Canadian Underwriter September 2011

C A N A D A’ S I N S U R A N C E A N D R I S K M A G A Z I N E . C A N A D I A N U N D E R W R I T E R . C A

S E PT E M BER 2 0 1 1 A Business Information Group Publication #40069240

M&A Fireworks

by David Gambrill

Slave Lake

By Vanessa Mariga

Revealing Credit Scores

By James Daw

FM Global Sept 2011

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Š2011 FM Global. All Rights Reserved.

WHEN CONFRONTING DISASTER, HAVING ALL YOUR EGGS IN

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FM Global Sept 2011

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VOL. 78, NO.9, SEPTEMBER 2011 CANADA’S INSURANCE AND RISK MAGAZINE. PUBLISHED BY BUSINESS INFORMATION GROUP

www.canadianunderwriter.ca

COVER STORY

M&A Fireworks?

32

Analysts have predicted mergers and acquisitions activity in the Canadian P&C industry many times between 2005 and 2009, but the promised fireworks display has largely been a dud. Suddenly, in 2010-11, an explosion of announced mergers has changed the landscape for Canada’s Top 10 players. Is this the start of the anticipated M&A fireworks display?

BY DAVID GAMBRILL

FEATURES

44

16 Slave Lake

Ongoing Communication

The second-largest insurance loss in Canadian history, the result of a wildfire gutting the town of Slave Lake, Alberta, has presented unique challenges for adjusters working at the scene.

Ontario brokers have entered into a new era of communication with clients as a result of the province’s auto insurance reforms.

BY KADEY SCHULTZ

BY VANESSA MARIGA

50

24

20 Auto Fraud Trends

42 Adjusting Character

Stealing doctors’ identities to access Ontario’s electronic claims administration system is one of several fraud trends identified during an ISB-U Education Series seminar in London, Ontario.

The important role an adjuster’s character and temperament played in the adjustment of claims a decade ago is as true now as it was then.

BY KEITH EDWARDS

BY DAVID GAMBRILL

28 Tightrope Act IBC is cautiously optimistic about the outcome of Nova Scotia’s auto insurance review. Insurers seek a balance between robust benefits and affordable premiums.

BY BILL ADAMS

48 International Networks Insurance law is globalizing, creating opportunities for networks of independent Canadian insurance law firms to affiliate themselves with like-minded networks in Europe and the United States.

BY DAVID GAMBRILL

Open Credit Insurers, regulators and brokers appear to be miles apart on the issue of how to disclose the use of credit scoring for underwriting purposes.

BY JAMES DAW

4

Risk Management Canada’s solvency regulator has published regulatory guidelines intended to shore up re/insurers’ risk management processes.

BY ROBERT McDOWELL AND KOKER CHRISTENSEN

Canadian Underwriter September 2011

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VOL. 78, NO.9, SEPTEMBER 2011

PROFILE

14 Sowing Seeds Agricultural specialist Dale Rempel, incoming president of IBAC, says brokers must cultivate positive relationships with Canada’s legislators and other important stakeholders.

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

Art Director Gerald Heydens Art Consultation Pylon.ca

Associate Editor Vanessa Mariga vanessa@canadianunderwriter.ca (416) 510-6793

Production Manager Gary White (416) 510-6760

Senior Publisher Steve Wilson steve@canadianunderwriter.ca (416) 510-6800

Subscriptions/Customer Service Gail Page gpage@bizinfogroup.ca (416) 442-5600 ext 3549

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Account Manager Michael Wells michael@canadianunderwriter.ca (416) 510-5122

Print Production Manager Phyllis Wright

BY VANESSA MARIGA

SPECIAL FOCUS

8

Editorial

10 Marketplace 58 Moves & Views 60 Gallery

Advertising Sales Christine Giovis christine@canadianunderwriter.ca (416) 510-5114

President Bruce Creighton Vice President Alex Papanou

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Canadian Underwriter September 2011

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EDITORIAL

A New Breed of Cats?

Insurers would be doing a real service to their communities (and the industry) by supporting and sharing climate change research that helps the public understand whether or not it’s facing a new breed of cat.

David Gambrill, Editor david@canadianunderwriter.ca

8

As we go to press, Ontario has just pledged $5 million to help clean up extensive damage done in the town of Goderich following the touchdown of an F3 tornado packing winds of 280+ km-h.

YouTube pictures show historic structures in the downtown area reduced to matchsticks.

Similarly, Atlantic Canada is now mopping up after the remnants of Hurricane Irene brought flooding and extensive property damage to the area. Irene’s visit to Canada as a tropical storm followed a path that caused devastation in North Carolina, New York City and Boston over the weekend of Aug. 27-28.

Damage estimates in the U.S. range between $3 billion and $6 billion.

Insured loss estimates for the Goderich tornado and Irene will not likely be available for some time yet. But they underscore the woes created this year by Canada’s second-largest insured disaster — the wildfires in Slave Lake, Alberta. Preliminary figures show the Slave Lake losses cost the Canadian property and casualty insurance industry in the neighbourhood of $700 million.

This has been another tough year for Canadian catastrophe insurers. It isn’t far-fetched to suggest that, when all of the 2011 losses are added up, Canadian insurers will be paying out a cumulative total of more

Canadian Underwriter September 2011

than $1 billion dollars for catastrophe claims losses again this year. This would mark the fourth time in six years that natural catastrophe damages have topped the $1-billion mark.

Welcome to the ‘new normal’ for Canadian P&C insurers.

Insurers often point to their admirable role as individual ‘good corporate citizens’ in addressing the effects of climate change. These efforts are to be applauded and augmented.

But as the frequency and severity of these natural catastrophe losses increase exponentially, it seems insurers should also be in the vanguard of supporting research on climate change, if they aren’t already.

Insurers constantly reference their own data at public conferences in discussions about catastrophe losses. Bar graphs showing natural catastrophe losses almost always grow taller as they approach the 2005-11 quadrant of the maps in the insurers’ power point presentations.

Despite this trend, which is obvious to insurers, climate change researchers still don’t seem to have a tool or model that would allow them to link climate events in local areas with global system maps that show much broader patterns related to climate change.

Presumably if such a link could be made between local and global climate patterns,

researchers might be able to say more definitively how global climate change is affecting (or exacerbating) local area conditions. This information would give insurers and the public a better handle on whether the disasters of the type we have seen in 2011 are part of a global trend, or whether they are just flashes in the pan.

Strangely, we know with precise detail how many runs a baseball team will not score when they take their star slugger out of the lineup. And yet, a great deal of our information about our environment seems to come from nothing more than media reports and sharing personal anecdotes. For most consumers, the storms we are constantly hearing about in the media simply ‘feel’ worse than other storms remembered from years past.

Some insurers say the more extensive damage has to do with the expensive stuff people are buying and putting into vulnerable areas of their homes. And to some extent this is true.

But insurers would be doing a real service to their communities (and their industry) by continuing to support and share climate change research that helps the public better understand whether or not these wickedly nasty weather storm events are a new breed of cat, or whether they are merely random freaks of nature.

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MARKETPLACE

Claims WEAKENED IRENE WREAKS HAVOC IN QUEBEC, MARITIMES The verdict is still out on insured losses caused by Hurricane Irene in Canada, but loss estimates for the United States range between $3 billion and $6 billion (AIR Worldwide) and for the Caribbean range as high as $1.1 billion (EQECAT).

Hurricane Irene weakened to a post-tropical storm by the time it lashed parts of Quebec and the Maritime provinces on Aug. 29. The storm left hundreds of thousands of Canadians without power, downed trees and dropped up to 80 mm of rain.

The storm moved over Quebec City on Aug. 29, moving north-northwest, with maximum sustained winds of 80 km-h and gale force winds extending 587 km from its centre, according to a RMS release. The storm then tracked northeast over Canada, passing over parts of New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland before moving into the Labrador Sea on Aug. 30.

In the United States, the large number of people left without power and forced to evacuate could have a significant impact on insurance losses from additional living expenses, particularly in the Northeast [US] where the cost of hotels and living expenses are higher, an AIR release said. “Business interruption losses could also be significant.”

10 Canadian Underwriter September 2011

F3 TORNADO DEVASTATES GODERICH, ONTARIO An F3 tornado devastated Goderich, Ontario on Aug. 21, causing extensive damage, killing one person and injuring 37.

The tornado touched down at approximately 4 p.m., packing 280 km-h winds. It carved a path roughly 20 kilometres in length through the downtown core of Goderich, tearing the roof and first floors off of several businesses, downing trees and destroying cars, cbc.ca reported.

“Access to the downtown area is blocked off, and police have closed all entrances to the town for safety reasons and likely to discourage looting,” cbc.ca reported.

“The property damage to homes and personal property, businesses and public buildings is extensive,” the Insurance Bureau of Canada (IBC) said in a press release “Ontario’s home, car and business insurers will be there to help residents and businesses recover from this disaster.”

SASKATCHEWAN INSURERS SEE LOSS RATIOS INCREASE IN 2010 Saskatchewan property and casualty insurers saw a 20point increase in their loss ratios between 2009 and 2010 (from 58.4% to 70.1%), reported the province's Superintendent of Insurance in its 2010 Statistical Report.

Overall, Saskatchewan property and casualty insur-

ers saw an 8% increase in premiums written between 2009 and 2010 — from $2.07 billion to $2.23 billion.

The collective loss ratio in property lines spiked from 45.7% to 81.4% from 2009 to 2010. Insurers with the highest loss ratios in this line include St. Paul Fire and Marine (455%); Unifund Assurance Company (202.5%); and Asset Protection Insurance Exchange (170.8%).

Canadian Market FEDERALLY LICENSED P&C INSURERS IN CANADA SEE PROFITS CUT BY $600 MILLION IN 2011 Q2 Federally regulated foreign insurers saw their consolidated net income tumble in 2011 Q2 to $1.5 billion from 2010 Q2’s $2.1 billion, according to the Office of the Superintendent of Financial Institutions.

Foreign property and casualty insurers saw their collective net income dip from $117 million in 2010 Q2 to $47 million in the same period of 2011.

Canadian federally regulated property and casualty insurers also saw their net income drop from $1.96 billion in 2010 Q2 to $1.47 billion in 2011 Q2.

Underwriting income for foreign and Canadian federally regulated insurers dropped from $235 million in 2010 Q2 to an underwriting loss of $15 million.

Net investment income for Canadian and foreign insurers on a consolidated basis declined from $1.8 billion in 2010 Q2 to $1.6 billion in 2011 Q2.

KEY FINANCIAL INDICATORS DETERIORATE FOR CANADIAN P&C INSURERS IN 2011 Q1: SWISS RE Canada’s property and casualty insurance industry saw a 13.7% decrease in profits, slower premium growth, an elevated combined ratio and a decreased investment yield in 2011 Q1, according to Swiss Re. In its Canadian Property & Casualty Quarterly for June 2011, Swiss Re reported the Canadian property and casualty industry’s after-tax profits declined by $115 million in 2011 Q1, down to $721 million. The industry’s capital increased by 0.4% over the same period.

Direct premiums grew by 2.9% in 2011 Q1, compared to 4.6% over the same period last year. Specifically, property premiums were up 3.1% (to $2.4 billion), driven mainly by 6.5% growth in personal property.

The industry’s combined ratio deteriorated by 1.5 points, moving up from 96.9% in 2010 Q1 to 98.4% in 2011 Q1. Swiss Re says this was the result of large cat losses in the first quarter of 2011.

Finally, the Canadian P&C industry’s yield on invested assets (including realized capital gains) declined to 3.6% in 2011 Q1 compared to 4% in 2010 Q1.

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MARKETPLACE

ALBERTA NAMES COMMITTEE TO GAUGE EFFECTIVENESS OF WILDFIRE MANAGEMENT PROGRAMS Alberta’s government has named an independent committee to look at how well it fought the May 2011 fires and the effectiveness of its wildfire management programs.

The Slave Lake fire is Canada’s second most costly natural disaster, with an estimated $700 million in insured losses.

The review will also look at weather and timber conditions leading to the catastrophe.

“What this is not is a review of the overall emergency response that fell on that region during this terrible time when the fires actually did destroy so much personal and public property,” Bill Sweeney, a former RCMP deputy commissioner and chairman of the committee, told The Globe & Mail.

The committee’s mandate is broad and Sweeney said he wants to focus on the prevention of wildfires through programs such as FireSmart.

Regulation

keep in mind the important role of property and casualty mutual insurers in the Canadian marketplace when considering new regulations that would allow mutual property and casualty insurers to demutualize.

In particular, IBAC notes property and casualty mutuals serve as “a bulwark against financial fragility” in the industry, raising the average minimum capital test score for the industry as whole.

Also, IBAC says, concerns about declining participation among mutual policyholders should be addressed by focusing on communicating the value of mutuals rather than the “quick fix” of demutualization.

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BROKERS ASK FEDS TO TAKE CAUTIOUS APPROACH TO DEMUTUALIZATION Canadian brokers have asked the federal government to take a cautious approach to demutualization.

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There’s strength in numbers.

Each of these Broker symbols represents 1,000 insurance brokers, every one a member of their local Brokers Association, and every one of them drawing on the professionalism and efficiency of Canada’s highest calibre insurance carriers to serve millions of insurance buyers across the country, earning their trust and loyalty.

Since its inception in 1988, the Broker Identity Program has served to dramatically raise the profile and enhance the professional reputation of our insurance brokers, and thereby reinforce, and assure the perpetuation of, the broker distribution channel in Canada.

In that time, consumers have come to readily recognize the broker logo championed by IBAC and its 11 member associations. Seen by millions of consumers to represent trust and peace of mind, and by hundreds of politicians and legislators as the embodiment of “people power” in every community across the country, the campaign goes from strength to strength each year. And 2011 is no exception.

Without your active support and cooperation as our friends and business partners in this quest for customer satisfaction and loyalty, it would be a different story. So it is with heartfelt thanks that we pay tribute to you and the partnerships we mutually enjoy.

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And together, we’re stronger than ever.

