2018 Risk Report
The
Risk Manager of the Future
+
cyber interruption, sexual harassment and more...
A P R I L 2018
Is NAFTA’s Collapse Insurable?
PM#40063170
BY GREG MECKBACH
Lloyd’s Starts a Claims Revolution BY SARAH NEWMAN
Drone Liability Simplified BY SEAN TINDALE
COMPREHENSIVE COVERAGE IS OUR MIDDLE NAME. Only Burns & Wilcox has the depth and breadth of experience to deliver the right solutions right away.
burnsandwilcox.ca
Commercial | Professional | Personal | Cross Border | Binding | Risk Management Services
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CANADIAN UNDERWRITER
VOL. 85, NO.3, APRIL 2018 CANADA’S INSURANCE AND RISK MAGAZINE. PUBLISHED BY NEWCOM MEDIA INC.
www.canadianunderwriter.ca
COVER STORY
The Risk Manager of the Future
22
A risk manager has been a purchaser and a protector for more than six decades. Going forward, risk managers will be asked for strategic insights incorporating a complete range of their skills, including traditional risk buying, managing enterprise risk, and predicting the best way to navigate through uncertainty. BY DAVID GAMBRILL
FEATURES
19
12
36 Canada’s trade risk
D&O’s Hottest Topic
Looking to transfer the risk of the biggest threat to Canadian exporters? Don’t rely on insurance to cover the business losses arising from NAFTA’s demise.
D&O insurers are watching carefully to see how many class action lawsuits attempt to link board accountability with sexual harassment and discrimination in the workplace.
BY GREG MECKBACH
BY DAVID GAMBRILL
34
Commercial Growth Despite record losses last year, pricing continues to favour insurance buyers, and insurers are particularly keen to attract and retain small business insurance packages. BY SEAN VAN ZYL
38
17 Cover the Interruption
Drone Liability
Before your business gets hacked and you face the threat of a critical shut-down, here are some things to watch for when shopping around for cyber policies that cover business interruption.
Determining the civil liability of negligent drone operators is not easy. Insurers will have to take a close look at the operator’s conduct, legal compliance, and specific fact situations.
BY CARY SCHNEIDER AND GREG MARKELL
BY SEAN TINDALE
Claims Freeze Defrost A tech revolution is poised to help Lloyd’s market speed up its claims process. The trick is to standardize the data the market receives from multiple sources. BY SARAH NEWMAN
April 2018 Canadian Underwriter
3
Claims (416) 442-5600 ext. 3545 (416) Paul Aquino Twitter: @InsuranceMedia Associate Editor Gail Page Gail Page Paul510-6793 Aquino Gary WhiteManager Gail Page Manual Manual Michael Wells Circulation mgarufi@bizinfogroup.ca and highly effective marketing communications opportunities. Associate Publisher sher hsingh@canadianunderwriter.ca Associate Publisher (416) 510-5187 (416) 510-5187 Manual (416) 510-5187 (416) 510-6800 Greg Meckbach Account Manager Art Director Associate Publisher nunderwriter.ca paul@canadianunderwriter.ca gpage@bizinfogroup.ca gpage@bizinfogroup.ca paul@canadianunderwriter.ca Associate Editor (416) 510-6760 gpage@bizinfogroup.ca InsuranceMarketer.com Mary Garufi ext. 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31 Habits of Successful Risk Managers RIMS presenters Steve Sachs and Tim Kraft tell Canadian Underwriter their thoughts about what makes for highly successful risk managers. BY GREG MECKBACH
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7 Editorial 8 Marketplace 40 Moves & Views 42 Gallery
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EDITORIAL
How many lawyers does it take to define an auto accident?
Somehow, the complex world of litigation has turned the definition of an “auto accident” into a cottage industry for personal injury lawyers. David Gambrill
Editor-in-Chief Canadian Underwriter david@canadianunderwriter.ca
What exactly is an auto accident? It seems like an easy enough question to answer. Two cars collide with each other, causing injuries. A slightly more nuanced definition may account for the fact that one of the cars is stationary when the other car strikes it. Either way, I think people would reasonably expect that an auto insurance policy would cover the injuries. Were it only that easy. Somehow, the complex world of litigation has turned the definition of an “auto accident” into a cottage industry for personal injury lawyers. It all starts with Section 1 of the Insurance Act, which says an auto policy insures a car owner or driver “against liability arising out of bodily injury…or damage to property caused by an automobile or the use or operation thereof.” The same ‘use or operation’ language has been imported into Ontario’s Statutory Accident Benefits Schedule (SABS), which defines an auto accident as: “An incident in which the use or operation of an automobile directly causes an impairment (my emphasis).” These legal definitions are ambiguous. They essentially invite litigators to test and expand auto policy coverage for their injured clients. It turns out that quite a few injuries could fall under
under this definition of an auto accident. It’s astonishing how many of these cases wind up on the doorstep of Canada’s top court. The Supreme Court has already ruled on two bizarre incidents that the lower courts incorrectly deemed to be “auto accidents.” In one, a hunter stepped away from his pickup truck under cover of darkness. With the motor running and headlights shining, he inadvertently blasted away at his friend, who was standing 1,000 yards away. The friend’s leg injury was originally considered to be an auto accident. In the other, two teenagers drove boulders to an overpass. They took the boulders out of their car and proceeded to drop them down to the road below, hitting a passing car and seriously injuring the driver. The insurer paid out $1.5 million to the driver, but the driver made an additional $1-million claim against his own auto insurance policy because one of the teens was underinsured. In both cases, the Supreme Court said the “chain of causation” that linked the use or operation of the vehicle to the injuries was broken somewhere along the line. This was the application of the famous Amos “causation” test from a Supreme Court case in 1995, when the top court came up with a two-part test to see whether the car was involved in an accident. There had
to be some causal “nexus” between the car and the injury, the court reasoned (as if the word “nexus” clears up any confusion). Believe it or not, the current legal definition of an auto accident is tighter than it used to be in the days of Amos. Accident benefits coverage used to be triggered by the “direct or indirect use or operation” of an automobile. How do you hurt someone “indirectly” with a car? However, despite the relatively more straightforward wording, we still find ourselves with an auto accident case knocking on the doors of the Supreme Court of Canada in 2018. In Dittmann v. Aviva Insurance Company of Canada, a woman scalded herself when she spilled hot coffee on her lap while in her car at a drive-through. Is that an “auto accident,” as defined in the SABS? The injured driver says yes, the insurer says no. So far, the courts have agreed with the insured. Stay tuned for whether the Supreme Court agrees to hear the insurer’s appeal. In the meantime, insurers should be lobbying for a clearer and much more precise legal definition of an auto accident, one that is far less expansive. Agreed, there are no words that can’t be litigated. But the fundamental purpose of auto insurance needs to be better expressed in the policy language.
April 2018 Canadian Underwriter
7
MARKETPLACE
HOW MUCH DOES IT COST TO ACQUIRE A NEW CLIENT? How much did your newly acquired client cost you? How many of your generated leads do you actually close? If you can’t answer these questions, you are already playing catch-up with brokerages and carriers that have a firm grasp of these key measurements.
WHY DIGITAL BROKERAGES CAN MARKET BETTER THAN DIRECTS Digital brokerages have a big marketing advantage over the directs, Dario Battista, president and CEO of isure says. “We’re not really concerned about the direct markets, quite frankly,” he told the Insurance Canada Technology Conference in Toronto last month. “We’re advantaged because we control our marketing. We do everything internally, so we can pivot a lot more effectively than [directs] can.”
8
Canadian Underwriter April 2018
“It’s really important to watch the metrics,” Jeff Roy, CEO of Excalibur Insurance Group, told the Insurance Canada Technology Conference in Toronto last month. “You have to make sure you are measuring your ROI [return on investment] and tracking for every dollar you are spending on generating a lead,” he said. “What is your close ratio, and what is your acquisition cost per client? It’s important for brokers to figure that out. If you can’t figure that out, you are just guessing and going with your gut, and going with your gut can get you killed in this marketplace.” Roy was asked for a benchmark on a successful cost per acquisition. “I think if you could get a $100 to $200 acquisition cost per client, I’m happy with that,” he said. “You have to look at the commission.”
In contrast, directs commonly outsource their marketing to agencies, which focus on the volume, as opposed to the quality, of the leads they generate. For example, one marketing tactic is to buy search words. Whenever consumers type these words into a browser such as Google, they are directed to a company website or a targeted ad may appear on their social media pages. Battista said he often gets a chuckle seeing a marketing agency target keywords in markets where the direct insurer doesn’t even compete. “The big advantage we have as brokers is that we understand the market, we understand the underwriting side of the business,” Battista said. “Marketing firms have a hard time understanding that there is not a good customer.”
HOME INSURANCE DISCOUNT? THERE’S AN APP FOR THAT A mobile app designed to help homeowners get a discount on insurance premiums by reducing flood risk should be on the market within a year. The Intact Centre on Climate Adaptation at the University of Waterloo is helping to develop the app, which asks homeowners questions along the lines of, ‘Is the downspout from your eavestrough disconnected from the weeping tile system?’ “This will be a downloadable app that any P&C company can subscribe to,” says Blair Feltmate, head of the Intact Centre. The Insurance Bureau of Canada is collaborating on the development. Homeowners would take 20 to 25 minutes to answer questions on the app, submit the answers to an insurance provider, get a response, and possibly get a reduction in premium. The questions reflect research that shows what typically goes wrong with houses, including basement flooding. “The average cost of a flooded basement in Canada right now is about $43,000,” Feltmate said. “The biggest threat to the housing market in Canada is not a 25-basis-point rise in interest rates. It’s flooding basements, by far.”
