediation is complete and
16 sites where investigation
and remediation is ongoing,”
notes the ministry’s Crown
Contaminated Sites Program
2016 Biennial Report.
Most sites “are the result of
past industrial activities,” it
states. “When a responsible
party cannot be found the
obligation for clean-up may
rest with the province.”
A liability for remediation
could occur when an entity is
no longer in productive use,
an unexpected event results
in contamination or there are
changes to environmental
standards relating to entities
no longer in use.
Technology
ottawa INVESTS IN
UNMANNED AIRCRAFT
SYSTEMS RANGE IN ALBERTA
Ottawa is providing $300,000
to support the development
of an unmanned aircraft systems (UAS) range in Alberta
for training and field testing.
The funding will support
range fit-up costs. The
Alberta government will also
provide $100,000 towards
business development and
range management.
The Foremost UAS range
will support industry and
academic work in training
and field-testing technologies for civil and commercial
applications.
With 700 square nautical
miles (2,400 square kilometres) of airspace designated
for up to 18,000 feet above
sea level, the centre opens
up significant training,
research and development
possibilities for both Canadian
and international companies,
the government notes.
GM EXPANDs work ON
AUTONOMOUS, CONNECTED
VEHICLE TECHNOLOGY
General Motors Canada will
expand its engineering and
software work to support the
development of “innovative
new automotive systems and
technologies for the future.”
Expanding its Canadian
base to reach about 1,000
positions over the next few
years, new work will be focused on autonomous vehicle
software and controls development, active safety and
vehicle dynamics technology,
and infotainment and
connected vehicle technology.
All areas are important
“for the development of new
connected, autonomous and
shared vehicles and mobility
systems,” the company adds.
HUGE ADVANTAGE FOR
FIRST-MOVERS IN SHARING
ECONOMY, ATTENDEES HEAR
The sharing economy is not
a new concept, but because
it moves so quickly, the
insurance industry must
innovate to catch up and reap
the benefits, David Nelis,
national CoE leader, casualty
for Aon Risk Services, suggested at a recent seminar.
“There’s a chance for these
insurers to get in and create
products and be the first ones
on the ground. And there will
be a huge first-mover advantage to the companies that
do that well,” Nelis said.
But innovation will prove
key. While the sharing
economy allows for “better
utilization of an asset,” like
a home or car, he pointed
out, “it does create additional
exposure to risk of loss.”
Nelis said that he sees
three main areas: new
exposures that exist from
the sharing economy; new
products that need to be
developed to address this;
and pricing of products
(based on funding the losses
that will come from it).
9
Profile
At the Crossroads
Heather Matthews,
incoming president
of the Canadian
Independent
Adjusters’
Association,
believes the claims
industry is at a
crossroads, but
that adjusters
are up to the
challenge.
Heather Matthews has no
problem taking sides — at
least when it comes to
what part of the insurance
business she finds most
intriguing and fulfilling.
“I’m very biased to the
claims side of the business,”
says Matthews, senior vice
president of Crawford &
Company (Canada) Inc.’s
National Claims Management
Centre (NCMC).
“I think claims are
fascinating because no two
days are the same. I know
it is a bit of a cliché, but as
adjusters, we get a great deal
of fulfillment from helping
people through traumatic
experiences and giving them
comfort when they are in
one of their greatest times of
need. I think it incredibly
important that we find
purpose in what we do every
single day and in claims that
is very easy to do,” she says,
pointing to just some of
10 Canadian Underwriter July 2016
the long list of attributes.
It was a list the current 1st
vice president and incoming
president of the Canadian
Independent Adjusters’
Association was more than
happy to share with people
entering the industry or
while recruiting for Crawford
Canada years ago.
Attracting the best and the
brightest was an issue then;
it remains an issue today,
regardless of industry. “I
would show them pictures of
claims and tell them stories
of claims,” Matthews reports.
And, of course, she would
talk about the people.
“I think people truly do
appreciate what we do,” she
says, citing as one example
what is currently unfolding
in Fort McMurray. There
is a “great deal of stress
on these people. They are
unsure of coverage, what’s
going to happen, who can I
trust. And we’re there to help
them,” Matthews says. “It
is particularly rewarding to
receive compliments and testimonials from policyholders,
they are often lengthy and
emotional and underscore for
me why we do what we do.”
That makes the job as
challenging as it is fulfilling.
Starting with Crawford
Canada in 1987, Matthews
began as an all-lines road
adjuster, and has held
numerous positions within
the company that has
afforded her a unique
perspective on the business.
In addition to claims, she
has held leadership roles in
sales and marketing, human
resources and healthcare
services before taking on
her current role in 2012
as senior vice president of
Crawford’s NCMC, where she
is responsible for over 400
employees and a diverse
array of services.
“We really need to
listen, focus and
understand their
(customers) needs
as we navigate
these changes,”
Matthews says.
“We need to better
understand the
unmet needs of
our customers and
how we can help
them both now and
into the future.”
VALUE ADDED
Like independent adjusting
itself, however, the profession,
the challenges and the
environment are changing.
“I really think we are at a
bit of a crossroads in claims
and in the insurance industry
as a whole,” Matthews says,
suggesting that one fork in
the road leads to utilizing
very technical claims adjust-
ing skills and the other leads
to using technology and data
with a greater emphasis on
customer experience. “I think
there’s a role for both.”
It is something Matthews
hopes to explore during her
time as CIAA president, a
key focus of which will be
“creating a stronger dialogue
with our customers to better
understand their current and
future challenges” and
actively engaging with
leaders on both sides of
the claim: insurers and
independent adjusters.
“We really need to listen,
focus on and understand
their (customers) needs as
we navigate these changes,”
Matthews says. “We need to
better understand the unmet
needs of our customers and
how we can help them both
now and into the future.”
She maintains, “In some
respects the challenges
of a staff adjuster and an
independent adjuster are
very similar. We need to, I
think, challenge some of our
traditional ways of thinking
and be prepared to step out
of our comfort zones. We see
evidence of dramatic change
and disruption all around us
and our industry is not
immune these pressures. As
a professional services industry, it is all about providing
credible and measurable
value to our customers.”
However, demonstrating
that value may demand
tweaking current self-
perceptions, as well as
making better use of
resources and technology.
In a lot of cases, Matthews
points out, an independent
adjuster sees himself or
herself “as that field adjuster
who goes out there and settles
the claim. We see changes
now in where, how and why
our customers want to engage
the services of an independent adjuster, more integrated
and aligned with their own
internal strategy. It is changing
the type of resources we
require to service some of
these evolving needs.”
One of the challenges
Matthews hopes to address
during her term is a collaborative focus between
the independent adjuster
industry and the insurance
carriers to solve the potential
future talent crisis as a result
of shifting demographics,
technological advances and
changing attitudes about
field-based service delivery,
all of which are significantly
changing or reshaping the
traditional “training ground”
for adjusters. “We need to
look beyond the current fiscal
periods and individual claim
assignments to collectively
ensure that the claims
industry will continue to be
well-served for many years to
come,” says Matthews.
When asked how she intends to fulfill her ambitions
during her term, Matthews is
quick to say, “Several years
ago the CIAA started down
Photo: Peter Tym
Profile
the path of creating a closer
dialogue with the insurance
carriers by creating an
Advisory Council filled with
claims executives from insurance carriers. It was the right
thing to do then and remains
the right thing to do now. We
need to revitalize that forum,
make sure we have the right
people involved and that we
are talking about the right
issues. I intend to make
that my mission.”
Insurers, too, have a role to
play, in light of the continuing
challenge of managing un-
predictable volumes cycles.
Of insurers, Matthews says,
“you need to keep at least a
steady stream of day-to-day
claims into our organizations
to keep the people employed,
keep their skill sets up, and
have them understand your
systems, your instructions,
your philosophy so that when
that catastrophe does hit,
we’re there, we’re ready,
we’re skilled, we have the
bodies, we have the licences,
we’re ready to hit the ground
running. We understand
that it is incumbent on us to
make sure we have a solid
value proposition to support
the carriers on their day-today requirements in order for
this proposition to work.”
Matthews points out that
part of the discussion centres
on metrics. Use of scorecards
on key performance indicators are now commonplace
among insurers. “They’re
aggregating all the data;
they’re looking at all of the
claims that we manage for
them and they’re scoring us
in all different components,”
she says. “We are learning
that some of these metrics
may actually have unintended consequences and, in
fact, be barriers to delivering
the desired outcomes on
claims. This is part of the
dialogue we need to have
with carriers, continually
calibrating and refining the
metrics to optimize the
customer experience”
GROWTH IN CHANGE
“I’m a big fan of change,”
Matthews notes. That said,
while people regularly
change their style — whether
clothes, haircuts, cars or
homes — “when you go to
change somebody’s job, it’s
like, ‘Whoa, stop the bus
here,’” she quips.
But even though change
can be scary, “I think it
stretches us, I think it
challenges us, I think it
allows us to learn new
things and look at different
perspectives.”
11
Death
of the
Pricing
Cycle?
Sean van Zyl
Freelance Writer
The current excess capital glut within the global
property and casualty insurance industry, mainly
concentrated in the reinsurance sector, has combined with almost negative investment income
growth due to low interest rates to drive the
present “soft market” across commercial and
personal lines. Many industry experts expect this
will continue unabated for the foreseeable future.
This high tide of unemployed capital has introduced a new pricing dynamic that, short of a megacatastrophic event resulting in a multi-billion-dollar
insured loss, signals the traditional underwriting
pricing cycle is something of the past.
David Mew, national placement leader for
Marsh Canada, describes the current market
conditions as being the longest soft market in
35 years. “For the foreseeable future, I don’t see
this changing, primarily due to the excess capital
situation,” Mew says.
With low interest rates, excess capital and
lack of any major Cat losses over the last three
years, reinsurers and insurers are going to focus
on underwriting and chasing business volume
to satisfy shareholders, he suggests. “The global
economy has changed so much, and become so
inter-connected, that local developments have
less impact on pricing. I think the pricing cycle
as we know it is broken.”
Sean Murphy, president of Lloyd’s Canada Inc.,
describes the current market environment as the
“perfect financial storm,” with exceptionally
low interest rates and excess capital combining
to drive down premiums and, in some cases,
insurers have widened their coverage.
Many in the market have rarely seen tougher
conditions. “It’s certainly the case that the present conditions may constitute something of a new
normal,” Murphy comments. “Canada is facing
similar pressures as the ones we are seeing globally,” he notes.
