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JULY 2008 A Business Information Group Publication Publications Mail Sales Agreement #40069240


Canada’s Black Swans BY ANDRÉ FREDETTE

Updated Weather Forecasting BY VANESSA MARIGA

Singing Severity Blues Tornadoes ILS: Here to Stay? Soft Market Survival Parametric Pricing Environmental Disclosure

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Defying Gravity


Reinsurers have thus far defied the gravitational pull of a soft market, holding back on lowering their premium rates despite the more drastic rate-cutting observed in the primary insurance market. BY DAVID GAMBRILL




Black Swans

Moody Blues

A recently published book refers to ‘black swans’ as unpredictable events with massive consequences, an apt metaphor for the potential impact of Guaranteed Replacement Cost (GRC) on Canada’s reinsurers.

Although reinsurance results have been very good as of late, a sudden escalation of claims severity has several reinsurers singing the blues.





42 Parametric Pricing

Insurance-linked securities are a hot commodity in the United States and the United Kingdom, but their reception in Canada has proved to be comparatively low-key, due in part to a lack of regulatory clarity surrounding them.

Parametric indices in catastrophe bonds could help address the fundamental tension between a bond’s transparency and the hedging of basis risks.

Bigger, stronger and costlier tornadoes are twisting their way onto the lanscape of the Canadian insurance industry. BY JOE NIEDZIELSKI



50 Need for Accuracy 26 Surviving Softness Reinsurers wishing to ride through the current soft market cycle with a minimum of anxiety will need to price their products with financial market volatility in mind.

38 Nuclear Insurance New and enhanced catastrophe models soon to be introduced into the Canadianmarket cover winter storm, tornado and hail perils, but the quest for aCanadian overland flood model remains elusive.




State of the Art Tornadoes

20 Here to Stay?

Canada’s nuclear insurance pool is celebrating its 50th anniversary with a call for more insurers to join and thus help maintain an even spread of risk.

The Nova Scotia Insurance Review Board corrects the record when it comes to reviewing auto insurance rates. BY DONNA BOUTILIER

53 Environmental Disclosure Insurers need to know when an insured client must disclose the details of an environmental catastrophe. BY NADIA M. MACPHEE


July 2008 Canadian Underwriter




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VOL. 75, NO. 7, JULY 2008


10 Moving Forward Incoming CIAA president Reno Daigle, a Maritimer by birth and at heart, has come a long way since giving Ontario a chance more than 30 years ago. BY VANESSA MARIGA





Market Watch

56 Moves & Views 59 Gallery

Senior Publisher Steve Wilson (416) 510-6800

Associate Publisher Paul Aquino (416) 510-6788

Editor David Gambrill (416) 510-6796

Art Direction/Design

Associate Editor Vanessa Mariga (416) 510-6793 Account Manager Mike Wells (416) 510-5122 Advertising Sales Christine Giovis (416) 510-5114

Associate Art Director Gerald Heydens Production Manager Gary White (416) 510-6760 Print Production Manager Phyllis Wright President Bruce Creighton Vice President Alex Papanou

Canadian Underwriter is published thirteen times yearly (monthly + the Annual Statistical Issue) by Business Information Group, a division of BIG Magazines LP, a leading Canadian information company with interests in daily and community newspapers and business-to-business information services. Business Information Group is located at 12 Concorde Place Suite 800, North York, ON, M3C 4J2. Phone: (416) 442-5600. All rights reserved. Printed in Canada. The contents of this publication may not be reproduced or transmitted in any form, either in part or in full, including photocopying and recording, without the written consent of the copyright owner. Nor may any part of this publication be stored in a retrieval system of any nature without prior written consent. We acknowledge the financial support of the Government of Canada through the Canada Magazine Fund toward our editorial costs. Š Published monthly as a source of news, technical information and comment, and as a link between all segments of the insurance industry including brokers, agents, insurance and reinsurance companies, adjusters, risk managers and consultants. Privacy Notice From time to time we make our subscription list available to select companies and organizations whose product or service may interest you. If you do not wish your contact information to be made available, please contact us via one of the following methods: Phone: 1-800-668-2374 Fax: 416-442-2191 E-mail: Mail to: Privacy Officer, 12 Concorde Place., Suite 800, North York, ON, M3C 4J2

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Canadian Underwriter July 2008

GST Registration number 890939689RT0001 Second Class Mail Registration Number: 08840 Publications Mail Agreement #40069240 Return undeliverable Canadian addresses to: Circulation Dept. Canadian Underwriter 12 Concorde Place, Suite 800 North York, ON, M3C 4J2

Canadian Underwriter wins Gold, Silver & 2 Top Fives Held at the Old Mill in Toronto on June 4th, Canadian Underwriter magazine came away from the 2008 Canadian Business Press (CBP) ‘Kenneth R.Wilson’ (KRW) Editorial Excellence Awards and Gala Dinner event with 2 awards and 2 top-five nominations:


Best Merchandising/ Marketing Article ‘The BIG Sell’ October 2007 issue David Gambrill


Best Cover August 2007 issue cover David Gambrill Vanessa Mariga Gerald Heydens

Top 5 Nomination:

Top 5 Nomination:

Best Feature Article ‘ARE WE READY’, August 2007 Issue Vanessa Mariga

Best Website

Additionally Canadian Underwriter received Top 10 nominations in the following categories:

Best Editorial • Best Professional Article • Best News Coverage

‘Kenneth R. Wilson’ (KRW) Awards: Regarded as one of Canada’s top business writers, Kenneth R. Wilson wrote with clarity and authority. His opinions were widely sought and respected. It is the memory of Kenneth R. Wilson, his example and his achievements in business press journalism that the Canadian Business Press association (CBP) honours each year with these awards.

For more information please see:



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Call for Help

Call centres allow insurers and brokers to sell their products more efficiently and economically, but serious issues relate to the quality and consistency of their service. David Gambrill, Editor


Canadian Underwriter July 2008

Responding to the ubiquitous consumer expectation that financial services must be available to consumers 24/7, the insurance industry is increasingly making use of the call centre model for delivering policies and advice to policyholders. In doing so, the industry is following a much broader social trend. Figures are wildly unreliable, but Canada’s call centre industry has no doubt boomed since six years ago, when estimates suggest there were anywhere between 4,500 and 13,400 call centre operations in Canada, employing between 210,000 and 570,000 workers (depending upon which sources you believe). Various advantages to call centres include: • cost savings (because a third-party is assuming the costs associated with operating the centre); • more readily available — and presumably therefore improved — customer service; • increased customer retention; and • increased sales and revenues. Be that as it may, some interesting wrinkles are associated with this model in the context of selling insurance products. One major question, not necessarily specific to the insurance industry, has to do with the quality of advice policyholders receive over

the phone. For example, most consumers have a story of frustration to share about some call centre employee who seemingly tried to stonewall them, or provided (at best) uneven or inconsistent advice. It’s not surprising that a online survey in the United Kingdom found that only 4% of its respondents reported having a good experience when dealing with a call centre.

A recent RIBO decision implies jurisdiction is still very much a live issue when it comes to licensing call centre employees In fact, insurance brokers point to this as an advantage they have over direct writers (which often use call centres), because, as brokers note, getting good advice is a cornerstone of the insurance product. Another wrinkle is the location of these call centres. Jokes abound about getting help for your computer, bought and broken in Canada, from call centre employees based somewhere overseas. But call centre locations are proving not to be a joke when it comes to dispensing advice about insurance products in Canada.

Last year, one insurer operating in Ontario was fined Cdn$5,000 by the province’s broker regulator because the company’s call centre, based outside of the province, was dispensing advice about insurance to Ontario consumers. The call centre employees in question were not registered with the regulator to provide advice to Ontario consumers, a Registered Insurance Brokers of Ontario (RIBO) disciplinary panel found. The RIBO decision implies jurisdiction is still very much a live issue when it comes to licensing the call centre employees. While the physical location of the call centre may not matter, the licensing jurisdiction still does, making staffing of these call centres potentially more costly to establish and manage. What one hand giveth, the other taketh away…. The upshot of all of this is that while call centres certainly do allow insurers and brokers to sell their products more efficiently and economically, there are serious issues to consider about the quality and consistency of their service — to say nothing of the thorny regulatory and licensing/jurisdictional issues their structures entail. An insurance industry attempting to deliver optimal service to consumers should be wary of the double-edged nature of this service delivery method.

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Expertise you can build on. © 2008 Swiss Re



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Canadian Market

expected to increase 29% — implying an estimated 10.8% increase in the basic auto insurance premium.

For the first five months of 2008, auto theft was down 43.9% in Winnipeg and 40.7% in the province overall.




The Insurance Bureau of Canada (IBC) is recommending a 36.9% rate increase for auto insurance in Alberta, to be applied only to the province’s grid rates. The suggested rate hike is to compensate for the court’s recent elimination of the province’s Cdn$4,000 cap on minor injuries. The IBC presented its proposal to the Alberta Automobile Insurance Rate Board on June 17. Ideally, the IBC noted in its submission, the adjustment should apply only to the province’s auto insurance grid rates and should not be an industry-wide adjustment. But, as the IBC also notes, Alberta’s rate board does not have the authority to apply adjustments to the grid only and not to the rest of the industry as a whole. For this reason, the IBC has asked the Alberta government to change its Premiums Regulation and public policy to allow the board to apply changes to the grid only. In a separate actuarial report submitted to the rate board, consulting firm Oliver Wyman Ltd estimated bodily injury claims costs are

Property and casualty insurers in 2007 wrote a total of Cdn$7.3 billion in premium in Quebec, marking a 3.6% increase from 2006’s Cdn$7.1 billion result. The Autorité des marché financiers (AMF) has reported that Quebec’s auto and property insurance premiums increased 3% last year, up nearly Cdn$172 million from 2006. Total premiums in the auto class stood at Cdn$3.08; in the property class, it was Cdn$2.84 billion.


Canadian Underwriter July 2008

MPI RECOMMENDS 1% AUTO RATE REDUCTION Manitoba Public Insurance (MPI) is seeking a 1% overall reduction in Autopac rates for 2009–10 based in part on declining auto theft rates. In its application filed with the Public Utilities Board, MPI said the rate decrease is possible because of dramatically fewer auto thefts, and in spite of lower investment returns and higher expenses for the public insurer. In Manitoba, vehicle thefts have fallen by 40% since 2004, MPI notes in a press release. This is expected to decrease another 40% by the end of 2009.

Insurers continue to emerge from the credit crisis in a strong position and are among the least affected of all financial institutions, a senior ratings agency official told the Casualty Actuarial Society (CAS). Jeffrey Berg, senior vice president and group credit officer with Moody’s Investors Services, told the CAS “very strong current financial profiles will enable most insurers to handle these [subprime-related] losses, and few rating downgrades driven solely by credit market concerns are expected.” But he cautioned insurers with outsized investment losses, combined with industry pressures, could prompt downgrades for weakly positioned firms, the CAS reported. Rated property and casualty insurers’ exposure to nonagency-structured mortgage investments is moderate, with a median of 12% of invested assets and 47% of equity, he told the actuaries.

States’ eighth-largest insurance brokerage firm, Hilb Rogal & Hobbs Company (HRH), for a total of US$2.1 billion, effectively doubling Willis’ North America revenues. The transaction is expected to close in 2008 Q4. It is subject to customary closing conditions, such as regulatory and HRH shareholder approval, according to a Willis press release. The new organization in North America will be renamed Willis HRH upon completion of the transaction.

Regulation INSURERS’ USE OF PRIVATE INVESTIGATORS PROMPTS COMPLAINTS TO PRIVACY COMMISSIONER Complaints against the insurance industry filed with the federal privacy commissioner increasingly involve the covert collection of personal information by private investigation firms, the commissioner said in her annual report. Of the 350 complaints filed with the Office of the Privacy Commissioner of Canada (OPCC) between Jan. 1 and Dec. 31, 2007, 10% were filed against the insurance industry.



Willis Group Holdings Limited has acquired the United

Nova Scotia auto insurance companies might have to



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apply to the Nova Scotia Insurance Review Board (NSIRB) for rate approvals and risk classifications at regular intervals in the future, and not just if there is a proposed change to the rates. The proposed change is contained in a new regulation intended to be introduced later this year. “Auto insurance rates should be regularly reviewed, so that rates fairly reflect market conditions,” Nova Scotia Finance Minister Michael Baker said in a release. As of June 1, 2008, nearly 38% of insurance companies active in Nova Scotia have not filed a full, actuarially justified rate application for private passenger vehicles with the NSIRB since 2004, according to a discussion paper by the Office of the Superintendent of Insurance in the Province of Nova Scotia. Roughly 62% of active companies have not filed since 2005.

ONTARIO BROKERS ASK REGULATOR TO REVIEW USE OF CREDIT SCORING The Insurance Brokers Association of Ontario (IBAO) has asked the Financial Services Commission of Ontario (FSCO) to look into whether insurers are using credit scoring and, if so, whether they are using credit scoring for the purpose of determining auto rates.

FSCO’s regulations currently ban the use of credit scores to determine automobile rates in Ontario. IBAO’s position is that all insurance companies

must abide by the spirit and the letter of this regulation, IBAO president Rodney Hancock notes in the association’s newsletter. “IBAO believes that the

‘playing field’ must be level for all insurers and that this is the best interest of consumers and all stakeholders,” Hancock said.