2011 Full Partners

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PROFILE

Sowing Seeds Vanessa Mariga Associate Editor

Incoming IBAC president Dale Rempel seeks to cultivate positive relationships with legislators as a key part of nurturing the broker channel.

Dale Rempel, president and CEO of Rempel Insurance Brokers, is in the growth business, but he doesn’t just specialize in the growth of the bottom line. The incoming president of the Insurance Brokers Association of Canada (IBAC) started out as an agrologist — someone who provides professional and unbiased expertise to members of the agriculture industry — before making the shift to insurance.

Rempel’s specialist knowledge has allowed him to carve out a niche professionally, in terms of selling agricultural insurance. It also makes him aware that, as IBAC president, achieving positive growth for the industry requires nurturing rela-

tionships with valuable stakeholders.

Born and raised in Morris, Manitoba, a small town not far from Winnipeg, Rempel studied agriculture and business at university. While in school, he supported himself by selling crop hail insurance. After obtaining his degree, he took a job with an ag-chemical company. Two years later, a broker approached him and suggested he become a general insurance broker. A brokerage in his hometown came on the market a year later that called his name — sort of.

“The unique thing is that the firm was called Remple Insurance, but the family that owned it was not related to me,” he says. “Our name is spelled slightly differently, as ‘Rempel.’ It was perfect. It was a small brokerage, my wife and I didn’t have kids yet. I was only 24 or so then.

We’re both from Morris, so it was nice to move back to our old community. That’s where it really started.”

After purchasing the firm (and adjusting the spelling of the name to reflect this new ownership), Rempel drew on his background as an agrologist to carve out a niche in

14 Canadian Underwriter September 2011

the Manitoba marketplace.

“Not many professional agrologists get into the insurance business,” he says.

“That gave me a good in with larger firms. We serve a lot of ag-chemical dealers, custom applicators and do quite a bit of long haul trucking business. We were able to develop the long haul trucking business because of the connections I had managed to make on the grain side of the business.”

Not many professional agrologists get into the insurance business. That gave me a good in with larger firms, such as ag-chemical dealers.

The firm now has 12 staff members and does long haul trucking business all over the province. “We’re one of the largest independent brokers in Manitoba in that line,” he says. “A lot of smaller or even mid-size firms tend to shy away from it. They feel there’s a specialty needed that they just don’t have.”

Typically, small independent firms rely primarily on

personal lines, Rempel says.

But commercial accounts constitute roughly 70% of his brokerage’s business. Alas, when your commercial accounts are primarily based on the agricultural industry, years like the past one — with increased claims from farmers due to hailstorms and record flooding — can create challenges.

The location of his brokerage has acted somewhat as a buffer. Rempel’s brokerage is located in the southern part of the province and, even though they are on the banks of the Red River, overland flooding does not pose as catastrophic a risk as it does to his counterparts to the north.

“We have a rain dyke around Morris,” he says.

“We are protected, and the farmland gets flooded. But, we get regular high water, so the farmers know how to deal with it. This year, farmers just seeded a little later than usual. The areas of Manitoba you’ve heard about in the news over the past year are not areas that typically deal with floods.

When we’re talking about a 1-in-300 year event, it’s happening in areas where they have never seen floods before.”

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PROFILE

IBAC Rempel is hoping to put his skills of cultivating growth to work in the coming year as the president of IBAC. A key focus during his term will be to continue to build upon the relationships with key stakeholders and members of government that IBAC has worked so hard to establish over past years.

“The insurance business as a whole is a relationship business,” he says. “I think most brokers in general are successful because of our ability to build relationships.”

Over the long term, if an issue develops and the broker channel needs to convey a message to legislators, having those relationships in place will be essential, he says. “If

we never talk to MPs or MLAs and there’s a problem and we go running to them, why would they want to give us the time of day? It’s like building any relationship. I think we’ve done a great job over the past while, and I think that’s why we’ve had a lot of success in the ventures or issues we’ve had to deal with.”

These good relationships played a key role in federal finance minister Jim Flaherty’s 2009 decision to amend the Bank Act so that a bank’s Web site is now treated as though it is a branch, Rempel says. The decision was a huge boon for brokers.

And now, IBAC members are girding themselves once again for the next five-year review of the Bank Act in 2012. Events in the world market over the past three years or so have demonstrated Canada has a strong and robust banking system — one might even argue it’s the envy of the international community, Rempel says.

Keeping that in mind, he doesn’t foresee the banking industry calling for any major changes to the Bank Act, nor has the government indicated it would be amenable to significant change. Be that as it may,

the broker channel must remain vigilant and be prepared to defend its territory, Rempel says.

Maintaining positive relationships, even in so-called peaceful times, is essential, he continues. These relationships serve the same important function as the proverbial water-cooler chat.

“They may not tell you exactly what’s going on, but they may give you a little indication or nudge about what’s coming,” Rempel says. “They may say, ‘We’re going to look at all angles of this issue. You should probably be aware of that.’”

IBAC is currently keeping a watchful eye on one issue working its way through the halls of Parliament Hill right now. Canada is drafting new regulations that would allow the demutualization of mutual insurance companies.

“We feel that if the regulations come down, depending on how they come down, it could really change the landscape of the entire insurance industry,” Rempel says. “If it becomes easy for mutuals to just demutualize for no real particular reason, it could have a huge impact on the marketplace. We are going to monitor that closely.”

September 2011 Canadian Underwriter

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Rebuilding Slave Lake Insurance adjusters faced a number of unique challenges when helping residents rebuild their lives after Canada’s second-largest insurance disaster in Canadian history.

Associate Editor

After wildfires destroyed much of the town of Slave Lake, Alberta in May 2011, adjusters working on the scene have had to overcome a series of challenges to help the community get back on its feet, including site access, locating lost records and demand surge.

BACKDROP The May 15, 2011 wildfires destroyed nearly 40% of the remote town in Northern Alberta.

Two wildfires conjoined in the surrounding area; wind gusts of up to 100 km-h fanned caused the flames to jump the fireguard. In just two hours, the flames bore down on the small community of 7,000 residents. The fire destroyed the better part of the southeastern part of the city, where flames consumed half of the area’s homes. The blaze also gutted the local shopping mall, town hall, library, radio station and many downtown businesses. In total, 433 of the town’s buildings were destroyed and another 96 were damaged.

The event would turn out to be Canada’s second costliest event in terms of insured losses, just after the 1998 Ice Storm, which cost more than $1.8 billion (figure adjusted for inflation).

According to data from Insurance Bureau of Canada (IBC), citing PCS-Canada data, claims totals have hit the $700 million mark as of July.

16 Canadian Underwriter September 2011

ACCESS TO THE TOWN The size and scale of the loss has posed challenges for the adjusters working the front lines.

The remoteness of the area, where accommodations are limited — particularly after some of the hotels were gutted by the fire — created a challenge for the insurance industry in trying to get adjusting and reconstruction teams in place and up and running. The scale of the damage is also a new frontier for some of the adjusters on scene. First, a large number of claims must be adjusted all at once. Second, many of the claims are so severe as to be total losses.

But previous catastrophes have taught the Canadian insurance industry some valuable lessons, and these lessons have been applied to Slave Lake, experts say. For example, insurers and adjusters had a catastrophe response plan in place at the time of the event, so that officials would merely have to pull the trigger and spring into action.This allowed adjusters to move in, set up temporary living quarters for staff members and call on trusted contractors to begin the heavy lifting of re-building.

Adjusters working in Slave Lake emphasize the importance of a strong working relationship between the insurance industry and the municipal and provincial levels of government.This helped facilitate a quick response to the Slave Lake losses

Illustration by Sandy Nichols/www.threeinabox.com

Vanessa Mariga

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and slashed red tape that might otherwise hinder re-building efforts.

The industry’s response turned out to be quicker than restrictions to the area allowed. For two weeks following the fire, access to the town was restricted while fire crews worked to ensure there would be no risk of flare-ups from smouldering foundations of homes. This twoweek “black out” time left adjusters in the dark as to what it was they were up against.

“With 100% of the town evacuated and the town essentially closed under an emergency order, the actual type and extent of the damage was largely unknown,” said Peter Karges, national manager of branch operations at Crawford & Company (Canada). “Site planning for office space and accommodations was hampered by not having access to the town or the evacuated business operators. It was unknown if some businesses were damaged and when they would return to operation.

Emergency, security, municipal and other key personnel had priority over the key accommodations. In some cases, returning residents had priority through block reserving of rooms by government departments.”

In hindsight, this two-week wait to access the site may have been more of a help than a hindrance. Many of the insurance industry responders had a catastrophe plan in place and ready to roll, says Wayne Ross, Aviva Canada’s vice president of national property claims.

Still, it all came down to how well the plan was executed. During the twoweek period between when the fire occurred and when access to the town was granted, Ross said his team was getting in touch with all of its suppliers, contractors and the local community to arrange accommodations for staff. “So, when we were given the green light to get going, we were there.”

When they did arrive on the scene, some were taken aback by what they saw. Jennifer Jory, a general and multiline adjuster at Cunningham Lindsey’s Lloydminster, Saskatchewan branch, described arriving on the scene as surreal.

“It looked like what I picture a war zone would look like,” she said. “Every-

18 Canadian Underwriter September 2011

thing was grey. All of the vehicles looked like they had been sitting in the junkyard for 20 years. They were all rusted from the fire eating the paint off. It was very strange to be standing in the middle of a neighbourhood and have everything be basically down to knee-height.”

Cunningham Lindsey partnered with a restoration company that established a temporary compound just outside of the town. The site came complete with generators, a kitchen, showers, washrooms, Internet access and sleeping and office quarters.

“It meant we could handle our jobs right on site,” Jory said. “It also meant we were travelling five minutes to and from town when we needed to go and

We have seen a slight increase in costs due to the remoteness of the area and the added expenses of shipping in people and construction materials from greater distances to Slave Lake. see people, and not one-and-a-half hours each way, with no place to stay.

We could work longer hours, spend more time on the front lines and meet people without extra travel time and expense.”

REBUILDING EFFORTS Accessing the town may have been the first hurdle, but it wasn’t the last. Karges notes that Slave Lake’s Town Hall, which housed all municipal property records, was destroyed. “These records were not stored off site,” he said. “The homes were 100% destroyed, and thus all

personal records including photos, original building plans, surveys, etc. were most often not available.”

To overcome the challenge, adjusters conducted extensive interviews and tracked down documents and other information from other sources such as the original builders, MLS (a property marketing system used by Canada’s real estate boards) and land survey offices.

Various levels of government and the insurance industry, represented by IBC as an intermediary, worked together to move reconstruction along rapidly, Ross says. He points to the fact that the municipal government removed red tape around obtaining building permits. “We provided them with blueprints and our plans, and they moved them through quickly.”

The provincial government is providing 350 rental accommodations on Crown Land at a fixed rate, so that the local population is not taken advantage of. Also, the province is trying to give residents every opportunity to stay in the area rather than having them relocate permanently to a different city, he adds.

And in terms of relocation, the local regulator made it easy for insurance adjusters to help insureds in Slave Lake.

Lisa McCabe is Cunningham Lindsey’s Vancouver branch office supervisor and acting cat supervisor for Slave Lake. She noted that the Alberta Insurance Council sped up the licensing process, enabling them to bring in adjusters from other provinces.

With the adjusters in place and permits in hand, the process of re-building got underway. But finding labour and materials to reconstruct the town proved to be a challenge. Finding the people to do the work was one issue, but the escalating costs of materials due to ‘demand surge’ were another.

“We have seen a slight increase in costs due to the remoteness of the area and the added expenses of shipping in people and construction materials from greater distances to Slave Lake,” McCabe says. “While there have been on occasion differences between the replacement costs and the policy limits, in all instances where we have been involved, the replacement costs have been honoured.”

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Finding the

Phonies

ISB-U Education Series (London, Ontario)

David Gambrill Editor

Cops and auto insurance claims investigators are warning about the identity theft of doctors, phony airbag deployment and fraudsters taking advantage of small claims settlements that go without investigation.

Identity theft of health care practitioners, taking advantage of an insurer’s desire to settle small claims quickly and phony airbag deployments were all topics of discussion at the ISB-U auto fraud seminar held in London, Ontario on July 26.

ISB Canada is a source of information and documentation required during the insurance claims handling process. Its seminar focused on industry efforts to identify auto insurance fraud trends, ‘red flags’ and successful efforts in combating auto insurance fraud.

IDENTITY FRAUD AND HCAI Representatives of the Insurance Bureau of Canada (IBC) and the Ontario Provincial Police (OPP) expressed concern at the conference that

20 Canadian Underwriter September 2011

fraudsters are using identity theft to gain access to the province’s new electronic claims administration system, Health Claims for Auto Insurance (HCAI).

Ontario’s insurance regulator, the Financial Services Commission of Ontario (FSCO), requires that all of the province’s health care providers submit their OCF treatment plans to insurers through HCAI. As HCAI notes on its Web site, the Ontario government commented in its 2011-12 budget that the province and its insurers could use HCAI as a tool for identifying potentially fraudulent claims activity in the system.

But HCAI itself may be the target of fraud, according to conference speakers representing IBC and the OPP. Kathy Metzger, an investigator for the Ontario injury rings unit of the IBC investigative services, told the conference that fraudsters have already tried to gain access to the HCAI system in order to submit fraudulent treatment plans.The key is to obtain a health care

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practitioner’s name and call-to-registration number.

Under the old regime, in which doctors submitted paper OCF treatment plans to insurers, the health care practitioner’s signature was required, Metzger said. “With HCAI, they don’t even need that signature anymore,” she said.

“Everything is done electronically. So the invoices, the treatment plans, the requests for assessments and the invoices are all submitted to the insurance companies electronically and all [fraudsters] need is a name and call-to-registration number. And they can get that anywhere.They can get it from a report they happen to read, they can get it from a résumé that’s come into the clinic if someone has applied for a job.”