ANALYST PERSPECTIVES
Robert Hartwig, president and an economist at
the Insurance Information Institute, notes that
to some extent, the industry’s traditional pricing cycle is dead, but this perspective depends
Illustration ©Carl Wiens, i2iart.com
The medieval nursery rhyme, ring a ring o’ roses, depicting the ravages
of the black plague, could well represent a metaphor for the property
and casualty insurance industry’s past erratic pricing behaviour. Now,
with a record level of excess capital awash in the global marketplace,
has the historical pricing cycle been broken forevermore?
Illustration Carl Wiens, i2iart.com
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on the definition of the “pricing cycle.”
Post-WWII to the mid-1970s was a
period of stable underwriting and pricing, not the “boom and bust” — hard
and soft — activity of subsequent years,
as influenced by cash flow underwriting,
Hartwig explains. “This fundamentally
shifted how insurers conducted business, relying on investment income.”
Globally, the p&c insurance industry’s
total annual underwriting capacity is
about US$1.8 trillion to US$2 trillion
compared with the United States market’s
total capacity of roughly US$675 billion.
Using the U.S. market’s surplus and
estimated 20% excess level of capital
and then applying this to the global
numbers suggest a very large amount of
excess capital accumulation. Barring an
unforeseen mega-Cat, Hartwig does not
expect coverage terms and pricing will
change in the near future.
Steve Webersen, head of insurance research at Conning, Inc., says that almost
all commercial lines in the U.S. marketplace have shown no rate growth for at
least the last nine months. “However, I
don’t think we can say that there will
never be another hard or soft market
again,” Webersen comments.
The excess capital factor is concentrated in the global reinsurance sector,
which has softened treaty renewal rates.
Reinsurers are also dealing with higher
retentions from primary companies and
battling non-traditional funding, such as
the Cat bond market, prompting them
to start partnering with capital providers to provide non-traditional coverage
vehicles, Webersen notes.
“Reinsurers have also encroached into
the primary market. At this stage, there
are very few reinsurers that operate solely in the reinsurance sector,” he says.
Greg Williams, assistant vice president for U.S. and Canadian markets at
A.M. Best, concurs the reinsurance sector has mostly been negatively impacted
by the global capital excess, which has
fed into the primary insurance market.
In its year-end Best’s Special Report, the
rating company notes that “conditions
will remain competitive and challenging, as primary companies are expected
to continue retaining more business
and/or seek better terms and conditions
for sharing their profitable business.”
Overall, Williams expects downward
pricing pressure to continue mostly in
commercial lines for both Canada and
the U.S. markets, adding that Canada has
seen a moderate reduction in rates.
The full extent of the insured loss
arising from the Fort McMurray fire
devastation is currently unknown, but
industry commentators anticipate the
the reinsurance sector,” Baker reports.
Preliminary data collected by MSA
Research for the first quarter of 2016
suggests the Canadian p&c insurance
industry is still delivering favourable
financial returns despite the decline in
coverage pricing. Insurers and reinsurers
saw underwriting income rise by almost
$900 million, while net claims costs fell
year-on-year by 14.2%. Though net income dropped 24%, this was largely the
result of a massive 48% downward slide
in investment income.
Nadja Dreff, director of economics
and assistant chief economist at Insurance Bureau of Canada, highlights the
negative impact of lower interest rates and
bond yields on the industry’s investment
returns. The average yield for one- to
three-year Government of Canada bonds
was a mere 0.5% at the end of 2015.
Says Dreff, “Globally, low interest rates
have contributed to the capital accumulation evident in the reinsurance market.”
INSURER/REINSURER
PERSPECTIVES
event will not materially impact the
pricing of commercial lines because of
the existing heightened competition.
It has been estimated the Fort McMurray fire could produce an insured
loss of between $4.4 billion and $9 billion. Even at the lowest loss estimate,
the event clocks in at more than double
the insured cost of the 1998 ice storm
($1.9 billion) and 2013’s floods in
southern Alberta ($1.8 billion).
Joel Baker, president and chief executive officer of MSA Research Inc., agrees
the wildfire loss will not be sufficient to
turn the commercial market in Canada.
“The fire will almost definitely cause
localized hardening of primary property market in Canada, as well as within
Intensified competition in Canada’s p&c
insurance marketplace has led to a more
prolonged “soft market” than past industry cycles, observes Martin Thompson, senior vice president of commercial insurance at RSA Canada.
Although Thompson does not see anything on a global scale that is going to
change market conditions, he notes that
the downward pressure on pricing in
Canada has been more “targeted,” affecting certain lines and products compared
with other international markets.
He further suggests current market
conditions are producing a gap in terms
of profitability between larger “top performers” — which have embraced new
technologies to reduce claim costs and
operating expenses — and companies
operating on the lower end of the scale.
Colin Simpson, chief financial officer
of Aviva Canada, adopts a more positive
view of the pricing cycle, which will
likely firm just as quickly as rates decline. “There’s always going to be losses,
and, eventually, the excess capital will
dry up,” Simpson says.
However, he expects any future turn
in the pricing cycle will likely be less
like the dramatic pendulum swings of
past cyclical shifts. One benefit of the
current heightened competition, Simpson suggests, is that insurers must look
at becoming more cost-effective in their
approach to writing business.
Another significant trend having
emerged from the industry’s capital glut
is consolidation through mergers and
acquisitions (M&A), Murphy says. “The
market has seen a considerable amount
of M&A activity throughout 2015, and
that has continued into 2016. There is
no doubt that the combination of the
soft cycle and excess capital in the market has meant that M&A activity is still
being looked at. Capital is not restrained
by borders, and it will be deployed in
areas where returns are favourable and
the market predictable,” he explains.
Thomas Holzheu, chief economist,
the Americas for Swiss Re, is sceptical
that the current excess capital will result
in the end of pricing cycles. Economic
factors such as low inflation and low
interest rates will, eventually, turn and,
thus, reduce excess capital and put pressure on profitability, Holzheu says.
That said, he notes there is no question the industry’s current excess capital
has brought about a global soft market.
A big factor influencing these conditions,
he suggests, is no major Cat losses over
the last three years. In this respect, this
“windfall” cannot be counted on going
forward as Cat costs are likely to mount to
more average levels, eroding the industry’s capital position, Holzheu explains.
BUYER PERSPECTIVES
work with risk managers in applying
risk control/mitigation measures into
coverage terms and pricing.
This is definitely a “buyers’ market,”
says Gloria Brosius, a board director for
RIMS, the risk management society, and
risk manager for Colorado-based Pinnacle Agriculture Holdings.
The combination of low investment
returns combined with excess capital in
the insurance industry has had a marked
impact on commercial pricing and coverage terms, Brosius notes. Multi-year
policies are often available during soft
market cycles, she says.
All that said, Brosius is leery of what the
future may hold in terms of price tightening of commercial rates. “With 26 years
of experience, I have no doubt that the
pricing cycle will continue to exist.”
If you’re in
Manitoba, this is
considered an
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Surprised? ARC isn’t.
Your customer has a list of the vehicles that
are covered by your fleet policy. You have
a list of the vehicles that are covered by
ARC Group Canada is a national
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network of independent law firms,
And your lists aren’t
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When the one vehicle that is involved in
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ARC Group Canada is a national network of independent law firms,
each intimately connected to their local market.
Insurance and risk management experts. Regional strength.
National scope. Go to AskARC.com
Darius Delon, chair of RIMS Canada
Council and associate vice president of
The ARC Legal Reporter
risk services at Mount Royal University,
Winter Issue – Article #1
points out that when insurers drop into
A National Network of Independent Law Firms
single-digit returns on equity for two
years running, there is an inevitable
When is a medical examination considered a second examination
tightening of rates across the industry.
under Rule 36 of the New Brunswick Rules of Court?
As such, Delon does not believe that
The ARC Legal Reporter
the historical pricing cycle has become
v. Crowther and Kelly
Case:
Winter IssueReported
– Article
#1 Blyth
2009 NBCA 80
Citation:
a relic of days past.
When both the plaintiff’s physical and mental condition are in issue in an action, a
At Issue:
A National Network of Independent Law Firms
the plaintiff undergoes a physical examination, will a subsequent application fo
However, he does concede that insurpsychiatric examination be considered an application for a second medi
examination?
ers are showing a greater willingness to
When is a medical examination considered a second examination Should medical examinations that are ordered as part of the discovery process
characterized as ‘independent’ medical examinations?
under Rule 36 of the New Brunswick Rules of The
Court?
Court of Appeal of New Brunswick
Court:
ARC_Fleet ad_1/2 page.indd 1
Reported Case:
Citation:
At Issue:
Judgment Rendered:
Factual Summary:
October 13, 2009 (Reasons delivered November 2015-02-14
26, 2009)
1:05 PM
The plaintiff suffered injuries in a motor vehicle accident and commenced an act
seeking damages. Both the plaintiff’s physical state and mental state were in issue
the action. The plaintiff submitted to a physical examination by the defendant’s exp
but subsequently refused to submit to a psychiatric examination.
Blyth v. Crowther and Kelly
2009 NBCA 80
When both the plaintiff’s physical and mental condition are in issue in an action, and
Up in
the Air
Associate,
Blake, Cassels &
Graydon LLP
Aviation war risk insurance provides coverage
for hostile acts of violence against the airline,
such as acts of war, terrorism, hijacking, acts of
sabotage, unlawful seizure of aircraft and civil
commotion.
Canadian aircraft operators are generally required to have aviation war risk liability and hull
coverage by their aircraft financing and leasing
agreements. Additionally, some foreign countries,
such as the European Union (EU) member states,
have required that all air carriers and aircraft
operators flying into, out of or over its territory
carry war risk insurance, regardless of whether
the aircraft operated is at their disposal through
ownership, lease agreement, joint or franchise
operations, code-sharing or any other arrangements, notes EU Regulation 785/2004, as amended
by Regulation 285/2010.
NEED FOR ADDITIONAL PREMIUM
This coverage is not included in the aviation allrisk insurance and is usually only available for
an additional premium. Prior to the 9/11 terrorist
attacks, war risk insurance was readily available at
commercially reasonable rates. Following 9/11,
however, private war risk insurance was temporarily cancelled.
When such insurance was reinstated, it was
done so at reduced indemnity coverage and, for
most airlines, became prohibitively expensive.
Governments around the world stepped in to
bridge the gap.
They did so in various different capacities. For
example, in the United States, the U.S. government
expanded its federal Aviation War Risk Insurance Program to guarantee that U.S. air carriers
Lisha Li
The December 31, 2015
deadline and the six-month
extension for the federal
government to provide war
risk indemnity under the
Aviation War Risk Liability
Program, meant to provide
war risk indemnity to the
Canadian air industry, has
passed. All Canadian air
carriers and aircraft operators
need to obtain war risk
coverage on the commercial
insurance market if
required under leases
and/or financing documents.