MARKETPLACE
RSA CANADA ENDORSES “ALL” MARSHALL RECOMMENDATIONS A special advisor to Ontario’s finance minister did an “excellent job” describing the auto insurance problems in the province, says the head of RSA Canada. During a conference call discussing RSA’s financial results, Martin Thompson, president and CEO of RSA Canada, alluded to Fair Benefits Fairly Delivered, a report released nearly a year ago by the Ontario government and written by David Marshall, former CEO of the Workplace Safety Insurance Board. In his report, Marshall made 35 recommendations to repair Ontario’s auto insur-
ance accident benefits system. Some are already in the works, such as a network of independent examination
WHY AUTO REPAIR COSTS INSURERS A FORTUNE Addressing the entire vehicle safety system after an auto collision – and not just a single component like a sensor – may be contributing to longer auto repair times and higher costs for insurers, says Mitchell International, which provides tech and information solutions to the insurance and auto collision industries. Jerry Gastineau, content manager with Mitchell’s editorial department, told Canadian Underwriter the mere fact that a sensor is in a vehicle doesn’t necessarily equate to longer, more expensive repair time. Sensors are just one aspect of the vehicle’s entire safety system. Multiple components are designed to come together as a system, Gatineau said. “So, if you’re replacing a sensor, that’s straightforward. But once that’s done, I need to address the whole safety system of which that sensor is a part, that whole ecosphere.” That’s where the challenge comes in: recalibrating and setting the system to its full safe operating condition. “That can be straightforward, or it could be complicated,” Gastineau said. “It could involve complicated drive cycles, in which the system has to re-evaluate and learn to interpret the system’s data from [everything] all together.” Time-consuming procedures such as diagnostics, calibration, aiming and a relearning process can extend cycle repair times; this in turn can increase an insurer’s costs through increased rental car payments, for example.
centres, standard treatment plans for minor injuries, and a new insurance regulator. “We would wholly endorse all of the recommendations in the Marshall report,” Thompson said during the call. Among them, Marshall envisioned the new Financial Services Regulatory Authority (FSRA). The new form of regulator in Ontario has yet to appoint a CEO and is not yet operational. Thompson said he does not think changes recommended in the Marshall report will be implemented until FSRA is up and running.
“WE REALLY DON’T NEED TO BUY ANOTHER COMPANY:” FAIRFAX CEO After buying the majority of Allied World Assurance Company Holdings AG seven months ago, Toronto-based Fairfax Financial Holdings Ltd. does not have any immediate plans to buy more insurance companies for the time being. “We really don’t need to buy another company,” Prem Watsa, Fairfax’s founder, chairman and CEO, said during a conference call with analysts. This is because buying back Fairfax shares is “the best thing” Fairfax can do to get its shareholders a good return, he said. Allied World, which has a Toronto office, provides reinsurance as well as commercial primary insurance such as professional liability, environmental, and directors’ and officers’ insurance, among others. Fairfax owns about two-thirds of Swizterland-based Allied World; other investors, including the Ontario Municipal Employees Retirement System, own the remainder. The acquisition closed July 6, 2017. Another major recent Fairfax acquisition was Lloyd’s insurer Brit PLC, which Fairfax acquired three years ago. Fairfax’s other insurance subsidiaries include Toronto-based Northbridge Insurance and Stamford, Conn.-based OdysseyRe.
April 2018 Canadian Underwriter
9
MARKETPLACE
INTERNET OF THINGS WILL CHANGE PRODUCT LIABILITY, LAWYER PREDICTS Product liability could look very different in the future once the Internet of Things (IoT) connects a variety of insured household and business products, Clyde and Co. litigator Prachi Shah tells Canadian Underwriter. In existing IoT literature, we hear a lot about cybersecurity and privacy concerns, but what about the impact of IoT on civil liability? “If our devices can talk to each other and to us, and can then function – and malfunction – without physical intervention by a human, who is liable when something goes wrong?” Shah asks in a recent blog piece. First-party insurers looking to subrogate a claim after an insured’s loss may have to branch out and involve a different class of IT or other experts in the product liability claim, Shah says. And third-party insurers defending a client from an IoT-related lawsuit should be looking for more actors to add to the suit – parties that may not have been considered relevant to a product liability claim previously. For example, these new actors may come from the world of IT, observes Shah. “IT firms have been developing apps, and apps can be used for all sorts of things,” Shah said. “But more and more, the Internet of Things depends on apps. It depends on connections being made, and if those connections don’t happen the way they are supposed to, things aren’t going to work correctly.”
INSURERS CALL FOR CUTTING TELEMATICS RED TAPE Restrictions imposed on how insurers price usage-based insurance (UBI) are hampering innovation in the insurance industry, Insurance Bureau of Canada (IBC) says. Canadian Underwriter asked IBC for examples of red tape that could be cut in the industry to help increase innovation. One example is that Ontarians should have access to “dynamic insurance products and services” such as UBI, says Steve Kee, IBC’s director of media and digital communications. But the introduction of telematics has come with regulatory restrictions. FSCO requires, for example, that insurer filings for UBI pricing must include: • consumer behaviours that are being measured (for example, acceleration or deceleration rates, speed, distance travelled), • how data is measured (frequency, occurrence, relevant thresholds), • how data is normalized and categorized for rating purposes (total occurrences, averaged), and • all relevant claim experience (claim severity, claim frequency, and loss costs) that supports the proposed UBI pricing program. “Largely because of the restrictions placed on UBI pricing, only a few insurers offer the option in Ontario,” IBC noted in its January 2017 report, Cutting the Red Tape: IBC’s Submissions for Ontario’s Red Tape Challenge.
INTACT FLAGS HIGH AUTO REPAIR COSTS Escalating collision repair costs have commanded the attention of Intact Insurance. Company officials said they had “unsatisfactory”
performance in personal auto lines in 2017. The chief culprits were new vehicle
10 Canadian Underwriter April 2018
technologies and more expensive vehicle parts. For the full year, Intact’s combined ratio in personal auto was 101.7% in personal auto, up 1.8 points from 99.9% in 2016.
“Physical damage inflation remains the main driver of our current under-performance [in the most recent quarter],” Intact Financial Corporation CEO Charles Brindamour said in a February conference call with investors. This was “driven by costs of repairs, largely driven by technology,” he said. “Parts are more costly, [and] the repairs are more complex and take more time.”
Intact has an action plan to reduce the severity of auto physical damage claims, Brindamour said, including a “faster determination” of whether a car is repairable or whether it is a total loss. This way, the insurer can reduce the number of times the car has to be towed, and reduce storage costs. “A lot of costs in physical damage are outside the actual repairs,” including rentals and towing, Patrick Barbeau, Intact’s senior vice president of claims, added.
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Canada’s uninsurable trade risk NAFTA’s potential collapse is a huge risk for Canadian exporters. In the absence of an insurance solution, risk managers can show their value by planning creative strategies for a trade disaster scenario. Greg Meckbach Associate Editor
12
The erratic renegotiation of the North American Free Trade Agreement (NAFTA) presents a risk to Canadian exporters, and it’s probably not insurable. Risk managers at companies exporting to the United States and Mexico may be thinking of ways to mitigate losses if the tri-lateral North American Free Trade Agreement (NAFTA) were to lapse, but one political risk expert warns there is no insurance for such losses. The potential dissolution of NAFTA is more of a business and risk issue than it is an insurance issue, according to James Gregory, Toronto-based regional director of Aon Crisis Management for Aon Reed Stenhouse. “From a realistic perspective, the idea that one could buy insurance against the dissolution of NAFTA – I don’t think it currently exists as it stands,” Gregory said in an interview. At press time, officials from Canada, the United States and Mexico were meeting in Mexico City for the seventh round of talks to renegotiate NAFTA, which took effect in 1994. The Montreal round of renegotiations wrapped up in January.
Canadian Underwriter April 2018
U.S. President Donald Trump has repeatedly threatened to pull the plug on the trade agreement, including a comment to Reuters in January that “the best deal is to terminate NAFTA.” In March, the Associated Press quoted Trump as stating NAFTA “has been a bad deal” for the U.S. due to what Trump called “massive relocation of companies and jobs.” These and other statements by the President have Canadian businesses thinking about what might happen if the NAFTA renegotiations fall apart. The implementation of NAFTA resulted in the elimination of tariffs on some goods sold among Canada, the United States and Mexico, among other things. It also provided for a dispute settlement mechanism. More than three-quarters (77.8%) of Canada’s total merchandise exports were destined for either the United States or Mexico in 2016, the federal government reports. Total merchandise trade between Canada and the U.S. has “more than doubled” since 1993. Canada’s merchandise trade with Mexico has grown
nine-fold during the same period, the federal government states in a backgrounder.