Metzger said a health care provider must sign a signature agreement in order to access the HCAI system. But she said evidence exists that fraudsters have attempted to forge doctors’ signatures in these agreements.

“Last year alone, we interviewed over 40 health care practitioners who were victims of identity theft,” Metzger said.

“Not all of them decided to pursue it, because they were afraid for their safety.”

Doctors can be victims of extortion in efforts to obtain their registration numbers, observed Sergeant Stephen Boyd of the OPP’s organized crime enforcement bureau.

“How do I get a doctor’s registration number and license number?” Boyd asked. “I go to Club Super Sexe in Montreal, call some doctors, and send the two prettiest girls from Quebec to the ugliest doctor in the bar. And he thinks, ‘Wow, this is…’ Probably looks like a Casino Rama commercial, right? ‘How can I be so lucky?’ She prostitutes the doctor, making out in the hotel room, and then says to the doctor,‘I want your registration number, your name, your clinic and everything from you. If you don’t, there’s a video that’s going to go on YouTube.’ What does the doctor do?

Lose the house in [Toronto’s] Rosedale [area] and the BMW? He’s going to give them what they want. Extortion.”

22 Canadian Underwriter September 2011

TAKING ADVANTAGE: SETTLING SMALL CLAIMS WITHOUT INVESTIGATION Insurance companies settling small claims (under $10,000) without any investigation may in fact be emboldening fraudsters to commit more serious forms of fraud in the future, a claims investigator warned at a seminar on combating auto fraud.

Jordan Legg of Cunningham Lindsey spoke about claims investigation strategies at ISB Canada’s seminar. His presentation referenced an ongoing debate all insurers face related to the enormous cost and time required to prove fraudulent claims.

Legg said most vehicle claims are anywhere between $10,000 and $15,000.

“Countless times,” he said, insurers are opting to pay out claims worth $10,000 or less rather than rack up the time and

HCAI itself may be the target of fraud. Fraudsters have tried to gain access to the electronic claims administration system in order to submit fraudulent treatment plans. The key is to obtain a health care professional’s name and call to registration number. money required to undertake a thorough investigation.

“One of the biggest debates we have is the ethics and economics (debate),” Legg said. “The question always is,‘How much do we pay [to investigate a claim] before paying out?’ Is it more economical just to pay the $10,000 rather than incur investigation expenses?

“What we say is, what you pay now, you get later. Because criminals start at a low level, a couple of $10,000 thefts.

They realize they can get away with it, they see how easy it is to pull an insurance fraud and they start to do bigger things. Basically it's just a snowball in the industry. People just continue to perpetrate these frauds, and then they

get bigger and bigger, because insurance companies are paying out with no investigation.”

Legg recommended insurers proceed with a staged approach to claims investigations. He suggested insurers allow investigators to do some preliminary work on a file, say four to five hours, which is “not going to cost you a lot.”

This initial investigation would at least determine whether or not there are any ‘red flag’ indicators of fraud.

“If there are any indicators, if there is any indication of discrepancies, you will be able to make that assessment at that time and proceed accordingly,” he recommended.

PHONY AIRBAG DEPLOYMENT Phony airbag deployment is an increasingly common element of auto fraud, said speaker Gord Jenish, president of Jenish Engineering.

Jenish noted fraudsters commonly tamper with airbags to make them deploy in an effort to suggest serious car damage.

The goal is to increase the amount of a possible insurance claim payout.

Jenish’s presentation included a number of slides illustrating a number of suspicious airbag deployments. A key indicator, he noted, is seeing only one airbag deploy, usually on the driver’s side, but not on the other.

“In almost every vehicle, if one stage of the airbag deploys in a collision because it was a command, the other [airbag] will deploy [immediately], or 100 milliseconds later, just to dispose of it,” Jenish observed. “This is so rescue workers aren’t injured by a live airbag stage [involving an airbag] that remains in place after a collision.”

Other telltale signs of airbag tampering include cut wires, heat damage or missing fixtures. Airbag covers can also point to fraudulent deployment.

Jenish observed airbags release with such force, the airbag covers will often swing upwards and crack the windshield just above the dashboard.

Some fraudsters don’t realize this and the absence of a cracked windshield in the event of an airbag deployment will give them away.

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Revealing Credit Scores

James Daw

Freelance Writer

Alfred Hughes and his spouse had the proof of their loss questioned when they reported a home burglary in 2008.Yet their claim was paid later, and their policy renewed on schedule.

Despite the reasonable outcome, Hughes was upset. He complained to authorities his credit score was searched without his consent. A sympathetic adjudicator in the Office of the Information and Privacy Commissioner for British Columbia, Nitya Iyer, delivered her ruling in May 2011 along with an ultimatum.

Ayer ordered Economical Mutual Insurance Co. to stop using credit scores to rate or reject policyholders until it notifies — to her satisfaction — those affected and gives them a chance to say no to using their credit score for underwriting.

The order would prove costly and cumbersome for The Economical, which is based in

24 Canadian Underwriter September 2011

Waterloo, Ontario. So it quickly appealed to the Supreme Court of British Columbia. To date, a decision has not been rendered.

DEBATE ON DISCLOSURE Regulators Meanwhile, opinions about the amount of information insurers should be providing to inform consumers properly are almost as far apart as eastern and western Canada.While a majority of consumers have been sized up using a three-digit credit score before buying home insurance — and in some provinces, before buying auto insurance — the disclosure they received remains controversial.

The Canadian Council of Insurance Regulators cited in a June 2011 report the lack of informed consent, the lack of awareness and the lack of understanding as three of seven potential risks to consumers when insurers use credit scores for the purpose of underwriting policies.

Newfoundland and Labrador resolved the issue in May by banning the use of credit scores for rating purchasers of personal home and automo-

Illustration by Sandy Nichols/www.threeinabox.com

Opinions vary widely about how much information insurers should be disclosing to consumers related to the use of credit scoring.

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bile insurance. Ontario and Quebec had already banned the practice for auto insurance. A private member’s bill proposed last year aimed to ban its use for home insurance in Ontario.

The Economical had the support of the Insurance Brokers Association of British Columbia when it argued a disclosure statement on the policy application signed by Hughes’ spouse in 2003 was sufficient notice. It read: “The applicant agrees that reports containing personal, credit, factual record, premium payment or claims history information may be sought or exchanged in connection with this application for insurance or renewal, extension, variation or cancellation thereof.”

But Iyer argued in her ruling that such disclosures should make it clear whether or not the insurer intends to use credit information to set premium rates and to decide whether to renew a policy. A denial of coverage would make it difficult to find replacement coverage, since more insurers make use of credit information for underwriting, she noted.

“In order to meaningfully exercise their right to protect their personal information, individuals need to fully understand the purpose for which it will be used,” Iyer wrote in her order. “A vague or overly general statement of the purpose of collecting information does not allow the individual to make informed decisions. Notice need not be lengthy, but it must be such that a reasonable person would understand that the (credit) information being collected is being used for risk assessment in underwriting, not to assess creditworthiness or ability to make premium payments, or for other insurance-related purposes.”

Iyer notes a consent statement proposed in 2008 by the Centre for Study of Insurance Operations (CSIO), of which Economical is a member, does refer to collecting credit information and later to the use of private information to assess applications, underwrite policies and combat fraud. Hughes’s spouse signed an older, less comprehensive version of the CSIO form in

Page 29

Notice need not be lengthy, but it must be such that a reasonable person would understand that the credit information is being used in risk assessment for underwriting, B.C.’s privacy commissioner says.

2003. Iyer does not, however, go so far as to say whether she thinks the 2008 CSIO statement is sufficient, noting that the question was not before her in the case at issue.

Insurers Ann MacKenzie, ombudsman and privacy officer for The Dominion, does not think it is sufficient disclosure. She

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notes first The Dominion would not want to use credit scoring for underwriting in any case. “But if it did, my recommendation would be to come up with something more robust (to provide disclosure.)

“I think a normal person is going to think:‘The insurance company will look at my credit score to decide if I can pay the premiums, or if I eventually have a claim, to see if some kind of fraud is going on.’ People don’t have it top-ofmind that credit score correlates with whether (your home) will be properly maintained or something.”

Also, she said, “I think if an insurance company is asking whether you will let it use your credit score to see if you qualify for a discount, you should have the opportunity to say:‘I don’t want a discount.

Don’t even look at my credit score.’”

The Economical’s lawyer will argue in court, among other things, that no evidence exists showing consumers do not understand how insurers use credit scores, or that they are unaware they are consenting to the use of credit scoring for underwriting.

A voluntary code of conduct published by Insurance Bureau of Canada (IBC) in 2010 proposes that insurers must be specific when seeking to use credit scores. It also calls on insurers to allow the consumer to say no to the use of credit scoring without disqualifying the consumers for coverage or competitive rates (excluding discounts).

“No one can give consent for another person,” the code stipulates. Insurers are urged to maintain a trail of proof of consent, respond quickly to corrections in credit data, provide refunds if errors resulted in over-charging, deal fairly with consumers who have no credit record or who plead for an exception due to an extraordinary life circumstance such as identity theft or catastrophe declared by their provincial government.

Brokers The code’s provisions appear to satisfy all of criteria enumerated by the B.C. adjudicator and more. But Whitby 26 Canadian Underwriter September 2011

Page 30

insurance broker Bryan Yetman thinks more is necessary. A leader in the campaign by the Insurance Brokers Association of Ontario to ban the use of credit scores for underwriting,Yetman says it would be “almost impossible” to allay brokers’ objections to credit scoring by providing adequate disclosure. Yetman further notes that for brokers, disclo-

A majority of consumers have been sized up using a threedigit credit score before buying auto insurance but the disclosure they received remains controversial. sure is only one of many issues related to the use of credit scoring.

But on the disclosure issue, Yetman says: “Take an insurance company that does not disclose to its employees how a credit score is used within its (underwriting) algorithm …(for) competitive reasons, (or) for privacy reasons, how could the consumer be well-informed if the people they are engaging with on the phones can’t articulate it to them because they don’t know?”

If credit scoring is not banned in home insurance lines, as the IBAO advocates, then in an ideal world, the consumer would receive two disclosure statements,Yetman says.The first would spell out how credit information will be used in claims investigations. The second would outline how credit information will be used in underwriting,

including how it figures in the calculations, what the potential premium increase or discount might be and what is the penalty for refusing to submit a credit score to an insurer.

Also, a consumer should be informed about the sources of credit information and the steps taken to validate accuracy, says Yetman. “He or she should know how to check the information and correct any errors or improve his or her score. By how much will premiums increase if the consumer says no to the use of credit information? What right (if any) will a consumer will have to change his or her mind? And how will rates be affected if they do?”

Furthermore, he says, “for any meaningful measure to protect consumers, some level of regulatory accountability would have to be put into place. Otherwise, it’s just a bunch of words on paper.”

The B.C. privacy adjudicator accepted that credit information is an effective tool for deciding how much to charge groups of policyholders and reflect their risk of future insurance claims. But she points out that scores such as the Canadian Property Loss Score, developed by Equifax Inc., are calculated using a selection of credit information and a proprietary algorithm that are not even disclosed to insurers such as Economical.

This would seem to create a severe impediment to meeting the standard of disclosure that Yetman imagines.

Steven Lingard, a lawyer for IBC, notes the privacy complaint against The Economical “was only partly successful,” and its implications for other insurers is limited. “The order is only against Economical and does not directly affect any other insurer,” he says. “The same would be true after the appeal.”

Yet Toronto lawyer Frank Palmay warned in a recent commentary that insurers are running the risk of further political backlash due to the use of credit scores. He urged them to do more than trumpet the correlation between low scores and a higher frequency of claims. “As more provinces ban the practice, it will become … harder to reverse the tide,” he predicted.

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Tightr s d n ope and Tradewi Opinion/Analysis

Bill Adams

Vice President, Atlantic, Insurance Bureau of Canada

During Nova Scotia’s review of its provincial auto insurance system, Canada’s insurance industry is walking a metaphorical tightrope through mild tradewinds as it seeks to balance robust benefits with affordable premiums.

For a tightrope walker, perfect balance is the key to success. Many things contribute to that balance. Even a light breeze can throw things off kilter. Similarly with auto insurance, multiple factors combine to create the balance required for a sustainable system.

Over the past decade, the Nova Scotia auto insurance system has seen its fair share of breezes and gales. Through it all, industry has maintained its balance, adapting to changing conditions as best it can. Along the way, a great deal has been learned by all concerned, including the wisdom of a collaborative approach between industry, government and

28 Canadian Underwriter September 2011

other stakeholders in achieving sustainable market stability.

You may recall that in the early 2000s, claims pressure was intensifying and auto insurance premiums were skyrocketing in Nova Scotia as well as in other provinces.To curb this trend, the Nova Scotia government introduced a package of reforms in 2003, including a $2,500 cap on pain and suffering awards for minor injuries. Alberta, New Brunswick and Prince Edward Island each took a similar approach. In all four jurisdictions, the minor injury cap has since brought down claims costs associated with minor injuries, in part by reducing the incentive for litigation. And now with constitutional challenges to the cap all but gone, the legal uncertainty created has begun to abate.

In Nova Scotia, the cap has resulted in improved availability of coverage and a 26% decline in average auto insurance premiums. Frustrated letters to the editor and complaints to elected officials have slowed to a trickle. Recent public opinion polling indicates consumers are largely satisfied with the auto insurance system. These are all good indicators that the Nova Scotia auto reforms have worked.

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Clear ly the ses — a winds e r c n of chang partic bility i stry a t e are in the s n i r ularly f o f u air in Nova Scotia, and the potential or an in he ind t , a dustry as i t still do o highly regulated as auto insurance. In Nova Sc es not k cap. y r u j now the n i inor full cost impl ications of the 2010 changes to the m

UPDATE ON NOVA SCOTIA’S INSURANCE REVIEW All government legislation and regulations need to be focused on outcomes that are desirable from the standpoint of the public interest. It is prudent, therefore, to review them at appropriate intervals against intended consequences to evaluate their effectiveness, as well as to determine what, if any, improvements should be made.