Illustration Carl Wiens, i2iart.com
could receive war risk insurance coverage with premiums based on the cost of
such coverage prior to the 9/11 terrorist attacks.
The Canadian government’s response
was to create the Aviation War Risk Liability Program in 2001, the aim of which
is to provide war risk indemnity to the
Canadian air industry in an amount
equal to the amount of general insurance coverage carried by the entity.
The war risk liability program needs
to be renewed by the federal government from time to time and Ottawa’s
2014 undertaking to provide war risk
indemnity under the program came to
an end December 31, 2015.
THE LAST EXTENSION
When the 2014 undertaking ended,
the program was granted one final sixmonth extension before expiring. Unlike
the previous undertakings, however,
this final extension to June 30, 2016,
did not extend the indemnity coverage
to lessors and financiers of the airlines.
The 2014 undertaking coverage had
provided to “any person covered under
an insurance policy held by an airline,
an airport operator, NAV CANADA, or
any supplier of goods or services to an
airport operator, an airline in Canada
or NAV CANADA who is insured against
general liability under an insurance policy.” (emphasis added)
This effectively meant that financiers
and lessors, who are generally named
as additional assureds in the insurance
policy of the aircraft operator, could
benefit from the program’s coverage and
air carriers did not need to turn to the
commercial insurance market to satisfy
their war risk insurance requirements.
However, the wording of this last
undertaking, on its face, appears to only
indemnify aviation industry participants in accordance with the terms and
conditions set out in the undertaking
and the schedule.
Aviation industry participants, a term
defined in the Aviation Industry Indemnity
Act, include the following:
(a)an air carrier;
(b) NAV CANADA;
(c) an owner or operator of an airport;
(d) a supplier of goods or services that
directly support the operation of
aircraft from an airport, including
with respect to (i) the preparation
of an aircraft for departure or on
its arrival, including maintenance
and cleaning of the aircraft and the
loading and unloading of passengers, baggage and cargo, (ii) freight
forwarding, (iii) air navigation, or
(iv) airport security services; or
However, the wording
of this last undertaking,
on its face, appears to
only indemnify aviation
industry participants in
accordance with the
terms and conditions
set out in the undertaking
and the schedule.
(e) an entity that is prescribed by regulation or a member of a class of
entity that is prescribed by regulation.
As there are currently no entities prescribed by regulation, the term, as it
stands, does not include lessors and financiers. This means that they could not
benefit from the program’s last exten-
sion, and aircraft operators, in order to
satisfy their insurance obligations under their respective leases and financing
documents, have had to obtain commercial war risk insurance.
Canada’s transport minister had issued a letter to the National Airlines
Council of Canada to clarify the scope
of the extended indemnity as being the
same as previous undertakings, and,
therefore, meant to cover persons covered under an insurance policy held by
an aviation industry participant.
Despite the clarification letter, the
wording of the 2015 undertaking was
never amended to be acceptable to aircraft lessors and financiers.
A NEW COMMERCIAL PRACTICE
As a result, all major Canadian airlines
have obtained war risk coverage on the
commercial insurance market since the
2014 undertaking period ended December 31, 2015. In any event, the final
extension of the program terminates on
June 30, 2016, and the Government of
Canada has indicated it will no longer
extend this program.
Therefore, after June 30, all Canadian air carriers and aircraft operators
will have to obtain war risk coverage
on the commercial insurance market if
required to do so under its leases and/
or financing documents, or if it flies
into, out of or over the territory of any
foreign country that has such requirements.
17
Response to
Recovery
Bill Adams
Vice President,
Western and
Pacific,
Insurance Bureau
of Canada
What has been projected to
be Canada’s largest insured
loss event, the wildfire in
and around Fort McMurray,
perhaps will become known
for something more positive:
how early, co-ordinated
and collaborative insurance
industry response can help
smooth the way to recovery.
Just a few days after wildfire forced the evacuation of Fort McMurray, one property and casualty
insurance industry representative was permitted
to enter the abandoned city; a week later, two
more arrived. In total, two senior staff from
Insurance Bureau of Canada (IBC) and an industry claims specialist retained by IBC were on the
ground to see the first-hand results of the Alberta
wildfire.
At the time, active firefighting was top priority;
the provincial Regional Emergency Operations
Centre (REOC) controlled the area with tight security at entry checkpoints. The air quality health
index was above 10 (indicating very high risk),
often reaching 30 and even as high as 50.
As the disaster was still unfolding, it was too
early to begin assessing damage or planning for
rebuilding. But the province had learned from its
recent experiences with the Slave Lake fire and
the floods in southern Alberta.
Embedding insurance industry representatives
in the province’s emergency response earlier
helped smooth the way for the 88,000 evacuees,
many of whom would soon be making insurance claims. It also helped connect the industry
with the community that it would help to rebuild.
In mid-May, AIR Worldwide issued an insured
loss estimate of $4.4 billion to $9.0 billion. The
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estimate reflects insured physical damage to residential and commercial property, as well as direct business interruption losses (except those related to the
oil industry). In early July, IBC reported
that, based on figures from Catastrophe
Indices and Quantification Inc., insured
damage was projected at $3.58 billion
But it is not just the size of the loss
that is unprecedented. The inclusion of
the p&c insurance industry — having IBC
act as the conduit between the government and the industry and its customers
— in all aspects of the provincial emergency response is also unprecedented.
This early industry participation is a
first in disaster management in Canada
and is likely to become a best practice
for future responses.
It may be early days in the Fort McMurray recovery, but it is not too soon
to begin assessing the results of this early
collaboration between the insurance
industry and government through the
lens of the events of the first six weeks
since the evacuation.
1
WEEK OF MAY 1
When the province declared a state of
emergency, many p&c industry representatives invoked their emergency response
plans and began mobilizing staff and
resources. By May 5, 26 insurers were
on the ground at Lac La Biche, Edmonton
and Calgary evacuee centres to hand out
cheques for additional living expenses
(ALE) and answer questions.
On May 6, IBC opened its Community
Assistance Mobile Pavilion (CAMP) in
Lac La Biche and Edmonton Northlands
to provide information and answers to
insurance questions. Shortly afterward,
CAMP opened in Calgary.
2
WEEK OF MAY 8
Demand for insurance information
skyrocketed, with the first questions
being, understandably, about ALE. Questions came not just from individual
policyholders, but from the provincial
government. For its own planning, the
province needed to understand what
kinds of support evacuees could expect.
The Alberta government began nightly telephone town halls on May 9, in
which IBC took part to answer insurance-related questions. The town halls
continued over three weeks, with a total
of 17 sessions and more than 160,000
people calling in.
With 24-hour notice, IBC provided
40,000 fact sheets on insurance and
the claims process to be included in the
province’s packages of prepaid debit
cards for evacuees.
Social media was a primary source
of information for evacuees and the
key platform for disseminating and
cross-pollinating messages from government, the industry and consumers.
The dedicated IBC Fort Mac Fire page
received five times the typical number
of daily visits in its first five days and
thousands of tweets about the disaster
mentioned insurance.
IBC re-tweeted government information and vice versa, helping to get out
accurate information and suppress misinformation.
In addition, IBC’s YouTube video to
promote information centres and contact
information was seen 137,000 times by
mid-June and had generated more than
300,000 impressions on Facebook.
This week, industry representatives
were invited to meet with the government recovery task force, including on
the issue of adjuster access to the area.
nounced a voluntary re-entry strategy,
new questions arose about transitional
housing. The government was keen to
ensure that its decision to move from a
mandatory evacuation to a voluntary reentry did not adversely affect insurance
coverage, so industry representatives
provided information on a number of
re-entry scenarios.
IBC also met with the Red Cross to
share information and provide assistance
while that organization worked on a
strategy to help the most vulnerable
evacuees.
4
WEEK OF MAY 22
3
5
WEEK OF MAY 29
WEEK OF MAY 15
Industry representatives were embedded in the REOC in Fort McMurray. Once
there, they were invited to take part in
the centre’s daily operations, including
attending the four daily briefings along
with representatives of services involved
in the emergency response efforts.
Once on the ground, industry representatives were quickly pulled in to
discussions and negotiations around
adjuster access, disposal of fridges and
freezers once residents returned, and
access to hotels and business facilities
for industry personnel.
And when Premier Rachel Notley an-
In the countdown to the phased reentry due to start June 1, air quality
became a major issue for industry staff
deployed to the area to prepare community infrastructure (such as grocery
stores and pharmacies).
The Regional Municipality of Wood
Buffalo (RMWB) approached IBC to
request that the insurance industry take
responsibility for collecting fridges and
freezers. Insurers were hesitant at first
but, after some discussion and number
crunching, they realized that centralizing removal with one vendor would
demonstrate the industry’s commitment
to the community and save them time
and money. By June 22, commissioned
local contractors had picked up, degassed and disposed of 10,114 units.
This was an intense week when many
overlapping issues required negotiations
and solutions. It was also a week when
the value of being embedded with the
REOC team became abundantly clear.
On May 30, with a phased re-entry
scheduled to begin in two days, Premier
Notley announced the chief medical
officer of health had deemed more than
560 homes not damaged by fire to be
uninhabitable because of contamination,
meaning 2,000 people would not be
allowed to return home.
The provincial state of emergency
was also extended for another 28 days.
The situation raised not only new
insurance questions, but also questions
about the health and safety of other areas of the city for both residents and
responding insurance personnel. With
more people unable to access their
homes, there was expected to be more
demand on the city’s rental space at a
time when many industry people involved in the recovery were also trying
to find accommodation.
Insurance industry representatives were
running into issues with office space
and use of temporary trailers, but later
negotiated with RMWB and the REOC
for space that would allow an insurance
hub to be set up.
Also this week, RMWB agreed on May
28 to allow adjusters to enter the area
ahead of residents on the condition that
they not visit homes or sites without authorization from the insured. By May 29,
400 adjusters and claims staff had arrived.
However, the night before residents
returned on June 1, the REOC circulated
well-intentioned, but inaccurate, information directing returning residents to
contact their respective insurance company “to assist you in determining if there
are health issues affecting your home.”
The industry quickly engaged senior
levels of government and the REOC to
address the problem.
Within a couple of days, Alberta Health
Services circulated new information
announcing that public health inspectors would be performing inspections
on specific homes to offer recommendations on remediation.
6
WEEK OF JUNE 5
Industry representatives presented a coordinated strategy for demolition and
debris removal, modelled on the Slave
Lake process, to Fort McMurray’s city
council, which was eventually accepted.