WHAT ARE THE RISKS? A withdrawal of the United States from NAFTA is “a concern that touches Canadian companies on many different levels,” including risk management professionals, Gregory noted. At this point, a formal withdrawal from NAFTA is not what Export Development Canada is currently expecting, EDC deputy chief economist Stephen Tapp stated to Canadian Underwriter in an e-mail. But the very fact that the renegotiations are taking place “opens up the possibility of the trade agreement lapsing,” wrote Dan Ciuriak, Lucy Ciuriak, Ali Dadkhah and Jingliang Xia in a paper titled Renegotiation: What if the US Walks Away?, published by the C.D. Howe Institute. A U.S. withdrawal from international trade agreements “could precipitate collapse of world trade,” said Prem Watsa, chairman and CEO of Fairfax Financial Holdings Ltd. (parent company of Northbridge Insurance and OdysseyRe, among others). The risk of a trade war “will continue to be very much monitored by us,” Watsa said during a recent conference call discussing Fairfax’s financial results. Trump announced in February that he plans to impose a 25% tariff on steel and a 10% tariff on aluminum on the grounds of national security. Most recently, Trump has threatened to impose these trade tariffs on Canadian steel and aluminum, tweeting on March 5 that: “Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed.” For Canadian companies, not only is there a risk of NAFTA being revoked, but there is also a risk of the imposition of new trade tariffs that were previously abolished.
That risk, from an insurer’s perspective, would be “generally considered a risk of doing business” and would not be insurable, Gregory said in an interview. In the C.D. Howe Institute paper, the four authors used computer models to predict the effects on the Canadian economy by 2023 if the NAFTA agreement were to lapse. They concluded the termination of NAFTA could cause a reduction by 2.8%, or about US$20 billion, in Canadian exports by 2023. Household income could drop by $15 billion a year, and between 25,000 and 50,000 Canadians could lose their jobs “due to long-term worker exit from
From an insurer’s perspective, the risk of NAFTA lapsing would generally be considered a risk of doing business. the labour force, even after full employment in the post-NAFTA economy has been re-established,” wrote the Ciuriaks, Dadkhah and Xia in the C.D. Howe Institute paper. If the U.S. does withdraw from NAFTA, a prospect that Tapp considers unlikely, Canadian companies with “highlyintegrated cross-border supply chains” are most at risk The three industries most at risk are automotive, computers and electronics, and food. Those three sectors account for nearly 75% of the overall impact of a U.S. withdrawal from NAFTA, Tapp wrote in an email to Canadian Underwriter. Nearly 2 million Canadian jobs “are related” to exports to the United States, the federal government says in a backgrounder. Export Development Canada expects that the renegotiation of NAFTA will “ultimately be resolved” but “possibly not until after 2018,” Tapp told Canadian Underwriter. “In the meantime, despite elevated uncertainty about the future of North American trade rules, NAFTA 1.0 remains in force,” Tapp said, referring to the current agreement.
About 30 different negotiating groups are involved in the renegotiation of NAFTA. An EDC survey of about 1,000 Canadian exporters shows that respondents “remain relatively optimistic about the strength and durability of the ongoing global economic recovery.”
MANAGING NAFTA RISK WITHOUT INSURANCE To address the risk of a NAFTA collapse, a company might try to make its customer base more diverse to ensure it is not too reliant on the United States, thus reducing the impact on the business of an “America first” policy, Gregory said. He compared this strategy to an investor trying to make his or her portfolio more diverse. Companies can buy political risk insurance but political risk is typically only offered in emerging markets, Gregory said. The definition of emerging market may vary slightly among insurers but would not include Canada, the United States, Mexico or most of western Europe. Examples of political risk include a coup or revolution, after which “established political protocols are sort of thrown out of the window,” Gregory said. By contrast, in markets such as Canada, the United States, and Western Europe, there may be subtle political changes, such as a change in government ideology. However, “fundamental business trading standards and accepted practices do not change unless it’s on a very detail-specific level,” Gregory said. Canadian firms could try to mitigate risk by seeking markets in places such as Brazil, Russia, India or China, Gregory suggested. But he said these markets also have risks that “may or may not be mitigated by political risk insurance, or other types of insurance such as kidnap and ransom.” Meanwhile, at press time, Trump tweeted there is a “100% chance” the U.S. will proceed with tariffs on steel and aluminum. It was unclear whether Canada will be exempt, but the tariffs could be lifted if NAFTA were to be renewed, The Canadian Press reported at the time.
April 2018 Canadian Underwriter 13
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2018 2018
Risk Risk
Report Contents
17 Cyber Risk and Business Interruption
Report 19 D&O and Sexual Harassment 22 Tomorrow’s Risk Manager
31 Expert Advice on Reducing Risk
April 2018 Canadian Underwriter
15
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2018 Risk Report l Cyber Risk and Business Interruption
Covering Your Interruption
Cary Schneider Partner Beard Winter LLP
Greg Markell
President, CEO Ridge Canada Cyber Solutions
For Canadian businesses, institutions and government agencies, ransomware and cyberbreaches have become an epidemic. Just five years ago, cyber risk ranked Number 15 in the annual Allianz Risk Barometer; this year, it has skyrocketed to Number 2.1 If you have been paying attention to the recent cyber hacks of massive organizations such as Equifax and Bell, then the Canadian budget released in February should come as no surprise. The federal government committed more than $271 million over the next five years to provide for cybersecurity and combat cybercrime. Today, it is almost negligent for a company to fail to insure against the threat of a cyberattack, and insurers are developing more intricate cyber policies. In particular, business interruption is an increasingly important facet of cyber insurance that may help an insured mitigate against certain losses. Following a data breach, an organization may face a loss of sales, ransom demands, reputational harm, first-party expenses, third-party exposure, and overall business disruption. Cyber policies offering coverage for business interruption aim to indemnify companies for loss of profit, reputational harm, increased cost of working, and costs of mitigating losses. While these basic concepts are understood in the context of traditional property damage claims (such as a fire), there are fundamental distinctions related to cyber policies.
For a policy to respond, there must be a causal connection between a cyber event and a loss of business. The direct link between a fire at a manufacturing plant and a correlated business loss is easy to understand, but this is not necessarily the case in the cyber world. A cyber event may have resulted in significant first-party costs to repair the incident, notification costs, and legal expenses, but there may not be a way to prove a direct loss of profit. However, if this cyber event becomes widely known, it might result in existing or prospective clients losing confidence in the company and taking their business elsewhere.
WATCH THE TIME For traditional property business interruption policies, the period of indemnity may be as many as 12-36 months, typically reflecting the period of time for a structure to be rebuilt after a fire. On the other hand, cyber business interruption policies cover much shorter periods of time, from a few weeks to three months, by which time a company is expected to have recovered from the attack. A retail business relying strictly on its web presence will want to consider a longer period of coverage in the event of a devastating attack to its business model. Cyber policies have waiting periods of anywhere between six and 24 hours; business interruption will only provide for indemnification
April 2018 Canadian Underwriter 17
2018 Risk Report l Cyber Risk and Business Interruption
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Canadian Underwriter April 2018
thereafter. Any loss that occurs within this waiting period is the responsibility of the insured. This could be problem for a retailer that gets shut down over the Christmas season, for example, or a supplier who gets breached when they are about to satisfy a contract. Insurers and insureds need to understand the nuances of a business in order to meet their specific needs. Most companies are particularly concerned about the risk of reputational harm following a data breach. Up to now, if a company subject to a ransomware attack made the executive decision to pay the ransom, it may have opted not to disclose the attack to avoid reputational harm. However, it is unlikely that such breaches will be kept secret for long given the upcoming implementation of the mandatory breach notification requirements under the Digital Privacy Act sometime in 2018. Business interruption under a cyber policy does provide indemnification for a quantifiable loss of market share and cost for crisis communications. Intangible costs such as loss of opportunity, goodwill, future loss of business are challenging coverage issues that should be canvassed thoroughly.
MITIGATING YOUR RISK Purchasing cyber insurance is certainly one step towards mitigating a loss arising out of a breach, but it is not the only measure that should be taken. Developing risk control measures is not only necessary for dealing with a crisis situation during a breach, it a requirement to purchase this type of policy. Basic measures that should be implemented and followed include: • Backing-up data on separate networks as frequently as possible • Training employees to avoid falling victim to “click-bait” such as phishing or spear-phishing attacks • Having appropriate cybersecurity software in place and engaging in routine assessments such as penetration testing • Developing a breach incident response
team that is ready to act in a crisis situation. This team should have one person in charge and should include management, IT, legal, and public relations. • Determining a method in which the appropriate cryptocurrency, usually bitcoin, may be readily obtained in the event of ransomware. Often an insurer can help in the development of a pre-breach response team and/ or the recommendation of external experts. Insurers and companies need to examine many issues before determining the right coverage. Property policies do have business interruption agreements, but they traditionally protect against losses causally connected to a physical loss as opposed to an intangible cyber one. Under a property policy, the general rule is “no fire, no water, no wind – no coverage.” Cyber extensions to an existing policy can be much more limited than a cyber policy itself. Conditional precedent language in a policy that requires an insured to take numerous onerous steps before they are entitled to make a claim for coverage ought to be avoided. Some policies set out pre-approved cyber breach teams or require the insured to seek pre-approval from the insurer before experts are retained. It is important for an insurer and insured to understand the terms of the policy before a crisis happens. Certainly the time to read the fine print in a policy for the first time is not when the CEO has a proverbial cyber gun to his or her head. As companies become more dependent on technology, including the Internet of Things and artificial intelligence, to operate a business, cyber-attacks will continue to increase exponentially. Cyber insurance will become a “musthave” form of insurance; business interruption will undoubtedly be an essential element of the policy. Understanding the uniqueness and role of business interruption in the context of cyber insurance is fundamental to the insurerinsured relationship. 1 Allianz Risk Barometer 2018
2018 Risk Report l D&O and Sexual Harassment
Underwriting Lust David Gambrill Editor-in-Chief
Should insurers be covering sexual misconduct and discrimination in D&O policies? Sexual misconduct lawsuits are the “hottest of the hot topics” for D&O insurers right now in Canada and the United States, according to U.S.-based D&O author Kevin LaCroix. In the United States, lawsuits against media personalities for alleged sexual misconduct have taken aim at the parent company of Fox News. As reported in Reuters, Twenty-First Century Fox Inc reached a $90-million settlement of shareholder claims arising from the sexual harassment scandal at its Fox News Channel, which cost the jobs of longtime news chief Roger Ailes and anchor Bill O‘Reilly.