Six years following auto insurance reforms, in late 2009, the Nova Scotia government launched a two-stage evaluation of the province’s auto insurance system. The purpose of the review is to ensure the system continues to strike an appropriate balance between all consumers who need affordable insurance and people injured in collisions.

In the first stage of its evaluation, the government reviewed the minor injury cap. It announced changes in April 2010 that increased the threshold to $7,500 from $2,500, indexed the cap to inflation and clarified the definition of a “minor injury” to mean strains, sprains, and whiplash-associated disorders, mirroring the definition that has been used in Alberta for the past seven years.

In the second stage, the government undertook a broader review of the entire auto insurance system, a process that included stakeholder input to a final report that was released earlier this year. Key recommendations of the report call for a doubling of Section B benefits (accident benefits), adoption

30 Canadian Underwriter September 2011

of minor injury diagnostic and treatment protocols and the potential removal of gender as a rating factor.

The Nova Scotia Utility and Review Board (NSUARB) is currently reviewing the cost implications of the above recommendations. The board is expected to issue a final report to government by the end of September. Although the government has yet to decide which of the recommendations it will implement, it is evident that further changes are coming.

Clearly the winds of change are in the air. And when those winds change, the potential for instability increases — particularly for an industry as highly regulated as auto insurance, in which pricing is calculated before insurers can know the true cost of claims (the industry’s single largest cost centre).

In Nova Scotia, the industry still does not know the full cost implications of the 2010 changes to the minor injury cap. This is why the NSUARB agreed to review the claims trend data at regular intervals and to hold a formal hearing in the fall of 2012 — one year from now.

Now, layered on top of that uncertainty, comes a new source of potential instability: the anticipated changes to the auto insurance system the government is currently considering.

To its credit, the Nova Scotia government has proceeded with its two-stage auto insurance review in a measured and prudent fashion, cognizant of the need for meaningful stakeholder en-

gagement to fully explore all potential changes before making any final decision. It appears committed to maintaining the stability and affordability Nova Scotians have enjoyed in recent years.

Few would argue against the value of reviewing the auto insurance product, the minor injury cap included, from time to time. No business operates effectively without being evaluated and introducing changes to make the business operate better. But given the complexity of calculating accurate auto insurance rates, it is vital that any changes consider the broad potential implications on market stability and certainty.

Industry leaders remain cautiously optimistic that the government’s review will conclude with solutions that continue to provide Nova Scotia drivers with a good balance between robust benefits and one of the lowest average insurance premiums in the country.

Market stability characterized by a predictable cost environment allows insurers the best opportunity to assess risk accurately and price their products accordingly. With continued prudence through the final stage of auto reform in Nova Scotia, an opportunity exists in the years ahead for a predictable auto insurance environment the likes of which has not been seen in the province for at least a decade.

When it comes to walking the auto insurance tightrope, predictable winds, so to speak, help to keep us on balance.

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By David Gambrill

32 Canadian Underwriter September 2011

A

nyone who has seen a homemade fireworks display knows the disappointment of watching the “burning schoolhouse.”

After all of the promise and anticipation associated with watching exploding, screaming, whistling and colourful thunderbangers, watching the burning schoolhouse has the same impact as watching a candle flame slowly consume a small cardboard box. The effect is underwhelming, to say the least.

Contrast this with the story of consolidation in the Canadian property and casualty insurance industry.

Between 2005 and 2007, analysts routinely predicted an exciting explosion of mergers and acquisitions activity in the fragmented Canadian P&C market.

Companies were amassing capital in the relatively benign catastrophe years of that period, and many proclaimed the capital would ultimately be used for acquisitions that would change the face of the Canadian market. Despite these many predictions, not much happened.

And then the financial crisis hit in 2008. For two years during the crisis, companies were all but silent about M&A. Seemingly, they preferred to “keep their powder dry,” conserving their capital to offset the effects of the contracting financial markets and depressed investment portfolios.

September 2011 Canadian Underwriter 33

COVER STORY

M&A Fireworks Suddenly, the predicted M&A fireworks occurred in 2010-11. In 18 short months, several major deals were announced. Among them, RSA Canada bought GCAN Insurance Company from the Ontario Teachers’ Pension Plan Board for $420 million. This deal, along with RSA’s acquisition of Canadian Northern Shield (CNS) for $75 million in 2007, vaulted RSA from Canada’s sixth-largest insurer to Canada’s fourthlargest. Then Economical Mutual Insurance Company, Canada’s 10th-largest private insurance company announced its plans to demutualize, pending a new regulatory framework for P&C demutualizations. The Economical’s plan includes either an initial public offering or a “sponsored demutualization,” in which like-minded partners might acquire all or parts of the mutual insurer.

Then came a granddaddy merger in 2011: Canada’s Number 1 insurer, Intact Insurance Company, announced its plan to acquire AXA Canada, the country’s eighth-largest insurer in terms of premium volume in 2010. The deal would give Intact a 16% market share in the country, dwarfing that of its closest competitor Aviva Canada, which had a 7.95% market share in 2010.

After hearing all of these loud noises in M&A activity in the marketplace, the obvious question arises. Does all of this consolidation activity mean the fireworks show has finally started? Or is all of this just sound and fury, signifying a prelude to little more than another prolonged burning schoolhouse display?

Consolidation by Numbers First, a note on definitions: as sources for this story point out, “consolidation” can take two forms. It can occur by means of M&A activity, or it can happen when insurers simply exit the Canadian market. Most observe that if consolidation includes the long-term attrition of insurers exiting the Canadian market over time, consolidation has been slow and steady for several decades. Data from the Office of the Superintendent of Financial Institutions (OSFI) bears out this observation.

34 Canadian Underwriter September 2011

According to OSFI, back in March 1998, there were a total of 214 federally incorporated insurers — 98 Canadian and 116 foreign — with assets totaling just over $50 billion. As of March 2005, those numbers had dwindled to 187 federally incorporated insurers (90 Canadian and 97 foreign). As of last year, in March 2010, Canada still had 187 federally incorporated insurers (95 Canadian and 92 foreign), with assets exceeding $123.6 billion.

These numbers paint just a partial picture, as they exclude provincially licensed insurers. In a July 2011 paper presented to Canada’s Department of Finance, the Insurance Brokers Associa-

In Canada, the Top 10 P&C insurers would represent about 60% of the market share, whereas if you look at France and the United Kingdom, it’s more like 70% to 80%. Japan would be 90%. tion of Canada (IBAC) notes there are currently 316 property and casualty insurers in the country. In comparison, a Statistics Canada report in 2002 says there were 395 licensed P&C insurers in Canada (both federally and provincially licensed) at that time.

The data above show the overall number of P&C insurers is slowly dropping.

Still, Canada remains a very fragmented market compared to other property and casualty insurance markets around the

world. “Yes, the Canadian market is very fragmented,” says Philip Cook, CEO of Omega General Insurance Company.

“In a country where the population is circa 35 million, having approximately 300 insurers/reinsurers means there is almost one insurer or reinsurer for every 100,000 of the population. That is a very over-serviced market.”

This market does not feature dominant players, as does the banking industry, for example. Eighty-five per cent of all P&C insurance companies in Canada have less than a 1% market share, Cook says.

Conversely, “the Canadian market seems similar to the U.S. one insofar as that the top 10 or so companies command about 60% of the market, while many smaller companies have the rest of the market,” says Joel Baker, president and CEO of MSA Research Inc. Relative to the global context, this isn’t a high degree of market concentration. “We looked at the Top 10 corporate groups,” Sharon Ludlow, president and CEO of Swiss Re Canada says. “In Canada, together, they would represent about 60% of the market share, whereas if you look at France and the United Kingdom, it’s more like 70% to 80%.

Japan would be 90%. The U.S. is only around 50% or less than 50%.”

Rowan Saunders, president and CEO of RSA Canada, observes the recent deals between RSA-GCAN and Intact-AXA Canada have bumped up those concentration levels by about 5% or so. “If you go back as recently as 2000, the Top 10 insurers had 55% of the market share, and if you now looked, pro forma, with Intact, Axa, RSA and GCAN, it would be closer to 65% at the end of this year.

That’s quite a significant movement. I think that will continue.”

But will it continue at its current lively pace? Or is this just a random spike in what has been a very slow development over a period of several decades?

“There’s been a fair amount of activity,” IBAC CEO Dan Danyluk says. “I guess the big question is: Do we think that somehow the economic climate has changed, and do we think that is going to lead us to more consolidation?”

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COVER STORY

M&A Fireworks Fireworks in the Future In the context of the big deals announced in Canada over the past 18 months, most sources discussed consolidation with M&A in mind. Those who argue Canada will see more M&A activity in the immediate future cite several factors. Taken together, these factors would allow companies to amass enough capital to pursue future acquisitions.

One is the overall improvement of global financial markets after the credit contraction in 2008-09. In particular, Canada came out of the crisis in relatively strong economic shape, compared to other countries. “Given that Canada was relatively unscathed through the crisis and generally there is good economic certainty…companies I think are feeling a little bit more confident about spending some of their capital than they were a couple of years ago,” says Ludlow.

One feature of recovering economic health is that P&C insurance companies have generally been able to write more premiums, thus bringing in more revenue. “From an underwriting standpoint, it’s been a fairly decent market,” says Jeff Mango, assistant vice president at A.M. Best. “When you have the profitability there, certainly premium is going to be associated with an acquisition.”

But the large number of P&C players means Canada is still a very competitive market. And while premium revenues are increasing as the financial crisis recedes, they might not be increasing enough for some insurers. This leads some to consider growth through acquisition rather than through “organic” growth (i.e. increased premium revenues).

“Companies have been going through various attempts to gain market share via more conventional means (marketing, dedicated broker affiliations, product design, improved service standards and better claims practices etc.),” says Cook. “Most of these activities have been designed to ultimately gain market share. And of course premium rate reductions have been added to the mix over the last five or six years to retain market share in a very competitive marketplace. Having 36 Canadian Underwriter September 2011

done all of these things, there is little opportunity for further growth unless through acquisition.”

The economic impact of the financial crisis also played a part in insurers considering growth through M&A, Saunders says. “We do have what I would define as a pretty benign growth in the GDP in Canada, and less so around the world,” he says. “That actually is having an impact on insurance. There’s less to insure, true exposures have come out

In a country where the population is about 35 million, having approximately 300 insurers/ reinsurers means there is almost one insurer or reinsurer for every 100,000 of the population.

That is a very over-serviced market. of the market and I think that makes it really hard to grow your business organically. For those organizations that are permitted to build a business in their chosen territories, M&A is actually a better strategy, subject to evaluations, than aggressive pricing to grow your portfolio. That’s why I think you are seeing an interest in companies acquiring either talent or profitable portfolios, as opposed to trying to aggressively build your book of business file by file. That’s likely to continue for the next little while.”

OSFI’s regulatory prudence mandated a solid capital base for Canadian companies. This, too, may be playing a role in current M&A activity, sources say. “Canadian PC insurers have typically been so well capitalized, by statute really, and adverse to risk,” says Jacqalene Catrino Lentz, a senior financial analyst at A.M. Best. “By statute, they’ve had fairly conservative investments in provincial bonds, government bonds. With the exception of companies here and there, they typically did not have crazy assets like derivatives or asset-backed securities, things like that.” This means companies have the financial wherewithal to buy, she concludes.

But some companies, with apologies to George Orwell, have recovered from the financial crisis “more equally than others,” as some sources observe.

In other words, some companies have improved their financial position postcrisis, while others have lagged. Some believe this creates opportunities for some well-capitalized companies to acquire others.

In support of this position, sources cite the combined ratios for Canada’s Top 10 private insurers in 2010 ranked by market share. Combined ratios are percentages obtained by dividing claims payments by premiums collected. Numbers below 100% show profitability; those above show a loss. The combined ratios among Canada’s Top 10 insurers in 2010 ranged between a low of 85.2% (Lloyd’s) to a high of 162.84% (State Farm Insurance Company). Similar spreads exist through the rest of the companies in the industry as a whole.

“There certainly seems to be this divergence in performance, where strong companies — well-capitalized, wellmanaged, good, sensible strategies — appear to be widening the gap in their financial performance compared to other companies,” says Saunders. “And when you look at the Top 10 or Top 15 insurers and the difference in their combined operating ratios, probably it’s never been larger between the successful and less successful players.”

In this respect, Saunders says the Canadian P&C insurance marketplace in

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COVER STORY

M&A Fireworks 2010 is in a different place than it was when it went through a similarly weak economic cycle in 2000-02. The difference suggests to him an increase in M&A activity in the future.

“If you think about when there were a lot of sellers in the last real downturn, the weak part of the insurance cycle, which was in and around 2000-02, that was a difficult time for most players in the insurance sector,” he says. “So while there were many companies for sale, there really weren’t qualified buyers with a strong enough balance sheet [to buy them]. I think that as you see this divergence in performance occurring and likely to continue [in 2011], there are some strong companies with exceptionally strong balance sheets that this time, I think, will be able to take more advantage of that. And that’s why we believe the M&A trend is going to continue for the next little while.”

Demutualization is another potentially major catalyst for future M&A activity. The Canadian government is currently crafting a regulatory framework that would allow Canadian property and casualty insurers to demutualize.

Mutuals share an ownership structure in which mutual policyholders make up the ownership of the company. Currently mutuals, which make up about one-third of the Canadian market, cannot be sold.

The Economical has recently announced its intention to demutualize once the anticipated regulations are in place. The company has a two-pronged strategy. It could demutualize either by way of an initial public offering, in which mutual policies are converted into shares, or through a ‘strategic partnership,’ in which selected companies purchase all or parts of The Economical.

“The pending demutualization regulations in Canada are certainly something that can open the door to more consolidation,” Ludlow says. “That’s obvious. It certainly did on the life industry [when the federal government allowed it to demutualize in 1999].

Five companies literally demutualized once those regs were in place.”