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Shaking Up the Status Quo Vanessa Mariga Associate Editor

As Reno Daigle prepares to take the reins of the CIAA, he stresses the importance of continuing education and training to adapt to the everchanging demands of the profession. You can take the man out of the Maritimes, but you can’t take the Maritimes out of the man. When Reno Daigle travels to Prince Edward Island in September to be inducted as the next president of the Canadian Independent Adjusters’ Association (CIAA), it will be a homecoming of sorts. Daigle, a native Maritimer — born and raised in Edmundston, New Brunswick — admits that even though he has forged the majority of his career in North Bay, Ontario, he is a Maritimer at his core. Like many others in the industry, Daigle stumbled into his career in the insurance industry almost unintentionally. His father was an

10 Canadian Underwriter July 2008

insurance appraiser, and once Daigle graduated from university in 1967 in Moncton, he needed to find work. His father called the manager of Adjusters and Appraisers (A&A) and Daigle landed his first job. After a quick relocation to Saint John, New Brunswick, he began to cut his teeth on marine claims and cargo losses (from paper to automobile to steel). Two years into his career, Daigle had dotted the province of New Brunswick. As he transferred from town to town, he learned the craft of adjusting. He admits worrying when he realized the next stepping-stone of his career would take him to Ontario. Daigle, an Acadian, learned a bilingual adjuster was needed in North Bay, but only for three weeks. “I didn’t want to come to Ontario, because Ontario to me was scary,” he says. “The only thing a person from a small town in the Maritimes knew of Ontario was Toronto. But I had no choice. Either I came [to Ontario] or I was going to look for a job. So, I came, but it was going to be for a short period — only for three weeks.” As it turns out, Daigle met his wife of 37 years on that

work placement. Now, nearly four decades later, the couple has set family roots in the Northern Ontario city and has three sons (one of which has also opted for a career in the insurance industry). “It’s been a very long three weeks,” he laughs. Before his 30th birthday, Daigle found himself in a management position; by his 33rd birthday, he attained the title of regional manager. In April 1983, he branched out on his own, starting up

There is always going to be a spot for the small independent, but they have to work at continuously getting educated. Daigle Insurance Adjusters Limited. He operated the company until 1993, when he sold it to Adjusters Canada, Inc. [which in turn sold to Crawford & Company (Canada)]. Currently, Daigle is the regional manager and assistant vice president for Crawford. He is responsible for the northeast region of Ontario, covering an area bounded by Thunder Bay, Newmarket and Ottawa.

MAKING CONNECTIONS Around the time he fired up his own business, Daigle began his involvement with both the CIAA and the Insurance Institute of Canada. “I got involved because being on my own, I had very little contact with the outside insurance industry,” he says. He says his involvement in the association has “caused me to travel and see Canada from coast-to-coast, meeting people in various places in Canada.” It has even forced him to confront and conquer his fear of Toronto, he adds. He stresses the importance of being an active association member and volunteering — a longtime passion of his — within both the industry and community. “I like to get involved, to help,” he says. “I don’t know if I do, but at least I try.” Certainly involvement is a key theme as he prepares to take the helm of the CIAA. He believes the biggest challenge in his new role will be to attract people into the industry. He is well aware of the looming labour void that is anticipated to follow the exodus of the baby boomers into retirement. “That’s a big issue, either as an independent adjuster or a company staff adjuster,” he



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says, noting the profession has struggled to attract younger generations into its ranks. “I believe part of the cause is probably that the young generation is changing [and] the quality of life is much more important than just work.” The work/life balance is not easy to achieve in a profession known for its long, unpredictable hours (often on an ‘on-call’ basis), and in which a person works under a high degree of stress. This tireless, relentless approach to work, the product of increased customer expecta-

The small adjusting firm that doesn’t do anything in the industry or invest anything in education will have a hard time. tions, adds to the difficulty of recruitment, he says. “A few years ago, if you didn’t send a report for six months but…you talked to the examiner, then everyone was happy,” he observes. “But not anymore, because

you have key performance indicators and you have to file reports within 15 days. There’s a lot of demand put on you, and it makes it hard to get young people.”

STAYING AHEAD OF THE GAME For those already in the industry, Daigle stresses the importance of continuing education and training across all lines of business and jurisdictions. He says this is particularly important in light of mergers and acquisitions activity that has concentrated the field of claims adjust-

ment into the hands of fewer companies. Daigle is no stranger to mergers and acquisitions: he has worked for both his own small independent firm and larger companies. While some decry the shift in the industry landscape that has left fewer players on the field — and the remaining ones growing even larger — he firmly believes there will always be a place in the market for smaller independents. But that won’t happen without aggressive professional development on a continuing basis, he says. “I think and I know that there is always going to be a spot for the small independent, but they have to work at continuously getting educated,” he says. “The small firm that doesn’t do anything in the industry, or [that doesn’t] have any involvement in the association or invest anything into education...will have a hard time,” Daigle maintains. “But the firm that is aggressive in training and knowledge, they are always going to survive.” Maintaining the status quo just won’t cut it, he adds. “You have to provide good service, expertise and knowledge, and that’s how you’re going to get your business.”

July 2008 Canadian Underwriter


Photo: David W. Smith




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Canada’s Black Swans

André Fredette Senior Vice President, General Manager, Caisse Centrale de Reassurance

While reading the April 2008 issue of Reinsurance recently, I came across a brief article by the editor, Mark Geoghegan, on a book by Nassim Nicholas Taleb called The Black Swan (published by Random House). In fact, the cover of the magazine featured a picture of a flock of white swans with a pink one in the middle (I guess black swans are too hard to reproduce on the magazine cover). If you are wondering what a black swan is in this context, I will quote directly from the inside dust cover of the book: “A Black Swan is a highly improbable event with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was.” Taleb’s book focuses on both positive and negative forms of ‘black swans.’ Positive examples of black swans would be successes that were not seen in advance or anticipated — i.e., the Internet, Google, eBay, J.K. Rowling’s success with the Harry Potter book series, cell phones, etc. One negative example of a black swan would be the subprime meltdown in the United States.

12 Canadian Underwriter July 2008

The black swan analogy goes back to the Middle Ages, when it was common belief that all swans were white. With the discovery of Australia, we learned that black swans also exist. Taleb is trying to make us aware of the limitations of our knowledge. It is human nature to try to imagine a world that is orderly and in which everything can be explained. His thesis is that the world is more random than we wish to believe. As I said earlier, black swans can be either negative or positive. Since insurers and reinsurers are in the risk-taking business, and our business is to handle the downside of risk, I would like to touch on a few examples of black swans within our own industry.

NOT PLAYING BY THE RULES Hurricane Andrew in 1992 was a black swan, in that it opened our eyes to how costly hurricanes could be. The World Trade Center loss in 2001 and Hurricane Katrina in 2005 were also black swans. If we look at these two latter events, we see an illustration of the kind of rationalization that occurs after the event. Following the World Trade Center loss, we have companies selling anti-terrorism software to help predict the cost of potential future terrorist attacks.That is fine if you assume the terrorists will play by the rules you set up in your software. After Katrina, the software modelling companies that all got the loss estimates wrong blamed it on poor data from the insurance companies. They also said they were modelling for wind and not for flood. But I think part of the problem is

Illustration: Rachel Ann Lindsay

A ‘black swan’ is an unpredictable event with a massive impact. Will guaranteed replacement cost (GRC) prove to be such a creature in Canada?

lingon˙berry noun 1 the cowberry. Vaccinium vitis-idaea, of northern regions, esp. typically in Scandinavia, where the berries are used in cooking. 2 an Arctic variety of this occurring in the former USSR and N America.

lin˙gual adjective 1 of or pertaining to the tongue or some tonguelike part. 2 pertaining to languages. 3 Phonetics. articulated with the aid of the tongue, esp. the tip of the tongue, as d, n, s, or r.

lin˙gui˙ne noun a type of pasta in long, slender, flat strips. lin˙guist plural noun 1 a specialist in linguistics. 2 a person who is skilled in several languages; polyglot. lin˙guis˙tic adjective 1 of or belonging to language: linguistic change. 2 of or pertaining to linguistics. lini˙ment noun a liquid or semiliquid preparation for rubbing on

or applying to the skin, as for sprains or bruises, usually soothing or counterirritating.

lining noun 1 something that is used to line another thing; a layer of

material on the inner side or surface of something. 2 Bookbinding. the material used to strengthen the back of a book after the sheets have been folded, backed, and sewed. 3 the act or process of lining something.

link noun 1 a connecting part, esp. a thing or person that unites or provides continuity. 2 a means of connection. 3 a means of transport between two places. 4 to connect or join. 5 to be joined; attach oneself to a system, company, etc. link˙age noun 1 the act of linking; state or manner of being linked.

2 a system of links. 3 Genetics. an association between two or more genes on a chromosome that tends to cause the characteristics determined by these genes to be inherited as an inseparable unit. 4 Machinery. an assembly of four or more rods for transmitting motion, usually in the same plane or in parallel planes. 5 a factor or relationship that connects or ties one thing to another. 6 any of various mathematical or drawing devices consisting of a combination of bars or pieces pivoted together so as to turn about one another, usually in parallel planes.

link-up noun an act or result of linking up. Lin˙naean adjective 1 of or pertaining to Linnaeus, who established the binomial system of scientific nomenclature. 2 noting or pertaining to a system of botanical classification introduced by him, based mainly on the number or characteristics of the stamens and pistils. linnet noun 1 a small Old World finch, Carduelis cannabina. 2 any of various related birds, as the house finch.

lino noun 1 a floor covering. 2 linoleum. lino˙cut noun 1 a cut made from a design cut into linoleum mounted on a block of wood. 2 a print made from such a cut. lino˙len˙ic acid noun an unsaturated fatty acid, considered essential to

the human diet, that is an important component of natural drying oils.

We’ll be connecting with brokers in a whole new way.

li˙no˙leum noun 1 a hard, washable floor covering formed by coating

burlap or canvas with linseed oil, powdered cork, and rosin, and adding pigments to create the desired colors and patterns. 2 any floor covering similar to this.

Lino˙type noun Printing proprietary a typesetting machine, operated

by a keyboard, that produces lines of words as single strips of metal, used esp. for newspapers before the introduction of electronic technology.



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the modelling companies’ love with Pareto curves. Put very simply, a Pareto curve illustrates an equilibrium found in the distribution of many small variables to a few large ones. Unfortunately, real life does not follow Pareto curves: the lines are more jagged. An excellent article in the October 2001 issue of Scientific American predicted that if any hurricane exceeding an F3 in force were to hit New Orleans, the dykes would not hold and the city would flood. As Scientific American is available in newsstands and not some obscure publication, why didn’t the modelling companies take this information into consideration? If they had, then their Pareto curve would be fine up to an F3 hurricane. But at F3, the line in their curve would have gone up to a vertical position. At this point, the city floods, electricity, water supplies, sewage and communications cease and the patient dies! However, modellers are not used to vertical lines or the fact that actual losses are jagged affairs and cannot be smoothed out on a curve.

RELYING ON MODELS In a recent speech to the Langdon Hall Financial Services Forum on May 6, 2008, OSFI Superintendent Julie Dickson made the following comments about the risks associated with an overreliance on models. “Many people have suggested that ‘models’ played a big role in the turmoil,” she said. “Models are all about taking what you have experienced in the past and trying to make sense out of it, so that if history repeats itself, you do not make mistakes that you could have avoided if only you had properly considered your own data and experience. Thus, while models are important, they should not be blindly relied on because they are based on the past, as well as on confidence intervals (they are right 99% of the time or 95% of the time). “As we know, it is the tails of distribution that pose the problem. And, as many have realized, increasingly we seem to be in the tails, not in the range of the expected, which requires 14 Canadian Underwriter July 2008

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that even more judgment be brought to bear.” In Canada, Quebec’s Ice Storm in 1998 was our black swan. As a result of heavy ice accumulation over a short period of time, more than 2 million people woke up without power. Some people went close to a month before their power was restored. Although the essence of a black swan is its unpredictability, I feel we are facing future black swans in Canada due to the way we carry on our business. For example, in Canada we give

Part of the problem is the modelling companies’ love with Pareto curves... Real life does not follow Pareto curves. “Guaranteed Replacement Cost” [GRC] on homeowner contracts. In other words, as long as our clients insure their homes for the same amount our replacement software comes up with, we will rebuild their houses with like material and size, no matter what the cost. This is great both for consumers, because it gives them peace of mind, and for insurance brokers, because they have no exposure to their E&O policies for insufficient coverage. This system works well for a single-risk fire loss

of a house. But in the event of a catastrophic loss, this is not so good for the insurance company. Take, for example, two Western provinces: B.C. and Alberta. Both provinces have hot economies. Currently in both provinces, given the current loss frequency, company officials tell me it is hard to find labour to repair cars or houses. If we had a severe storm hitting Calgary or Edmonton, or a major quake hitting Vancouver, from where would the labour force come to repair the homes? In B.C. especially, if we had to rebuild thousands of damaged homes there, contractors would quickly learn we have no limits on our policies, thanks to GRC, and would use the situation as a financial windfall. In the Kelowna fires of 2003, where only 250 homes were destroyed, we saw the average cost of rebuilding a Cdn $500,000 home was closer to Cdn $800,000 and higher. On a much larger scale, the danger is that uncontrollable costs would push insurance companies through the top of their reinsurance program and back into their net capital and surplus. I am not advocating abolishing GRC on homeowner business. I would suggest we cap it at 50% above the replacement cost value. That is, a Cdn$500,000 homeowner policy would have a GRC endorsement, but with a ceiling recovery of Cdn$750,000. Insurers and reinsurers are all financial institutions. Corporate governance impels us to act conservatively and wisely to protect our abilities to respond to unexpected losses. We have seen the mess the banks have incurred in the subprime mortgage situation, in which losses cannot be quantified and estimates keep changing for the worse. Since there will continually be unpredictable events or black swans, we should not think we can foresee everything with our current risk models. We should at least have a limit on our financial obligations as an ultimate safety when all else fails. In the meantime, I heartily recommend reading the book The Black Swan, by Nassim Nicholas Taleb.

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It’s what wedo to make them f a s t e r , b e t t e r and s t r o n g e r .

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Singing the Blues

G.S. (Steve) Smith President and CEO, Farm Mutual Reinsurance Plan Inc.

The words of the Moody Blues album of the same name resonates loudly as the soft market continues in Canada, almost obscuring a very concerning trend shift in loss severity. The balance between premium allocation and loss costs is starting to reflect a dramatic shift between insurers and reinsurers. Historically, Ontario auto has been the cornerstone both driving and determining the profitability of the Canadian insurance industry. Not so long ago, the Ontario auto results were characterized by loss frequency issues, extensive fraud and political interference.The results were dismal at best and industry return on equity (ROE) was at an all-time low.Welcomed regulatory changes were subsequently implemented and served to improve the overall results, reduce fraud and create an optimistic sense of security for the insurers.The product was fixed. Life was good — good and profitable.