“I will say that if this represents any type of future trend, this is a big problem,” LaCroix told a PLUS Canada seminar in Toronto in February. “And the name of the problem is board accountability.” Boards could be held accountable for allowing sexual harassment to take place, or for turning a blind eye when misconduct does arise. In Canada, as reported by CBC, Soulpepper Theatre in Toronto has been named in a sexual harassment lawsuit seeking $4.2 million in damages from the theatre and $3.6 million in damage from its former artistic director. These allegations have not been proven in court and the former artistic director told CBC that he intends to “vehemently” defend himself. “Insurers writing EPL [employment practices liability] coverage are now very much attuned to recent news coverage of sexual harassment and
April 2018 Canadian Underwriter 19
2018 Risk Report l D&O and Sexual Harassment discrimination suits going on,” says Patrick Bourk, principal and national cyber practice leader at Hub International Ontario Ltd. “We’re talking about eight claims that are ongoing [in Canada] as of 2017, some open, some closed. Quantum is not stratospheric, ranging from anywhere between $10,000 and $75,000 for these sorts of things.” Brian Rosenbaum, national director of the legal and research practice at Aon Risk Solutions, told the PLUS Canada seminar that he was not aware of any sexual harassment class actions in 2017 that had “taken a run at the board” in Canada. [Since then, Bourke reported, the Soulpepper lawsuit in 2018 does target the board; for its part, the board reportedly claims it knew nothing about the alleged behavior.] One class action last year did catch Rosenbaum’s eye because of its potential to reach the board level. In May 2017, approximately 100 former and current female RCMP officers settled a class action lawsuit that included systemic sexual harassment. Ultimately, the allegations did not involve board members, Rosenbaum said, and the case reportedly settled for $220,000 in May 2017. One question that comes up is whether insurers may deny coverage based on existing exclusions in the D&O policy for moral hazard. “Every D&O has exclusions related to moral hazard,” Bourk says. “A D&O policy won’t cover for fraud or dishonesty. Query whether or not misbehaviour on the part of a director or officer would be considered ‘dishonest’ activity and therefore excluded.” Insurers may also restrict the scope of coverage to lawsuits brought against the board by employees only. Coverage for lawsuits brought by non-employees are not necessarily part of standard D&O coverage.
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Canadian Underwriter April 2018
“Some insurers will make a distinction between an employee or a former employee who is making an allegation of harassment and/or discrimination against the board or company, and a non-employee making the same allegation,” says Bourk. Take, for example, a retailer who has a customer walk in and they are not served because of what they look like, or they are not treated properly. “So now you have a customer, not an employee, but a customer, bringing a suit against the company,” Bourk says. “There will only be coverage for that if your EPL policy has been appropriately enhanced. That’s not always a standard coverage.” In his conversation with LaCroix at the PLUS Canada seminar, Rosenbaum questioned why D&O policies would even cover allegations of sexual misconduct in the first place. “EPL is a funny bird,” Rosenbaum said. “In insurance, we don’t like to insure intentional bad conduct. But when
you talk about sexual harassment and discrimination, in most cases, it’s intentional conduct. So, it flies in the face of the fortuity principle in any event. I’ve always wondered why we justify EPL insurance given that…it covers intentional conduct.” Under the fortuity principle, insurance is based on covering unforeseen or unanticipated losses. On the principle that no one should profit from his or her own wrongful conduct, insurance policies exclude losses arising out of intentional acts – criminal acts such as sexual assault, for example. LaCroix recalled that when he first entered the insurance industry, he was hired as an underwriter. At the time, he suggested to his hiring manager that the company should consider getting into the EPL space. “I’m willing to insure greed,” he recalled his hiring manager responding. “I’m not willing to insure lust.”
“EPL is a funny bird. In insurance, we don’t like to insure intentional bad conduct. But when you talk about sexual harassment and discrimination, in most cases, it’s intentional conduct.”
Putting the pieces together.
Events and Seminars Calendar CIP Society Events and Seminars give you the opportunity to learn, to network, to catch up on industry developments and to advance your professional and career development. CIP Society Seminars
CIP Society Events
Calgary—Equipment Breakdowns ...............................................................April 11 Nanaimo—Demystifying Cyber Liability ..................................................... April 12 London—Cannabis: Insurance & Risk Management .................................. April 24 Ottawa—Cannabis: Insurance & Risk Management................................... April 26 Victoria—Strata Insurance ..............................................................................May 1 Edmonton—Business Interruption .................................................................May 9 Kitchener—Cyber Liability ............................................................................May 23 Kitchener—Personal to Commercial Boot Camp ...........................................June 7
Nanaimo—Peers & Beers ............................................................................ April 12 Vancouver—Symposium 2018 .................................................................... April 24 St. John—WICC 50 Shades of Pink .................................................................May 3 Toronto—Celebrate, Refresh & Relax ...........................................................May 23 Markham—At the Forefront......................................................................... May 24 Vancouver—Annual Golf Tournament .........................................................June 15 Edmonton—Annual Golf Fun Day ................................................................June 18 Victoria—Annual Golf Tournament ............................................................. June 20
Looking for insight and research on the latest trends in the p&c industry? Visit our free online library of Trends Papers at www.insuranceinstitute.ca/cipsociety/information-services. Looking for information to advance your career? Visit: www.insuranceinstitute.ca/mycareer.
2018 Risk Report l Cover Story I The Risk Manager of the Future
Tommorow’s
RISK MANAGER
Purchaser. Protector. Predictor.
BY DAVID GAMBRILL
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Canadian Underwriter April 2018
2018 Risk Report l Cover Story I The Risk Manager of the Future
Risk managers are entering a new era that emphasizes their strategic thinking skills. Increasingly, they will be asked to provide valuable risk insights that will help guide their organizations through an uncertain future. Are they up to the task?
They started in the 1950s as purchasers of insurance to protect a company’s assets and balance sheet. Then, in the mid-2000s, buffeted by the financial meltdown of companies during the end of the dotcom era and the start of the subprime mortgage crisis, risk managers started to build up enterprise risk management (ERM) capabilities to protect against risks that could sink the organization. Now, corporate boards are asking risk managers to expand their role and create value for the business using the insights they have developed about risk and uncertainty. Which corporate strategies create greater risk for the company? Which risks are acceptable? Which are not? In addition to being purchasers and protectors, risk managers are now becoming predictors. How did risk managers get to this phase of their development and what will they need to prepare for the future?
April 2018 Canadian Underwriter 23
2018 Risk Report l Cover Story I The Risk Manager of the Future
Purchaser
I
n the beginning was the primordial risk manager — the insurance purchaser. As Darius Delon, president of Risk Management 101, tells the story, this traditional risk manager typically arrived at the company by way of the insurance industry. “Really in the mid-‘50s, we heard the title of ‘risk manager’ first emerge,” says Delon, a past vice chair and chair of the RIMS Canada Council. “It might have been a broker who moved out of the brokerage and became an insurance manager for a company.” The early role of a risk manager was close to that of an insurance
manager. “The risk or insurance manager would actively manage the insured’s procurement process, and they were more successful at it because they had a background in insurance,” Delon says. “They knew the nuances of insurance, and they had the understanding required to get the most out of it.” The function was largely transactional.The risk manager would look for any hazards, liabilities and threats to the organization, and make sure the company bought enough insurance to cover the risks. The risk manager would look for opportunities to hedge or transfer the risk to other areas than insurance, where possible. But the basic idea was to make sure you had enough coverage for a claims payout after an incident occurred.
Clash of the Ideologies: When Purchasers Talk to Predictors When strategic risk managers (the predictors) talk about “opportunity,” do they mean the same thing as “risk,” as conceived by traditional risk managers (the purchasers and protectors)? A definition of opportunity includes chance and uncertainty, as does the definition of risk. From an opportunity point of view, uncertainty is presumed to lead to a positive outcome, whereas a negative outcome is associated with risk. “Many companies don’t have a clear definition of what they mean by risk,” says Philip Bromiley, dean’s professor in strategic management in the Merage School of Business at the University of California. “We have this kind of conflict between the ideology [of strategic risk], which says we should be looking to exploit where we have an advantage, and the way people actually think about [risk].” For Bromiley, most people, including traditional risk managers, would think of risk as downside, or, as he puts it: “Some combination of ‘How bad could it be?’ and ‘How badly could I get hurt?’” The definition of risk as an opportunity, or as Bromiley puts it, “doing better than you think,” is not really viewed by many as a risk. “Nothing leads to less productive discussions than when we are using the same term and meaning something different by it,” Bromiley says. “And that happens all the time in this domain. We’ll be talking risk, and one person will be meaning downside, the other person means something else, and it ends up being a really weird talk.”
