A New Conversation

The world returned to its catastrophic ways in 2013, featuring everything from hurricanes, earthquakes, windstorms and, of course, flooding – regular flooding, overland flooding, flash flooding.

But unlike most years, except perhaps a distinct few, talk of Canada was much more on the lips of reinsurers, insurers and everyday folk beyond the country’s borders. Canada played unwelcome host to the extreme flooding in southern Alberta – its associated insured costs already expected to eclipse those related to the previously most expensive natural catastrophe in the country’s history, the ice storm in 1998 – followed by flash flooding in and around Toronto, an event garnering its own dubious distinction, producing the highest insured losses of any nat cat ever in Ontario. The peril then changed from water to fire, but was no less upsetting or concerning, with the rail tragedy in Lac-Mégantic, Quebec.

These events have been among those to fuel new conversations, conversations that invariably involve talk of rethinking current thinking and positing whether or not Canada is now facing a new norm of more and more expensive events.

Couple these considerations with emerging and persistent conditions elsewhere – including low interest rates, pressure on reinsurers to improve results and alternative capital entering the market – and 2013 made for a much more active year for reinsurers than 2012.

In light of the changes, both existing and emerging, Canadian Underwriter asked senior executives of reinsurance companies in Canada what they see ahead for 2014. What considerations need to be part of the conversation?

1  Pierre DionneSenior Vice President & Chief AgentCaisse Centrale de Réassurance – Canada

There may be some truth in the old superstition that 13 is an unlucky number.

The year 2013 was certainly not kind to the insurance industry in Canada. Not only did the industry witness the largest-ever insured catastrophe with the Southern Alberta flooding, there was a second $1-billion event with the Toronto storm, followed by the tragedy of Lac-Mégantic, and multiple other storm events throughout Canada. The final tally will be over $4 billion in claims paid.

The current trend of more frequent and severe events – brought on not only by climate change, but aging infrastructure, increasing population density and increasing wealth – seems to be here to stay. As an industry, if we want property insurance to remain affordable, we need to engage politicians and consumers on prevention, in order to reduce future losses.

Some changes to the insurance product, such as limiting Guaranteed Replacement Cost and Actual Cash Value on roofs in the case of hail or wind damage, would also go a long way in controlling costs.

In the meantime, reinsurers will again adjust their pricing on catastrophe-exposed business. Loss-impacted treaties can expect some increases. Although alternative capital has impacted the pricing of catastrophe business in the United States, the same impact is not foreseen in Canada.

Given the ever-increasing medical costs, judicial inflation and low interest rates, there should also be some pressure on automobile and general liability pricing. However, most treaties are expected to renew with flat pricing.

The story may be different next year if the Ontario government follows through with the mandated 15% reduction in Ontario automobile rate. This may turn out to be the next politician-made catastrophe. Stay tuned!

2  Tim FisherSenior Vice President & Canadian Branch ManagerXL Group’s Reinsurance Operations

When considering what the Canadian reinsurance market can expect during 2014, context is important.

Analysis of filed results for 2009 to 2012 show that local reinsurers generated an average combined ratio of 94.5%; removal of the contribution from Caribbean and other non-Canadian business written locally would worsen this already weak result. The significant and often tragic events this year appear likely to generate a much higher market combined ratio for 2013.

Additionally, the cost of transacting business locally will increase due to the application of GST/HST to reinsurance premiums paid to non-resident affiliates and 2014 increases in capital requirements will further weaken margins.

So what can the Canadian market expect? First, there is likely to be greater scrutiny of local reinsurers by their head offices, resulting in increased pressure to improve results. The available levers to achieve this are limited: reinsurers can cut costs, reduce cover or increase product price.

Following a year of record catastrophe losses, there can no longer be any doubt that frequency and severity of natural catastrophes has increased. Reinsurers will likely seek to address changes in the product cost during the 2014 renewal process.

Second, reinsurers are expected to work with their customers to better understand how they address un-modelled earthquake risk as part of their risk management discipline following the completion by all federally regulated insurers and reinsurers of the B9 Gap Analysis for the Office of the Superintendent of Financial Institutions of Canada at the end of September. Additionally, there is likely to be pressure from reinsurers to reduce occurrence limits provided under property per risk contracts as the summer events demonstrate catastrophe risk is better managed and controlled in the Cat product.

Finally, with yields on “new money” remaining weak, claims inflation running between 3% to 5% annually and a number of mid-sized losses having impacted the casualty market this year, we are likely to see increased rates for casualty reinsurance during 2014.

The views expressed are the author’s alone and do not necessarily represent the views of XL Group plc companies.

3  Kenneth IrvinPresident & Chief Executive OfficerMunich Reinsurance Company of Canada

Weather-induced catastrophic events are certainly top-of-mind for reinsurers and insurers alike. Climate change induced by the evolution of man, the cyclicality of the ecosystem or the yet-to-arrive meteorite, produces human hardship and suffering and a pot-full of insured losses.