Adjusters and other industry personnel
then got access to fenced-off and restricted areas.
Several new issues arose, including
the rights and responsibilities of landlords, tenants and insurers in determining when tenants could return to their
homes. And the issue of rebuilding on
the same site was raised during the
last telephone town hall held on June
8, foreshadowing what is an ongoing
discussion among the province, the
municipality and the industry around
same-site issues.
The transition began from emergency response to recovery and rebuilding.
The provincial REOC disbanded and
transferred responsibility back to the
RMWB, although a provincial state of
emergency was to remain in effect.
Even from this accounting of the first
six weeks of disaster recovery, rebuilding Fort McMurray is clearly a marathon,
not a sprint.
But collaboration to date bodes well
for a strong race and a successful finish,
first and foremost, for the residents of
Fort McMurray and the region.
Within the Margins
Some reinsurers use the catastrophe models of third-party
vendors; others have opted to develop their own internal
models to estimate losses. But despite significant improvements
in data collection and computing power, there will always
be some level of uncertainty in Cat models, especially those
attempting to predict losses from human-induced disasters
like cyber attacks or nuclear terrorism.
GREG MECKBACH
B
uildings that are not constructed to
code, man-made events such as terrorist attacks, the infrequency of market-shaking
earthquakes and the lack of detailed hurricane data prior to the mid-1800s are
among the factors that contribute to uncertainty in the models currently being
used by reinsurers in the property and casualty insurance industry to determine
their capitalization strength.
Of course, some risks — such as cyber attacks and terrorism — have more
modelling uncertainty than natural disasters, reinsurers suggest. For example, a
product manager for one catastrophe modelling provider says that despite there
being much better data for terrorism loss models today than 15 years ago, the
potential for a terrorist using a nuclear, biological or chemical weapon is top of
mind for some reinsurers since such an incident could threaten the entire industry.
Cat models are based on science, loss experience and engineering judgment, says
Andrew Castaldi, senior vice president and head of catastrophe perils, Americas for
Swiss Re. “All models have a degree of uncertainty in them,” Castaldi says plainly.
“There are statistical models and with any statistic, there will be some type of
uncertainty, and there is also some uncertainty in the scientific component,” he
points out.
“Modelling uncertainty is both an issue and an opportunity for everyone in the
reinsurance industry,” says Paul Nunn, head of natural catastrophe risk modelling
for Paris-based SCOR. “Many complex third-party Cat models are in use and these
models are changing frequently as new data and science emerges,” Nunn explains.
“Understanding the uncertainty in underlying science, modelling approaches
and results requires specialist expertise and time, both of which are in very limited
supply. While vendors do reveal some of this uncertainty, there is still much that
is not quantified — this is of bigger concern to us,” he suggests.
July 2016 Canadian Underwriter 23
COVER STORY
Within the Margins
Castaldi cites another concern. “As good
as the models that we build are, they
can’t read a policy form,” he cautions.
“The models are designed on loss history from the past and that loss history
is based upon policy wordings, deductibles, sub-limits and everything else that
happened years ago, decades ago, in
some cases,” he adds.
So if policy wording changes, “in effect, you really should be modifying
your modelled output to track the policy
form that you have,” Castaldi explains.
A broader form, he ventures, “would
mean that your model results are probably understated. If you contract the
form, more than likely, your model results might be overstated. I think that is
one of the most important things that
people tend to miss.”
Brian Schneider, senior director of insurance at Fitch Ratings Inc. suggests
that Cat modelling “is a big factor” in
determining a reinsurer’s capitalization
strength. “Model uncertainty comes
from a variety of sources — accuracy of
the underlying insured data, robustness
of the data event set of the model itself,
assumptions as to claims inflation from
demand surge and the unique aspects of
the actual event itself,” Schneider says.
VALIDATE THIRD-PARTY MODELS
A paper released in late April by Standard
& Poor’s Financial Services LLC notes
that there is “significant modelling uncertainty” when estimating a reinsurer’s
exposure to catastrophe. Cat models created by third-party vendors “reflect the
vendor’s own view of catastrophe risk,”
states How We Capture Catastrophe Modeling
Uncertainty in (Re)insurance Ratings.
“Reinsurers may not fully agree with
these views, and some have even developed their own models for some perils.
In fact, regulators have encouraged reinsurers not to blindly use the vendor
models, but to review the workings of
the models and identify and address any
elements that do not reflect their view
of the risk,” the paper notes.
In rating reinsurance firms, S&P researchers “take a negative view if a reinsurer
does not vet and validate the vendor
models to establish their suitability for
the reinsurer’s own view of the risk and
catastrophe exposure,” it adds.
Castaldi reports that Swiss Re relies
almost entirely on its own models. “Our
whole risk appetite, capital costing system, accumulation, everything is tied to
our own internal tools,” he notes.
the next year with a confidence level of
99.5%, resulting from changes in market
values of assets held by insurers, notes
information posted on EU’s website.
As part of its internal capital model,
SCOR adjusts and incorporates thirdparty models, “where these have been
formally adopted in the business,” Nunn
says. “Internally, SCOR developed Cat
models, then supplement where no
third-party model is available or fit-forpurpose,” he reports.
“We use models as one tool, amongst
others, to inform decision-making,” he
says. “Modelling uncertainty can be a
major issue where firms are overly influenced by their modelling results.”
SOURCES OF UNCERTAINTY
“Modelling uncertainty
is both an issue and
an opportunity
for everyone in the
reinsurance industry,”
suggests SCOR’s Paul
Nunn. “Many complex
third-party Cat models
are in use and these
models are changing
frequently as new data
and science emerges.”
“The only reason we license an external vendor tool is because of their data
format,” he goes on to say.
For its part, SCOR “operates a full internal model for capital setting in the
Solvency II sense,” writes Nunn.
Solvency II is a European Commission
(EU) directive that applies to some property and casualty insurers. Among other
things, it requires insurers to determine
capital requirements to cover the market-consistent losses that may occur over
There are “two main sources of uncertainty that permeate through modelled
losses,” says Tom Sabbatelli, product manager with the model product management
team at Risk Management Solutions
(RMS) Inc. “One part of that is the data
and the assumptions that are being used
by a modelling company, and the other
part is going to be based on the data
quality and availability that is controlled
within each individual company.”
A Cat model depends on exposure
data; for instance, “characteristics that
dictate” how a building would respond
to a peril such as wind or ground shaking, Sabbatelli reports.
For that, the four “primary characteristics” of a building are the number of
storeys, construction type, occupancy and
year it was built.“Those are generally
well-captured by a majority of companies in North America,” Sabbatelli says.
“Cat models are trying to predict losses
to an insurer or reinsurer’s portfolio, so
you need to bring the right information
into the model if you want to get the
right output,” says Cagdas Kafali, vice
president of research at AIR Worldwide,
a unit of Verisk Analytics Inc.
For property risk, a modelling firm
would “want to know the use case,”
Kafali explains. “Is it a hospital? Is it a
restaurant? Is it a concrete structure or a
masonry one? Does it have a basement?
So there is a lot of input that we need
SCOR’s strength stands out clearly
SCOR consistently delivers. Since 2003, SCOR has overcome obstacles, faced economic and financial crises, and absorbed major
natural catastrophes. Throughout this long journey, the Group has held its course and achieved the strategic targets set out in its
successive plans. The Group has reinforced its financial strength, and expanded and deepened its franchise. It has diversified, developed
a state-of-the-art risk management strategy, and become a truly global group.
The upgrade of our rating to AA- by S&P and Fitch* demonstrates the relevance of SCOR’s business strategy, which continues to withstand
the current macroeconomic and market environment. It confirms SCOR as a Tier 1 global reinsurer. The Group’s strength is a clear benefit
for our clients.
Denis Kessler
Chairman & Chief Executive Officer
* Fitch on July 21, Standard & Poor’s on September 7, 2015.
COVER STORY
Within the Margins
to bring into the Cat model and some
insurance companies are doing better
than others in collecting the data.”
Structure information like use, occupancy, material, height and construction year is generally incorporated into
Cat models in the United States and
Canada, Kafali notes, but adds that this
may not be the case in other markets,
such as Asia. If this type of information
is missing or incorrect, however, “then
the model is making an assumption,”
he notes.
“Asia is where we, as an industry, need
to really, really ramp up data collection,”
contends Kafali.
The data there tends to be “at a very
aggregated level, so they may know they
have this amount of total exposure in
a given province, but they don’t know
where those are located. So without
knowing where they are located, you are
going to have a hard time estimating
your risk from typhoons where flooding
may be important,” he says.
Some insurers “go the extra mile” to
capture secondary characteristics of a
building, things like roof shape, roof
material, local tree density and special
shutter usage that “could exacerbate or
mitigate damage,” Sabbatelli reports.
The issue is that this sort of information can be more difficult to collect, he
points out. For example, “if the right
nails weren’t used on a house and,
therefore, it wasn’t built to code precisely, a Cat model wouldn’t pick up on
that because that’s happening on such a
small scale,” Sabbatelli explains.
Consider when RMS was updating its
hurricane model and experts reported
that in Texas, some roofs were not actually being built to code. As such, “roofs
were failing at lower wind speeds than
expected,” Sabbatelli reports.
“The model is meant to produce losses for the expectations, but if homes are
not being built to the expectations, then
it’s very difficult for the Cat model to
represent that,” he points out.
A Cat model “produces mean losses,
but, ultimately, this is useless without
addressing some of the uncertainty
around that because each location is
going to have individual characteristics that set it apart from the average,”
Sabbatelli cautions. “Even if we had a
perfect data set, that would still produce
a certain level of uncertainty that would
need to be quantified,” he suggests.
There are “two main
sources of uncertainty
that permeate through
modelled losses,”
reports Tom Sabbatelli
of RMS. “One part of
that is the data and
the assumptions that
are being used by a
modelling company,
and the other part is
going to be based on
the data quality and
availability that is
controlled within each
individual company.”
have for any natural catastrophe peril,
but if you speak to statisticians, they
may say that 160 years is not necessarily
a long enough sample to work with,”
he says.
“While we have a certain length of record of data for earthquakes, they have
far less frequency, whereas hurricanes
are happening far more frequently,”
Sabbatelli adds.
Kafali says there is plenty of information from both insurers and government
agencies, such as the U.S. Geological
Survey, on catastrophes in the U.S.
Fitch Rating’s Brian Schneider notes
“certain regions can have more modelling uncertainty to the extent that the
frequency of events is lower and the catalogue of events is more limited,” which
is “particularly the case for earthquakes.”