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Canadian Underwriter April 2018
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2018 Risk Report l Cover Story I The Risk Manager of the Future
Protector
S
ometime around the 1970s and 1980s, risk practitioners started to evolve into more holistic risk managers. The stance became more preventative, and less transactional (i.e. they didn’t just buy insurance anymore) The focus shifted to identifying, preventing and reducing losses before and after incidents occurred. That could mean any number of things, including managing risks around workplace safety, security (protecting company property), and ensuring business continuity after a loss. This early activity blossomed into Enterprise Risk Management (ERM) in the late 1990s and early 2000s. ERM focused on identifying and quantifying the risks of an entire organization, a focus that coincided with the regulators’ concurrent heightened scrutiny of corporate responsibility. Enterprise-wide organizational risks were highlighted after the high-profile collapse of dotcom-era companies like Enron and WorldCom, as well as the bankruptcy filings of Bear Stearns and Lehman Brothers (a bank that once
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Canadian Underwriter April 2018
had assets of more than $600 billion) following the subprime mortgage crisis in 2008-09. At this time, the U.S. government dubbed insurer American International Group (AIG) “too big to fail,” and temporarily took over the company with an $85-billion bailout to prevent the company from going bankrupt. All of these events culminated in the introduction of the U.S. Sarbanes-Oxley Act in 2002, which called for the same types of controls that risk managers would introduce as a means to ensure corporate accountability and financial solvency. Around this time, in 2004, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) came up with its “integrated” ERM framework. It defined ERM as “a process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.” “ERM had a big boost in the arm when COSO came out in 2004,” Delon says. “It gave a structure to attach risk.” As more organizations adopted ERM
frameworks, the role of risk managers became what some have characterized as “defensive.” At this point, risk managers were developing refined and complex models for quantifying risks across the entire organization. They were analyzing data sets, searching for patterns that would provide insights into how to protect an organization from losses. They were looking for ways to avoid uninsured expenses and improve cash flow. Boards and leadership were now looking to ERM functions “to provide an additional level of assurance that risks are identified, assessed and managed,” as Jessica Wasserman put it in her 2016 Risk and Insurance Management Society (RIMS) paper, Risk Taker versus Risk Manager. ERM is now a fact of life for most organizations. In a 2017 RIMS benchmark global survey, 73% of 397 risk managers surveyed reported having a fully or partially integrated ERM program in operation. As ERM becomes more sophisticated at producing a broad risk profile for the whole organization, its insights can be used by the board to inform strategic decision-making, and thus the role of a risk manager is starting to transform once again.
Risk Management Evolution
2018 Risk Report l Cover Story I The Risk Manager of the Future
• Horizontal compe-
The Evolution of the Risk Manager
Predictor
Create and Protect Value Throughout an Enterprise
Protector
Protect Organization’s Mission and Value
Purchaser
Protect Assets and Balance Sheet
tency in planning and activities • Future-focus and objectives-focused • Inform capital allocation decisions
Focus on uncertainty and decision making
• Prevent
and reduce losses be- Focus on fore/after incidents control activities • Avoid uninsured expenses and improve cash flow • Purchase
insurance, hedge and transfer risks when possible • Indemnification after the fact
Focus on hazards, liabilities and threat
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2018 Risk Report l Cover Story I The Risk Manager of the Future
Predictor
I
n April 2007, Marsh launched a new branding campaign called “the upside of risk” that challenged risk managers to go beyond the defensive posture of avoiding risk. It encouraged risk managers to become more involved in identifying future strategic business opportunities for the organization. Today, the risk manager’s role as a business strategist is starting to mature. No longer mere “managers” of risk, risk practitioners are now more like “predictors” of risk who help guide their organizations through the realm of future uncertainty. “Strategic risk management involves the organization looking forward and becoming objectives-focused,” says Nowell Seaman, director of global risk management at Nutrien and past chair of RIMs in 2017. “The focus is on reducing uncertainty and improving decision-making. What strategy is appropriate? And how can we increase the certainty that the chosen strategy is the right strategy?”
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Canadian Underwriter April 2018
Now risk managers in the board room will be called upon to help in the organization’s planning and activities, Seaman says. “They will help the company determine its objectives and goals based on a complete assessment of a company’s risk, made possible by ERM.” The new ISO 31000 risk management standard, launched this year, does incorporate more strategic advice for risk managers. Formed in 1946, the International Organization for Standardization (ISO) is an international organization with a mandate to coordinate and unify industrial standards across the globe. Implementing ISO 31000 “helps organizations see both the positive opportunities and negative consequences associated with risk,” ISO says of its new standard. “It allows for more informed, and thus more effective, decision making, namely in the allocation of resources. What’s more, it can be an active component in improving an organization’s governance and, ultimately, its performance.” As a sign that ISO 3100 has incorporated more of a strategic element to risk, Delon notes the new standard introduces a new vocabulary: “risk appetite.”
Carol Fox, vice president of strategic initiatives at RIMS, sees strategic risk managers as becoming more holistic in how they approach risk. This means they can support their organizations in a variety of ways, whether as purchasers, preventers, predictors – or some combination of all of the roles. “Rather than looking at primarily insurable types of risks and things that are within the control of the organization, [strategic risk management] is really looking at the goals and objectives of the organization, the strategy of the organization, which would include noninsurable risk as well,” she says. In this new strategic role, a risk manager would build a competency in risk management across the entire organization – within planning processes, within activities, and initiatives that an organization might be taking. “It’s more future-based than looking at historical data,” she says. There is still a place for risk managers to perform the roles of purchasers and protectors, Seaman says. But these roles stand to gain from the insights of strategic risk management and vice versa. “Many organizations view strategic risk management, traditional risk management, and integrated risk management as various parts of an overall en-
2018 Risk Report l Cover Story I The Risk Manager of Tomorrow terprise-wide risk framework,” he says. “The function that does ERM oversees the traditional area of risk, but it also understands there is a role for that risk function to play in supporting the strategy process. At the same time, [the traditional risk manager] can take the output from the strategy process to use as a lens to determine the highest-priority risks.” Those who want to branch out into role of a strategic risk manager may need to brush up on their professional education, Seaman notes. “If you came from a traditional risk management background, you might not have had courses on change management in your education,” he says. “You might not have had courses on business strategy. If you are going to move into that arena, you need to understand how the strategy-setting process in organizations works.” One can imagine strategic risk practitioners sitting at boardrooms tables with crystal balls, asked to predict future outcomes of various potential strategic paths – only instead of ‘crystal balls,’ they will harness the power of artificial intelligence (AI). AI is often hailed as a means to uncover new business insights that are buried within vast quantities of data generated by the Internet of Things (IoT). “[AI] will allow our risk practitioners to really step up and do things and view things from a higher level,” says Van Zorbas, managing partner of Deloitte Canada’s risk advisory process. “The discourse is changing to strategic risk, in terms of what risk can do for organizations. We’re looking at risk to understand decision-making and to come up with the better answers regarding taking chances in the market, taking chances on products, taking chances on vendors. Risk can now help performance and decrease the opportunity of loss in many organizations. It’s moving into the strategy level in a way that’s quantifiable and that hasn’t been done before. If you are just looking to buy insurance, you are missing the [strategic potential] that you can have as a risk manager.”
Risk managers won’t necessarily need to become data scientists to do their jobs in the future, Fox says. “You can always hire somebody who has those types of skills,” she says. “I know of one senior director at an organization who has PhDs reporting to him. They are doing the data science part; they are taking the data and using
AI. He has to understand their objectives in helping the organization. His team is brought in when new products and services are being considered. You have to understand analytics, but [the future role of a risk manager] is really focused on being able to build on business insights using communication, collaboration, and a natural curiosity.”
April 2018 Canadian Underwriter 29
Announcing the
QUARTER CENTURY CLUB 59th Annual Reception
Wednesday, May 16, 2018 The Albany Club
91 King Street East Toronto, ON, M5C 1G3
Bar opens – 11:30 a.m. Lunch – 12:30 p.m. Cost - $75.00 59th Annual Reception Committee: John Cherrie - 416-737-7525 John Sharoun - 416-957-5001
Send Contact Info and Cheque Payable to (or VISA, provide exp. date):
Featuring... The Roasting of Michael Holden
John Sharoun Quarter Century Club c/o Crawford & Company (Canada) Ltd. 55 University Ave, Suite 400 Toronto, ON M5J 2H7 Email: John.Sharoun@crawco.ca Phone: 416-957-5001
Thank you for the support of these generous event sponsors:
Once again this year, The Quarter Century Club plans to continue to make a donations to Children’s Charities & the Insurance Institute Scholarship Fund. Design and Space Compliments of:
.ca
Q&A
2018 Risk Report l Successful Risk Managers
Habits of Highly Successful Risk Managers Steve Sachs, co-chair of the Willis Towers Watson Real Estate Practice, is a “big fan” of the late Stephen Covey, author of The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change. Sachs was such big fan of the book that he collaborated with a former work colleague, Tim Kraft, risk manager for JBG Smith Properties in Washington, D.C., to adapt the approach to the risk management arena.