UNPRECEDENTED SEVERITY TRENDS That was then, this is now. The shift in balance has been moving from a loss frequency issue to a severity issue. Losses are now shifting to the reinsurers, and the reinsurers are beginning to brace for what appears to be unprecedented severity trends.These trends are clearly evidenced by a series of court and arbitration decisions that are both garnering attention and momentum. The message received by the judiciary and arbitrators alike from cases such as Desbiens v. Mordini is that the SABS is remedial legislation that should be interpreted broadly. In the

16 Canadian Underwriter July 2008

meantime, primary insurers appear to be continuing to enjoy relatively positive net results, leaving the reinsurers to wrestle with escalating losses exacerbated by reductions in reinsurance premiums, a direct result of reducing premiums at the primary level. The balance needs to found. Rising claims costs will mean rising premiums. Whether driven by primary losses or reinsurer losses, the system needs to support these rising claims costs. As reinsurance rates and premiums increase, the costs will be transferred, first to the insurers then to the policyholders. Regulators’ support will be paramount; this means recognizing the changing climate and allowing the necessary rate increases in the automobile sector to respond to these rising loss trends. If Ontarians and Canadians want increased awards and broad interpretations of the SABS, that’s fine.The insuring public and regulators will need to realize and understand this will certainly come at a cost. Several factors are at play here. Solutions are not simple.The primary rate levels have seen continuous reductions over the last few years, and these rates drive the reinsurance premiums. Case law has eroded the framework of accident benefit losses as well as tort exposure.The changing rules governing and determining catastrophic impairment under the accident benefits coverage has meant a dramatic increase in the medical and rehab benefits. Suddenly, hundreds of claims that were once thought capped at Cdn$100,000 now face exposure up to Cdn$1 million. Liberal judgments are not only creating unprecedented

Illustration: Rachel Ann Lindsay

The reinsurance industry needs to carefully consider emerging pricing disparities, as loss severity trends continue to escalate

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levels of loss,but unanticipated levels of loss. Reinsurers rely heavily on primary carriers to recognize losses as early as possible, analyze and report those losses to reinsurers and to be as diligent as possible in the subsequent investigation and adjustment of reserves. Early recognition of losses enables reinsurers to respond to trends and price products appropriately.The gap between primary pricing and reinsurance rates is widening; the solution could prove concerning if correction is not achieved within a very short time frame. Reserving practices of the primary insurers are under extensive scrutiny. The ability to recognize changing loss exposures early and post adequate reserves is critical. Recognition of these losses is not only crucial to the reinsurers to post adequate reserves on a timely basis, but it is also crucial to primary rate filings. Rate change indications are based on ground-up losses; failing to capture accurate information early results in delays to rate increases, which often leads to “knee-jerk” reactions by insurers, adverse public reaction and then, ultimately, unwanted political intervention. Several recent cases, including Gordon v. Greig, have resulted in two judgments in excess of Cdn$11 million, illustrating the trend towards increasing claims severity.These losses are falling squarely on the shoulders of the reinsurance community. Undoubtedly, this direction is without precedent and certainly without pricing consideration. We therefore have to ask: where does this stop? If the trend continues, primary pricing may be facing extraordinary adjustments. Reinsurers will have no choice but to recognize the escalating working layers and, of course, price the capacity appropriately. Upon extensive review of the case law and arbitration decisions, two distinct factors are emerging. First is the court’s approach in determining Whole Person Impairment under the SABS.The approach is to combine both physical and psychological impairment in order to breach the

18 Canadian Underwriter July 2008

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55% threshold. This was not originally contemplated under the SABS, in which the physical and psychological determination rules were distinct and separate. The second trend relates to the escalating costs associated with future and attendant care. In Gordon, both plaintiffs were awarded in excess of Cd$8 million under this head of damages alone. One thing has become abundantly clear during the last few years: care providers have proven to be very opportunistic and have taken full advantage of a very generous first-party benefits system.

The reinsurance market, although currently very stable and secure, will need to address emerging pricing disparities. The exorbitant cost trends of future care have already been on accident benefit adjusters’ radar screens for several years. The loss costs associated with long-term care, including those illustrated here, while often nothing short of abuse, reflect the increased costs associated with long-term attendant care with hourly rates for professionals increasing from Cdn$21 per hour in 1999 to Cdn$35 per hour in 2007, an increase of more than 65% in eight years. The bar just keeps getting raised. Regulators need to examine this area closely and consider imposing limitations, possibly based on OHIP costing. If not, the claims cost will continue to soar, and policyholders

will ultimately pay the price. At this point I will get off the soapbox. Several other factors are at play in the severity trend. Plaintiff’s counsel are becoming more experienced with the “new” rules.They are more specialized and sophisticated when it applies to catastrophic cases. Unfortunately, the judiciary hearing these serious cases is often not as experienced. It is incumbent upon defence counsel to be diligent in the investigation of a loss, useappropriate experts and recognize the exposure. Another significant factor is the growing trend of the buying public to purchase higher liability limits. More and more, policies are being issued with limits of Cdn$2 million and Cdn$5 million. Historically, this exposure was considered somewhat innocuous; the pricing reflected this attitude, with increased limits garnering very minor charges of only a few dollars.The Cdn$1 million to Cdn$2 million layer of coverage is without question a working layer.The industry needs to rethink their pricing policy with respect to this increased coverage and charge accordingly and appropriately. In addition to the inadequate pricing at the primary level, this increased exposure is often borne 100% by the reinsurance companies (since primary company retentions have often already been breached), thereby placing further strain between pricing and exposure. The last issue at hand is the effect of the poor performance of the investment portfolios. The reduced discounting on reserves will drive up both case and incurred-but-not-reported (IBNR) reserves, again driving the scope of the loss severity and distancing the results between the primary and reinsurance market. The reinsurance market, although currently very stable and secure, will need to address emerging pricing disparities as loss severity trends continue to escalate. The jurisprudence appears clear: claims are getting larger, awards are subject to more liberal interpretation, and pockets are perceived to be deeper. At the end of it all, we will need to find the balance.



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Superintendent of Financial Institutions (OSFI) has released a number of guidelines with respect to securitization, but currently there is no specific regulatory guidance for ILS in Canada. ILS may not currently be taken into account for statutory solvency considerations for insurers such as MCT (Minimum Capital Test) and BAAT (Branch Adequacy of Assets Test). However, for DCAT (Dynamic Capital Adequacy Test), a risk management tool that tests a company’s capital adequacy, it may be that a well-structured ILS can help reduce the total capital requirement.

Insurance-Linked Securities:

Here to Stay? Francis Blumberg Head of Canadian Operations, Chief Agent, PartnerRe

The use of insurance-linked securities is a hot topic in both the United States and Europe, but it has received less attention in Canada, in part because of a lack of clarity in regulatory guidance for ILS in Canada The convergence of the capital markets and reinsurance is currently a hot topic in Europe and the United States. Driven by investors attracted to high spreads and the opportunity to diversify their portfolios, the insurance-linked securities (ILS) market has taken off in recent years. It has shown significant growth across the spectrum of ILS products, including industry loss warranties, catastrophe futures and derivatives. Cat bonds in particular have experienced a surge in popularity, as have life bonds. ILS products that transfer risk to the capital markets as an alternative to reinsurance for lowprobability, high-severity events have existed for some time. Growth of the ILS market accelerated after the 2004 and 2005 hurricane seasons, when rating agencies increased capital requirements for catastrophe-exposed underwriters, creating a demand for and a contraction of the supply of reinsurance capacity. Insurers increasingly turned to the capital markets as a supplement to reinsurance for their risk transfer solutions for peak U.S. exposures. But the recent enthusiasm for ILS products manifested in the European, United States and Japanese markets has not to date been reflected in the Canadian market. This may be due in part to the current lack of clarity around the regulatory guidance for ILS. The Office of the

20 Canadian Underwriter July 2008

THE FUTURE OF ILS How successful this trend will prove to be in Canada or elsewhere over the long term is yet to be seen. In the short term, the convergence of reinsurance and the capital markets is already significantly changing the risk transfer landscape in markets in which ILS is well established. Some capital markets institutions are starting to build or acquire their own internal insurance underwriting expertise. On the reinsurance side, some reinsurers are going the route of full convergence and implementing investment banking business models. Over the past two years, there has been significant innovation with new products. As a result, there is currently a wide spectrum of products available to cedants, from “pure” reinsurance — which is generally customized, indemnitybased and uncollateralized — to catastrophe bonds, which tend to be based on market losses, modelled losses or a parametric index, and fully collateralized. Indemnity bonds represent yet another option. Cat bonds once covered single perils and single territories. Now, however, they can include various natural perils such as earthquake, tornado, hail, wildfire, flood and winter storm in multiple territories. At one time, rating agencies considered catastrophe bonds “less than investment grade.” More recent catastrophe bond issues provide coverage at high attachment levels and have received investment-grade



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ratings, opening up the asset class to new investors. Interest is also growing on the life side, particularly around the securitization of extreme mortality risk — such as pandemics and regulatory capital relief — as well as for the securitization of longevity risk as life expectancy continues to extend. With such an enormous choice of risk transfer solutions currently available on the market, both through the capital markets and traditional reinsurance, cedants need to be clear about their objectives and carefully consider the pros and cons of each. For example, ILS

More recent catastrophe bond issues provide coverage at high attachment levels and have received investment-grade ratings, opening up the asset class to new investors. products can be expensive to set up: fixed up-front costs include legal, rating and bank fees. They are fully collateralized and so bear minimal credit risk. However, basis risk — the risk that index calculations will not equal the actual loss — can be significant. Reinsurers offer technical expertise particularly valuable to small- to mid-sized cedants, no fixed up-front costs and customized coverage. But credit risk may be an issue for lower-rated reinsurers. Reinsurance and the capital markets present two very different approaches to risk transfer, both with advantages. The attraction of ILS as an alternative source of capacity is undeniable; its long-term success will depend on the care with which capital markets solutions are chosen and applied.

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Seven Questions to Ask About ILS Choosing between ILS and reinsurance requires careful deliberation. Here are some issues you might wish to consider:


What are your objectives in considering ILS products?

Finding the right balance between traditional reinsurance products and ILS depends on an insurer’s size, risk appetite and many other factors. There is no onesize-fits-all solution; the factors for and against should be carefully considered.


Does your company have a tolerance for basis risk within your reinsurance program?

Bonds are generally issued on a namedperils basis and introduce basis risk. Traditional reinsurance coverage, on the other hand, is indemnity-based; as a result, it is much broader and less restrictive with no basis risk. Although ILS might make sense for large, geographically diverse primary insurers, this may not be the case for mid-sized or smaller insurers that are less able to absorb basis risk.


How important is full collateralization to your reinsurance program? The need for collateralization depends on the insurer’s appetite for credit risk. Some insurers elect to supplement their program of strongly rated reinsurers with fully collateralized bonds.


How do the costs and resource requirements of risk transfer compare between reinsurance and capital markets issuance?

The average first-time issuance of a bond takes three months or more to complete, and may require significant legal and other specialist resources.

These expenses can be efficiently amortized through a large, multi-year program. Companies considering this route should consult with a broker or banker about expected fees.


If your company has decided to pursue a capital markets solution, would a derivatives strategy provide lower costs and more flexibility in risk transfer than a catastrophe bond issuance?

Given the up-front issuance costs, it may be more cost-effective to pursue a derivative strategy for midsized cedants. Anyone considering this strategy should first talk with a broker or trusted reinsurer that can offer a considered view of the various options.


How will the rating agencies credit this form of risk transfer versus reinsurance? Rating agencies do not give full capital credit for many ILS products because of the basis risk, but they do publish guidance. A.M. Best Company, which specializes in insurance company ratings, has provided guidance for evaluating basis risk.


What are the legal, regulatory and accounting implications of placing risk in the capital markets?

The legal, regulatory and accounting implications around capital markets transactions may be significant and should be checked first with both a legal counsel and auditor. This Q&A is an excerpt from PartnerRe’s recent publication, A Balanced Discussion on Insurance-linked Securities. The publication in full is available at

July 2008 Canadian Underwriter




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Not in Kansas Anymore… Bigger, stronger and costlier tornadoes have emerged as a new reality facing the Canadian insurance industry

Joe Niedzielski Senior Business Analyst, Analytical Services Group, A.M. Best Co.

Property and casualty insurers in Canada and the United States posted solid profitability and underwriting results in the past two years despite recurring losses from severe thunderstorms, hail and tornadoes. Although catastrophes such as earthquakes and hurricanes present the greatest threat to insurers’ financial strength and credit quality, large-scale thunderstorm events spawning tornado outbreaks and hailstorms have proven to be costly perils in their own right. For their part, Canadian insurers are particularly concerned about earthquake risk. At the same time, the industry continues to be battered by a greater number of hailstorms, and the number of tornadoes appears to be increasing. It might be true that tornadoes tend to strike areas where property concentration is minimal (Canada’s prairie provinces of Alberta, Saskatchewan and Manitoba, for example, along with parts of Ontario). But the occasional tornado is capable of touching down near metropolitan areas. The 2005 tornado outbreak in Southern Ontario, for example, produced two F2 tornadoes and the highest insurance loss for the industry this decade. At a time when rates for commercial and personal property coverage are under pressure, and investment results aren’t as robust as they’ve

22 Canadian Underwriter July 2008

been in the recent past, Canadian and U.S. insurers find themselves paying out an increasing number of claims because of more frequent and severe weather events. In the United States, tornadoes and related weather events routinely cost U.S. insurers billions of dollars in claims each year — with 2006 being the costliest, at more than US$8 billion. Losses of US$1 billion and more from single severe thunderstorm events that generate damaging tornadoes have been on the rise. In addition, when compared with the recent past, more tornadoes are occurring earlier than what’s considered the tornado season’s typical peak from April through June. The first three months of 2008 already have demonstrated the destructive nature of these catastrophes. One event came close to breaching the billion-dollar threshold. In the United States’ deadliest tornado outbreak since May 1985, up to 82 twisters touched down in 10 states in the mid-South in early February.The so-called ‘Super Tuesday’ tornado outbreak generated as many as five EF4 tornadoes, or tornadoes with wind speeds ranging from 166 to 200 miles per hour. The Super Tuesday outbreak and related severe weather resulted in US$955 million of insured losses, according to the Jersey City, New Jerseybased Property Claims Services (PCS) unit of the Insurance Services Office (ISO). In March, a tornado that struck in downtown Atlanta – believed to be the first to touch down in the city – and other counties, contributed to the US$610 million of insured losses in the state of Georgia during the first quarter.