38 Canadian Underwriter September 2011

The ‘Burning Schoolhouse’ Argument Before everyone plugs their ears in anticipation of an M&A explosion in the future, however, people need to remember some mitigating factors.

Several sources note the Canadian marketplace represents a balance between private insurers, public insurers and mutual insurers, with a number of insurers offering niche and specialty

Given that Canada was relatively unscathed through the crisis and generally there is good economic certainty, companies are feeling a little bit more confident about spending some of their capital than they were a couple of years ago. products. Or to put it simply, the fragmented market, as it is presently constituted, works for the consumer.

“I think Canada is still well-served,” says Maurice Tulloch, president and CEO of Aviva Canada. “You have a difference of players. You have national players. Clearly there is one less national player after this most recent deal [between Intact and AXA Canada]. You still have some very strong regional players.

Some are mutuals, some are not. You have niche players and you have some local players in small geographic areas.

For Canadians, the market is still wellserved in most jurisdictions.”

Ultimately, Tulloch adds, M&A will be driven by a company’s business strategy.

“I think from our standpoint at Aviva, we are always going to be looking at opportunities that make sense for us, and every company is in the same boat,” he says. “They will look at opportunities and see if they fit into their strategy. Is there an opportunity to extract value? If you look at the environment for acquisitions, it’s got to be driven out of the fact that you can ultimately extract value. So it’s back to the old, are you buying low and selling high? And if you’re not, you’d better have a heck of a strategic business case that ultimately you are driving value here.”

Finding that good strategic fit within a myriad of potential partners has been one factor inhibiting consolidation, some sources say. The scarcity of suitable marriage partners drives up the values or “multiples” of those who might be a good fit. Some potential sellers are spread across the country, some are not, some are niche players, others are not, says Ludlow. “So if you are looking for a good block of business to fit with Company A, whoever A might be, the shortlist is maybe 10, not 200,” she says. “The fact that there aren’t that many drives some of that [high valuation]. There’s a premium, because there are relatively fewer in the market than you would find in the United States.”

Ludlow observes that typical insurance company valuations in Canada are in the order of a multiple of 1.8. A “multiple” is a value, usually expressed as a factor, that companies multiply against a business economic benefit to arrive at their business value. The 1.8 multiple in Canada is higher than in the United States, where the average is more like 1.2.

Those high multiples may be impeding further consolidation in Canada.

“Why is that an impediment?” says Ludlow. “Well, obviously because the acquirers have been looking at those valuations and saying, ‘No, that’s too expensive.’”

Baker says the spread between what buyers want to pay and what acquirers want to receive is still too large to support anything more than sporadic M&A activity in the future. Prior to the market

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COVER STORY

M&A Fireworks crisis, there was “no real shortage of buyers,” he says. “The only impediment was the bid/ask spread between what buyers wanted to pay and what sellers thought that they could command. This largely remains the case now. Neither the GCAN nor the AXA acquisitions were bargains by any stretch. I would argue that both of these events were one-offs insofar that each deal had its motivations that cannot automatically be extrapolated to the rest of the market.”

If sellers’ multiples remain high, the most recent signs of volatility in the market, in addition to other challenges — including huge catastrophe losses in 2011 — may constrain capital, thereby curtailing future M&A activity. In support of this observation, sources note the recent Standard & Poor’s downgrade of the U.S. credit rating and some of the sovereign debt issues facing Greece and other European countries. All of these events suggest the re-emergence of a potential financial downturn, potentially affecting buyers’ capital positions.

At this point, it is impossible to know whether the recent market downturn in August is a trend, or a temporary blip on the radar screen. “I guess if we go down the path of an 08-09, we probably could see some sort of lag in M&A activity,” Mango says. “Again, whether a week makes a trend I highly doubt, but we will just wait and see from that perspective.”

Should an extended market downturn emerge once again in the near future, that could depress valuations, affecting M&A activity in the same way the 2008-09 crisis affected multiples and mergers. “The financial crisis experienced from 2008 through 2010 was an impediment to industry consolidation,” says Mark Tullis, chief financial officer at Intact Financial Corporation.

“As valuations declined during that period, potential sellers were reluctant to trade at what they view as discounted book values.”

Some believe that even if the Canadian economy continues to improve, growth through acquisition may no 40 Canadian Underwriter September 2011

longer represent an attractive growth strategy. “Ironically, if the economy were to get significantly better, it would probably tend to slow down M&A activity, as the larger companies would see premium growth from existing business and ‘sellers’ would see more inherent value in their own businesses and demand more for them,” Cook says.

I think that scale may be something that’s overrated. It strikes me that the critical issues are cultures, and that if you are going to get married, it might behoove you not to marry a tree, because your relationship isn’t going to work.

Saunders makes a counterargument, noting that economic downturns have sometimes triggered consolidation activity and not necessarily suppressed it. “If you think about the last significant downturn, it did create corporate activity,” he says. “One example was ING. Given the challenges the parent company of ING faced, they ended up exiting non-core or non-banking lines, and that’s how come ING Canada completely went public through an IPO [resulting in the current incarnation of Intact]. I do think whenever there is an

economic downturn, companies have challenges, either in their own markets or their core lines….I do think some of that facilitates people thinking and open to M&A.” Proponents of M&A have argued that in response to Canada’s market fragmentation, companies may opt to merge in order to take advantage of economies of scale. But does size matter? There are many skeptics.

A Stats Can report authored by Christine Hinchley examined this position in 2002 and concluded that “evidence for economies of scale (or size advantages) across all product lines in the current Canadian P&C insurance industry is not strong.” If the argument were true, Hinchley writes, more insurance firms in Canada would be large.

However, she noted in 2002, “there is a widespread distribution of firms by size according to market share of net premiums written (NPW). The largest licensed insurers serve more than 2% of the market each, the smallest serve less than 0.01% and there is a range of insurer sizes in between.”

About a decade later, each of Canada’s Top 10 P&C insurers serves between 4% and 8% of the market. Most insurers still serve less than 1% of the market each. Thus, while some may argue that having a large, financially strong carrier is a benefit in Canada, others aren’t quite so sure.

“I don’t think consolidation is necessarily inevitable,” says Danyluk. “And I’m not sure that larger means more efficient. I’m not sure larger means more effective. I’m not sure that larger means more choice.”

Ultimately, says Danyluk, echoing Tulloch’s point, M&A activity in the future will be determined by whether or not there is an appropriate strategic fit between the cultures of two distinct business partners. “I think that scale may be something that’s overrated,” he says. “It strikes me that the critical issues are cultures, and that if you are going to get married, it might behoove you not to marry a tree, because your relationship isn’t going to work.”

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It’s Not in the

Textbook Sixty years ago, my grandfather discussed the role of an adjuster’s personality in his or her professional success.

His observations still hold true today.

Keith Edwards

Senior Vice President, Training and Development, ClaimsPro (an SCM Company)

“A man may be full of technical knowledge and yet cut a very indifferent figure as an adjuster.”

My grandfather, P. Ormond Jones, used these words to open his remarks to the Chartered Institute of Loss Adjusters in London on Mar. 13, 1951.

Sixty years later, I was curious: are his comments still applicable today? Surprisingly, yes.

I come to this conclusion while acknowledging my grandfather’s observation is the product of a man who saw Queen Victoria when he was a boy. As a young man, my grandfather visited fire scenes dressed in a velvet collared frock coat and silk top hat.

While my grandfather’s talk covered a range of topics, I will concentrate on several aspects related to the personality of the adjuster.

THE ADJUSTER’S PERSONALITY In his speech, my grandfather said “no degree of technical skill can offset certain…defects (in the adjusters temperament) if they exist. An adjuster

42 Canadian Underwriter September 2011

is not employed by companies or underwriters to indulge in the luxury of showing resentment if he receives provocation. It is not his business to match retort with retort, and the more he can make himself impervious to the things which irritate him — and sometimes intended to irritate him — the better for all concerned. We are not schoolmasters to rebuke bad manners or teach good ones.”

I admit, as did my grandfather before me, to the humbling experience of living down an illadvised, but momentarily satisfying remark. As my grandfather said, “our principals are not likely to be much impressed when they get a letter of complaint, however unjustified the claimant may be, if the explanation really is that the insured got no more than he deserved.”

An adjuster’s ‘temperamental defects’ may not be inbred or permanent, but simply the inability to put out of mind the stress of a bad morning, heavy traffic or missed lunch. A claim that starts well tends to end well, or as well as can be expected.The cultivation of an equitable professional demeanour is as essential now as it was then.

THE ADJUSTER’S RESPONSIBILITY My grandfather believed adjusters should accept full responsibility for making their own decisions. As he put it in his speech: “The adjuster should always take to the full the responsibilities which fairly devolve upon him, and not attempt

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to pass them on to the (instructing) office. I hold it to be the unmistakable duty of the adjuster to indicate what in his opinion is the proper line (of enquiry) to pursue. It seems to be both weak and unjustifiable merely to recite the difficulties and ask for instructions.

Surely an underwriter is entitled to something better than that.The adjuster must not presume to dictate the decision, but the onus is upon him to advise.”

Unless the adjuster’s retainer specifically excludes comments on coverage or procedure, there is now, as there was then, a responsibility to offer an opinion, all the while being cautious not to paint one’s principals into a corner. Adjusters often court failure when they are unwilling to think critically or creatively, and when they do not trawl through all the permutations and possibilities to arrive at an informed opinion.

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lieve it is a total, but are merely playing for safety. Certainly be pessimistic and avoid wishful thinking, but make no further concessions to weakness, for weakness I think it is.”

Obviously little has changed since my grandfather said this. The challenge remains of reasonably forecasting what sum may eventually be paid when, literally, the smoke has not cleared. Sometimes it’s necessary to say fixing a reliable reserve is premature.Too frequently adjusters rush to judgment or carelessly throw out a figure that has to be significantly revised later, to the embarrassment of the adjuster and to the detriment of all involved.

REPORTING My grandfather stressed the importance of the adjuster’s role as a communicator.

“An adjuster who can’t report is like an architect who can’t draw,” he said.

ON COMPROMISE All adjusters have faced or will at some time face the dilemma of whether or not to compromise or stand firm. “A wise compromise may often be justified, but it should not be the compromise of weakness,” my grandfather said.

“The test of a wise compromise, in my judgment, is that if the adjuster can say to his own conscience that if he were underwriting with his own money and that money were at stake, he would compromise on the terms available, then he should compromise. But if the answer is in the negative, it is weakness approaching cowardice for him to give way.”

I can’t think of a better test.

ON SETTING THE RESERVE Few things cause even the most experienced adjuster more anxiety than deciding a reasonable figure on which to return the loss or set the reserve, my grandfather observed. “With many losses, the adjuster has the necessary material on which to form a reasonably reliable judgment...but on others it is not easy. If the loss is serious, at least you know the policy cannot pay more.

But I regard it as an act of weakness to return a total loss when you do not be-

An adjuster who can’t report is like an architect who can’t draw. If a report fails to be selfexplanatory, I do not hesitate to call it a thoroughly bad report.

“Long experience has led me to the conclusion that it is generally more difficult to train a young man in what I would call the art of reporting than to give him at least a working knowledge of the more essential rules of practical adjustment.”

One essential component of a good report is that it should be self-explanatory, my grandfather said. “If it fails in that, I do not hesitate to call it a thoroughly bad report,” he said. “Can anything be more exasperating…than to get an adjuster’s report that has to be read not once or twice, but several times in order to be sure precisely what the writer means? It would infuriate me to be compelled to take up a pencil and put down figures in order to ascertain what was the adjustment.”

If it is necessary to refer to documents, my grandfather added, they “should be

so clearly identified that they can be turned up at once without a search through a mass of other papers.”

An adjuster is in the communication business. He or she collects, analyzes and reports information. Despite great changes in communications technology — my grandfather did not live long enough to see the commercial introduction of the fax machine, let alone email or text messages — nothing has changed. A good report covering all the issues in a concise, factual and balanced way with organized attachments is rare and, unfortunately, often undervalued.

The contemporary mantra of “faster, cheaper, better” can backfire if the report is an ill-thought-out data dump that is hastily digested and triggers thoughtless action. Obviously the preference would be for a carefully contemplated, concise and well-argued piece of prose to provide the basis for well-considered decisions and actions.

Hasty reports can lead to lack of vision, confusion, a need for clarification and perhaps backtracking.This is not an efficient or effective way of doing business.

As any adjuster can tell you, rattling off a rambling, verbose three-page report is easy. It’s far more difficult, intellectually challenging and time-consuming to condense it to one page of well-written text.

Ironically, the adjuster who does produce that concise, well-thought-out and well-written report runs the risk of criticism for spending what on the face of it appears to be a disproportionate amount of time on a short piece of prose.

I will leave it to grandfather to have the last words on reports: “Frame your report as though you had to meet a fair but possibly critical reader. Do not, on any account, omit to mention facts that, if known, would dispose of the reader’s doubts. The knowledge in your own mind is useful to you, but possibly to no one else in the world, so far as its informative qualities are concerned.”

Were my grandfather able to speak to a similar audience today, I suspect that his original remarks would stand the test of time.

September 2011 Canadian Underwriter

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Kadey B.J. Schultz

Partner, Hughes Amys LLP (Toronto)

Ontario’s auto reforms highlight the importance of documenting all communications with consumers — even if those communications prove to be entirely one-sided.

Ontario’s 2010 auto reforms, particularly changes to the Statutory Accident Benefits Schedule (O. Reg. 34/10), marked the first time in Ontario auto insurance history that coverage has actually been taken away. At the same time, auto insurance consumers were faced with an increase in premium for less coverage than previously enjoyed. Meanwhile, consumers were told this is part of the government's rate stability program.

More money for less coverage, rate stability but higher premiums — no wonder consumers are feeling confused. If we can agree on one thing, it’s this: paying more for car insurance is not on anybody’s list of Top 10 priorities, especially not after the past three years of economic challenges.