Both are scheduled to present Seven Habits of Highly Successful Risk Professionals in April at the Risk and Insurance Management Society Inc. (RIMS) annual conference in San Antonio, Texas. Canadian Underwriter’s Greg Meckbach caught up with Kraft and Sachs before the RIMS Conference to ask them for their thoughts about effective risk managers and management.
Q: How does leadership factor into the habits of a successful risk manager?
A: Sachs
As a risk manager, you are talking with the C-suite. If you want to be a leader, you need to understand how they work, what is important to them, and how they understand performance. What are the short-term and long-term objectives of the company? What is the company’s mission? When getting in front of senior management, often a risk manager wants to talk about the things they do, because they think it’s important. But [the C-suite executives] don’t care what you do. They care that you are protecting the company; that there are no surprises. So, if you have any opportunity to work with senior management, you need to talk their language, understand where they are going, and be sort of ‘Big Picture.’
Q: A:
What
is one of the more challenging risks?
Sachs
Cyber is a big disruptor. The challenge in cyber is that sometimes it’s hard for management to get their hands around it. When you are dealing with [information technology staff], their first answer is, ‘I got it, we’re fine,’ versus allowing their vulnerability to show through. I know that is changing, but if I were a risk manager I would be scared about what I don’t know.
Q: Are risk managers good at seeing the larger picture? A:
Kraft As a leader, you should have a very broad perspective, and a willingness to stretch and do things you may not be comfortable with. I don’t have to do it myself. I can hire somebody to do it, or I can find people on my team to do it, but I am responsible for getting those results. It’s not uncommon for people to stick to what they are comfortable with. If people just stay within their comfort level, ultimately the organization suffers, as do they. Steve Sachs, Co-Chair of the Willis Towers Watson Real Estate Practice
April 2018 Canadian Underwriter
31
Q&A
2018 Risk Report l Successful Risk Managers
Q: As a risk manager, did you draw upon any valuable
experience as an officer in the United States Marine Corps?
A: Kraft
One of the strengths I have in my practice, certainly picked up from the Marine Corps, relates to leadership and managing people. I have to understand what my senior management wants. The next step is putting that into action and realizing that I get evaluated based on results, not activity. I can’t do everything myself, so I can be more successful to the extent that I am a better leader and delegate and support and lead my team. In the Marine Corps, my bosses typically were colonels, generals and admirals. I reported much higher in the organization. Much of what I learned in the Marine Corps is fully transferrable to the business world in the C-suite. I don’t look at someone like a CEO as a three-headed ogre. They are a person just like me. They have a role, they have responsibility, and I have a comfort level communicating with them because I really try to make it my business to figure out how I can help them.
Q:
Q: What is top of mind for you at JBG? A:
Kraft My client JBG is in Washington, D.C. We don’t have the typical coastal wind, earthquake, mudslide – we really have none of those catastrophic exposures. That does not mean we don’t have some risk from time to time. For example, in early March, we had 65-mph winds throughout the District of Columbia area, and I had half a dozen incidents happen. I get to spend a lot of my time doing higherlevel things. My renewals are fairly straightforward. I don’t have a lot of weather-related claims, so I really am able to fine-tune the people in my organization.
One habit of successful risk managers is putting ‘first things first.’ What does this mean, and how do you do this?
A: Sachs
People don’t get fired for bad news, people get fired for surprises. We must have the courage to bring bad news to the C-suite rather than let the situation fester and become a surprise at some later point.
Q: How should a risk manager deal with cyber coverage? A: Sachs
I tell risk managers, ‘After you buy a policy, have the broker do a policy workshop for you.’ The risk manager, the general counsel, and the information security officer should actually review the policy and go through what it covers, and then go through the limitations and exclusions. What would scare me as a risk manager on cyber is getting the company to buy cyber insurance, and then having a loss and it’s not covered. Go through every line of the policy to make sure what you just paid for will actually respond when someone has a loss, so you don’t have an insurance carrier saying, ‘That wasn’t covered. Sorry.’
A: Kraft
I have a scheduled monthly meeting with our insurance committee, which is chaired by our chief legal officer. It’s a relatively new committee. Every month at the meeting, we do an overview of what each of our coverages are, with a specific focus on the exclusions. And it’s been very, very enlightening.
32 Canadian Underwriter April 2018
Tim Kraft, Risk Manager, JBG Smith Properties
A
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Up in the Air
Sean Tindale
Lawyer, Partner Hughes Amys LLP
Your client’s liability for negligent drone use is a gray area. Here’s what insurers should consider when assessing the civil liability of drone operators. Civil liability exposure for drone operators (and their insurers) is a developing area of law in Canada. If anything is clear, it’s that determining liability for negligent use of a drone doesn’t follow a simple mechanical formula. When faced with civil liability claims, insurance and legal professionals will need to consider, among other things, the drone operator’s conduct, compliance with local and national
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Canadian Underwriter April 2018
laws, regulations and standards, as well as specific policy wordings and the unique facts and circumstances of each case. Below is an overview of some of the issues affecting civil liability exposure of drone operators and their insurers.
COMPLIANCE WITH FEDERAL LAWS Drone operators and their insurers must be familiar with a variety of statutory compliance issues at the national level. Canadian laws regarding drone use are about to change in 2018. Proposed federal aviation regulations for drones weighing up to 25 kilograms include pilot training and testing requirements, mandatory insurance, and minimum age restrictions. Among other things, operational rules will require pilots to fly at least 5.5 kilome-
ters from airports, 1.85 kilometers from heliports, 150 meters from open-air assemblies of people, and up to 75 meters from people or vehicles. In urban areas, specific flight rules apply; approval from air traffic control may be required. As well, drones operated in urban areas must meet design standards, and drones heavier than one kilogram must be properly marked or registered. Indeed, statutory operational standards are set to provide a benchmark for the safe use of this emerging technology in Canada. In addition to new aviation regulations, drone operators must comply with existing laws, including the Criminal Code. Sections of the Criminal Code that may apply to drones or “unmanned air vehicles” (subject to judicial interpretation of the term “aircraft” used in the statute) may include: • s. 219-220 – criminal negligence • s. 249 – dangerous operation of an aircraft (in a manner that is dangerous to the public in all the circumstances) • s. 251 – unsafe aircraft (knowingly operating an aircraft that is not fit and safe for flight and endangering the life of any person) • s. 253 – operation of an aircraft while impaired • s. 430 – criminal mischief (damage to or interference with enjoyment of property) Violation of some of these provisions may result in penalties of up to 10 years in prison.
NEGLIGENCE AND STATUTORY COMPLIANCE Drone operators and their insurers must also be alert to how statutory compliance issues may affect civil (tort) liability exposure. It is useful to recall that a person’s conduct is negligent and subject to civil liability if it creates an objectively unreasonable risk of harm. In Ryan v. Victoria (City), the Supreme Court of Canada confirmed that to avoid liability in negligence, a person must exercise the standard of care that would be expected
of an ordinary, reasonable and prudent may still be enforceable even if there is a person in the same circumstances. contravention of a criminal or other law. Within this context, Canadian courts The relevant portion of s. 118 states: have held that breach of a statute is not “Unless the contract otherwise necessarily proof of negligence. The provides, a contravention of any reverse is also true: compliance with a criminal or other law in force in statute does not necessarily prevent a Ontario or elsewhere does not, by finding of negligence. In Canada, statuthat fact alone, render unenforcetory compliance may be an important able a claim for indemnity under a factor in the overall assessment of neglicontract of insurance except where gence, but it is not determinative. the contravention is committed by What does this mean for drone opthe insured, or by another person erators and insurers in Canada? Breach with the consent of the insured, of statute is effectively subsumed in the with intent to bring about loss or general law of negligence, and the undamage…..” derlying obligation of reasonableness is Section 118 has been invoked by incritical. Civil liability will depend upon sured persons in the automobile insura variety of factors, including a drone ance context in Ontario. operator’s conduct, statutory and regulaIn addition to new aviation regulations, tory standards, and other factual circumdrone operators must comply with stances of the case. existing laws, including the Criminal With the foregoing in mind, eviCode. dence of breach of aviation regulations – for example, opFor example, the Ontario Court of erating within “no drone zones;” op- Appeal decided in Kereluik v Jevco that s. erating within prescribed proximity to 118 does not permit an insurer to deny airports, people or vehicles; operating coverage or reduce coverage to miniabove prescribed altitudes or speeds; mum statutory limits based solely on an operating at night; or operating beyond impaired driving conviction. Instead, line of sight – should be an important the Court agreed that s. 118 was deconsideration when assessing the stan- signed to provide insurance protection dard of care in a negligence claim. for negligent wrongdoers who do not Likewise, evidence of breach of a intend to cause harm. criminal statute, such as operating an That said, the Kereluik case was decidaircraft while impaired, criminal neg- ed in the context of a standard Ontario ligence, or knowingly operating an insurance policy (OAP1). The OAP1 did unsafe aircraft, should continue to be not contain a specific exclusion clause for highly relevant when assessing reason- losses that were the result of criminal acts. able (or unreasonable) conduct. In the case of non-standard drone insurance policies or endorsements, PROVINCIAL INSURANCE LAWS coverage questions arising from statutoWhen considering the impact of statu- ry compliance issues should be assessed tory compliance on civil liability, drone by appropriate insurance and/or legal operators and their insurers should also professionals on a case-by-case basis. be familiar with insurance legislation in In the end, familiarity with statutory their province, including whether statu- compliance issues and the impact on civil tory compliance may give rise to ques- liability will help insurance professionals tions about coverage. assess risk and exposure in the context of For instance, in Ontario, Section 118 of an important emerging technology. the Insurance Act provides that a claim for 1 See the 1983 Supreme Court of Canada ruling in indemnity under a contract of insurance The Queen (Canada) v. Saskatchewan Wheat Pool.