And since perils like flood and severe
convective storm “happen on a much
smaller scale” than earthquake and hurricane, Sabbatelli notes, he suggests it
is difficult for insurers to model individual thunderstorms and tornadoes
unless they use computers with “huge”
processing capacity.
“You can’t run these millions and millions of thunderstorms at a high scale
because it could cause the computer
to crash. So you have to find a middle
ground over which you can measure
the larger-scale aspects that drive severe
convective storms while also trying to
maintain some level of detail within individual events,” he explains.
“Over time, as computing power
has become more sophisticated and
the modellers have had more events to
study, the models have continued to improve and have proven to be extremely
useful,” Schneider points out.
BEYOND NATURAL
For some perils, Sabbatelli notes, the
data on the frequency and severity will
be shorter than for other perils.
For example, south of the border, the
National Oceanic and Atmospheric
Administration’s HURDAT2 database
has information as far back as 1851.
“160 years worth of data represents
about the longest historical record we
In addition to natural catastrophes, RMS
also models losses from terrorist attacks.
These models are based, in part, on computational fluid dynamics to “simulate
how blast hazard waves propagate, deflect off buildings and damage different kinds of structures,” explains Chris
Folkman, the company’s senior director
of product management.
“We have less data on large-scale acts
of terror available to us compared to
the climate perils,” Folkman notes. “For
things like wind storms and hurricanes,
we have millions of sensor readings and
wind speed readings, and it’s very wellestablished science with a lot of data behind it,” he adds.
That said, the industry has “much
better data” on malicious disasters today than it did September 11, 2001,
when al-Qaeda operatives hijacked four
civilian airliners, crashing two into the
World Trade Center in New York City
and one into the Pentagon outside of
Washington, D.C.
Inflation-adjusted insured losses resulting from those attacks were about
US$42.9 billion, Congressman Gregory
Meeks noted in 2014 during a debate
on a bill to extend the U.S. Terrorism Risk
Insurance Act. After 9-11, “terrorism risk
insurance quickly became either unavailable or very, very expensive and
unaffordable,” Meeks said at the time.
The Terrorism Risk Insurance Program
Reauthorization Act, which was signed into
law earlier this year, extends the act to
the end of 2020. In short, the act requires commercial property insurance
in the U.S. to cover terrorism, with the
federal government sharing losses under certain conditions.
It was noted in a 2014 report by the
U.S. President’s Working Group on The
Long Term Availability and Affordability
of Insurance for Terrorism Risk, while
risk models for terrorist attacks “have
become more advanced” since 2002,
“commenters report that such models
are still of relatively limited utility, particularly in terms of developing pricing
for the risk of large-scale attacks with a
sufficient degree of confidence.”
One recent tragedy — which at press
time was under investigation as a possible terrorist attack — was the shooting in the early morning hours of June
12 at the Pulse Nightclub in Orlando,
Florida. As of late June, the Orlando
Police Department reported, 50 people,
including the perpetrator, U.S. citizen
Omar Mir Seddique Mateen, had died
and another 53 had been injured.
“There are strong indications of
radicalization by this killer, and a potential inspiration by foreign terrorist
organizations,” U.S. Federal Bureau of
Investigation director James Comey told
reporters June 13.
“What happened in Orlando was
absolutely terrible, but it remains to
be seen what the overall insured loss
will be from that,” Folkman says.
“Compared to a natural catastrophe
peril or something like that, in a way
that could threaten solvency, I don’t
think the Orlando attack is going to
reach that level.”
What could potentially reach that
level are incidents in which terrorists
use chemical, biological, radiological
or nuclear (CBRN) weapons. That possibility “really keeps a lot of reinsurers
up at night, because a CBRN event could
threaten not just the solvency of one reinsurer, it could potentially threaten the
entire industry,” Folkman comments.
MASS DESTRUCTION
“Cat models are trying
to predict losses to an
insurer or reinsurer’s
portfolio, so you need
to bring the right
information into the
model if you want to
get the right output,”
Cagdas Kafali of AIR
Worldwide points out.
Mateen “made clear his affinity, at the
time of the attack,” for the Islamic State
of Iraq and the Levant, Comey reported.
But Mateen “also appeared to claim
solidarity with the perpetrators of the
Boston Marathon bombing, and solidarity with a Florida man who died as
a suicide bomber in Syria for al Nusra
Front, a group in conflict with Islamic
State,” he added.
The presence of CBRN material, as well
as explosives, “creates a significant risk
of diversion or exploitation by terrorists or criminals,” Public Safety Canada
notes on its website.
Folkman reports that indications are
that mustard gas has been used recently
in Syria. “What’s even more concerning, and this was recently highlighted
by (U.S.) President (Barack) Obama
at a nuclear summit in April, is there
seems to be a renewed interest by a
number of threat groups in revitalizing
their research and development programs for CBRN attacks and more ambitious forms of terrorism,” he adds.
Those types of “severe attack scenarios” were mentioned in RMS’s recent
paper, Terrorism Insurance & Risk Management
in 2015: Five Critical Questions.
For example, modelled property
damage loss from a five-kiloton nuclear detonation in Chicago (which
the paper projects will kill 300,000
people) is US$323 billion while the
modelled property damages from a
similar attack in London (projected to
kill about 190,000 people) is US$69
billion. The modelled property damage loss in New York City was US$12
billion from a sarin gas attack (with
2,000 fatalities) and US$127 billion
from a cesium-137 dirty bomb (projected to kill few people).
COVER STORY
Within the Margins
“It could be relatively easy for us to (simulate) a certain bomb in a
building and figure out what type of damage occurs to that building
or the surrounding buildings,” suggests Swiss Re’s Andrew Castaldi.
“But the likelihood of that happening is very, very hard to predict in
a model because we cannot read the human aspect.”
Attacks such as these “still carry a
low probability of success,” RMS suggests in the paper.
“Typically speaking, the uncertainty
levels around CBRN events are very
large compared to the uncertainty associated with conventional terrorism,”
Folkman reports. “One of the reasons is
that these are very, very rare events that
have very high severity associated with
them. The CBRN events also depend on
things like wind conditions for successful dispersion and the technical
barriers around assembling a successful weapon tend to be very high. That
adds to the overall uncertainty level
compared to something like a straightforward bomb blast,” he explains.
Folkman reports RMS has modelled
approximately 90,000 events, including the smallest, a car bomb, to truck
bombs and aircraft impacts. “We try to
quantify risk and our ability to quantify the risk depends on the amount and
the quality of the data that we have.”
The risks from terrorism and cyber
events “are much less well-understood
and the model methodologies are correspondingly less well-tested,” SCOR’s
Paul Nunn notes. “While scenarios can
be designed and used to understand
how portfolios behave over time, representing the frequency of attacks, in
the face of global security efforts to intercept, remains a key challenge.”
Risks such as terrorism and cyber
“have more uncertainty in that there
is more difficulty in modelling the
frequency of events as these are manmade and not driven by science as are
natural catastrophes,” points out Fitch
Ratings’ Brian Schneider.
“It could be relatively easy for us to
(simulate) a certain bomb in a building and figure out what type of damage occurs to that building or the surrounding buildings,” says Swiss Re’s
Andrew Castaldi. “But the likelihood
of that happening is very, very hard to
predict in a model because we cannot
read the human aspect,” he adds.
The likelihood of that bomb being
detonated in a building “could be influenced not only by the person plant-
ing the bomb, but also by the government’s activity in trying to prevent it,”
he says.
“People have to realize no model
is ever going to be perfect, Castaldi
points out. “It’s a model; it’s not reality,
but it shows you relativity. For example, a certain area might have greater
exposure to a given hazard than another area and you would see the losses
from the area being higher there. It
does give you an idea of accumulation.
It’s a very good knowledge system,”
he suggests.
Castaldi regards Cat modelling as
“one of the most significant steps forward at the property insurance industry has made in the last 25 years.”
Still, AIR Worldwide’s Cagdas Kafali
notes, models will always carry some
uncertainty. “We can reduce it if we
inject more knowledge and more data
into the modelling process,” he notes.
“There is a part of the uncertainty
that we will never be able to remove.
That’s the whole idea of risk. That’s
why there is insurance,” he adds.
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Putting the pieces together.
Events and Seminars Calendar
You work hard to protect your clients’ property. Now, it’s time to ensure that you apply the same kind of energy
and commitment to your own success. CIP Society Events and Seminars give you the opportunity to learn, to
network, to catch up on industry developments and to think about your career.
CIP Society Seminars and Events
Edmonton – CIP Society Annual Golf Fun Day ......................................................................................................................................................................... July 18
Moncton – Communicating with Tact and Sensitivity ........................................................................................................................................................ July 19
Cambridge- 2016 Symposium West......................................................................................................................................................................................... August 11
Moncton – CIP Society Golf Tournament ............................................................................................................................................................................. August 11
Moncton – Taking an Effective Statement .......................................................................................................................................................................... August 23
Hamilton – Beach Volleyball Tournament ............................................................................................................................................................................ August 31
Looking for information and research on the latest trends in the p&c industry?
Go to insuranceinstitute.ca and visit the CIP Society’s INFORMATION SERVICES section
for a free online library of Trends Papers, with topics like Uber, Airbnb, and Drones.
Richard Clark
Business
Development
Director,
Xuber,
a CSC company
It appears that surveyed
reinsurers have finally
reached the technology
tipping point. Digitization
is now seen as key to the
change that must unfold.
It is believed that those
who quickly move to create
solutions that are grounded
in modern technology,
taking into account how
insurance is bought, sold
and managed, will be the
most likely winners.
It is no secret that the reinsurance industry is
changing. Technology advancements, regulation,
mergers and acquisitions (M&A), talent gaps,
cyber security and soft market conditions all
put pressure on insurers and reinsurers to make
changes more quickly.
Xuber’s recently released 2016 Global Reinsurance
Survey took an industry pulse check of reinsurers around the world, and, thus, revealed the
top pressures facing the industry. Conducted by
email and telephone interviews this past April
and May, survey results reflect input from reinsurance professionals from London, the United
States, Switzerland, Canada and Bermuda.
Pressures voiced in 2016 included several
stark similarities to last year’s results, suggesting
that change may not be happening fast enough
and many of the same concerns reinsurers saw
in 2015 persist — namely the need to modernize through digitizing.
In 2015, for example, M&A, soft market conditions and the need for modernization all proved
to be top concerns for surveyed reinsurers.
After a 187% increase in M&A activity last
year, it is no surprise that cultural integration,
operational alignment, system integration and
resource duplication were among the main concerns for reinsurers this year.