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In total, the first three months of the year resulted in about US$3.35 billion in catastrophe claims, according to PCS. Insured property loss was the largest in the past decade and the worst in terms of frequency of weather-related catastrophes since 1999, PCS says. The higher catastrophe losses have been a contributing factor to the subpar financial results that an increasing number of U.S. property and casualty insurers have reported for the first quarter of 2008. Over the past 20 years, insured tornado losses in the United States have been on the rise.This is generally attributable to an increase in property values, greater building density in tornadoprone areas, more universal insurance coverage and possibly greater tornado frequency. Given the right conditions, insured damages from a severe tornado, wind and hail event could rival those of a moderate U.S. hurricane catastrophe.

LINKING TORNADOES WITH CLIMATE CHANGE There is considerable debate today concerning climate change and its influence on catastrophic weather events. The ferocity of the Super Tuesday tornado outbreak in early February occurred following record-high temperatures in some areas of Arkansas, Mississippi and Tennessee. This prompted some observers to link climate change with an increase in tornado frequency and severity. As noted above, more tornadoes have been occurring earlier than what’s considered the typical peak for the season. Figures from the U.S. National Oceanic & Atmospheric Administration demonstrate a rising trend of tornado activity in the first quarter of the last four years. Linking tornadoes to climate change presents some challenges, though. For one, scientists and meteorologists aren’t fully aware of why some thunderstorms spawn tornadoes and others don’t. Also, tornadoes form on such a rapid and small scale that it becomes difficult to track their individual characteristics. Some meteorologists note the gap 24 Canadian Underwriter July 2008

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between linking trends in tornado frequency and severity with global climate models that tend to track long-term weather patterns on a broader scale. Nevertheless, experience with extreme weather in recent years and its potential link to climate change is familiar to many Canadians and the country’s insurers. The number of severe weather

Some meteorologists note the gap between linking trends in tornado frequency and severity with global climate models that tend to track long-term weather patterns on a broader scale. events during 2007 in Alberta, Saskatchewan and Manitoba hit 410, eclipsing the previous record of 297 the year before, according to Environment Canada. For the first time ever, crop-related hail losses in 2007 exceeded the premiums that insurers collected, Environment Canada notes. Although damages from tornadoes in Canada haven’t been on the scale of those experienced by U.S. insurers, the considerable threat tornadoes pose shouldn’t be minimized. Last year, for example, a tornado that touched down near Elie, Manitoba on June 22 was the country’s first-ever F5 tornado. These tornadoes are capable of generating

wind speeds from 420 to 511 kilometres per hour.

STRAIN ON RESOURCES The tornado near Elie raised another issue: natural disasters put a strain on the resources and finances of local and national governments. After original estimates of more than Cdn$1 million for cleanup following the tornado and windstorms last June, Manitoba province officials estimated earlier this year that the actual total costs were more in the range of Cdn$4 million. Many Canadian insurers aren’t waiting for a definitive answer on whether climate change results in more frequent and severe extreme weather events.The Insurance Bureau of Canada has targeted improving the country’s water and sewerage infrastructure to offset claims from sewer back-up coverage on homeowner’s policies. Meanwhile, Canadian insurers spend millions each year on cloud seeding to help reduce the size of damaging hailstones. The increased frequency and severity of hail and rain storms, particularly in 2005 and 2007, should be of concern to the industry. Since construction costs are rising and labour demand has picked up, frequent storms have led to an increase in claims severity on property coverage for Canadian insurers. That is an unwelcome development, since the Canadian property and casualty industry appears to be in a stronger financial position than it was several years ago. According to A.M. Best, industry capitalization has benefited from more adequate pricing, stricter underwriting standards and improved expense management. However, the competitive market and regulatory factors, particularly in the auto business line, could diminish some of the gains the industry has realized. Canadian insurers also face uncertain investment markets along with higher claims costs and rising frequency trends. The prospect, then, of more frequent and severe extreme weather events would only add to the list of key challenges the industry faces.

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How to Survive The Soft Market Reinsurers need to price their product with volatility uppermost in their minds

Matthew Spensieri Vice President, Chief Agent for Canada, General Reinsurance Corporation

It may not be immediately obvious, but competition is alive and well — and quite prevalent — in the Canadian insurance market. One need only look at the size of the market and the sheer number of insurers operating here, along with their respective market shares, to appreciate the validity of this statement. On more than one occasion, I have been introduced at an industry function to an insurance broker who asks me about the “state” of the reinsurance market, usually as it pertains to catastrophe. Are “cat” prices up or down? Is capacity shrinking or growing? I presume the answers to these questions are determinative as to whether the market is hard or soft, and thus prescribe how brokers should be acting/reacting upon it. With these comments, I’d look to clarify a few points. Cat covers generally represent the largest value of limits purchased. Although insurers generally find it prudent and necessary to purchase catastrophe protections as a risk management strategy, it might not be the only reinsurance that is purchased. In many cases, the cost of cat covers is not the insurer’s greatest reinsurance expense. Data taken from the MSA Research and the Reinsurance Research Council (RRC) show the Canadian property and casualty industry wrote approximately Cdn$35 billion worth of premium in 2007. RRC member companies collectively wrote about Cdn$2.2 billion of premium. Reinsurance premiums therefore represent slightly more than 6% of the Canadian total; this number has been declining for a number of years, for a variety of reasons. It would appear safe to say that reinsurance is therefore not the industry

26 Canadian Underwriter July 2008

driver, but only one component of a fluid market. To help define current market conditions, let’s look at industry results, again taken from data available from MSA Research. The industry’s combined ratio in 2006 was 92.06%. In 2007, the combined ratio increased to 94.16%. Given that pricing for insurance products is generally decreasing, many in the industry suggest we are currently in a “soft” cycle. How long will it last? What are some possible outcomes?

SOFT CYCLE SCENARIOS I have created a chart to provide some possible scenarios [see Figure 1]. These scenarios may end up being for specific lines of business and/or for the industry as a whole. The basic premise is that rates will continue to soften. A couple of assumptions are built into the calculations. The first is that rates will continue to decrease at a rate of 10% per annum. Another is that claims will continue to inflate at a rate of 5%. Other percentages can be/could have been used or debated, but the percentages used here are not outside the realm of possibility.Additionally, these calculations were made on the basis that no significant CAT events/losses occur during this period. As you will note from the chart, the first year with a combined ratio of 95%, is almost precisely the actual industry result for 2007. In the next year, 2008, the ratio jumps to 109%. If the same conditions remain for four consecutive years, the combined ratio is projected to increase to 149% — a staggering number, either for the industry or any single insurance company. How does a reinsurer survive in this environment? Although some of the answers to this question may be applicable to insurers, the comments offered here are made from a reinsurer’s perspective. I reference at this point two studies/ reports completed by the consulting firm McKinsey & Company. The first is entitled The



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Journey.The second is The Journey:Revisited. The primary conclusion is that longterm success depends on a company’s ability to manage risk, as measured largely by the combined ratio. Four main success factors for managing risk are: enterprise risk management; strategic capital management; product market management; and transactionlevel execution. Some in our industry refer to this as “managing the cycle.” Others refer to it as having “underwriting discipline.” The key is to establish benchmarks to accurately price risk in support of achieving a targeted combined ratio. Also important is the discipline to decline business when pricing is deemed to be inadequate. One has to appreciate that a reinsurer’s risk may not be identical to that of the ceding company. A contract may cover the same “risks” as the ceding company, but not necessarily at exactly the same premium. The contract may not cover the same perils. The contract may not have the same attachment point.The reinsurer may provide higher limits.These factors generally mean the reinsurer is more susceptible to severity losses than the insurer. Reinsurers’

results are therefore much more susceptible to volatility and they need to price for that volatility. In order to succeed, reinsurers generally have to use all of their resources to achieve long-term success. Rather than just relying on a single underwriter to make a decision, they may draw upon actuaries, accountants, lawyers, claims professionals and mathematicians/ modellers. While balancing the need to maintain strong relationships with clients, reinsurers must also recognize the need to maintain underwriting discipline. This involves many things, but must include the following. • recognize the need to make an underwriting profit; • develop metrics and use appropriate statistics; • assess the “risk” correctly/consistently; • price the “risk” correctly/consistently; • be prepared to make difficult decisions; • be patient and search out new opportunities. All of this may sound easy enough, but it is difficult to achieve. Just ask any one in the insurance business in Canada. Or better yet, look at our results!

The key is to establish benchmarks to accurately price risk in support of achieving a targeted combined ratio. Also important is the discipline to decline business when pricing is deemed to be inadequate.

Figure 1

Rate Decreases and Claims Inflation Illustrative Combined ratios Earned Premium Losses Expenses

2007 $100 65 30

2008 $ 90 68 30

2009 $ 81 72 30

2010 $ 73 75 30

2011 $ 73 79 30

Underwriting gain (loss)

$ 5

$ (8)

$ (21)

$ (32)

$ (36)




(10%) 5%

(10%) 5%

Assumptions: Premium rate change Claims cost change

144% (10%) 5%

149% (10%) 5%

Presentation for PCUC May 14, 2008 Propriety and Confidential. © 2008 General reinsurance Corporation

July 2008 Canadian Underwriter




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Defying Gravity One distinguishing aspect of the current insurance market cyle is that reinsurers are attempting to defy the common gravitational pull in a soft market towards lowering premium rates. Reinsurers have thus observed an widening gap between their own rates and those of primary insurers .




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is common knowledge Canada’s insurance industry is well into the fourth year of a so-called ‘soft cycle,’ characterized by generous policy coverage and a reduction of premium rates, all in an effort to entice more policyholders and thereby gain additional market share. Soft cycles are no stranger to the Canadian insurance industry: reinsurers and primary insurers alike rode out a particularly nasty soft cycle in the late 1990s. During that time, the Top 28 Canadian reinsurers (measured by net premiums written) reported ugly industry combined ratios of 117.8% in 1998 and 105.5% in 1999.The combined ratio is an indicator of a company’s financial strength and is derived by dividing claims losses by premiums written. Percentages more than 100 indicate more losses sustained than premium collected; no reinsurer wants to see that. And yet, the same soft market cycle 10 years ago featured a silver lining — booming investment income. The same 28 reinsurers 10 years ago amassed Cdn$357.6 million in investment income, just short of the Cdn$382.6 million in investment income that a similar group of reinsurers posted in 2007. And so, 10 years ago, that investment income was put to use supporting questionable premium pricing and generous underwriting terms and conditions.This led to a situation in which policyholders ended up feeling more than a little sideswiped by the higher premiums and narrowing coverage terms that characterized the subsequent hard market in the early 2000s. Regulators took an active interest in the policyholders’ concerns. Insurers and reinsurers responded that their actions were required to raise the capital that had evaporated during previous soft market cycles. Which brings us to 2008. Once again, after a few years of relatively few catastrophe losses, the industry is flush with capital. Once again, reinsurers find themselves defying the gravitational pull towards cutting their own rates. This time, however, even though rates on the primary insurers’ side are currently plunging — particularly on the commercial side, which is routinely demonstrating



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On for the Ride

THE WIDENING GAP “I would characterize this [soft market] as quite different in some respects from the prior soft markets,” says Caroline Kane, senior vice president and chief agent in Canada for The Toa Reinsurance Company of America. “For one thing, what we’ve seen…happen in the past is this: either the primary market or the reinsurance market starts to soften first and then, very shortly thereafter, the other side follows suit.” This, time however, “the reinsurance market [has] remained fairly disciplined,” she says. “So it was really out of sync with the primary market.” Which isn’t to say reinsurers aren’t currently experiencing a soft market, adds Cam MacDonald, vice president of the Transatlantic Reinsurance Company. The difference is more one of degree. “On the primary side, on commercial property for example, we’ve got big rate cuts again — in the 20% and 30% [range],” MacDonald notes. “We haven’t seen rate cuts to that degree on any reinsurance program. We’ve seen the fives and 10s, maybe the odd one with a little more, but certainly not the 30s, 40s and 50s you hear have happened on certain primary business.” One would think Canadian reinsurers would be pleased about their current prudence relative to the primary market. But many still approach this cycle with some trepidation. André Fredette, senior vice president and general manager of Caisse Centrale de Reassurance (CCR), notes Canadian reinsurers are still influenced to a degree by rate30 Canadian Underwriter July 2008

cutting on the primary side, even if reinsurers remain wary of racing the primary sector down to levels of unprofitability. “We’re in for the ride,” Fredette says. “In theory, if the client’s underlying price or rate has gone down, our prices should go up, because the exposure stays the same,” he says. “So assuming you have a constant — which is the exposure and the number of losses — if the client’s premium base is going down because he’s cutting the rates, in theory we should charge a higher rate to have the same premium, because we’re going to have the same number of losses. But in fact that doesn’t happen in the real world.” In the real world, primary insurers, flush with capital, are trying to leverage

The reinsurance market has remained fairly disciplined, so it was really out of sync with the primary market.


anecdotal evidence of rate cuts between 20–50% — reinsurers riding this soft market are generally holding the line at less substantial reinsurance premium decreases of between 5–10%. The effect is a widening gap between primary insurance premium rates and reinsurance premium rates, and this is something that makes this soft market in Canada quite different than others, reinsurers note.

their ability to retain more risk to get a better rate from reinsurers. Fredette recalls one recent example in which an American primary insurer pitched business to the CCR in exchange for a reduced premium rate. “It was a 20-25% reduction,” Fredette remembers. “In other words, [their] head office decided:‘Here’s the price we’re pitching to the reinsurers and if they don’t buy it at this price, we’ll keep [it as] a net [retention] and house it in head office.’We’re seeing a little bit more where the larger companies are throwing some weight around.”