Given the above, it’s obvious why auto reform is a live, political and positional issue. It will continue to have tremendous momentum until case law emerges defining the new regulations, set-

44 Canadian Underwriter September 2011

ting out the standard of practice for brokers, insurers and medical assessors alike.

As an insurance defence lawyer with a practice devoted to first-party disputes, most of my energy prior to September 2010 was committed to the end of the “transaction process.” This includes the period when an arbitration or court claim is initiated against an insurer as a result of denial or non-payment of benefits demanded following an auto accident.

However, long before a dispute between an insurer and claimant, the “transaction process” has already undergone many stages. The first stage is now in the spotlight and warrants attention and thought.This is when the broker helps the consumer make an informed decision when purchasing auto insurance.

DOCUMENTING THE BROKER’S ADVICE From the perspectives of defence counsel, risk managers and errors and omissions experts, a critical issue is how brokers document their

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The Era of Active Communication

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efforts in order to show a standard practice (of best practices), thereby protecting the broker from what appears to be inevitable litigation given the current auto insurance climate.

“Inevitable litigation” isn’t said in an effort to make brokers panic or simply for the sake of being dramatic. Just as sure as there will be litigation over the next few years related to the application of the Minor Injury Guideline (MIG) cap of $3,500 or the $2,000 cap on assessment fees, so, too, will litigation commence against brokers. This is predictable when an insured client suffers injuries requiring benefits in excess of the standard package policy limits, only to learn that there is no money to be had.

As many readers would appreciate by now, for policies that have renewed since Sept. 1, 2010, the standard package of accident benefits has decreased by half for medical, rehabilitation and attendant care coverage for non-catastrophically impaired claimants (from $100,000 collectively for medical and rehabilitation benefits to $50,000, and from $72,000 to $36,000 for attendant care benefits). These and other reductions in the basic coverage are significant.

In our ongoing provincial lecture circuit for the Insurance Institute, my copresenters Hugh Fardy (CG&B Group), Jim Cameron (Cameron & Associates) and I have outlined the following, easy example illustrating how quickly those limits can be depleted, with no recourse against any third party.

A couple of “snowbirds” drive to Florida from Ontario when they hit some fog. A single vehicle accident results in both the driver and his wife being hospitalized in South Carolina for five nights. The hospital bills exceed $50,000 for each of them. Their travel insurer had it written into the travel policy that the auto insurer would be first payer in the event of a claim stemming from an auto accident. Immediately, the $50,000 available for medical and rehabilitation benefits from the AB insurer is gone. And because the snow

birds have returned to Ontario, the travel insurer will not pay for any expenses once repatriated. OHIP then takes 12 months to reimburse the AB insurer for its covered portion of the U.S. hospital fees. By then, the two elderly, previously independent and active snowbirds require significant ongoing medical and rehabilitation treatment.

Brokers may not be able to protect themselves from a claim being made against them. What they can do is protect themselves from a finding of negligence.

They also require further attendant care benefits, which, at a maximum of $3,000 per month (up to a maximum of $36,000), were exhausted in the first year post-loss. Sure, the wife can make a claim in tort against her husband (not an easy decision to make after 48 years of marriage). But the husband, the driver, has no third-party claim, no more money available under his auto policy, and yet has significant continuing needs. What are the snowbirds to do?

SUING THE BROKER As a choicely-worded advertisement in the Barrie Examiner would recommend, the snowbirds, who have been with the same insurer for 15 years, and have only spoken with their broker perhaps twice in all of that time — they have one of those convenient direct withdrawal plans — may have a claim against their broker.The ad suggests a claim might be appropriate if the broker has been negligent and failed to make reasonable efforts to communicate with the snowbirds to advise of their diminished insurance coverage — especially given the reduction of their policy coverage since renewal on Sept. 2, 2010.

With no one else to claim against, and a genuine need, the snowbirds feel they have no choice but to engage in litigation against their broker.

Surely now the broker reading this article starts to panic.

How can brokers protect themselves?

The reality is that brokers may not be able to protect themselves from a claim being made against them. What they can do is protect themselves from a finding of negligence by following a few basic best practice tips.

PROTECTING AGAINST NEGLIGENCE It starts with communicating and ends with documenting. Yes, there are a few steps in between. And the dedication of resources — people, time and paper (i.e. money) — is a necessary feature.

The changes to the standard package amount to more choice for the consumer.The job of the broker — even on personal lines policies, where perhaps 90% are on a direct payment plan with little to no communication with the broker historically — is to make sure the client is informed. One must ask why taking away coverage was required for this communication piece to become so relevant, since optional benefits have been available for some time.

Arguably this should have been part of the standard practice annually, with or without the September 2010 reforms.

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When I say “make sure the client is informed,” it is important for the broker to differentiate between: 1) making a sale (having the client purchase any or all of the optional coverages) and 2) putting the broker in a position of strength down the road, in the event a negligence claim is made based on the coverages in place at the date of a loss. I will leave the sales advice to the experts.

Both the Insurance Brokers Association of Ontario (IBAO) and the brokers’ self-regulating body, Registered Insurance Brokers of Ontario (RIBO), worked hard to help brokers prepare for the September 2010 changes. In addition to the Financial Services Commission of Ontario (FSCO) efforts (three standard documents, mandated insurance company mailings, Web site information), the IBAO put together a

Coming Through For You!

road show seen by thousands of brokers. In addition, the association created specific, broker-related tools including sample marketing and checklists. RIBO, in addition to providing sample forms, additional information sources and a summary of the changes, also put together a Best Practices Guide.

The best practices include: • informing and educating your client; • being consistent (with your client and your practice as a whole); • communicating often; • obtaining client instructions; and • documenting the process.

However, the challenge of implementing best practices is multi-faceted. How is a broker to inform and educate?

Knowing with a fair level of confidence that a broker will not be protected by

The reality is that if brokers use the resources created by FSCO, the IBAO and RIBO; use the mailings and checklists; create client contact points; and consistently document their efforts to assist clients in making an informed decision, then there is no negligence.

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the three to five mailings that FSCO requires insurers to send out, how much effort — and expense — must a broker go to in order to successfully defend against a negligence claim? If three to five mailings is FSCO’s standard for insurers, then brokers are wise to attempt to inform and educate their clients the same number of times, in writing, by phone, in person, by email, etc. These contacts must be documented and archived so the broker has proof of the efforts made, regardless of the eventual result.

You might think obtaining instructions shouldn’t be too difficult: after all, isn’t this a product the consumer has sought out, is paying a dear penny for

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and should ensure is in place to protect their own interests?

If you answered this rhetorical question, you have forgotten that auto insurance in Ontario is compulsory — and expensive. Average Ontarians are paying several percentage points more of their net family income for car insurance than residents in the rest of Canada. On top of that, the average Ontarian actually understands very little about Statutory Accident Benefits. So, at the end of the day, it turns out that even if a broker applies the necessary time and resources to communicate with the client, the calls may not be returned, the mailed questionnaire may go unanswered and the renewal may come and go with no written or verbal connection with the client.

If this makes you panic, again, you are missing the point.

The reality is that if brokers use the resources created by FSCO, the IBAO and RIBO; use the mailings and checklists; create client contact points; and consis-

tently document their efforts to assist clients in making an informed decision, then there is no negligence.This is true regardless of whether the client calls

back, returns the questionnaire or communicates at all with their broker. No doubt, a claim may be made. But an aggressive defence with cost consequences can flow from an unmeritorious claim.

All the while, the broker has the peace of mind knowing that he or she met the requisite standard of practice.

Some brokers I have trained in the last several months have had a look of pure agony on their faces when I say: “And this is not a one-off.You now have to do this every year with each renewal.” But it seems the majority of the industry has accepted and planned for the augmented effort required to communicate with the client and assist them in making an informed decision. And most brokers are aware of the importance of documenting those efforts annually. We are unlikely to have further reductions in coverages within the next five years, but we might as well consider this the training ground. Who really knows if the worst has yet to come?

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International David Gambrill Editor

Reach

Insurance law is globalizing, and international networks of independent law firms present an attractive alternative to a merger between individual firms.

As insurance globalizes, business and insurance law firms in Europe, Canada and the United States are marrying up, and legal networks are expanding across the Atlantic to provide an attractive alternative for insurance defence firms wishing to retain their local identities.

For a variety of reasons, a number of business and insurance law firm mergers and strategic partnerships have been announced over the past few years.

At least three main reasons are cited for these mergers. One is the increasing internationalization of insurance, dominated by the London, New York, Chicago and Bermuda markets. A second reason is Europe’s renewed interest in the Canadian market, which is frequently described as a stable market that can help diversify risks globally. This is tied in with the third reason,

48 Canadian Underwriter September 2011

which is that insurers are increasingly looking to expand into emerging markets in South America, Asia and the Middle East. Canada is a place where capital can be parked safely while insurers pursue comparatively riskier ventures in the new markets.

The fact that insurers are expanding onto these global markets suggests the need for a more internationalized legal claims expertise. And so, individually, international firms have been exploring opportunities to merge with Canadian partners.

Most recently, for example, Canadian insurance law firm Nicholl Paskell-Mede LLP (NPM) joined forces with U.K.-based law firm Clyde & Co. effective Sept. 1, 2011. Clyde & Co. specializes in the areas of aviation, insurance, marine, energy, construction and infrastructure and trade and finance. NPM specializes in insurance law and professional and civil liability defence work.

As a result of the merger, NPM’s team of 40 professionals, including 15 partners based in Montreal and Toronto, became part of Clyde & Co.’s global network that currently includes 24 offices and 1,400 employees worldwide. NPM will adopt the Clyde & Co. brand and banner.

This announcement followed the June 1, 2011 pairing of Ogilvy Renault in Canada, a business

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law firm with a specialty practice in insurance law, with the international business law firm Norton Rose Group.

Meanwhile, DLA Piper, a global law firm that does work in commercial law (including product liability), is also looking to get into the game in Canada.

The Globe and Mail reported in March 2011 that DLA Piper was in talks with several large Canadian legal firms about a potential merger.

Given all of this activity happening at the individual firm level in Canada, it is perhaps not surprising that national networks of independent Canadian legal firms are forming affiliations with likeminded networks of independent legal firms in Europe and the United States.

In Canada, for example, The ARC Group Canada, a network of independent law firms across the country, has formally associated itself with Insuralex, a worldwide network of 21 independent insurance and re-insurance law firms based in the United States, Europe and South America. Insuralex offers legal services dedicated to the insurance and risk management communities.

Basically, Insuralex treats The ARC Group Canada as it would any other national organization. For example, the Insuralex network has a firm in England, a firm in France, a firm in Italy, etc.

The ARC Group Canada’s eight members would be considered ‘the firm’ in Canada. The ARC Group Canada would be attracting business from European insurers to the various firms in Canada.

“In ARC, Insuralex has been fortunate to find not a member, but a partner that itself has members covering the whole of Canada — members that have the same values and expertise as Insuralex’s members, and that are committed to the same aims and benefits for their clients,” says Insuralex president-elect Bill Perry, a solicitor with Perry Carter Bailey, a solicitor’s firm in London. “Our co-operation is thus, as we see it, a ‘natural.’ It can only be of assistance to the clients

of every member of ARC and Insuralex.

“In those circumstances, Insuralex sees no need to enter the Canadian market, which is fully covered by firms in whom it has every confidence and with whose group,The ARC Group, Insuralex is delighted to work as an alliance of equals who share these mutual objectives and values.”

From a Canadian standpoint, given the globalization of the insurance business, an association with networks of independent legal firms elsewhere in the world simply makes good business

When you are in an affiliation, everybody is a separate firm.

We have connections and referrals and marketing opportunities as a group, but we are still separate businesses. We keep not only the autonomy, but the good will. sense, says Jamie Trimble, partner at Hughes Amys, one of eight members of The ARC Group Canada Inc. Trimble cites at least two main reasons why the network affiliation approach might be an attractive alternative to a merger between individual law firms.

“The first benefit is, it gives us the ability to market beyond our borders to clients who do business within our borders,” he says. Of course, legal firms can do this without the need for a network. But the primary benefit of the network is that it allows firms within the network an opportunity to do their homework on one another.

“We knew from our existing clients and our broader inquiries that the people we were going to do business with and represent ourselves with [through Insuralex] were very good at what they do, excellent in their marketplaces and had a good reputation among the clients

for whom they do the types of work that we do,” he says. “What it means for us is that we are satisfied those with whom we are taking up a common cause reflect the values that we reflect in the market, do the kind of work that we do or compliment us in some way, and quality is appropriate.”

A second reason has to do with the almost ‘federated’ approach of a network.

The legal firms participating in the network can pool resources and take advantage of the strength of the larger network, which can bring in business referrals from around the world. They do this without losing their individual brands or identities, which can be a strength domestically.

“When you are in an affiliation, everybody is a separate firm,” says Trimble. “We have connections and referrals and marketing opportunities as a group, but we are still separate businesses.We keep not only the autonomy, but also the good will.”

Domestic insurers that have been in business for a long term may not want to lose the benefits associated with longevity that their established names connote. In the legal world, a firm name often expresses a solid institutional backing behind the work of reputable individual lawyers. The firm name can be an advantage in a domestic courtroom setting,Trimble says, an advantage that might be lost if the firm name disappears as a result of a merger.

“When I go into a courtroom and people see the name of the firm, that says something,” he says. “It’s not going to win you the day, but it says something. Normally what it says is: ‘They know what they are doing, they are established and reputable, they have been around a long time’ — all the stuff that longevity says. If you lose your identity tomorrow, because, for example, we cease being [a longstanding identity] and become XYZ, then the only reputation and recognition that you carry with you is personal now.”

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Re-calibrating Risk Management Robert McDowell In the wake of the past financial Financial Institutions and Services Group, Fasken Martineau DuMoulin LLP

Koker Christensen Financial Institutions and Services Group, Fasken Martineau DuMoulin LLP

crisis, global insurance regulators, including OSFI, are turning their attention to risk identification, governance and compensation in the (post-) financial crisis world.