Additionally, 81% of those surveyed named soft
market conditions as one of their top five concerns, while 69% recognized regulation as a top
31
Tipping Point
is based on face-to-face relationships.
North America is slightly ahead on
this front because its vast geographical
size has forced reinsurers to adapt to
long-distance trading.
Survey results reveal technology will
be pivotal to the success of the industry
in the future, with 79% of respondents
strongly agreeing that “technology will
become more important in driving the
success of my business.”
Not surprisingly, 54% of those polled
are planning major investments in their
IT systems in the next 18 months. This
feedback is consistent with the results
from the 2015 version of the survey.
As the reinsurance industry moves
through 2016 and beyond, stakeholders
are going to see a greater adoption of
electronic interchange across the entire
reinsurance life cycle and an end to
wasteful, duplicated administration efforts. Systems will seamlessly capture
and transmit data across each stage of
the insurance process. This will lead to
an increase in the volume of business
for reinsurers and the streamlined process will contribute to lower rates.
challenge (making it the second-most
pressing concern).
Other top concerns for reinsurers
include competition from third-party
capital, improving investment returns
in a low interest rate environment, cyber
crime and maintaining underwriting
disciplines.
The fact that these concerns have
shown no signs of abating in the past 12
months has put the industry at a tipping
point and the demand for change has
never been higher. Technology is at the
crux of the drive for change, with an
almost universal consensus that a fundamental shake-up needs to happen now.
Here is how this shake-up could play
out over the next year.
EMBRACING ADVANCED
TECHNOLOGY
The idea that the insurance industry
lags in terms of technology adoption is
certainly nothing new. But 2016 sees a
real call to arms, with insurers taking on
The idea that the insurance
industry lags in terms of
technology adoption is
certainly nothing new. But
2016 sees a real call to
arms, with insurers taking
on the mindset that if they
do not adapt, they will
not survive — especially
on the global stage.
the mindset that if they do not adapt,
they will not survive — especially on
the global stage.
For example, those with reinsurance
companies know that traditional, faceto-face functions need to figure out
how to digitize.
This is especially so in the London market where the entire insurance industry
CYBER TAKING CENTRE STAGE
A subset of the technology revolution
is cyber insurance. Cyber attacks pose
huge risks to businesses across all industries, and this is where true innovators
can break through the noise.
For instance, a British government report from this past May shows that twothirds of major businesses in the United
Kingdom have been hit by cyber attacks
in the past year.
When asked about the main factors
preventing companies from being better prepared for cyber attacks, 49% of
the Xuber survey respondents say it was
the complexity of the risk involved, followed by lack of skills in-house to assess
risk (21%), companies not considering
it a priority (15%), and a clear assessment
of the costs of the risks involved (13%).
Insurers and reinsurers are aware of the
vast amounts of sensitive data they hold
as large global financial service players.
Losing or breaching any of this data
can result in fines of epic proportions,
not to mention a loss in reputation.
However, with cyber risk still being
relatively new, many reinsurers are having trouble writing related policies. No
clear track record exists for pricing cyber policies.
Plus, as reinsurers strive to be more
technologically advanced and digitize
their own information, they run the
risk of exposure themselves.
One survey respondent even suggested businesses “cannot win” because the
threat from cyber criminals constantly
changes. Cyber security (and how to write
policies for cyber attacks) will continue
to be a hot topic for the insurance industry as experts explore the best way to
handle the risk.
Insurers and reinsurers are
aware of the vast amounts
of sensitive data they hold
as large global financial
service players. Losing or
breaching any of this data
can result in fines of epic
proportions, not to mention
a loss of reputation.
INVESTING IN THE RIGHT TALENT
As reinsurance companies begin to
implement new technology and enter
the cyber market, it is important that
they have the qualified talent to back
their businesses.
In general, the insurance industry has
not appealed to a younger, more ambitious workforce. It is not seen as an
exciting industry. And for areas outside
of London and New York City, the insurance talent pool is essentially dry.
Around the globe, the industry will
address this gap in a few different ways.
First, the push to digitize will act as a catalyst to bring in new, tech-savvy talent;
second, the insurance industry has a
unique opportunity to stand out and
appeal to young graduates.
While many recent graduates clamour
to join hot tech start-ups or giants like
insBlogs
Google, the insurance industry presents
an opportunity for a recent graduate to
easily stand out among his or her colleagues and get a step ahead.
The way insurance is bought, sold and
managed is changing rapidly, and insurers recognize the need to take an innovative digital-first approach to maintain
their relevance with clients. Those who
LOOKING FORWARD
create solutions grounded in modern
It is clear that 2016 will be a pivotal technology that deliver across the insuryear for reinsurers everywhere. The surance value chain will thrive.
vey results indicate that reinsurers see
And the savviest reinsurers who act
digitization as theInsurance
key to Blogs
change.
quickly
will emerge as the winners.
hosted by Canadian Underwriter
insBlogs
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33
Strictly
Speaking
Owen Jones
Partner,
Gowling WLG
(Canada) LLP
A recent decision by
a British Columbia
court makes clear that
strict compliance with
the replacement cost
endorsement is expected.
The requirement to replace
with “due diligence and
dispatch” remains, even
if the insurer has denied
coverage for the loss and
even if that denial is
later overturned in the
insured’s favour.
As a result of a March 2016 decision of the Supreme Court of British Columbia, Bhaniwal v. The
Mutual Fire Insurance Company of British Columbia, an
insurer may now be able to deny coverage following a fire loss and, at the same time, still require
the insured to promptly replace the damaged
property.
By not immediately replacing the fire-damaged
property, something an insured may be reluctant
to do until the insurer’s liability has been determined, the insured may, as a result of the Bhaniwal
decision, find itself restricted to the depreciated
value of the structures lost (the actual cash value)
rather than the replacement value, even if eventually successful in having coverage confirmed.
Bhaniwal also highlights the difficulties that an
insurer faces when trying to prove what a property owner knew, or ought to have known, about
a tenant’s unauthorized activities.
THE FACTS
Kawaljeet Bhaniwal was the owner of property
in Oliver, British Columbia, on which she and
her husband operated a garden supply business.
There were a number of structures on the property, including a residential house, commercial
greenhouses and a storage facility with attached
living suite. The house and attached suite were
not occupied by the Bhaniwals, but were, instead,
rented out to a single tenant.
Late one evening in August 2010, a fire broke
out that completely destroyed the storage facility and attached suite. While attending the scene,
members of the local fire department observed
signs suggestive of a marijuana grow operation
in the rented suite. These included plastic sheeting on the walls, covered windows, venting and
multiple grow lights.
Although marijuana plants were not present
at the time of the fire, experts who viewed the
scene agreed it was set up as a grow operation.
The cause of the fire was never determined.
The property was insured under a fire policy
issued by The Mutual Fire Insurance Company of
British Columbia. The policy provided for coverage on a replacement-cost basis, subject to various
conditions, including the usual: Replacement shall be
effected by the Insured with due diligence and dispatch.
Bhaniwal submitted a “proof of loss,” seeking
recovery for the storage facility and attached suite.
In response, Mutual Fire Insurance declared
the policy void due to material misrepresentation
since there was evidence that a marijuana grow
operation had been undertaken in the rented
living suite without the insurer’s knowledge or
approval.
Bhaniwal and her husband denied any knowledge
of the grow-op and sued for a declaration of en-
titlement to coverage under the policy.
They also sought punitive damages, arguing that the insurer had wrongfully
denied coverage based upon a mere
suspicion that they were aware of the
tenant’s marijuana grow operation.
During the eight-day trial that followed, Mutual Fire Insurance argued
the Bhaniwals must have known about
the grow operation. The insurer pointed
to a number of things that should have
alerted the Bhaniwals to the grow operation’s existence, including the following:
• the tenant was renting both the house
and separate suite, although living by
himself only in the house;
• the tenant always paid his rent in cash;
• the electrical usage, as reflected in the
hydro bills sent to the Bhaniwals, was
unusually high; and
• the Bhaniwals were around the property on a regular basis and, presumably,
must have smelled the odour of marijuana and seen the venting, lights and
other trappings of a grow operation.
THE FINDINGS
Despite this evidence, the trial judge,
Justice Brian Joyce, ultimately, accepted
the Bhaniwals’ testimony that they were
completely unaware of the tenant’s
marijuana grow operation and were,
therefore, entitled to indemnity under
the policy.
Having decided the insurer was wrong
to have denied coverage, Justice Joyce
went on to consider the Bhaniwals’ claim
to punitive damages because of Mutual
Fire Insurance’s conduct in responding
to the claim. The judge reviewed the
steps taken by the insurer in investigating this loss and concluded that while
the insurer, ultimately, was unsuccessful
in its denial of coverage, it did not act
with undue haste or in bad faith in taking that position.
From the start, Mutual Fire Insurance
did all the right things. The insurer had
Bhaniwal execute an authorization enabling investigation of the fire loss, it
promptly engaged an adjuster to obtain
statements from the insured, the tenant
and firefighters, and it hired an expert to
investigate the cause and origin of the fire.
The results of those investigations
established the presence of a marijuana
grow operation on the property and provided sufficient basis for Mutual Fire
Insurance to reasonably take the position
of denial that it took. The claim for punitive damages was dismissed.
The last issue Justice Joyce considered
was whether Bhaniwal was entitled to
recovery based on the cost of replacing
the damaged buildings and contents, or
if she was restricted to a lesser amount.
Mutual Fire Insurance argued that
Bhaniwal, although successful in having
coverage confirmed, was, nevertheless,
restricted to the depreciated value of the
structures lost (actual cash value) rather
than the replacement value because no
replacement had taken place.
The judge reviewed
the steps taken by the
insurer in investigating
this loss and concluded
that while the insurer,
ultimately, was
unsuccessful in its
denial of coverage, it
did not act with undue
haste or in bad faith in
taking that position.
Bhaniwal replied this was because, as
Mutual Fire Insurance had denied coverage, she did not have the money to
replace the structures. The insurer disputed this, saying that the Bhaniwals had
other property and, therefore, presumably
could have borrowed the money necessary to replace the burned buildings
and contents.
Justice Joyce considered all of the arguments and concluded that Bhaniwal
had the ability to borrow the money necessary to replace the burned buildings,
but instead chose to await the result of
the lawsuit before doing so.
While it might have seemed prudent
for Bhaniwal to want to first clarify
whether or not the policy was void before funding replacement, Justice Joyce
did not see things that way.
Having failed to replace with “due diligence and dispatch,” the judge decided
this failure by Bhaniwal constituted a
breach of a condition fundamental to
the replacement cost extension. As such,
she was limited to the actual cash value
of the building and contents.