INCREASED RETENTION OF EXPOSURE Primary insurance companies ceding less of their business to reinsurers is a feature often noted of the current soft market cycle. Having said that, primary

companies, when they are awash in available capital, can and do cede more of their portfolio to reinsurance companies, thus taking advantage of lower reinsurance rates and generous terms and conditions. “In a way, in a soft market, you can keep on ceding (premium to reinsurers),” observes Francis Blumberg, chief agent for Canada at PartnerRe. “You can get better conditions [than] in a hard market for your reinsurance.” He says PartnerRe has seen some evidence of primary insurers employing this strategy during the current soft market. Nevertheless, by and large, the opposite seems to be happening, many reinsurers note. “Typically what we’ve seen in previous soft markets is companies looking at laying off more risk,” says Kane. “In other words, increasing a quota share cession [in which an insurer assigns a proportion of its portfolio to a reinsurer in exchange for paying a premium] or buying an opportunistic excessive loss layer — a layer, in other words, that they don’t really need because the pricing is cheap.” But during the 2008 renewals, Kane notes, “we’ve actually seen the opposite: we’ve seen several companies actually increase retention or replace their proportional reinsurance with excessive loss. That goes against the grain of a typical soft market cycle.” And so the question becomes: For how long will Canadian reinsurers be able to continue to defy gravity, avoiding the temptation of offering better terms to primary insurers in an effort to regain a bigger portion of the shrinking pie of the country’s reinsurance business? The answer depends on several factors at play in the current soft market.

INVESTMENTS THEN AND NOW First of all, it would appear at the moment that Canadian reinsurers are not willing and/or able to rely as they once did on investment income to finance rate decreases. In other words, they are less likely to rely on “cash flow

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On for the Ride

underwriting,” in which investment income is used to support unsustainable premiums or unprofitable underwriting terms and conditions, all for the sake of expanding market share. “In the 90s, we had a very pronounced [soft] cycle,” says Jean-Jacques Henchoz, president and CEO of Swiss Reinsurance Company Canada. “There was a lot of cash-flow underwriting being performed generally, not only in Canada. And this was because companies were expecting good investment returns on their asset base and

required the country’s property and casualty (re)insurers to “discount” their outstanding loss reserves “to reflect the time-value of money.” Mandatory reserve discounting flows directly through the balance sheet and income statements affecting loss ratios, combined ratios and return on equity (ROE). In other words, insurance companies ‘discount’ or reduce their reserve money, which is used to cover costs associated with prior-year claims, based on how much investment income they anticipate for the year. Reserves

This is probably the biggest difference between the soft markets of then and today: cash-flow underwriting is no longer attractive. were counting on asset management revenues to compensate for substandard underwriting. “I think this is probably the biggest difference between then and today: this kind of cash-flow underwriting is no longer attractive. Today, obviously you have the current difficulties and challenges on the financial markets.You have a much more volatile situation. The capital markets are experiencing much more volatility, profit margins are much thinner than they used to be, and so relying on revenues on asset management activities is no longer part of the game.” Canada’s current economic environment features low interest rates, which has contributed to keeping investment income now from reaching the values attained in the late 1990s. “The only truly differentiating factor I see with this soft market is the low interest rate environment this time around,” says Ken Irvin, president and CEO of Munich Reinsurance Company of Canada. “The optimist would say that low investment returns, combined with much more sophisticated modeling and analytical tools, will result in quicker response times to poor underwriting results —

32 Canadian Underwriter July 2008

and therefore a less protracted and damaging soft market cycle.” Another factor indirectly affecting investment income is the fallout related to the subprime mortgage crisis in the United States. Canada has been predominantly sheltered from the effects of the so-called “credit crunch” arising from the securitization of questionable subprime mortgage loans in the United States. But as a result of the regulatory response to this event, the movement of capital or credit may be subject to more restrictions than it was prior to subprime; this may in turn have some sort of residual, indirect impact on Canadian insurers’ investments. “The credit crunch leads to more volatility in the financial market, which may impact the [reinsurer’s] income statement, the balance sheet, as well as the liquidity of the market,” says Christophe Colle, the branch director and chief agent in Canada for XL Re America Inc. The impact to the income statement is based on the fact that reserves are booked on a “discounted” basis.As MSA Research notes, starting in 2003, Canada’s insurance industry regulators

might be budgeted at a lower level, for example, if anticipated investment income can make up for any shortfall in the reserve money. An insurer’s combined ratio is partly contingent on a measure of the company’s reserves.Thus if an insurer’s investment income fluctuates because of market volatility, it won’t be clear how much of its reserves should be budgeted for losses. This could throw off an insurer’s combined ratio by as much as two or three points, a significant deviation.Therefore, based on the “storm clouds” on the horizon associated with subprime, many insurers are more hesitant in this soft market cycle to rely on their investment income as a means to a larger share of the business in the Canadian marketplace. Henry Klecan, president and CEO of SCOR Canada Reinsurance Company, says reinsurers have very little in the way of investments to substitute for a loss of income, relative to past soft markets. “Our investment returns are by no means what they were 10 years ago, so it’s not as if we have this incredible fallback position with very good investment rates to guarantee anything,” he says.

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On for the Ride

CONSOLIDATION Several reinsurers say there are also fewer players in the game now than 10 years ago, which is also cited as a moderating influence on the current soft market. Steve Smith, president of Farm Mutual Reinsurance Plan, says “the single biggest issue distinguishing [the current soft market] is just that there are fewer players involved.” Certainly a look at Reinsurance Council of Canada (RCC) shows some signs of gradually increasing market concentration over the past 10 years among its 13 listed full members (it also has associate and correspondent members). Such consolidation might be a restraining influence unique to this particular soft market, MacDonald says. “One of the big things, certainly from a Canadian perspective, is that the number of what we’ll call ‘significant’ reinsurers has got smaller and smaller and smaller,” he says. “So there are fewer mavericks out there, or fewer new entrants that are trying to buy their way into the market. I think that is slowing the softening market.” There are limits to this argument, says Henchoz. “I would argue…that the barriers to entry in this market are not that high, so there’s always room for short-term, more opportunistic type of capital,” he says. “And to some extent, this is offsetting the potential impact of consolidation. When prices are attractive, when prices are increasing, there’s always a plethora of start-up companies ready to start on the wagon and write more business, so I don’t believe consolidation has had a tremendous impact in Canada.” THE WORLD IS WATCHING But it’s not just a matter of fewer reinsurers watching over each other. Certainly the entire industry has promoted a cautious approach after suffering through the public relations debacle following the last soft market cycle. But this approach, in itself, is subject to greater scrutiny by regulators, policyholders and ratings agencies alike. 34 Canadian Underwriter July 2008

“There isn’t one reinsurer I know that doesn’t say to themselves,‘We have to be very careful in how we manage our businesses,’” Klecan says. “Because between the shareholders, between all of the stakeholders, there are many people watching us.That wasn’t the case in the late 90s. I think that’s something sobering. They saw the sins of the past and there’s always a curiosity about whether those sins of the past will resurface…. How many times does a smart person need to learn?” Canada’s Office of the Superintendent of Financial Institutions (OSFI), the solvency regulator for the nation’s financial sector, is watching the insurance industry very carefully, paying attention to

The number of ‘significant’ reinsurers has got smaller and smaller. So there are fewer mavericks out there trying to buy their way into the market. the industry’s use of capital and whether that capital is supporting sound underwriting decisions. Many Canadian reinsurers, for example, are waiting to see the outcome of changes to Part XIII of the Insurance Act, which has been amended to be aligned better with the country’s Wind-up and Restructuring Act. And in a recent speech before Langdon Hall in Cambridge, Ontario, OSFI Superintendent of Financial Institutions Julie Dickson announced an initiative that will see OSFI introduce new initiatives related to the oversight of Canada’s reinsurance industry in the fall. “A discussion paper is currently being prepared by OSFI that will address a wide range of reinsurance issues,” Dickson said. “Its purpose will be to

outline OSFI’s current regulatory and supervisory approach and identify a number of OSFI initiatives underway… “A key subject of the paper will be collateral requirements that are applied to unregistered (or ‘foreign’) reinsurance activities, and the issues associated with the possible pursuit of a system of mutual recognition for reinsurance supervision in the long term.This issue has been the subject of much debate, domestically and internationally via the International Association of Insurance Supervisors (IAIS), the National Association of Insurance Commissioners (NAIC) and regulators such as the Australian Prudential Regulatory Authority (APRA). It is one which is of particular importance for Canada, given that the Canadian reinsurance market is primarily composed of foreign firms, many of which have opted, for sound business reasons, to underwrite reinsurance contracts on Canadian risks directly from abroad. “The paper will also address corporate governance issues, regulatory limits such as the 25% limit on unregistered reinsurance and the 75% fronting limit, capital requirements and the approvals process for reinsurance transactions, among other areas.” Long story short: reinsurance is on the regulator’s radar screen, meaning industry practices are under scrutiny. “There are so many regulatory issues on the horizon that probably will impact both the insurance and reinsurance market that companies are reluctant to go hell-bent-for-leather [with rate cuts] because they’re just not quite sure what the reinsurance landscape will look like over the next year or two or three,” says MacDonald. “So there’s some trepidation there, especially on the part of the reinsurers.” Investors also are watching the reinsurance industry carefully. And more so than in past soft markets, they are likely to be unforgiving of business practices that result in the injudicious use of capital. “I think that shareholders are certainly expecting a disciplined

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On for the Ride

MARKING THE TURN What will it take for Canada’s insurance market to reach a point in which it must start to charge increased premium rates? Perhaps more importantly, will these market conditions occur before reinsurers feel themselves getting sucked into a vortex created by falling rates on the primary side? A future large-scale natural catastrophe is the wild card in all of this. But given how much available capital is floating around in the North American market right now, Kane believes such a disaster in Canada would have little impact on the country’s reinsurance market, given 36 Canadian Underwriter July 2008

its small size. She points to the 1998 Ice Storm in eastern Ontario and Quebec, which set a record for claims and cost the insurance industry roughly Cdn$1.8 billion, and had virtually no impact on catastrophe rates in the country. In fact, MacDonald notes, catastrophe insurance premiums in Canada actually decreased after the storm. MacDonald says it would take a catastrophe on the order of a US$140-billion hurricane hitting Miami or New York to take out much of the excess capital currently in the

In some ways, the primary market’s increasing retention of exposure may ultimately be the cause of market hardening in the future. Severe net losses can add up when they’re not reinsured.


approach to our business,” Klecan says. “I don’t think any shareholder wants to continue losing business or money for long periods of time. They certainly weren’t as vigilant [in the soft market period of the early 1990s] as they are today. They say capital is easy to get a hold of, but the return expectations are certainly there and shareholders will not hesitate to make a turn when it is necessary. I don’t believe their tolerance for pain is as high as it maybe was once upon a time.” Faced with increased scrutiny, the reinsurance industry has placed more of its faith in science. Methods for determining rates and the best use of capital are now rationalized compared to what they were years ago, when, as one reinsurer put it, rates could have been established on the basis of cocktail napkin sketches. “This time, we have more sophisticated pricing, we have better data, you can see more clearly that the rates are insufficient,” says Blumberg. “I’m not saying the quality [of the industry’s pricing models] is outstanding right now, but I think it’s better than what we had in the past in terms of pricing tools. We have made a bit of progress over the last 10 years on that front. And yet, we’re not behaving any differently at all. So that is a big difference [between soft cycles]. We know better this time and yet we still behave the same way.”

system. Joel Baker, president and CEO of MSA Research Inc., recently estimated Canada’s insurance market has an excess of Cdn$11 billion in capital. In some ways, Smith noted, the primary market’s increasing retention of exposure may ultimately be the cause of market hardening in the future. For example, there has been a dramatic increase in claims severity recently seen in Canada’s auto results. “I didn’t think we’ve seen this kind of severity this quickly,” says Smith, pointing to liability results on the auto side. “We’re seeing those Cdn$10-million, $11-million and $12-million judgments suddenly, which we didn’t anticipate. There wasn’t a gradual trend to it. It was suddenly just ‘Boom,’ they were there.” Smith notes these kinds of severe net losses can add up when they are not reinsured, or when primary insurers’ excess-ofloss treaties start at Cdn$2 million or

$3 million or higher instead of at lower excess-of-loss layers. “That may in fact slow down the [soft market] deterioration, if all of a sudden they [the primary insurers] are getting a lot of net losses,” Fredette agrees. “That may shock them into thinking: ‘Gee, we’ve always kept those big retentions and now we’re getting killed with this stuff…’ We are seeing more net losses by companies [on the primary side], which may have an impact in slowing down the erosion of the marketplace.” Others, however, are not quite as optimistic the defiance of gravity witnessed thus far in the current soft cycle will be maintained. “The skeptic in me remains unconvinced,” says Irvin. “I believe that, at least on the commercial lines of business, we are in for another couple of years of falling and/or depressed rates...A horrific storm season with commensurate insured losses could definitely have a global effect on prices — but that possibility exists every year. Also, the industry is currently very well capitalized.” It remains to be seen how much longer the reinsurance side will be able to maintain its discipline when primary rates in the current soft market continue to go down. Definitely, many factors are in play during this soft market that make it unique: • an increasing gap between primary and reinsurance rates; • more financial pressures on investment income now than in the past; • greater retentions of exposure by the primary side; • consolidation in the industry that discourages “rogue” rate-slashing behaviours; and • intense scrutiny by regulators, shareholders and rating agencies alike. And yet, the cycle has lasted four years thus far; absent of any major catastrophes, it may well extend for a few more years. In this context, how much longer will reinsurers be able to hang onto its well-defended notion of underwriting discipline?