April 2018 Canadian Underwriter 35
The unlikely growth of the commercial market Sean van Zyl
Freelance Writer
Despite record global losses, a buyer’s market still exists for certain types of commercial business. Marketplace lore holds that the global property and casualty insurance industry would have to incur a catastrophe loss of more than US$100 billion to soak up the excess capital that has driven an ongoing soft market. And yet, despite an estimated insured price tag of US$135 billion last year, property and casualty insurers appear to be relentlessly chasing new business with scant signs of a hard market on the industry’s horizon. A press release issued by Munich Re at the beginning of this year notes the total global insured loss for 2017, pegged at a record US$135 billion, is associated mostly with hurricanes Harvey, Irma and Maria, although it includes other cats as well. Surprisingly, the insured cost is less than half the total damage amount of about US$330 billion. Looking ahead, cat costs to the insurance industry are only likely to mount in both severity and
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incidence, observes Torsten Jeworrek, a Munich Re board member responsible for global reinsurance business. “For me, a key point is that some of the catastrophic events, such as the series of three extremely damaging hurricanes, or the very severe in flooding in South Asia…are giving us a foretaste of what is to come,” he tells Canadian Underwriter. “Even though individual events cannot be directly traced to climate change, our experts expect such extreme weather to occur more often in future.” The ability of insurers operating in North America to shrug off the record cat losses last year is a clear sign that the industry remains robust without capital constraints, says Raymond Thomson, associate director (and Canadian market overseer) at rating agency A.M. Best Co. “Insurers were able to absorb 2017’s cat losses, including Canada’s wildfires and flooding [which cost Canadian insurers more than $1 billion],” he says. “Overall, there’s a healthy risk appetite out there, with excess capital driving price competition. Despite low investment income yields combined with pressure on underwriting, A.M. Best views the Canadian market as financially healthy with a ‘stable outlook.’”
“There has been some upward pricing pressure in some areas of the market based on loss experience, but at the same time insurers have also reduced pricing in other areas,” Kavanagh observes. “I would say that insurers have so far adopted a more disciplined approach to underwriting growth, with specific attention to potential cat exposures.” Overall, Kavanagh points out that Aon’s analytics unit focuses on four key industry factors: catastrophic loss activity, capacity stability, reinsurance, and underwriting. “In all respects, the industry appears healthy and competitive and thus unlikely to deliver any unforeseen pricing corrections or a lack of coverage availability in the year ahead.”
BUYERS’ MARKET?
However, Thomson expects last year’s cat losses to prompt insurers to apply a more circumspect approach to underwriting potential cat risks. “Insurers are more likely to continue to focus on risk mitigation with specific attention to the underlying factors associated with the risks being underwritten,” he adds. David Levinson, CEO of Zurich Canada, concurs that global excess capital within the P&C industry will continue to drive underwriting competition in the year ahead. “In Canada, capacity will continue to exert force on policy pricing.” The pricing competition in Canada reflects the broad global environment governing the actions of insurers, says Sean Kavanagh, manager of national broking, strategy and operations at Aon Risk Solutions. The cat losses of last year had a muted impact on the year-end reinsurance treaty renewals; therefore, pricing across various lines of business has been lacklustre.
insurance industry is currently at the bottom of its pricing cycle, which will eventually lead to a general rise in coverage rates. “Pricing of coverage seems at present to be more influenced by insureds’ loss history and the type of risks involved,” he says. “However, competition remains strong, so risk managers still have some leverage.” Insurers have been particularly aggressive about competing for commercial casualty business, Pottle says, an area in which claims have decreased in Canada. However, while claims have dropped, the severity of losses has risen, he notes, which could see insurers applying more restrictive conditions and terms to coverages. Risk managers in most sectors are currently enjoying a flat pricing market which is unlikely to change in the year ahead, according to Betty Clarke, a former chair of RIMS Canada and risk manager of corporate risk and recovery at the City of St. John’s. “There are more carriers than ever with growth targets looking to get into a number of specific specialised lines of business including but not limited to municipal risk,” she notes.
Nona McCreedy, principle owner of managing general agency Aurora Underwriting Services, describes the current state of the Canadian commercial market as a “mish-mash.” She doesn’t regard the current industry environment as being either a “buyers” or “sellers” market. The soft marketplace has been going on for so long that historical indicators of a market Insurers seem to be particularly aggressive shift in the industry cycle are no longer in chasing and retaining small business relevant, she com- insurance packages. This is an insurer’s ments. “Though, I ‘bread and butter’ because it’s cost-effective do believe insurers are taking the op- to manage. portunity to examClarke says the ongoing chase by inine their books of business in terms of surers for new business has caused risk which lines are profitable.” That said, McCreedy observes that insur- managers to review their risk portfolios ers appear to be adopting a similar stance and adopt different strategies. For into underwriting commercial risks across stance, in the city’s recent broker proCanada. Insurers seem to be particularly posal request, she asked brokers who aggressive in chasing and retaining small were interested in bidding for the city’s business insurance packages. This is an account to send out proposals to specific insurer’s ‘bread and butter’ because it’s insurers of their choice. They were asked cost-effective to manage. Such business falls to include the insurer’s pricing along between the $2,500 to $35,000 range in with the broker’s fee for service in their response. This approach differed from coverage. Steve Pottle, a board director of the the standard method of simply choosRisk and Insurance Management Soci- ing the successful proponent based on ety (RIMS) and director of risk man- the brokerage fee. “This approach really agement at York University, believes the produced great results,” Clarke says. April 2018 Canadian Underwriter 37
Thawing the Claims Freeze
Sarah Newman
Support Service Director Endeavour Insurance Services
Key players in the London market are using new technology to speed up claims handling, transforming how Lloyd’s coverholders and third-party administrators in Canada do business. We now live in a world in which a fridge knows it is running out of milk, and it can update its user’s internet shopping list accordingly. Sophisticated weighing and temperature sensors, and even cameras, allow users to keep their eye on their fridge’s activities 24 hours a day, seven days a week. Given this seamless, just-in-time technology associated with an everyday household appliance, people have high expectations when it comes to the technology they use to run their companies.
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But, at the risk of stating the obvious, the London market is no Internet of Things (IoT)-enabled fridge. The market has long been a source of frustration for North American coverholders and third-party administrators (TPAs), some of whom have found placing business with Lloyd’s slow and cumbersome in comparison to other markets. One common complaint is that they often receive timely payments to settle a claim from every other market except Lloyd’s. It has been suggested that claims payments from Lloyd’s have been so slow in the past that it affected the reputation of local coverholders, causing them to re-adjust their business models with less of a focus on the claims stream. Going back to the fridge analogy, imagine manually entering the details of each product you take in or out of your fridge. That would put a lot of people off. Similarly, some coverholders and TPAs may be left with the impression that
there are too many processes along the way when it comes to placing business in – and extracting claims payments out of – the London market. Of course, we must not lose sight of the fact that the London market is a unique hub for placing specialty and complex risks from around the world. The multifaceted nature of the bespoke risks placed in Lloyd’s market can make the claims handling process understandably more complex than when dealing with claims relating to ‘off-the-shelf’ coverage.
TRACKING ALL DATA Data standardization has been a huge challenge for Lloyd’s historically. Data is often presented to the market from multiple sources, and in an array of formats. To provide consistency and meet regulatory demands, we continue to add columns to bordereaux and ask our clients to complete more forms; this has led to further complaints of cumbersome and onerous processes when dealing with Lloyd’s. If we wish coverholders to continue to place business into the Market, we need to find solutions that do not affect our clients to such a large degree. At the same time, we must satisfy the regulatory and standardization requirements that have become a feature of placing business into the London Market. Although this specialist insurance market is far more complicated than mainstream, ‘one-size-fits-all’ insurance, there is a similar need to track all data traffic as transparently and efficiently as possible. That’s a principle at the heart of the technological revolution currently taking place in London.
MAKING CLAIMS A ‘THING’ An advanced claims management solution should effectively turn each claim into a ‘thing’ that can be tracked in realtime by all parties involved – from coverholder to broker to underwriter – at every stage of the process. The aim is to provide each organization with the transparency, consistency and account-
ability required to work more efficiently and alleviate regulatory burdens. A single point of entry is required, thereby removing the need for duplicate processing across a multiple array of systems that don’t necessarily interact. All data should be stored in one central location. Users must be able to interact with market systems, such as lineage and electronic claims file, as well as other parties’ internal systems. Such an advanced claims management platform will allow information to be delivered both into and out of the market with no unnecessary delays, particularly if it could resolve the age-old problem of how to handle co-led claims.