POTENTIAL IMPLICATIONS
In reaching this decision, Justice Joyce
looked to some earlier British Columbia cases, which confirmed that while
replacement cost endorsement wording required an insurer to pay the cost
of replacement when that replacement
was completed, it did not require the
insurer to advance funds to enable that
replacement.
Those earlier cases did note that, as a
matter of practice, some insurers would
initially pay the actual cash value and
then make progress payments to enable
replacement, but they were not required
to do so.
Generally, once an insurer undertakes
to pay the cost of replacement, an insured
can then easily obtain the necessary financing to enable that replacement.
It is important to note those earlier
cases focused upon whether or not an
insurer had to pay the cost of replacement before replacement was completed.
This is different from the situation
where, as in the Bhaniwal case, the insurer
has denied coverage and the insured delays replacement until clarifying whether
or not she will be indemnified for that
replacement.
Before Bhaniwal, the case law suggested that in such circumstances, the need
for an insured to elect to either accept
actual cash value or to promptly replace
the property would be “suspended” until the insurer’s liability was determined.
The Bhaniwal decision, however, goes
against that approach and strictly applies the requirement to replace with
“due diligence and dispatch” — even if
the insurer has denied coverage for the
loss and even if that denial is later overturned in the insured’s favour.
35
Calculated Risk
Audit committees need to remain “up to speed” as disruption sparks
the next generation of corporate risks. There is a definite need to
understand and act on a widening universe of strategic, financial,
business, operational and reputational risks.
Canadian
Managing Partner,
Audit,
KPMG in Canada
in Canada. Audit Trends 2016: Targeting Transformation
outlines four disruptive trends that are increasing the pressures felt by audit committees to better identify, understand and act on a widening
universe of strategic, financial, business, operational and reputational risks.
Report observations are meant for everyone from
audit committee members to CEOs and executive
committees who depend upon committee oversight and advice, and the investing public who
trust that current and future risks are spotted.
BUSINESS DISRUPTION BUFFETING AUDIT
Business disruption bubbles up from many sources, from demographic trends among consumers
to a ground-breaking scientific discovery. The
report details the top four emerging risks generating new questions for audit committees.
It is hard to avoid the topic of business disruption
given the near-constant talk about game-changing
technology and economic, social and political
forces that threaten to overturn traditional business models and unleash aggressive new competitors, threatening long-reigning corporate giants.
This disruption is also having an impact on
internal audit committees and how they size up
these previously unimaginable new risks and
opportunities.
In fact, the business disruption wave means
that it is time for corporate audit committees to
strengthen their governance and oversight duties, suggests a newly released report by KPMG
FOCUSING ON RISING RISKS
Technology risk
Technology innovation is one of the biggest drivers of business disruption, and it is spawning a
vast variety of risks for audit committee members to consider.
On one hand, fast-developing new technologies — from autonomous cars to artificial intelligence — are creating business model risk.
Audit committees must provide oversight and
Kristy
Carscallen
While risk analysis and mitigation have long been
passions of underwriters, the topic has seldom
stirred great interest in the broader investor
community, except during high-profile instances
like 2008’s global financial crisis, which ignited
intense scrutiny of corporate risk taking.
Today, risk management is earning attention,
as business disruption is causing everyone from
chief executive officers (CEOs) to main street
investors to consider what this recently coined
business phenomenon might mean for the companies they run or in which they invest.
governance of whether or not management is making the necessary strategic
course changes to adapt to industryreshaping technology.
On the other hand, as companies embrace new technology in their business
and operating models, their technology
risks increase. Business-critical issues can
emerge, such as data protection and cyber
security risk. In addition, as companies
invest millions in new technology infrastructure, they are vulnerable to costly
technology project risk if these massive
IT programs are not well-governed.
Audit committees now find themselves needing to develop or have access
to specialization to be able to assess
whether or not adequate risk remediation procedures are in place.
Political and economic risk
While many Canadian companies are recognized for embracing globalization and
pursuing ambitious overseas opportunities, such diversification creates exposure
to global political and economic risks.
Issues such as currency fluctuations, local
and regional economic conditions and
political regime change can quickly reverse the fortunes of a multi-national firm.
Even companies focused solely on the
domestic market are now potentially
affected by distant foreign political and
economic events. A labour strike in Central
America could paralyze the supply chain
of a Canadian manufacturer or election
results in the United States could squash
confidence among Canadian consumers.
It all means members of audit committees need to be well-attuned to foreign
developments, and ready to analyze the
possible direct or indirect impacts of
globalization on their businesses.
Rising reporting expectations
Past financial scandals have cast considerable attention upon public companies
by investors and regulators. While these
stakeholders expect faster and more detailed financial reporting, there are also
calls to evolve corporate reporting to
better portray the full range of risks.
Audit committees must interpret a wide
variety of new operating and performance
suring compliance with domestic and
global regulations, they must also monitor regulatory developments in other
jurisdictions that could be introduced
in Canada. With complex new regulatory standards emerging in Europe, Asia
and the U.S. — covering everything
from revenue and financial instruments
to consumer-oriented rules around
privacy and business conduct — audit
committees must ensure management
is considering these potential future
organizational risks.
RISING TO THE CHALLENGE
Technology innovation is
one of the biggest drivers of
business disruption, and it
is spawning a vast variety
of risks for audit committee
members to consider.
Audit committees now find
themselves needing to
develop or have access to
specialization to be able
to assess whether or not
adequate risk remediation
procedures are in place.
indicators, as well as review their accuracy
and fitness to disclose such detail.
Many audit committees are considering changes such as the International
Integrated Reporting Council’s Integrated
Reporting initiative. The initiative aims
to refocus reporting around a company’s business model and operating priorities, and increase strategic disclosure,
to better discuss future business trends
and mounting interest in expanded and
customized audit reporting.
Evolving, complex
regulatory landscape
Finally, it is important to note that just
as audit committees are focused on en-
Although it is easy to conclude audit committees face an overwhelming
workload in light of the new risks challenging their mandates, the report also
highlights how this critical board function can disrupt itself and rise to the
disruption.
Audit committee members should
embrace a number of best practices
to transform themselves to be able to
keep up with today’s disruptive forces.
Among them, boards must strengthen
the knowledge within the audit committee by increasing director education
sessions and recruiting new talent to fill
crucial knowledge gaps.
Audit committees must also intensely
review and strengthen their key practices, whether by increasing the depth and
frequency of risk framework reviews,
expanding stress and scenario testing
programs, or working more collaboratively with their company’s internal risk
functions to verify the suitability of current controls.
In addition, boards should consider
the need to engage third-party knowledge and perspectives to make meaning
of complex new topics from cyber security to overseas regulatory affairs.
By doing so, audit committees can
ensure they are well-equipped to face the
next generation of corporate risks.
Business disruption can be intimidating,
but audit committees can take important
steps to provide essential financial and
governance oversight, and bring even
greater value to management and investors in a rapidly changing world.
37
MOVES & VIEWS
upcoming events: for a complete list visit
www.canadianunderwriter.ca
and click ‘my events calendar’ on the home page
1
Ian Rutherford [1]
has been promoted to
head XL Group plc’s
Canadian property business.
Rutherford currently manages
XL Catlin’s property underwriting operations in Vancouver
(where he is based), Calgary,
Toronto and Montreal. He
joined Catlin Canada in
2010, reports XL, which
acquired Catlin Group Ltd.
last year. “Prior to joining
XL Catlin, he spent more
than two decades at GCAN
Insurance Company, formerly
Gerling Canada Insurance
Company, including serving
as vice president and regional
manager for GCAN’s British
Columbia regional operation.”
2
Chris Schmidt, formerly chief operating
officer of restoration
firm DKI Canada Ltd., has
been named the company’s
new chief executive officer.
Replacing Ken Tucker,
Schmidt has more than 15
years of insurance claims
and restoration industry
experience. Since joining DKI
Canada in 2012, Schmidt
“led the company’s growth
and expansion, extending
DKI’s reach to almost 80
locations servicing all provinces
across the country,” says
chairman Dany Roy. Tucker
will remain with DKI Canada,
serving as an advisor to
both the company board
and to Schmidt.
1
3
6
10
11
13a
3
4
5
The Insurance Brokers
Association of Canada
(IBAC) has announced
the departure of its chief
executive officer (CEO) Dan
Danyluk [3], who served in
the role since 2013. “The
Board of Directors wishes to
thank Dan for his dedicated
work both for the organization
and the insurance sector
over the last 13 years,” IBAC
notes. Danyluk had been
managing director of Crawford
& Danyluk Insurance Brokers
Ltd. for 19 years before
taking on the CEO duties at
IBAC. A former president
of the Insurance Brokers
Association of Ontario,
Danyluk has also worked
as a research economist for
Ontario’s Ministry of Labour.
Allianz Global
Corporate & Specialty
SE has named John
Hastings as head of property
for Canada. Most recently,
Hastings was AGCS’s director
of key client management in
Canada. Before that, AGCS
notes, “he was with Willis
Canada as a commercial
account executive focused
on sales and business
development.” Also at AGCS,
Michael Hansen has been
appointed Toronto-based
regional head of aviation
for North America. Hansen,
previously deputy chief
underwriting officer at
XL Catlin Aerospace, has
also worked as president
and chief executive officer
of Catlin Canada HUB.
CAA Insurance
Company is now
offering home and
auto insurance, written by
CAA Insurance, and travel
insurance, written by Orion
Insurance Company, through
brokers. The broker appointments include KTX Insurance
Brokers; Brokerteam
Insurance Solution Inc.; My
Insurance Broker; isure insurance; Northbrook Insurance
Group; Mitchell & Whale
Insurance Brokers; Arthur J.
Gallagher Canada Limited;
Brokers Trust Insurance
Group; InsureitGroup; Sound
Insurance Services; Rai Grant
Insurance Brokers; Staebler
Insurance; Verge Insurance
Brokers; Dan Lawrie Insurance
Brokers; Rivet Insurance;
MOVES & VIEWS
MOVES & VIEWS
3
7
9
positions have included gen13b
eral
adjuster, branch manager,
vice president of operations
DPMLloyd’s
Insurance
Group;
and
and
Division
leader.
Nicol Insurance.
6
Aviation claims
Macdonald
Chisholm
adjuster
Ian Gallagher
Trask
Insurance
(MCT)
[6] is the new
presiannounced
in early
dent of the
Insurance
January
thatOntario
it will join
propAdjusters
Association,
taking
erty
and casualty
brokerage
over from Catherine
Groot.
BrokerLink.