The financial crisis revealed many financial institutions around the world did not fully appreciate the risks to which they were exposed.The Senior Supervisors Group, which includes the Office of the Superintendent of Financial Institutions (Canada) (OSFI) and supervisors from other countries, believes one of the deficiencies that contributed to, or was revealed by, the financial and banking crisis of 2008 was “the failure

50 Canadian Underwriter September 2011

of some boards of directors and senior managers to establish, measure and adhere to a level of risk acceptable to the firm.”1 Part of the fallout from the financial crisis has been an increased focus on risk management.

While the financial crisis was primarily a banking crisis, the increased focus on risk management also has significant implications for insurers. This article provides an overview of key risk management developments, with a particular focus on what insurers should be doing to identify and manage risk properly, and related expectations regarding compensation.

BACKGROUND: RISK MANAGEMENT IN CANADA OSFI’s current approach to risk management emerged in 1999 with the release of the Supervisory Framework.The general approach set out in the

IBAO CUW SEPT 11

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INSURANCE BROKERS ASSOCIATION ONTARIO

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91 st Annual Convention Wednesday, October 19 th – Friday, October 21 st , 2011

The Fairmont Royal York Hotel, Toronto, Ontario Thursday October 20, 2011 IBAO’s Annual KEYNOTE SPEAKER: Convention is Jason Ryan Dorsey, The Center for Generational Kinetics the biggest and Selling Across Generations: Specific Tactics that Drive Sales Whether You Text, Tweet, or Actually Talk On Your Mobile Phone most exciting Close a deal at Starbucks or invite them to your office? Plastic membership cards or Facebook. Fan Page? Never before have one generation’s hot buttons been so similar to another generation’s deal breakers. To compete and win you must know how to sell to all four generations insurance selling in today’s marketplace – and prepare for an emerging fifth generation. In Selling Across Generations, best-selling author Jason Ryan Dorsey broker event on reveals what you need to know about Gen Y, Generation X, Baby Boomers, and Traditionalists to drive sales results in the marketplace. You will learn each generation’s buying mindset, purchasing pathway™, loyalty hot buttons, and ideal customer experience. Jason even explains why the Canadian Gen Y will “ink” a deal with a text message while Boomers want to actually sign (and with a pen!). With a keen understanding of each generation’s buying preferences, Jason then shares numerous best practices and practical sales strategies collected from his work with companies and sales insurance leaders around the world. These ready-to-use strategies are designed for fast implementation and long-term results. You leave this engaging industry presentation ready to increase your sales with each generation of customer– whether they text, tweet, or actually talk on their mobile phone. calendar. EDUCATION PROGRAM AT A GLANCE:

There is simply no other event quite like it!

CSR SEMINAR: The Art of Powerful Conversation Stuart Knight, Stuart Knight Productions (RIBO CE - 3 Personal Skills Hours)

MEMBER’S SEMINAR: CEO PANEL This year’s CEO Panel will be moderated by Evan Solomon - CBC Television Broadcaster, Journalist and Author. The Panel will be comprised of five top executives from leading property and casualty underwriters. Our line-up of industry CEO’s who will be participating in this popular event are: Alister Campbell, President & CEO, Zurich Canada; George Cooke, President & CEO, The Dominion; Louis Gagnon, President, Intact Insurance; Karen Gavan, President & CEO, The Economical Insurance Group; and Maurice Tulloch, President & CEO, Aviva Canada.

Friday October 21, 2011 EDUCATION SEMINARS: Managing Organizational Change Ross McBride, Management Performance Centre (RIBO CE - 3 Management Hours)

The 2011 IBAO Annual Convention is a tweet-friendly event and we are encouraging attendees to tweetaway!! The hashtag for the event is #IBAOConvention11.

For complete program details and to register online, visit our website: ibao.org and click on Events.

Paying for Productivity – Acquiring, Compensating and Managing Producers in the 21st Century and Incentive Compensation for Brokerages Al Diamond, Agency Consulting Group Inc. (RIBO CE - 3 Management Hours)

How to Deal with Difficult People and Resolve Conflict Ross McBride, Management Performance Centre (RIBO CE - 3 Management Hours) Strategic Planning… Your Roadmap to Success Barry Nelson, Practical Management of Canada Inc. (RIBO CE - 3 Management Hours)

Competing and Winning…Beyond Price Lorie Guthrie Phair, LePhair Associates Ltd. (RIBO CE - 3 Personal Skill Hours)

Platinum Sponsors:

Banquet & Ball featuring: 4th Annual Award of Excellence Gala

This year, don’t question whether or not you should stay for our closing night. IBAO will be hosting its 4th Annual Award of Excellence Gala where we will be recognizing brokers for their contributions to the industry and community.

Also featuring the entertainment featuring a performance by: The Caveners Audiences have been raving about the all Canadian tribute to the Beatles known as THE CAVENERS..

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Part of the fallout from the financial crisis has been an increased focus on risk management. While the financial crisis was primarily a banking crisis, the increased focus on risk management also has significant implications for insurers.

Supervisory Framework is that boards of directors and management of federally regulated financial institutions are responsible for identifying and managing the risks faced by their institutions.

OSFI’s role is to oversee how well institutions manage their risks. At the time, the original Supervisory Framework represented a significant shift in responsibility for risk management from OSFI to institutions themselves.

OSFI updated the Supervisory Framework in December 2010. The fundamental approach of the Supervisory Framework remains focused on risk assessment, which is described as “the fundamental work activity of supervision.” But OSFI further articulates its risk management expectations in its guidelines, which address a wide variety of risks — including governance, outsourcing, money laundering and terrorist financing, reinsurance, legislative compliance, capital management and stress-testing (the latter of which itself addresses risk identification).

KEY DEVELOPMENTS IN RISK MANAGEMENT Identifying risks In order to manage risks, one must first identify them. Emerging views on risk management emphasize the need to have structured processes in place to identify emerging risks, to consider the 52 Canadian Underwriter September 2011

interconnectedness of various risks and to consider the impact of the occurrence of various risk scenarios.

Numerous organizations and sources can be helpful in identifying risks.

These include the International Association of Insurance Supervisors, the World Economic Forum, the Financial Stability Board, the Global Risk Institute, Basel III (e.g., risk weighting of different assets, products and lines of business), risks identified in prospectuses and other public company filings, DCATs, work of auditors in connection with the annual audit of a company and analyses of causes of the last crisis (which include insufficient capital, liquidity and risk management).

As an example of current perspectives on risk identification, a recent workshop sponsored by the Global Risk Institute identified five broad categories or groupings of risk issues: (1) governance, culture and agency risk; (2) public policy and regulatory risk; (3) data integrity and quality, (4) emerging and unknown risks; and (5) model and business complexity.

In another example, the World Economic Forum identified the following 10 key risks in its report Global Risks 2011: • climate change; • fiscal crises; • economic disparity; • global governance failures; • extreme weather events;

• • • • •

extreme energy price volatility; geopolitical conflict; corruption; flooding; and water security.

Economic disparity and global governance failures are highlighted as being particularly significant given their high degree of impact and their interconnectedness with other risks.

Establishing risk appetite/tolerance The concept of risk appetite — i.e., the amount of risk an institution is willing to take on in pursuit of value — has received considerable attention recently. In Observations on Developments in Risk Appetite Frameworks and IT Infrastructure, the Senior Supervisors Group addresses the importance of institutions establishing a “risk appetite framework” and using this as a strategic decision-making tool.2 This report states a risk appetite framework is to establish an explicit, forward-looking view of a firm’s desired risk profile in a variety of scenarios and to set out a process for achieving that risk profile.

A related concept is risk tolerance — for example, the maximum acceptable level of exposure. The International Association of Insurance Supervisors released its report Enterprise Risk Management in October 2010. It says insurers are to be required to: • establish and maintain a risk tolerance statement that takes into account all rel-

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

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

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

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

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

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

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

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

54 Canadian Underwriter September 2011

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

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

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

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

INSURANCE LAW

Grain Insurance and Guarantee Company Commercial Lines Underwriters www.graininsurance.com RSA Leading car, home and business insurer. www.rsagroup.ca Sovereign General Insurance Company of Canada Since 1953 www.sovereigngeneral.com

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

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

RESTORATION SERVICES Winmar Property Restoration Specialists Coming Through For You! www.winmar.on.ca

RISK MANAGEMENT The Guarantee Company of North America “Specialized insurance products...professional service” www.gcna.com

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

SPECIALTY INSURANCE Wawanesa Insurance Earning your trust since 1896. www.wawanesa.com

William J. Sutton & Co. Ltd. Insuring Special Risks since 1978 www.wjsutton.com

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evant and material categories of risk and the relationships between them; • make use of its risk tolerance levels in its business strategy; and • embed its defined risk tolerance limits in its day-to-day operations via its risk management policies and procedures.

Corporate governance and risk management The recent focus on risk management has included a critical review of the role of boards of directors and senior management, calling for a more explicit connection between corporate governance and risk management. A key issue here is independence.

The Basel Committee on Banking Supervision recently addressed the increased expectations related to the board’s responsibility to approve and oversee the implementation of the bank’s overall risk strategy, including its risk tolerance/appetite and policies for risk, risk management and compliance.3 In Observations on Developments in Risk Appetite Frameworks and IT Infrastructure, the Senior Supervisors Group notes that firms with more developed risk appetite

In firms with more developed risk appetite frameworks, the board, with input from senior management, sets overarching expectations for the risk profile. The CEO, CRO and CFO then translate those expectations into incentives and constraints on business lines. frameworks assign roles in the following, fundamentally important way: • the board, with input from senior management, sets overarching expectations for the risk profile; • the CEO, CRO and CFO translate those expectations into incentives and constraints for business lines, and the board holds the businesses accountable for performance related to the expectations; and • business lines manage within the boundaries of these incentives and constraints, and their performance depends

in part on the risk assessment framework’s performance.

OSFI is currently conducting a system-wide review of corporate governance practices to benchmark and assess gaps in current practices against OSFI’s expectations as set out in the Corporate Governance Guideline and the Supervisory Framework. In an interview earlier this summer, Julie Dickson, superintendent of financial institutions, signalled that OSFI is stepping up its oversight of the boards of banks and insurers and that directors will be subject to higher expectations.

OSFI has also indicated it is looking to update the Corporate Governance Guideline.

Compensation and risk management Failure of an institution’s compensation structure to support its risk management strategy — rewarding excessive risk-taking, for example — is widely viewed as one of the causes of the financial crisis.

The Financial Stability Forum (the predecessor of the Financial Stability Board) released the FSF Principles for Sound Compensation Practices in 2009. They include the following principles related to

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CU Seminar ad September 2011

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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: Toronto – CIP Society Wine and Cheese . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 12 Hamilton/Niagara – Speakers Breakfast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 1

CIP Society PROedge Seminars: Toronto – Finance for the non-financial professional . . . . . . . . . . . . . . . . . September 30 Kitchener – Advanced Construction Insurance Topics–Insuring Large Risks . . October 5 Kitchener – Nuclear Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .October 12 Edmonton – Finance for the non-financial professional . . . . . . . . . . . . . . . . . October 12 Ottawa – Advanced Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 13

CIP Society members are encouraged to welcome our new grads to the Society at convocations and awards functions across the country: PEI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .November 2 Nova Scotia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .November 3 New Brunswick . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .November 4 Newfoundland and Labrador . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .November 5 IIO – Cambrian Shield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .November 8 IIO – Southwestern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .November 10 IIO – Ottawa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .November 11

Keeping you at the forefront of the P&C industry.

The CIP Society. MEMBERS BENEFIT. www.insuranceinstitute.ca/cipsociety

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the effective alignment of compensation with prudent risk-taking: • compensation must be adjusted for all types of risk; • compensation outcomes must be symmetric with risk outcomes; • compensation payout schedules must be sensitive to the time horizon of risks; and • the mix of cash, equity and other forms of compensation must be consistent with risk alignment.

The Canadian Coalition for Good Governance has articulated similar principles.4 In a May 2009 letter to federally regulated financial institutions, OSFI outlined its expectations that they adopt these principles and ensure their compensation practices align with them.

Role of the Chief Risk Officer (CRO) The CRO is to be a key senior management position with significant clout, filled by a person with significant experience. In many financial institutions, the CRO reports directly to the Chief Executive Officer.

OSFI has publicly indicated it expects the CRO to have a broad view of all risks faced by the institution, including the basic risks — credit risk, market risk, operational risk, reputation risk and concentration risk. OSFI also expects the CRO to ensure that appropriate risk management strategies are in place; to have a solid awareness of capital management implications; and to be a strong voice with regular reporting to the CEO and board.5

ADVERTISERS’ INDEX ACE INA Insurance

9

Allstate Insurance Company of Canada

63

A.M. Best Company

23

Applied Systems

5

Aviva Canada Inc.

61

Canadian Broker Network

7

Compu-Quote, Inc.

67

CNA Canada

47

Cunningham Lindsey Canada

11

Crawford & Company (Canada) Inc.

19

Duck Creek Technologies

41

Elliott Special Risks LP FM Global

OSFI has publicly indicated it expects the CRO to have a broad view of all risks faced by the institution, including the basic risks — credit risk, market risk, operational risk, reputation risk and concentration risk.

OSFI also expects the CRO to ensure appropriate risk management strategies are in place.

27 2, 3 (IFC)

The Guarantee Company of North America

25

Guy Carpenter

39

Great American Insurance Group

29

Hannover Re

65

IBC – Insurance Bureau of Canada

62

ICBC

66

Insurance Brokers Association of Ontario (IBAO)

51

Insurance Brokers Association of Canada (IBAC)

12, 13

Insurance Institute of Canada

31, 56

Insurance Internet Directory

54

Pembridge Insurance Company

21

RSA – Royal & Sun Alliance Insurance Company of Canada

17

Swiss Reinsurance Company

35

WICC

53

WINMAR

46

XL Insurance

37

END NOTES 1 Risk Management Lessons from the Global Banking Crisis of 2008¸ Senior Supervisors Group (2009).