THE FUTURE
The ability to produce extensive reports on the progress of claims not only adds to market transparency, but it should also help with risk management as well. Claims data can be used to identify trends, analyze policy/binder performance, and monitor the profitability of programs. Thankfully, all of this is no longer blue-sky thinking. Work is nearly complete to deliver this functionality, and much more, as part of the most advanced coverholder claims management technology.
FREE TO USE The pace of change will of course be determined by the mindset of those working within our industry. It requires a willingness to drive change instead of waiting for others to offer a solution. In the past, excessive costs have been a barrier to the uptake of new technology.
Upgrading processes in a specialist market takes time, but there is a lot of future promise. Since claims management platforms have the advantage of handling large volumes of data, an evolution into more of an analytical – even The multifaceted nature of the bespoke predictive – tool seems risks placed in Lloyd’s market can make the a natural next step. For instance, if an adclaims handling process understandably vanced claims platform more complex than when dealing with also accepted data feeds claims relating to ‘off-the-shelf’ coverage. that included premium bordereau and risk level information, all parties would be able to Crucially, many of us in the Lloyd’s maridentify potential and actual risk exposures ket believe there should be no extra costs at both policy and binder level without hav- for those who opt to use the latest claims ing to undertake huge manual exercises. Such handling systems. No doubt, the coverholder and binda tool would be very powerful, helping all parties to understand and model for the po- ing authority structure offers many adtential impact of catastrophe situations, for vantages to local North American businesses: it allows domestic players to example. Policy data validation is another area write specialty risks and combine their that can create unnecessary delays. The expert local knowledge with the secu“check” is performed in London rather rity and trust of placing this business than at the time of data production and within the firm foundation of Lloyd’s. But efficient claims handling must be entry by coverholders. Ideally, technology platforms should have the ability to vali- recognized as crucial to this process. Just date data at source, rather than after the like keeping food fresh and chilled is fact, and then create Lloyd’s standard- the fridge’s raison d’être, paying claims is the very purpose of any insurance busiized version 5 premium bordereau. This would create a far more flexible ness. Brokers like us must embrace and platform; it would also lay the founda- champion new technology in order to tion for a more wide-ranging data tool. stay relevant.
April 2018 Canadian Underwriter 39
MOVES & VIEWS
UPCOMING EVENTS: FOR A COMPLETE LIST VISIT
www.canadianunderwriter.ca
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The Guarantee Company of North America has appointed Donna Barclay as its president and chief operating officer. Barclay, who joined The Guarantee in 2016, has 30 years of experience in the property and casualty insurance industry. She has a Bachelor of Arts in Economics from the University of Western Ontario, a Diplôme D’Études Collégiales from Marianopolis College in Montreal, and an A.I.I.C. (Associate of the Insurance Institute of Canada) designation from the Insurance Institute of Canada.
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Pamela Derksen, former vice-president of commercial insurance for Economical Insurance, is now vice president of operations and product development at brokerage Cowan Insurance Group. Derksen has more than 20 years of insurance experience, focusing on large commercial business, oil and gas, and manufacturing lines. Cowan Insurance Group’s markets include construction, transportation, manufacturing, municipalities and universities, among others. The firm has more than 450 employees and currently 40 Canadian Underwriter April 2018
operates in 12 locations across Canada. It is owned by Cambridge, Ont.based Princeton Holdings Limited, which also owns The Guarantee Company of North America and managing general agent Frank Cowan Company.
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Insurance law firm Strigberger Brown Armstrong LLP has hired lawyers Suzanne Armstrong [3a] and Stas Bodrov [3b]. Armstrong, who previously worked as a personal injury lawyer, will work out of Waterloo, Ont. for Strigberger Brown Armstrong’s bodily injury and disability groups. Bodrov will work in Toronto for the law firm’s subrogation and transportation groups.Bodrov was called to the bar in 2017. “With its new intermediate and junior lawyers, Strigberger Brown Armstrong furthers its commitment to avoid ‘over-lawyering’ files,” the firm said in a release.
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Restoration firm First General has appointed Lorne McIntyre as director of its large and complex loss division. McIntyre’s role includes helping the firm expand its network in the United States. McIntyre has more than 30 years of
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5 experience in cleaning and restoration. His qualifications include Restoration Industry Association Certified Restorer, Water Loss Specialist and Certified Structural Drying Supervisor from the American Council for Accredited Certification.
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Claims service firm Sedgwick Canada appointed Delphine Clerc as its new vice president of business development. She holds the same job title for Vericlaim Canada, a Sedgwick subsidiary that provides loss adjusting services. Before joining Sedgwick Canada, Clerc specialized in captive claims, truckers
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9a liability, product liability, medical malpractice, marine survey, residential property, environmental, heavy equipment, tractors and trailers, auto physical damage and flood.
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30 Forensic Engineering, formerly known as Giffin Koerth, recently announced three new appointments. Aerospace engineer Fabian Erazo is now an associate within the human factors group, where he will study driver behaviour and personal injury events. Erazo’s graduate thesis explored how helicopter pilots operating in degraded visual environ-
MOVES & VIEWS
3a
3b
streamlined experience that was truly national in scope to meet their ever-changing needs,” says Opta president Greg McCutcheon. Precise Field Services will provide residential and commercial loss control services nationwide. Opta, which provides information on properties for carriers, “is now nationally staffed with an unrivaled team of readily available field experts,” SCM stated.
8 9b ments respond to changes in their information display systems. 30 Forensic Engineering has also appointed Ahmed Fahmy as intermediate associate in its Geotechnical Group. Fahmy has worked on geotechnical engineering and construction inspection projects and has designed earth retaining structures and shoring systems, among other things. He is a former geotechnical engineering professor at Western University in London, Ont. Derek Gibson, a new senior associate within 30 Forensic Engineering’s civil/ structural group, has more 20 years of experience in
10 building condition assessments, failure analysis of building systems, building code compliance audits, investigation and rehabilitation of building enclosure systems, and structural evaluations of damaged properties.
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SCM Insurance Services has combined its Opta Information Intelligence and Risk Management Services (RMS) units. The latter is being rebranded as Precise Field Services. “Through internal discussions, it became apparent there was an opportunity to provide our customers with a
Sharp Mobile Technology Ltd. and EMethod will merge under a new company, Trufla Technology Ltd. Its services will include search engine optimization, web design, lead management and application programming interfaces, among others. EMethod is a marketing agency majorityowned by Sharp Insurance, a Calgary-based brokerage. “Joining with EMethod gives us a great opportunity to provide more value to our brokers, especially with the addition of their lead management tool, Clickhook,” says Ken Sedgewick, vice president of sales for Trufla. Sedgewick is former director of sales for Sharp Mobile.
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operations at ClaimsPro, an independent adjusting firm. Volk is now senior vice president of corporate transformation at SCM Insurance Services, the parent company of ClaimsPro. Sivakumaran is a former vice president at Cunningham Lindsey, which he joined in 2004 as a customer service representative in Hamilton, Ontario.
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Janet Mascitelli has retired from Trisura Guarantee Insurance Company, effective March 1. She was Trisura’s vice president of surety. From 1986 through 2006, she was manager of surety at the Guarantee Company of North America, according to her LinkedIn profile. “While most of her time was dedicated to contract surety, she transitioned over the last few years into developer surety, helping set up the department for future success,” Trisura says. She is from Saint John, N.B. originally. “Like most people, Janet stumbled upon the surety industry, and she was one of only a few women in the field at that time,” Trisura noted.
Kumar Sivakumaran [9a] is replacing Dustin Volk [9b] as vice president of national April 2018 Canadian Underwriter
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GALLERY
This year’s edition of The Big Mingle lived up to its name. The highly anticipated annual event attracted several hundred partygoers to The Rec Room in Toronto’s John Street Roundhouse for networking over drinks, hors d’oeuvres and a poutine-powered buffet. Once again, Blouin Dunn LLP and -30- Forensic Engineering co-hosted the get-together, which coincided with the end of the annual Ontario joint conference of the CICMA and CIAA.
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GALLERY See all photos from this event at www.canadianunderwriter.ca/gallery
April 2018 Canadian Underwriter
continued on page 46...
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The 2018 Insurance Canada Technology Conference hosted IT professionals, brokers and other industry members eager to learn the latest on a range of topics, including AI and data management. The popular broker-distribution topic stream included a panel discussion on tech-powered marketing moderated by Canadian Underwriter publisher Ian Portsmouth. The event took place February 27-28 in Toronto.
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GALLERY See all photos from this event at www.canadianunderwriter.ca/gallery
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April 2018 Canadian Underwriter
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GALLERY See all photos from this event at www.canadianunderwriter.ca/gallery
Dr. Kelly Metcalfe was the keynote presenter at the National Sponsor Luncheon of the Women in Insurance Cancer Crusade (WICC), which educates the charity’s supporters about its work. (Canadian Underwriter is a WICC national sponsor.) Metcalfe, a University of Toronto nursing professor and Women’s College Research Institute scientist, provided an overview of her research into the BRCA1 and BRCA2 gene mutations, which indicate a higher risk of developing certain types of cancer, and how pre-diagnosis genetic testing can spur preventative surgeries. The event was held March 7 at the downtown Toronto offices of Chubb.
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