The terms
of the
Gallagher,
who
works
as
transaction were not disan executive
for
closed,
notes adjuster
a statement
Kernaghan
Adjusters
Ltd.,
from BrokerLink. BrokerLink
has a private
pilot’s licence
companies,
subsidiaries
of
and has
handledCorp.,
aviation
Intact
Financial
claims for
years.
include
8425-plus
offices serving
7
clients in Atlantic Canada,
has
AlbertaKeal
and Technology
Ontario. Dating
hired
Laurent
Nadeau
back more than 60 years,
[7]more
as vice
president,
MCT has
than
110 insales
and
marketing
surance professionalsfor
in the
18
broker
management
system
offices. Michael Brien, who
vendor.
Nadeau’s
“many
has
led MCT
over the
last 12
years of
experience
withas
years,
joins
BrokerLink
ING/Intact,
Zurich operations.
and more
head
of its Atlantic
5
8
recently, First Canadian Title,
made him the ideal candidate to help Keal pursue its
growth throughout Canada,”
notes Ontario-based Keal,
which was acquired earlier
10
this year by Vertafore Inc.
87
Independent
Carolyn Snowadjust[7] will
ing
ClaimsPro
leadfirm
RIMS
as president
Inc.
has2014
appointed
for the
term,
Sean
Forgie
[8]
asJanuary
senior 1.
which took effect
vice
president,
Snow,
who has specialty
been on the
risk
division.
Forgie
is a for
RIMS Board of
Directors
certified
fire
and
explosion
seven years, is currently diinvestigator,
Chartered for
rector of riskamanagement
Insurance
Professional
(CIP),
Humana Inc.
She previously
past
chair
of the CIP
Subserved
as RIMS’s
treasurer,
Committee
anddirector
a member
secretary and
of
of
the
Academic
Council
for
external affairs. The
RIMS
the
Insurance
Institute
of
board for 2014 also includes
Canada,
reportsRichard
ClaimsPro,
vice president
aRoberts,
unit of SCM
Insurance
Jr.; treasurer Julie
Services
Inc.corporate
Forgie has
Pemberton;
secreextensive
expertise
in director
comtary Nowell
Seaman,
mercial
claims.
of globalliability
risk management
for
9
Potash Corporation of
The Independent
Saskatchewan
Inc.; Gloria
Insurance
Brokers
Inc.
Brosius;
Steve Pottle,
director
(IIBI)
has
expanded
of risk management services
into
Cape
Breton Island
with
at York
University;
Jennifer
the
addition
of MacDougall’s
Santiago;
Janet
Stein, direcInsurance
an IIBI
tor of risk as
management
and
member.
Mines, Nova
insuranceSydney
at the University
of Calgary; Gordon Adams;
Robert Cartwright, Jr.;
Al Gorski; Leslie Lamb; John
Phelps; Michael Phillipus;
Scotia-based
MacDougall’s
Frederick Savage;
and Lori
Insurance
offers auto, home,
Seidenberg.
business and life and health
insurance. IIBI was formed
in 2000
strategic
Asas
ofaJanuary
8, partnershipToronto
of general
insurance
insurance brobrokersker
operating
in Nova
Jones DesLauriers
Scotia
and
New
Brunswick.
Insurance Management Inc.
8
10
(JDIMI) had acquired Whitley
Peter
Morris [10]
Insurance and
Financial
SerhasInsurance
been named
vices. Whitley
has
principal Ontario
broker to
offices in Belleville,
“two
additional
brokerages,”
and the
nearby communities
reports
Robertson
Morris
of Trenton, Deseronto
and
Consulting,
which
has
Stirling. “The acquisition
is
accepted
expected principal
to build abroker
solid
responsibilities
for Insurance
presence for JDIMI
in Eastern
Protection
andthe
for firm
Ontario andGroup
position
Insurance.
theclients,
case
Fava
to better
service In
their
of
Insurance
Protection
with
strengthened
commerGroup,
focus will
be
cial andthe
personal
insurance
on
working
with
the
comofferings in the region and a
mercial
producers
to expand
new financial
services
divithe
firm’s
existing
portfolio
sion,” notes a statement from
of
commercial
accounts.
JDIMI.
President
and CEO
Steve
ownerwill
of lead
Favathe
ShawnFava,
DeSantis
Insurance,
plans
for
teams fromhas
both
companies.
technological
innovation
Loris Clarke [8]
has beenand
additional
staff. Morris
and
named successor
to Paul
Fava
will
work
together
to put
Whitley, president of Whitley
these
changes
in
place.
Insurance, who will remain
11
during a transition period.
Cytelligence
Inc. has been
Ken launched
Rayner [9]byhas
Daniel joined
Tobok [11],
former
Anderson
managing
director
of
forenMcTague & Associates
sics
and
security
consulting
Ltd. as its director of busiat
telecommunications
ness
development, Central
carrier
Region.Telus.
“KenToronto-based
brings a wealth
Cytelligence
investigate
of experiencewill
to our
comcyber
review
pany, breaches,
having held
various
clients’
business continuity
senior management
positions
plans
and take
into
conwith insurers
and
other
MGAs,”
9
says Chuck McTague,
president of Anderson McTague & Associates, a familyowned MGA based in New
sideration
andAnBrunswick.the
In “pros
January,
cons
of McTague
cyber insurance”
derson
& Associates
for
its clients.
Alsoexpanding,
on
announced
it was
Cytelligence’s
executive
team
adding an office
in Toronto
to
is
Gene
McLean,
former
vice
service the brokers of Ontario
president
and chief
security
and Manitoba.
Rayner’s
officer
of
Telus,
who
will
appointment confirms
the
serve
as
managing
director
company’s “commitment to
of
theinvestigations.
Ontario/Manitoba market-
12
place, and to the building of
Scottteam
Gibson
a local support
to assist
been
hired
brokers withhas
their
surplus
by MGBtoClaims
lines and difficult
place
Consultants
Inc. as senior
business,” McTague
adds.
general adjuster. Previously
with Crawford & Company
Canada, Gibson
“signifiThehas
Guarantee
cant experience
in large
Company
ofindustrial property,
Northequipment
America
breakdown,
appraisals
and
has announced
that Tara
construction
claims
(wrap
Wishart [10] became vice
up/course
of claims
construction),”
president of
for the
MGB
Claims
reports.
insurer’s Toronto
branch on
10
13
December 2, 2013. Having
Co-operatives
21 years ofThe
experience
in The
Mutuals
Guarantee’sand
claims
department,Canada
Wishart(CMC)
will be
has
recognized
the operations
responsible
for the
Co-operators
Ltd.
as
of the TorontoGroup
Branch
Claims.
co-operative
of
the
year.
With
She first joined The Guaranits
Achievement
Award,
CMC
tee in 1995 as an adjuster
recognized
Ottawa-Vanier
and has held
roles of increasLiberal
MP
Bélanger
ing seniorityMauril
with the
com[13a]
for his “exceptional
pany, including,
most
contribution
to promoting,
recently, claims
manager for
developing
and Wishart
uniting is a
specialty lines.
co-operatives
andthe
mutuals
member of both
Suretyin
Canada,”
while
Lacey
Association of Canada Chyz
and
[13b]
receivedAssociation
the Emerging
the Canadian
of
Co-operator
Award.
Women in Construction.
Follow @CdnUnderwriter on
http://twitter.com/CdnUnderwriter
February 2014 Canadian Underwriter
57
GALLERY
See all photos from this event at www.canadianunderwriter.ca/gallery
A solid turnout of 200-plus
industry representatives attended
the 57th Annual Reception of the
Quarter Century Club on May 13 at
the Albany Club in Toronto. The
event was a roast for Brad Ebel,
partner and president of
MDD Forensic Accountants.
GALLERY
Insurance Brokers Association
of Alberta (IBAA) held its 2016
Convention and AGM, the theme of
which was “connect,” in picturesque Banff, Alberta on May 15
to 18. A robust agenda included
keynote speaker Richard Bertram,
WestJet’s vice president of communications and community
relations, the AGM, a CEO Panel
featuring eight insurance company
CEOs, seminars, hospitality night,
the President’s Gala, a golf tournament and much more. At the
convention, Julia Marshall took
the reigns as new IBAA president.
41
GALLERY
On May 19, Markel Canada celebrated its 50th Anniversary with a
party at Steam Whistle Brewing
at the historic Roundhouse in
Toronto. Karen Barkley, president
of Markel Canada and William
Stovin, president of Markel
International greeted guests and
acknowledged the milestone.
Markel’s operation in Canada,
formerly known as ESR, was
launched in 1966. In 2009,
ESR was purchased by Markel
International, a London-based
specialty property and casualty
insurer and reinsurer, and a
subsidiary of Markel Corporation,
a U.S.-based diverse financial
holding company. The Sport,
Leisure and Recreation Program
at Markel is complimented by its
interest in All Sport Insurance
Marketing Ltd. (All Sport) of
Vancouver, British Columbia.
GALLERY
43
GALLERY
Sovereign General Insurance
Company hosted its annual “Spring
Cocktail Social” on the Rooftop
Lounge of the Thompsons Hotel
in Toronto on May 19. Guests
were treated to unparalleled
views of the Toronto skyline, great
music, fine food and cocktails.
GALLERY
The Sovereign General held
its Quebec Broker Event at the
Terrasses Bonsecours in the
Old Port of Montreal on June 2.
Guests relished the opportunity
to connect with one another
while enjoying the breathtaking
views of the St. Lawrence River
and the Old Port of Montreal.
45
GALLERY
The annual CIP Society Fellows’
Golf Tournament took place on
June 6 at Wyndance Golf Club in
Uxbridge, Ontario. Although a bit
windy, the rain held off and the
sun shined for golfers. This year,
the winning team was from Intact
Insurance (and guests) with
golfers Erik Fischer, Mike
Stauffer, Jennifer Kennie and
Mike Lagos. Next year’s tournament
is scheduled for June 5, 2017.
I am a CEO.
Protect me.
I have thousands of employees worldwide,
working in dozens of offices.
I have a C-suite of talented executives and
my company’s reputation and profitability
to protect.
I have a broad range of risks facing me, my
business and my employees.
I want a particular kind of protection and
level of service that comes from decades of
experience insuring large corporations and
their unique assets.
Not just coverage. Craftsmanship.SM
Not just insured.
Chubb. Insured.
SM
©2016 Chubb. Coverages underwritten by one or more subsidiary
companies. Not all coverages available in all jurisdictions. Chubb®, its
logo, Not just coverage. Craftsmanship.SM and all its translations, and
Chubb. Insured.SM are protected trademarks of Chubb.
new.chubb.com

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