2 Observations on Developments in Risk Appetite Frameworks and IT Infrastructure, Senior Supervisors Group (2010).

3 Principles for enhancing corporate governance, Basel Committee on Banking Supervision (2010).

4 2009 Executive Compensation Principles, Canadian Coalition for Good Governance (2009).

5 For example, in remarks by Superintendent Julie Dickson to the Actuaries Club of Toronto on September 23, 2009.

September 2011 Canadian Underwriter

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MOVES & VIEWS

UPCOMING EVENTS: FOR A COMPLETE LIST VISIT

www.canadianunderwriter.ca

AND CLICK ‘MY EVENTS CALENDAR” ON THE HOME PAGE

YES 58% NO 42%

1

Credit scoring should be banned throughout Canada, according to more than half (58%) of respondents to www.canadianunderwriter.ca’s latest online poll. Of the 163 respondents, 42% said “no” to an all-out ban on the use of credit scoring in Canada.

2

Greg Dunn has been appointed executive vice president of Claims and Customer Service Operations (C&CSO) at Aviva Canada. C&CSO comprises claims, complex claims, broker and customer care, strategy and shared services and performance assessment and analytics. Dunn joined Aviva Canada in 2004 as vice president of corporate development for Pilot Insurance Company. He most recently served as chief risk officer representing the property and casualty business for Aviva in North America. His experience spans a wide variety of disciplines, including risk, actuarial, pricing, underwriting, sales and product development. “Greg is an

innovative and insightful leader who has successfully driven many strategic initiatives during his career with Aviva,” said Maurice Tulloch, Aviva Canada’s president and CEO. “We are proud of the improvements we made in our claims and customer service area over the past two years and we know he will build on that too.”

3

Joel McQuilkin has been appointed director of specialty services-transportation fleet services at Cunningham Lindsey Canada Claims Services Ltd. (Cunningham Lindsey).

McQuilkin will be responsible for providing leadership to the national network of transportation fleet specialists across Canada. He will concentrate on increasing the division’s presence within the Canadian marketplace and the claims handling of these specialized losses. A Chartered Insurance Professional, McQuilkin joined Cunningham Lindsey in 1992. Since that time, he has specialized in trucking and transportation-related claims adjusting.

4

John O’Donnell [4] has been appointed president and CEO of Allstate Canada Group of Companies and its affiliates.

O’Donnell succeeds Chris Kiah, who has returned to parent company Allstate Corporation in Northbrook, Illi-

58 Canadian Underwriter September 2011

2 nois, to work on a variety of projects supporting Allstate agencies in the United States. O’Donnell joins Allstate Canada from his role as field vice-president of the southeast region with Allstate Corporation. He was formerly with GMAC Insurance, where he was instrumental in creating and implementing numerous business development initiatives. He has held leadership roles with a number of companies including The Walt Disney Corporation and served as an associate in the investment management division of Goldman Sachs.

5

Economical Mutual Insurance Company has appointed Philip Mather as senior vice president and chief financial officer, effective Oct. 1, 2011.

Mather is currently a partner in the audit and assurance group of PricewaterhouseCoopers LLP, specializing in the financial services practice. Mather has more than 16 years of financial consulting experience. He has

3 provided audit and assurance services to a wide range of global insurers, Canadian-listed companies and Canadian federally regulated banks and insurance companies. He has also worked on numerous assurance and advisory engagements with a variety of financial services clients, focusing on the areas of Sarbanes-Oxley compliance, accounting advice, risk management and governance.

Prior to joining the Toronto office of Pricewaterhouse Coopers LLP, Mather worked for PwC in the United Kingdom, where he focused on the provision of audit and assurance services to clients in a wide range of industries.

6

Garreth Elston has been appointed vice president of analytics and corporate development at MSA Research Inc. Elston has more than 12 years of international capital markets experience in the investment management, strategy and research fields. He holds an MBA in finance and private

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MOVES & VIEWS

Canada.” ClaimsPro now has more than 1,050 insurance professionals.

10

4 equity from the University of Toronto’s Rotman School of Management. “Garreth’s sharp analytical skills will greatly strengthen MSA’s bench strength, allowing us to ramp up service delivery, customersupport and analytical product development going forward,” Joel Baker, MSA’s president and CEO, said in a release.

7

McLarens Canada has been renamed Granite Claims Solutions.

McLarens is a subsidiary company of Granite Global Solutions Inc. (GGS), which offers independent adjusting, private investigation, disability management, structured settlement and forensic engineering services to corporate, legal, insurance and government clients. GGS is part of Granite Partners, a boutique private equity firm based in Toronto that targets profitable, well-managed, manufacturing and service companies with sales in the $10-million to $100-million range. McLarens Canada began 35 years ago in Toronto as Ponton Coleshill Insurance Adjusters. Since

6

8

then, the company has grown to more than 500 employees and provides claims services across Canada from almost 50 branch offices. Headquartered in Toronto, Ontario, Granite offers a national presence to the domestic property and casualty insurance industry. It has more than 300 specialty claims adjusters, marine surveyors and third party administrators coast to coast in Canada.

president of engineering and construction. Previously he served as CEO and chief agent of Arch Insurance Group’s Canadian operations, and was subsequently appointed worldwide chief underwriting officer for Arch Insurance Group’s onshore energy (technical risk) and CAR/EAR businesses.

8

Michael Baxter [8] has been appointed vice president of property of the Canadian branch of XL Insurance Company Limited, part of the insurance underwriting operations of XL Group plc. Reporting to Joseph Tocco, head of XL Insurance’s North America property unit, Baxter will be responsible for managing XL Insurance’s Canadian property business, including energy and construction-related property coverages. He is based in XL’s Toronto office.

Baxter joins XL Insurance from Swiss Re Corporate Solutions, where he was vice

9

ClaimsPro Inc., a Canadian independent adjusting company, has completed the acquisition of Brouwer Claims Canada & Co. Ltd., a Vancouver-based independent adjusting firm that has been serving Canadian clients for more than 25 years. The transaction aligns with ClaimsPro’s strategy to build the most comprehensive claims adjusting company from coast to coast, the company says in a press release.

“This acquisition will add further strength to our already deep talent pool of adjusters,” the release says. “In addition, we will proudly be offering services as ClaimsPro with many new locations in

FirstOnSite Restoration has beefed up its Western leadership team with the appointment of two new directors. Scott McFie is now director of commercial business development in Western Canada. McFie recently served as senior vice president of international business development and sales with ClaimsPro Inc. Martin Moran is now the director of business development in Western Canada. Moran joined FirstOnSite in 2010, working in its Ontario business development unit. “FirstOnSite has recognized there is a growing need for quality mitigation and restoration work in Western Canada,” said Bruce Derraugh, FirstOnSite’s chief operating officer.

11

IBAO is holding its ninth annual Customer Service for the Insurance Professional (CSIP) Workshop & Retreat.

The event will be held in Ottawa between Nov. 9 and 12.

It has been developed specifically for top performing CSR or personal lines managers.

The three-day workshop and retreat offers the opportunity to learn the “best practices” of the CSIP program, fine tune customer service skills and network in a relaxed setting.

September 2011 Canadian Underwriter

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GALLERY

More than 220 golfers attended the 12th annual WICC Ontario Golf Tournament on July 11 at Angus Glen Golf Club in Markham, Ontario. Attendees enjoyed a barbeque lunch, silent auction, raffle and dinner. A WICC cheque for $250,000 was presented to the Canadian Cancer Society.

60 Canadian Underwriter September 2011

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GALLERY See all photos from this event at www.canadianunderwriter.ca/gallery

September 2011 Canadian Underwriter

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APPOINTMENT

GALLERY See all photos from this event at www.canadianunderwriter.ca/gallery

Gregor M. Robinson Senior Vice-President, Policy, and Chief Economist

Insurance Bureau of Canada (IBC) is pleased to announce the appointment of Gregor M. Robinson as Senior VicePresident, Policy, and Chief Economist.

Mr. Robinson brings to IBC more than 37 years of experience in economics and policy development both within and outside of government. During his career, he has worked in various economist and policy positions for Ontario’s Ministries of Finance, Energy, and Natural Resources. He has also worked in private industry as President of Plain Language & Design Inc. where worked on economic and public policy, finance, and strategic communications. Before joining IBC, Mr. Robinson was Vice-President, Policy & Economics Analysis for the Ontario Energy Association.

Mr. Robinson holds undergraduate and master’s degrees in economics, the latter from the London School of Economics.

Insurance Bureau of Canada is the national industry association representing Canada’s private home, car and business insurers. Its member companies represent 90% of the property and casualty (P&C) insurance market in Canada. The P&C insurance industry employs over 114,000 Canadians, pays more than $7 billion in taxes to the federal, provincial and municipal governments, and has a total premium base of $40 billion.

62 Canadian Underwriter September 2011

Winmar celebrated the grand re-opening of its Oakville/Mississauga office in a new location.

MPP Kevin Flynn, Mayor Rob Burton, regional and town councillor Cathy Duddeck, town councillor

Pam Damoff, Oakville Chamber of Commerce president John Sawyer, Oakville Chamber of Commerce board member Wendy Rinella, Winmar cofounder John White and Mike White, owner/manager

of the Oakville/Mississauga location, all attended the official ribbon-cutting ceremony.

The new location is at 1158 South Service Road in Oakville, Ontario.

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APPOINTMENT

GALLERY

The Magnes Group Inc. held its annual Charity Golf Classic on June 17 at Heron Point Golf Club in Ancaster, Ontario. One hundred and twenty golfers raised a

total of $60,000 for Ian Anderson House, Camp Trillium, Children’s Aid Foundation, Kerr Street Ministries, St. Elizabeth Healthcare Foundation, WICC and Bridges to

Community. This marks the 13th annual event hosted

by Magnes, which has donated more than $750,000 in proceeds to local charities.

John O’Donnell W. Guy Hill, Jr., Chairman, is pleased to announce the appointment of John O’Donnell as President & CEO of Allstate Canada Group of Companies and its affiliates.

Mr. O’Donnell joins Allstate Canada from his role as field vice-president, Southeast region with Allstate Corporation. Mr. O’Donnell was formerly vice president, general manager for the exclusive agency division of GMAC Insurance. He has held leadership roles with a number of companies including Walt Disney Corporation and served as an associate in the Investment Management Division of Goldman Sachs.

See all photos from this event at www.canadianunderwriter.ca/gallery

Catlin Canada hosted a cocktail party on June 29 to “officially” open its Montreal office. More than 100 brokers enjoyed great music, food and drinks.

Managed by Pat Bruzzese, the new office is located at 1411 Peel St.

Mr. O’Donnell earned his Bachelor of Science degree in Mathematics from the United States Naval Academy and served as a helicopter pilot in the United States Marine Corps, achieving the rank of captain. He also holds a Masters degree in Business Administration in Finance and Economics from the University of Chicago.

Allstate Insurance Company of Canada is a wholly-owned subsidiary of Allstate Corporation of Northbrook, Illinois.

Founded in 1953, Allstate Canada is a multi-channel producer and distributor of home and automobile insurance products with headquarters in Markham, Ontario.

September 2011 Canadian Underwriter

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GALLERY

The Canadian Independent Adjusters’ Association (CIAA) held its 27th Annual General Meeting and Conference at the JW Mariott The Rosseau Muskoka Resort & Spa from Aug. 24-28. More than 60 delegates joined together for a trade show, a day of education, a dinner cruise and the member meeting.

At the President’s Banquet & Ball, Greg Merrithew took over the reins as president of the association for the 2011-12 year. He succeeds outgoing president Mary Charman.

64 Canadian Underwriter September 2011

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GALLERY See all photos from this event at www.canadianunderwriter.ca/gallery

EMPLOYMENT OPPORTUNITY Hannover Re Canadian Branch Senior Property Facultative Underwriter Responsibilities: u Develop and manage a property portfolio to achieve profitable targets u Underwrite and process new business, renewals, endorsements and cancellations u Participate in production trips and corporate functions for marketing purposes u Contribute to continuous improvement of work processes and procedures Qualifications: u Minimum 5 years property underwriting experience u Post-secondary education with CIP or FCIP designation u Awareness of market conditions and trends u Excellent communication and negotiation skills u Strong analytical and problem solving skills u Motivated and enthusiastic with a positive outlook u Ability to work independently as well as part of a team u Strong organizational and time management skills u Good computer skills – Word, Excel, Outlook Why work for Hannover Re: u One of the largest reinsurers globally u Financial strength: “A” rated company u Innovative and entrepreneurial working environment u Opportunities for advancement

Please e-mail your resume and your cover letter in confidence to: hanremail@hannover-re.com

September 2011 Canadian Underwriter

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GALLERY

More than 150 guests boarded the Yankee Lady III for a four-hour tour of the Toronto harbour. The third annual event, co-sponsored by Winmar Toronto/Brampton and Gilbertson Davis Emerson LLP, raised $5,000 for Kerry’s Place Autism Services. The cruise, held Aug. 18, provided guests not only the opportunity to raise money for a valuable cause, but mix and mingle with insurance professionals, friends and colleagues over lunch and cocktails.

Announcing a new member of the team Mark Blucher, senior vice president of Insurance, is pleased to announce the appointment of Tim Courtney as vice president of Commercial Insurance.

TIM COURTNEY VICE PRESIDENT OF COMMERCIAL INSURANCE Mr. Courtney is a Chartered Insurance Professional with over 30 years of experience in the commercial insurance industry.

He most recently served as vice president of Corporate Underwriting and Product and Service Innovations at Markel Insurance, a leading insurance company for the trucking industry. At Markel, Mr. Courtney was responsible for underwriting infrastructure and governance, as well as the development of highly customized insurance and risk management advisory solutions. His extensive experience also includes 15 years with Zurich Canada’s Commercial Lines Underwriting group, with the last two years as vice president of Underwriting.

Mr. Courtney’s depth of experience in product design, development and pricing for the commercial market will strengthen ICBC’s approach to working with customers in this key market segment.

icbc.com

66

Canadian Underwriter September 2011

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