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Nuclear Insurance Proliferation A nuclear insurance pool has existed in Canada since the mid-1950s. Although the pool is well-capitalized, an optimum spread of risk calls for more insurers to participate Colleen DeMerchant Assistant Manager, Nuclear Insurance Association of Canada

Nuclear insurance pools have existed since the mid-1950s as part of the insurance fabric of most jurisdictions that employ the use of nuclear fission for peaceful purposes. Insuring nuclear facilities at first appeared daunting due to the new challenges nuclear technology brought.The extremely large values of insurance required, the new and unproven technology and the potential for catastrophic losses did not deter insurers, but instead united them to address these challenges by creating nuclear insurance pools. Creating these pools ensured the risk was spread throughout the insurance industry, accomplishing three important goals: • providing the large limits required by the nuclear industry; • providing protection to the general public; and • protecting insurers’ solvency. Sixty-seven Canadian insurers responded in 1958 by committing Cdn$13.5 million in capacity to the Canadian nuclear insurance pool to cover property and liability for nuclear risks. From the beginning, the Canadian nuclear insurance pool, named Nuclear Insurance Association of Canada (NIAC) — managed by the CUA (Canadian Underwriters Association), IAO (Insurers Advisory Organization) and now CGI Insurance Business Services — has seen many successes and challenges over the years. While overcoming many of these obstacles, the pooling system, developed with such prescience

38 Canadian Underwriter July 2008

by the insurance professionals of the mid-1950s, remains relatively unchanged after all these years. Canada’s pooling system is closely aligned with various other nuclear liability conventions in force throughout the world; it developed because of the main principles established under these conventions (commonly referred to as “channelling”). These principles are: • strict liability — that is to say, liability without fault; • exclusive liability of the operator; • limitation of this liability in amount and in time. • obligation on the operator to cover this liability by insurance or other financial security. The operation of the first two principles creates a channelling concept, in that all liability is channelled to the operator without right of recourse. All auto, property and CGL policy wordings contain nuclear exclusions. It is paradoxical that the use of these exclusions in conventional policy wordings allows for the most efficient means of insuring the nuclear facilities. Without these exclusions, significant risk-mapping would be required near nuclear facilities to ensure that concentrations of exposure would not be exceeded. In addition, liability mapping of some sort would likely be necessary for all contractors who perform work on nuclear installations.This would be cumbersome, time-consuming and possibly inaccurate. However, the channelling concept contained in nuclear liability legislation allows insurers, through NIAC, to issue one property policy and one liability policy (which covers the operator and all contractors and suppliers) to each nuclear operator. Members of NIAC thereby limit their nuclear peril exposure to each nuclear operator by their participation in NIAC.


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A number of interesting challenges face the nuclear pooling system. The conventions have recently undergone revisions; one of the principal changes was to increase the amount of compensation available to victims of a nuclear incident. The Canadian legislation governing nuclear operators (the Nuclear Liability Act, or the NLA for short) also contains the main principles of the conventions. A revised NLA that reflects the recent changes to the conventions is now before Parliament. Currently, the NLA requires nuclear operators to carry Cdn$75 million in third-party nuclear liability insurance.The revised NLA will increase this requirement to Cdn$650 million. In addition, the nuclear power industry is experiencing a renaissance. Both of these factors indicate more insurance capacity will be required to meet the needs for nuclear insurance. Unfortunately, the number of Canadian insurers participating in NIAC has been declining, a trend the NIAC would like to see reversed.

ENTERING THE NUCLEAR POOL Nineteen Canadian insurers and reinsurers are members of NIAC. Although capacity has increased slightly, the spread of risk is concentrated to only a few markets in Canada. NIAC provides 92% of the Cdn$75 million, third-party liability insurance limit the NLA requires. However, when the new limit of Cdn$650 million becomes effective, NIAC's percentage share will drop to 10% (foreign capacity provided through the British and United States nuclear pools is used to supplement the Canadian capacity, as required). The main reason for NIAC's decreased capacity over the years is due to consolidation in Canadian property and casualty insurance industry. NIAC may also, to some extent, have become a victim of its own success: it has run so smoothly that fewer and fewer underwriters are now familiar with how it works and the terms of its policies.This is unfortunate, since a strong Canadian pool lends credibility to the underwriting and 40 Canadian Underwriter July 2008

engineering of Canadian nuclear business, which is currently in the forefront of the so-called ‘nuclear renaissance.’ NIAC always needs and welcomes domestic capacity. Capacity committed to NIAC must be on a net retention basis (a fundamental principle in the pooling system). If every insurer in Canada provided 1% of their company’s equity as capacity, NIAC's capacity would be increased considerably and a good spread of risk achieved.

POTENTIAL BARRIERS TO ENTRY One reason Canadian insurers cite for not providing capacity to NIAC, especially terrorism capacity, is the current situation with provincial insurance legislation, which prohibits insurers from excluding fire following a terrorism incident. Under the NLA, operators are liable for all nuclear incidents, even if that incident occurs because of terrorism. It is difficult for some insurers to support NIAC when they have decided not to provide terrorism coverage as a general matter of principle as a result of this provincial legislation. Addressing the fire following issue in provincial insurance legislation might allow more insurers to support NIAC for terrorism capacity or otherwise. How safe are nuclear facilities, anyway? This is a question of some debate, especially since there have been two widely reported nuclear accidents — Three Mile Island (1979) and Chernobyl (1986). The lessons learned in these accidents and the resultant changes have transformed the way nuclear power stations are built, maintained and operated. Redundant safety systems and advances in technology, when coupled with the checks and balances of quality programs and human performance reviews (to mention a few initiatives), have resulted in an unparalleled culture of safety. Regulator oversight is vigilant. Peer review and information-sharing within the nuclear industry, even among competitors, is enviable. As a result, there is a high degree of confidence among the

nuclear insurance pools about the safety of nuclear power plants. Notwithstanding these improvements and the confidence exhibited by the pools, increasing use of nuclear energy continues to demand an efficient and equitable method of providing compensation to victims of a nuclear accident. Climate change is a term on everyone’s mind and there is a great deal of debate on how to reduce emissions. It is clear nuclear energy must be a part of this solution.Today there are 439 reactors worldwide. Thirty-five are under construction and 91 are planned. The number of proposed reactors is a staggering 228; this figure is growing almost on a daily basis.There are two refurbishment projects in Canada at the moment (Bruce Power and NBPower), with the possibility of others on the horizon. There are new-build opportunities in three provinces. This puts Canada at the forefront of the nuclear renaissance.

INSURING THE NUCLEAR RENAISSANCE Nuclear insurance pools were formed when there were very few nuclear risks and the financial resources of many insurers were required to provide the necessary coverage.The worldwide nuclear pooling system that was developed represented the best risk transfer mechanism for this potentially catastrophic exposure. The pools are a true risk transfer mechanism: they use the assets of only insurers should a loss occur. The pools have not been subject to the insurance market price fluctuations that have characterized the hard and soft markets over the past 10 years.The pools are, in effect, funding for a catastrophe. It is therefore important that the underwriting approach be conservative and consistent, preserving the assets of its members. The solvency of member companies is also protected even if a catastrophic loss should occur. Finally, the pools have amassed more than 250 years of nuclear engineering experience — a resource our insureds highly regard.


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Pulling the

Parametric Trigger The use of parametric indices in catastrophe bonds could address the fundamental tension between transparency in the bond structure and the hedging of basis risks John Stroughair Vice President, RiskMarkets, Risk Management Solutions, Inc.

Ben Brookes Director, RiskMarkets, Risk Management Solutions, Inc.

Last year was another record-breaker for catastrophe bond issuance, with more than US$7 billion in 27 publicly disclosed deals. Despite a soft reinsurance market and a sluggish start, 2008 looks thus far like it might continue the trend of increased use of capital markets for catastrophe risk cover. But measured against other areas of fixed income, cat bond issuance remains small.The volume of collateralized debt obligations (CDOs) issued in 2007 exceeded US$250 billion, while for mortgage-backed securities it was more than US$2 trillion. And yet, a recent Guy Carpenter report revealed total cat bond issuance corresponds to only 8% of the current reinsurance cover. So why has a tool that at first looked so attractive not taken off sooner? We believe two factors hinder the growth of the cat bond market — pricing, and transparency v. basis risk.

PRICING Cat bonds effectively compete with traditional reinsurance. Following two years of relatively low insured losses from natural disasters, reinsurance rates are depressed, whereas credit

42 Canadian Underwriter July 2008

spreads are high due to the ongoing credit crisis. In this environment, cat bonds no longer look as attractive to fixed income investors, while reinsurance looks more appealing to potential cedants. This is almost certainly a temporary issue that will change as both markets revert to more normal pricing.

TRANSPARENCY VERSUS BASIS RISK There is a fundamental tension in the cat bond market. Most investors want greater transparency in the bond structure; as a result, they often prefer parametric structures in which bonds are triggered by a physical or numerical index like wind speed. Issuers, on the other hand, tend to be more concerned with basis risk, the risk associated with imperfect hedging. For this reason, issuers generally prefer structures linked to their own insured loss experience (as opposed, say, to measuring risk based on industry averages or event parameters).Typically, the choice comes down to risk versus return, but the market has probably not yet hit on the structure that provides an optimal balance between the interests of issuers and investors. Recent developments in the provision of parametric indices have sought to address the inherent tension between transparency and basis risk. If an index can effectively mirror the actual exposures in a cedant’s portfolio, then the tension between transparency and basis risk can be resolved.This can be achieved by creating an index comprised of many sub-indices, each with a narrow geographical focus. Each sub-index can be weighted in an appropriate way to match the cedant’s exposure profile. How this can be done is described in detail below, using U.S. hurricanes as an example.



12:59 PM

PEAK ZONE EXPOSURES The catastrophe risk insurance market is highly concentrated, posing a significant challenge for (re)insurers. By way of example, one need only look at Florida, which accounts for 80% of extreme hurricane risk in the United States. (Re)insurers must attempt either to diversify this risk away or keep significant concentrations and strive to get paid appropriately. Although many insurers have significant exposure in Florida, very few have a profile that closely matches the average industry exposure to the state. So a parametric solution based on state-level losses or triggers would leave many potential cat bond issuers exposed to significant levels of basis risk. Yet a parametric approach would be easier for most potential investors to comprehend: it is much easier to understand the chance of 100 mp-h winds blowing than the probability of a particular insurer incurring more than US$1 billion of losses. Paradex, a new index introduced by RMS, is designed to address these issues and benefit both issuers and investors. RMS has partnered with WeatherFlow to develop a network of hurricane-hardened weather stations along the U.S. coast to record wind speeds. The network currently covers Houston and surrounding areas and Florida but will be extended to the entire Gulf region and Eastern Seaboard by the start of the 2009 hurricane season. The Florida stations are indicated in the map below (See Figure 1 on page 44). The data supplied from this network will allow peak wind speeds to be accurately estimated down to zip code level across the entire area affected by a hurricane.These measurements are then referenced against RMS insurance industry exposure and vulnerability curves to calculate final index values. Although the area covered by the weather stations is detailed enough to provide loss information at the zip code level, in most cases the nine zones on the map above will provide adequate

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resolution for potential cat bond issuers to reduce basis risk to acceptable levels. The approach, as illustrated, is used in a U.S. hurricane situation. But there is reason to believe it would work for all natural catastrophe perils, so long as the hazard can be measured in sufficient detail that sub-indices can be developed to minimize basis risk. Potential in-

vestors don’t need to understand the intricacies of insurance, just the odds of specified physical events occurring. As for cedants, they can tailor the index by adjusting the weights of each sub-index to manage basis risk to acceptably low levels. Over time, these approaches could allow the capital markets to offer the most competitive pricing for peak zone hazard risk.






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WHAT IS A CATASTROPHE BOND? A catastrophe bond, usually abbreviated as a ‘cat bond’ is a mechanism for transferring insurance risk to the capital markets. The cat bond is issued by a Special Purpose Vehicle (SPV) established to support the transaction; the sponsor transfers risk to the SPV through a reinsurance arrangement. The SPV funds itself by issuing a cat bond to the market. Cat bonds are structured so that principal repayment is reduced if certain trigger conditions, usually related to events that would cause significant loss to the sponsor, are met. Sponsors of cat bonds effectively receive a capital injection when it is needed most – immediately following a loss. Cat bonds are typically priced as a spread over the London Interbank Offered Rate (LIBOR) where the spread is determined by market pricing for the risk. The premiums paid by the ceding insurer fully fund

44 Canadian Underwriter July 2008

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the spread plus any other expenses associated with the structure. The proceeds from the issu-ance are placed in a collateral account and invest-ed in low-risk assets and the returns are swapped to LIBOR. Together the ceding insurer’s premium payments and the

swapped investment returns generate the required cashflow to meet the bond’s coupon payments. In the event that the bond is triggered, the SPV can draw on the assets in the collateral account to meet its reinsurance obligations to the sponsoring company.

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Updated Weather Forecasting Associate Editor

Enhancements to tornado, hail and earthquake models are on the horizon, but whether or not Canada will ever have an overland flood model remains to be seen When it comes to natural catastrophes, especially weather-related events, history will not only repeat itself, researchers warn, but it will do so in a much more frequent, severe manner. Scientific research points to the likes of the 1998 Ice Storm and the August 2005 Toronto storm becoming regular occurrences. Has the technology employed by catastrophe modellers been able to keep pace with Mother Nature? This summer will bring to the Canadian market the release and enhancements of winter storm, tornado, hail and thunderstorm models. Earthquake models are also becoming more robust, modellers say. But the question of creating a model for overland flooding still has modellers and insurers scratching their heads, wondering how they will plug that particular gap in the Canadian marketplace.

CHANGING LANDSCAPE Property values in Canada have increased significantly since the last major Canada industry exposure update in 2004, says Jayanta Guin, senior vice president of research and modelling at AIR Worldwide. Using indexed census data, 46 Canadian Underwriter July 2008

AIR updated the number of residential risks. Replacement costs were updated based on data from Statistics Canada to reflect large increases in material and labour costs in the country over the last several years. “The largest increases were seen in Alberta and Saskatchewan,” Guin says. “For example, according to Statistics Canada, residential replacement costs in Alberta surged 26% from May 2006 to May 2007 alone. Replacement costs in Saskatchewan increased 21% during the same period.” Significant increases were also seen in B.C. Guin attributed most of these changes to a re-evaluation following the Kelowna wild fires, which revealed substantial undervaluation. “Changes to commercial property values have by comparison been modest,” he continues. “However, coverage splits have been updated, resulting in a significant shift in value from building to contents value.” This has had the effect of reducing modelled losses for the earthquake peril, he says. The effect on severe thunderstorm losses is much smaller.

STORM WATCH AIR has used the updated Canadian property value database to update its AIR Canada Severe Thunderstorm model, due to be released in July. Risk Management Solutions (RMS) plans to launch major upgrades to its tornado hail model in August 2008 (the enhanced model will be a convective storm model and will include straight-line wind and lightening in addition to tornado and hail), as well as release a winter storm model. This is potentially good news for insurers, who

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last year suffered losses due to an F5 tornado that pummeled Manitoba; in addition, a series of hail storms across the prairies caused a spike in the number and severity of claims – particularly in Saskatchewan, where the number of claims reported, 13,700, was 10% higher than the five-year provincial average. “We [at RMS] are using more and more advanced techniques and we’re bringing in techniques that are currently employed in weather forecasting — namely, numerical modelling — in order to get a much more complete event set,” says Claire Souch, the senior director of model management at RMS. Numerical models use equations to determine the behaviour of the atmosphere at any given point in time. Essentially, this form of weather prediction samples the state of fluid in the atmosphere at ay given time; equations common to the fields of fluid dynamics and thermodynamics are then used to estimate the state of the atmospheric fluid at some time in the future. This allows modellers to predict how the weather or the atmosphere is going to evolve. “We can also force [our] systems to create new storms,” Souch says. “So it’s a way of creating storms in a simulation environment, which can then be put into our models and allow us to get to a very, very high, detailed resolution.” She says the use of numerical modelling techniques, coupled with more robust information on building stock and claims data, allows modellers to build an event set that contains all of the possible permutations of these types of storms that might strike Canada. As well, it allows for the modelling of what the damage might be from these storms on the ground. Looking at Insurance Bureau of Canada data from 1984 to the present for cat losses due to winter storm, “you were probably only modelling for one-third of the losses incurred,” suggests Keith Fillmore, senior vice president of Aon Re Global. Among the losses not modelled for was the 1998 Ice Storm – which RMS estimates say could potentially incur

48 Canadian Underwriter July 2008

US$3 billion in losses if it were to happen today (more than double the 1998 insured losses).

SHAKING THINGS UP Models targeting atmospheric events are not the only ones becoming more robust. Canadian earthquake models have existed for years, but new developments in the United States may trickle their way onto the Canadian market, says Julie Serakos, senior vice president of Willis Re Inc. The biggest update in earthquake research stems from work led by the U.S. Geological Survey, Serakos says. “Essentially, it’s a better representation of a risk at a local level,” she says. “So when an earthquake occurs, there is more understanding about how the ground motion will propagate away from the fault line and specifically affect buildings and the areas affected by the event.” Also, there is now a better understanding of the “interplay of the ground motion with the soil and the structures of the buildings,” she says. It’s quite possible there will be some changes to the Canadian models in the future as a result of this research, modellers say. PLUGGING THE FLOOD GAP Although earthquake and tornado models have been available for years, comprehensive overland flood models for the Canadian market continue to elude modellers. Some suggest it’s a combination of the degree of difficulty in modelling this particular peril, a lack of sufficient data and a perceived lack of demand from (re)insurers. Unlike earthquake and tornado perils, overland flood is not a localized event, Souch says. “With flood modelling, you have to really be able to estimate the flood depth, which changes very rapidly over the surface of the ground, so you’re very dependent on having good information available on the elevations [and] terrain of the ground,” she says. “It’s very data input-intensive. It’s also very modelling intensive, because you have to model the entire hydrological cycle in order to get it

right. That includes modelling rainfall, rainfall run-off, evaporation, snow melt — all sorts of things.” Souch says RMS is in the process of developing a robust overland flood modelling technology for the United Kingdom market, which will hopefully find its way into the United States market. Whether or not that will include Canada, though, is still up in the air. One major complication is that, in contrast to the United States, Canada has a lack of detailed government flood maps and information, Souch says. Steven Jakubowski, senior vice president and group manager of Impact Forecasting, says his firm is almost ready to release an overland flood model for the U.S. market within the coming months. The riverine model uses the U.S. Geological Survey’s storm gauge data for river networks across the country to build a forecast for future events. “We have to have actual street address position to determine the exact position of a structure,” he explains. “We can marry that information with a digital elevation model. Then we can have a forecast flood based on historical storm gauge data. We can say at your particular residence or commercial building that we expect there to be three, five or 10 feet of flooding. And then we’re going to model the losses based on that.” Fillmore is not convinced such a model will make it to the Canadian market. He says the earthquake peril is, and will likely remain, the big issue here. “The issue with adding perils for Canada is that there is no problem selling an earthquake model for Canada, but as you get further down the list of perils — like brush fire or flooding — you have fewer and fewer people who are prepared to pay for models.” Fillmore says he doesn’t mean to suggest that non-earthquake perils are insignificant in Canada, just that from an economic point of view “the real driver that everyone looks at is earthquake.” If the industry wants third-party cat modellers to add more models to the Canadian table, “there’s going to have to be a push from reinsurance brokers, reinsurance underwriters and the insurers,” he says.



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Correcting the Record Donna Boutilier Executive Officer, Nova Scotia Insurance Review Board

Re: Canadian Underwriter, May 2008, “Need for Speed” I am writing to address information reported in the May 2008 cover story, “Need for Speed” with respect to the Nova Scotia Insurance Review Board (NSIRB). In particular, the article reported that due to slow turnaround times, “an insurer has taken the Nova Scotia Insurance Review Board to court because of the length of time it alleges the board took to approve the companies proposed 8% premium decrease.” I would like to take the opportunity to clarify two items: (1) the turnaround times of the NSIRB, and (2) any court action involving company applications to the NSIRB. The NSIRB recognized the first applications filed under the legislative reform took longer to complete than desired. Since its first year of existence, the NSIRB has

50 Canadian Underwriter July 2008

continually improved turnaround times on applications while upholding its statutory obligation to ensure rates and risk-classification systems are just and reasonable. The second item I wish to clarify deals with the quoted text in the first paragraph above suggesting that an insurance company took the NSIRB to court because of a slow turn-around time. The NSIRB has not had any insurance company initiate court action related to turnaround times. The article does not identify the company in question. However, I can confirm that two companies, which are affiliated with one another, did appeal the NSIRB orders on their initial 2004 applications through the appeal level of the NSIRB and, subsequently, to the Nova Scotia Court of Appeal. The right to appeal a decision of the NSIRB is provided for in Nova Scotia’s Insurance Act and companies are entitled to exercise that right. In both of the above

noted cases, the companies were requesting rate changes of 0% and were ordered to take significant decreases by the NSIRB. The Nova Scotia Court of Appeal allowed the appeals and sent them back to the NSIRB to be decided in light of reasons of the court. The NSIRB issued new orders for these cases, ordering decreases of 8% and 9.5% for the two companies. The two companies have again exercised their right to appeal these decisions and are scheduled to have the appeal heard by an appeal panel of the NSIRB in late July 2008. I thank you for the opportunity to clarify the facts associated with the only legal proceedings the NSIRB has been involved in since its inception. It is important that your readers are provided with an accurate depiction of this matter as well as the balance the NSIRB must strive to achieve in addressing the needs of the industry while fulfilling its legislated mandate.



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As claims for environmental contamination increase, insurers would do well to mitigate their exposure to litigation by paying close attention to reporting requirements Nadia M. MacPhee Associate, Barry Spalding Barry Spalding is a member law firm of the ARC Group of Canada.

Plaintiffs are increasingly seeking damages for injuries to land arising from contamination. Environmental litigation is receiving more attention and will be the subject of an upcoming appeal to the Supreme Court of Canada in the 2006 New Brunswick case, Cousins v. McColl-Frontenac Inc. For insurance carriers, there are several considerations in the context of pollution claims brought against their insureds. Initially, insurers and their coverage counsel must consider the issue of coverage. They must determine whether or not there is prima facie coverage for the claim; then they must consider whether any of the exclusions, including a pollution exclusion, might apply. It is imperative that coverage counsel consider the effect of the reporting requirements in the policy or in any applicable statute. Occurrence-based CGL policies normally provide that the insured must report as soon as practicable any occurrence or incident that might result in a claim to the insurer. The significance of this requirement might be considerable if one considers the insured’s potential liability for the contamination of real property. Take, for example, an insured that has knowledge of a significant hydrocarbon escape from its property but fails to notify the insurer (or any other party) of the escape for several days, weeks or months. The contaminant may be permitted to escape to neighbouring properties during that time, infiltrating not only the soil but also possibly wells and watercourses. By failing to comply with the provision requiring prompt reporting, an insured

52 Canadian Underwriter July 2008

may significantly increase its own and the insurer’s exposure. Despite the insured’s imperfect compliance with a reporting provision, however, it may still be able to look to the insurer for indemnity, as well as a defence, in light of the relief from forfeiture provisions of the various Insurance Acts. For example, s. 110 of the New Brunswick Insurance Act says: “Where there has been imperfect compliance with a statutory condition as to proof of loss to be given by the insured or other matter or thing required to be done or omitted by the insured with respect to the loss insured against, and a consequent forfeiture or avoidance of the insurance, in whole or in part, and the court deems it inequitable that the insurance be forfeited or avoided on that ground, the court may relieve against the forfeiture or avoidance on such terms as it deems just.”

EXPANDING RELIEF FROM FORFEITURE Although s. 110 speaks of statutory conditions, case law has expanded the applicability of relief from forfeiture provisions to contractual requirements. In the Supreme Court of Canada decision in Falk Bros.Industries Ltd.v.Elance Steel Fabricating Co. Ltd., the court considered a relief from forfeiture provision. A claim was made against Falk Bros. Industries Ltd., but it failed to provide notice of the claim until 28 days after the expiry of the period for notice set out in the bond.The matter involved s. 109 of the Saskatchewan Insurance Act, which allowed a court to relieve an insured against forfeiture.The Supreme Court of Canada found that s. 109 of the Saskatchewan Insurance Act extended to contractual as well as statutory conditions. In Falk Bros., the Supreme Court stated the courts are guided by equitable considerations in deciding whether to grant relief from forfeiture. The test to be applied is whether, in all of the circumstances of the case, it is just and equitable that relief be granted. In Can.Equipment Sales & Service Co. v. Continental Insurance Co., Ontario’s Court of Appeal noted the two factors most often considered by courts in granting



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relief from forfeiture are good faith on the part of the insured and a lack of prejudice to the insurer. “Section 103 is an ameliorating clause,” the appellate court found. “It is not to be used to allow contracts entered into in good faith to be broken with a careless disregard for the rights of the insurer so as to cause actual or potential injury to the insurer’s position. On the other hand it should not be so encrusted with authorities as to become a circumscribed rule of law rather than a principle of equity to be exercised with judicial discretion.”The Ontario Appeal Court went on to note it had reviewed dozens of cases “…and it has become clear that recourse to s. 103, and its counterpart in other jurisdictions with relation to other types of insurance, has always depended on the particular facts of the case, and on whether there was clearly some actual proven prejudice to the insurer, or potential prejudice which could not be quantified after the event.” In addition, the court noted, “regard

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was had to the conduct of the insured, whether he had, for example, deliberately misled or lied to the insurer. There is no suggestion in this case that the plaintiff has been guilty of bad faith or deliberate misrepresentation or concealment.”

REPORTING CONTAMINATION Courts will normally grant the relief sought provided there is no bad faith on the part of the insured or prejudice to the insurer. The factual considerations of a particular case will dictate whether or not a court will grant relief from forfeiture. The court will consider whether or not the insurer has been prejudiced by the imperfect compliance; if the answer is in the affirmative, the court will not normally grant the relief. It has been held an insurer will be prejudiced if the insured’s breach causes the insurer to lose “a realistic opportunity to do anything that it might otherwise have done” in responding to the claim. In the context of contamination of real property, an insured’s delay in

reporting an occurrence that might result in environmental damage could be significant. It is possible that if a spill or other escape had been reported on the day it occurred, the insurer could have taken remedial measures to restrict the effects of the occurrence. For this reason, the reporting requirements of a policy should be carefully scrutinized in considering coverage for a pollution claim. It would seem that if an insurer can demonstrate the late reporting prevented it from intervening and lessening the effects of the contamination, real prejudice will have been shown to exist and relief from forfeiture would not be granted. The evidentiary basis for such an argument will in all likelihood require expert evidence from someone — such as a hydro-geological engineer, for example — to confirm the contamination might have been contained, and therefore the damage reduced, if remedial steps had been taken when the insured became aware of the occurrence.

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In the most recent Canadian Underwriter online poll we asked: “Have insurance companies managed the market cycle well over the past 12 months?” Only 29.41% are confident insurers have held the line on underwriting discipline. The other 70.59% felt insurers have failed to manage the market cycle well over the past year.

NO 70.59%

YES 29.41%


Les Assurances Gaudreau, Demers et Associes Inc. successfully completed the first-ever electronic download of a commercial insurance quotation in Canada using the Centre for Study of Insurance Operations (CSIO) XML standards. On Apr. 9, 2008, a commercial insurance quotation was downloaded from ING’s GoBrio web-quoting site into Les Assurances Gaudreau, Demers et Associes’

56 Canadian Underwriter July 2008

Policy Works system using the Policy Works eMarketing functionality. “This is a very exciting day for everyone at Policy Works Inc.,” said Policy Works president Kevin Campbell. “Congratulations to Les Assurances Gaudreau, Demers et Associes Inc. for being the first brokerage in Canada to download a commercial quotation. I wish to express my sincere gratitude to ING for sharing our vision. Together we are building solutions that help our brokers to better serve their clients.”


SCOR Group has established a “hub” structure for the Americas in New York, encompassing SCOR Canada, SCOR US, and SCOR Global Life Re US. Henry Klecan Jr. [3A] is the managing director of the hub. He will remain CEO of SCOR Canada and SCOR Re and will be SCOR’s representative in the Americas for all corporate matters relating to the SCOR Group as a whole. Jean-Paul Conoscente is the treaty property and casualty chief underwriting officer for the Americas. Reporting to him will be Patrick McGuiness [3B] for Canada. “SCOR writes 20% of its business in the Americas,” said Francois

3a de Varenne, group chief operating officer of the hub. “The hub structure lends itself particularly well to this region in view of its sheer size and diversity.”


The Insurers Financial Group was the 2008 recipient of a business achievement award from the Richmond Hill, Ontario Chamber of Commerce. The award was presented at the 17th annual gala awards dinner at the Sheraton Parkway Hotel. Michael Freedman, president and CEO of The Insurers Financial Group, accepted the award on behalf of the company. He cited the company’s Partners in Risk program, combined with the dedicated and knowledgeable sales and service staff, as key factors in the organization’s success.


Royal & SunAlliance Insurance Company of Canada has been rebranded; it is now known as RSA. Created 10 years ago after a merger between Sun Alliance and Royal Insurance, the company has weathered

3b some fundamental changes since that time. In light of that, the company says it felt it was the right time to modernize its identify to support its profitable growth strategy. “RSA reflects where we are today as a company and where we’re headed,” says Rowan Saunders, president and CEO. “Our new logo reflects an RSA that keeps you moving, protecting what’s most important to you, while you get on with the business of living life.”


The Institute for Catastrophic Loss Reduction (ICLR), The Co-operators and the Downtown Guelph Business Association have partnered in the creation of the disaster-planning program called ‘Open for Business.’ Launched in Guelph, Ontario, the pilot program consists of a disaster planning folder, a guide and a planning toolkit to help small businesses prepare for business interruption. During the pilot project, kits will be distributed to raise awareness of the program and assist local companies

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The Best Workplaces initiative was a great way to hold up the mirror on how we create an environment that communicates exactly that.”





with business continuity planning throughout the summer. “Research tells us that at least one in four small businesses forced to close for a period after a loss never reopens,” says Kathy Bardswick, president and CEO of The Co-operators and chairperson of the ICLR. “Those that do [reopen] struggle to remain in business.” Smaller businesses tend to lack the resources to develop robust business continuity plans, which are standard among larger businesses. “This program is designed to help them do just that, so that they can better protect their investments and livelihood,” Bardswick adds.


Pottruff & Smith Insurance Brokers Inc. has been recognized

as one of this year’s 50 Best Workplaces in Canada by Great Place to Work Institute Canada. The competition process is based on two criteria: two-thirds of the total score comes from a 57statement survey completed by a random selection of employees, who included their open-ended comments about their organization. The remaining one-third of the score comes from an in-depth review of the organization’s culture — including an evaluation of HR policies and procedures. The people working for the insurance brokerage give it a critical competitive edge, Michael Fitzgibbon, president of Pottruff & Smith Insurance Brokers Inc., says in a press release. “This is a team you want to keep for a long time.


Kernaghan Adjusters Ltd. has appointed Blair McGregor [8A] to the position of branch manager in Vancouver. Mark Sherwood [8B] has been promoted to the position of assistant branch manager. McGregor has more than 25 years of expertise in multiline claims management and loss control. Sherwood has 25 years of multi-line claims experience as an independent adjuster in B.C. and Alberta — including complex commercial property and liability, professional liability and motor carrier cargo claims.


Cunningham Lindsey Canada Claims Services Ltd. has launched its Causation Forensic Specialists (CFS) division. The division is lead by Bernard (Bernie) Lefebvre, a fire investigator. “CFS fills a very specialized niche that falls under a branch of causation forensics known as fire origin and cause determination,” said Robert Seal, president and CEO of Cunningham Lindsey Canada Claims Services Ltd. “The use of this type of expertise is required when fire losses involve large quantum, injury, suspicious circumstances, subrogation

and potential litigation. Properly determining the origin and cause of a fire can impact all of these elements of a claim.” Lefebvre has more than 30 years of experience with the Ottawa Police Service. He spent 15 years in criminal investigations and 14 years as a fire investigator. He has investigated more than 600 property and motor vehicle fires.


Keal Technology and Canadian Signassure/sigXP User group (CSU) have entered into a partnership to deliver education to their clients. The partnership will see Keal and CSU come together to offer educational conferences to Keal clients starting Sept. 25 and 26, 2008 in Toronto. The companies say their newly established partnership will benefit clients through enriched session content to enhance return on investment in Keal applications and training. They also note they will be collaborating together to address client needs while maintaining objectivity as required. The newly created events are intended to increase attendance and amplified peer-to-peer collaboration. They will also increase awareness of Keal applications and services through demo stations to enhance broker workflows.

July 2008 Canadian Underwriter


CU Seminar ad July 08


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Putting the pieces together.

Events and Seminars Calendar You work hard to protect your clients’ property. Now, it’s time to ensure that you apply the same kind of energy and commitment to your own success. CIP Society Events and Seminars give you the opportunity to learn, to network, to catch up on industry developments and to think about your career.


CIP Society Events

PROedge Seminar: Insurance Relationships: Building Success (a.m.) . . August 27

Edmonton - CIP Society Golf Tournament . . . . . . . . . . . . . . . . . . . . . . . . August 25

PROedge Seminar: Management of Change (p.m.) . . . . . . . . . . . . . . . . August 27

Hamilton - Beach Volleyball Tournament . . . . . . . . . . . . . . . . . . . . . . . . August 28

Annual Speakers Breakfast - Richard Dubin, IBC . . . . . . . . . . . . . . . September 10

Saskatoon - CIP Society Golf Tournament . . . . . . . . . . . . . . . . . . . . . . September 3 Ottawa - CIP Society Golf Tournament . . . . . . . . . . . . . . . . . . . . . . . September 26


London - CIP Society Golf Tournament . . . . . . . . . . . . . . . . . . . . . . . September 26

CIP Society Luncheon: Ontario Auto - The Road Ahead . . . . . . . . . September 25

Toronto - Annual Fellows Golf Tournament . . . . . . . . . . . . . . . . . . . September 29

Keeping you at the forefront of the P&C industry. The CIP Society. MEMBERS BENEFIT.

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GALLERY About 200 insurance industry supporters attended the 2008 New Brunswick Fun Night on May 1 in aid of Women in Insurance Cancer Crusade (WICC). Linda Dawe, CEO of the Insurance Brokers Association of New Brunswick, presented organizer

Nancy Thorne with the WICC Lew Dunn Memorial Award. The award had been bestowed upon Thorne at the annual WICC Ontario Dinner in March 2008, but Thorne was unable to attend. Thorne is a New Brunswick broker and a can-

cer survivor. Thorne and her colleagues in 2003 organized a Fun Night, which began as a Pub Night. Since then, it has become an annual community event in Saint John, NB, raising almost Cdn$45,000 for WICC since 2003.

The Insurance Institute of Ontario – CIP Society presented its 4th annual ‘Symposium 2008’ on April 29. More than 200 industry professionals attended the event, entitled ‘Emerging Landscapes: Insurance, Finance and Media.’ The event featured an industry leadership panel, including: Dan Courtemanche, president and CEO of GCAN Holdings Inc.; David Gambrill, editor of Canadian Underwriter magazine; Rick Gulliver, president of Hub International; Robin Spencer, president and CEO of Aviva Canada; Alain Thibault, president and CEO of TD Meloche Monnex and Jeffrey T. Bowman, president and CEO of Crawford & Company. The breakfast keynote speaker was Diane Francis, a columnist from The Financial Post, and the luncheon keynote speaker was Mark Ram, president and CEO of Northbridge Financial Corporation.

CLARIFICATION In the May 2008 issue (Page 70), we reported Allstate Insurance Company of Canada had expanded its presence in Eastern Canada. The company has in fact restructured and rebranded its existing Neighbourhood Agent Offices into a new business model — the “new Allstate Insurance Agency.” The new agency model operates out of four offices (Fredericton, NB; Saint John, NB; and two in Moncton, NB).

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GALLERY WICC BC Chapter held its 6th Annual Candlelight Ball on April 5 in Vancouver, attracting hundreds of industry supporters. WICC BC co-chairs Pamela Rose and Nicole Nanke presented a Cdn$20,000 cheque to Barbara Kaminsky, CEO of the Canadian Cancer Society of BC. The organizing committee for the gala was Lori Manskopf, Sara Mehrjou, Samantha Ip and Marti Messam.

XL Capital Ltd. celebrated its third annual Global Day of Giving on May 21. XL’s Toronto staff gave a hand to More Than Child’s Play, a resource centre for new immigrant families, and the North York Women’s Shelter. In Montreal, XL helped Moisson Montreal, Canada’s largest food bank.


Get the job. Done. TM

Insurance Professionals Know Where to Look for Their Next Career Move.

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Positions posted on are also featured in the Insurance Careers Section at and appear on’s twice-weekly Insurance Headline News Email Alert.

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GALLERY Hundreds of industry professionals descended on Spirale Banquet and Convention Centre in Toronto for ‘Friendship Night’ on on May 8. Presented by the Insurance Brokers of Toronto Region (IBTR), the fun-filled evening allowed industry peers to meet and greet each other to the Caribbean-inspired music of Keith Buddle and his band and enjoy a true taste of the Caribbean from the kitchen and bar of Spirale.

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More wishes will be coming true this year, thanks to the 14th Annual Insurance Charity Gala in support of Starlight Starbright Children’s Foundation. The ‘Roaring Twenties’themed event drew a sell-out attendance of 480 guests. The black-tie soiree was held at The Carlu in Toronto and helped raise Cdn$213,000 for the charity (including 22 wishes). Six ‘Fun Centres’ will be placed in hospitals

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Appointment Notice

selected by the presidentlevel sponsors of the event. According to gala co-chairs Carla Blackmore and Wendy McCowan, “the gala committee was overwhelmed by the support that we received from the insurance industry. Everyone we have talked to loved the venue, so we are going back to The Carlu next year – May 2, 2009. Hold that date so you can be there with us!”

Walter Leszkowicz, BA, CIP orge Arruda, Senior Vice President, Operations of The Economical Insurance Group is pleased to announce the appointment of Walter Leszkowicz, BA, CIP, to the position of Regional Vice President, Ontario. Over his 31-year career in the insurance industry, Walter has developed a broad and comprehensive knowledge of insurance operations. Walt has held several progressive leadership roles within The Economical Insurance Group. For the last six years, Walter led Perth Insurance Company. Under his leadership, Perth has posted impressive growth and profitability results.


The Economical Insurance Group is one of the largest property and casualty insurers in Canada with more than $1.9 billion in annual premium volume and $4.3 billion in assets. Based in Waterloo, Ontario, this Canadian-owned and operated company services customers’ needs through branches and service offices across Canada and in the United States.

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Guy Carpenter Canada was delighted to host its second (Re)Insurance Industry Charity Poker and Casino Event in Toronto on May 22 for WICC (Women in Insurance Cancer Crusade). The Four Seasons Hotels’ penthouse salons, ‘Windows,’ set the scene for the event. The 32nd-floor venue offered a spectacular

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view of the Toronto skyline. Seventy guests competed for various prizes, including the Grand Prize of four days’ accommodation for two at the world famous Peregrine Lodge in the Queen Charlotte Islands (Cdn$10,000 value). Tom MacDowall of GCAN Insurance won the poker tournament.

Terry Denomme, CIP orge Arruda, Senior Vice President, Operations of The Economical Insurance Group is pleased to announce the appointment of Terry Denomme, CIP, to the position of Division General Manager, Perth Insurance. Over his 25-year career with The Group, Terry has successfully taken on roles of increased leadership accountability in the KitchenerWaterloo Branch. In 1993, he was appointed as the K-W Branch Claims Manager, followed by an appointment to Marketing Manager in 1996 and then, to Branch Manager in 2003. Under his guidance, the K-W Branch has consistently performed well. In his new role, Terry will lead the execution of Perth's strategic plan on a national basis.


The Economical Insurance Group is one of the largest property and casualty insurers in Canada with more than $1.9 billion in annual premium volume and $4.3 billion in assets. Based in Waterloo, Ontario, this Canadian-owned and operated company services customers’ needs through branches and service offices across Canada and in the United States.

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The XL Insurance companies hosted a cocktail and hors d'oeuvres reception on May 28 in University of Toronto’s historical Hart House. Along with XL colleagues and senior management from across North America, more than

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200 of XL’s business partners and clients enjoyed the evening in one of Toronto’s cornerstone gathering spaces since 1919. Hart House features soaring stained-glass windows, marble floors and oak-timbered ceilings.

Edouard Moreira, C.I.B., C.R.M. Senior Vice President Messrs. Pierre and Patrice Vézina, CoPresidents of Vézina assurances inc., are pleased to announce that Mr. Edouard Moreira has been promoted to Senior Vice President. Mr. Moreira holds a college degree in finance and a university certificate in Risk Management and Insurance. Backed by his 32 years of service amongst the national and international brokerage houses, he has acquired an enviable reputation within the Canadian insurance industry, in which he mainly concentrated his know-how in the marketing aspects of the business. He will now be supporting, in an administrative capacity, the two CoPresidents in their respective responsibilities. He will also concentrate on the maintenance and development of our good business relationship with our corporate markets. Furthermore, he will be involved in developing new market niches and innovative insurance products. His expertise being aimed at the industrial, manufacturing and institutional risks, he will be enhancing our servicing platform in the risk management for our national and international clientele. Established in 1978, Vézina assurances inc. is one of the 10 largest damage insurance brokers for commercial and industrial risks, and ranks amongst Canada’s best performer and best managed enterprises. It offers its clientele risk management solutions that are adapted to their reality and specific to their needs.

Vézina assurances inc. Firm in damage insurance

4374 Pierre-De Coubertin Avenue Montreal (Quebec) H1V 1A6 Tel: (514) 253-5221; fax: (514) 253-4453 Email:

July 2008 Canadian Underwriter


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More than 120 industry veterans attended the 49th Annual Reception of the Quarter Century Club, held May 7 at the Hilton International in Toronto. Emcee John Cherrie welcomed members and presided over the “roast” of Scott ‘Scooter’ Francis. Francis started his insurance in-

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dustry career in 1972 with The Co-operators before moving to L.S. Croth for two years. He spent the next 16 years at Cunningham Lindsey, before joining The Shumka Group. He is now senior vice president and national claims advocacy leader with Aon Reed Stenhouse.

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Caisse Centrale de Reassurance held its 7th annual Blues Night on April 16 at Fionn MacCool’s in Toronto. Little Bobby and the Jumpstarts, one of the city’s premier blues bands, captured

See all of our Insurance Industry Event Photos Online within the ONLINE PHOTO GALLERY at

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the sounds of the ‘golden era’ of 1950s blues. In the meantime, members, clients and guests of the (re)insurance community mingled and sampled culinary treats.

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Canadian Underwriter July 2008  

Canada’s Insurance and Risk Magazine. Since 1934 Canadian Underwriter, Canada’s leading insurance journal, has provided insurance profession...