The floods in Alberta, rainstorm in Toronto and hailstorm in Regina certainly demonstrate the need for catastrophe reinsurance programs to protect against the uneven climatic conditions of our time.

Catastrophe program rates in Canada will increase for 2014 – most notably in low layers revealed to be the most vulnerable. This is not unexpected as primary carriers adjust their own rates to respond to this new reality of greater and more frequent exposure.

Loss mitigation efforts in advance of the calamities will certainly have beneficial effects on both the human capital and economic outcomes of events, but these will be counter-weighted to some degree by the seemingly exponential increase of insured values in our urban centres.

Reinsurance rates, ex-catastrophe, will reflect individual experience. Primary commercial rates are finally beginning to rise from the floor created by satisfactory company and industry results in recent times – this will, if continued, solidify the financial base insurers and reinsurers need to serve their constituents and themselves well. 

4  Caroline KaneSenior Vice President & Chief Agent in CanadaToa Reinsurance Company of America

The year 2013 has been a challenging one for the Canadian insurance/reinsurance industry. The Calgary floods in June, estimated at $1.7 billion insured loss, followed by the Toronto rainstorm in July, estimated at $850 million, will largely be borne by reinsurers.

There is a general understanding that mitigating future catastrophic losses will require industry collaboration with federal and provincial governments, as well as investing in infrastructure on an ongoing basis.

For the upcoming January 1, 2014 treaty renewals, reinsurers and cedants can expect rate increases on catastrophe excess and risk excess treaties that were impacted by one or both of the Calgary or Toronto rainstorms.

But it is not just a question of raising rates. Reinsurers will no doubt be in discussions with their clients (cedants) to learn and to better understand each of their changes in underwriting – for example, deductible levels, sub-limits for certain exposures, use of models and predictive analytics, etc. – in order to control exposures and mitigate future losses.

Capacity is plentiful in the Canadian reinsurance market and this will put pressure on pricing. It is too early to gauge whether capital markets will play any sort of a role in the Canadian reinsurance market in 2014. For some, the choice may boil down to accepting cheap capital or preserving value-added relationships with reinsurance partners.

It is worth mentioning that a number of reinsurers also provide capacity for casualty programs. And while most cedants have healthy retentions, this means that reinsurers are primarily exposed to the volatility of medium to long tail automobile and liability shock losses.

Low interest rates remain on the horizon for the foreseeable future, and so it is imperative that reinsurers exercise underwriting discipline and obtain adequate rate for the risk return. Reinsurers need to take a measured approach in deploying our capital, managing risk and selecting business partners where there is an appropriate strategic fit. 

5  Sharon LudlowPresident & Chief Executive OfficerSwiss Re Canada 

The re/insurance industry is one in which you have to learn from past experience and continually evolve if you are to effectively serve clients. This is why in 2014 it is vital that the insurance industry takes heed of events that occurred in Canada this year.

Canadians saw significant water damage in Alberta and in Toronto, which demonstrated how vulnerable we are to this particular peril. For a long time now, the industry has talked about ways to better protect people financially from the impact of flood, but these events showed that it is time to back up those words with action.

Canada is the only G8 nation that does not have a flood program. Without this, and with the inconsistencies in definition and application of sewer back-up coverage, there is confusion in the marketplace. As an industry, it is necessary to better explain what is covered and what is not under sewer back-up. But the industry must go further and look for ways to provide protection for this peril.

There are questions that still need to be answered, of course. But the industry has the advantage of evaluating programs in a variety of other countries; and determining what fits best for Canada. And this does not have to be done alone; meaningful discussion and action needs to take place with the industry and with government.

The industry needs to have a simple, transparent policy that states what is covered and what is not. While insurers cannot prevent flood events, they can help consumers prepare for them by helping them better understand their risks and offering them financial protection should an event strike. 

6  Cam MacDonaldSenior Vice President & Chief AgentTransatlantic Re

Another tumultuous year for the Canadian reinsurance market, dealing with insured losses from two major catastrophic events totalling approximately $3 billion, and these latest losses are on the heels of the Calgary hailstorm and Hurricane Sandy in 2012.

This unprecedented series of major losses will quite likely have a profound impact on the Canadian reinsurance market as reinsurers come to grips with the extent of their losses. Changes to reinsurance terms and conditions appear inevitable.

Those property catastrophe and property per risk treaties that experienced several losses over the past two years will almost certainly see some form of rate adjustment, although the larger question may be: Are these recent Cat losses truly market-changing events and will there be a change in underwriting attitude throughout the entire marketplace and across all lines of business?

One major factor that may mitigate any positive shift in underwriting policy is the overabundance of available capacity not only from traditional reinsurance sources, but from capital markets that appear to have a renewed interest in property and casualty products. While capital market capacity in the form of Cat bonds, sidecars and pension plans is typically dependent on yield and may be fleeting, in the interim it could pose a serious problem to a market that is in dire need of correction.

Our operating environment is changing rapidly and reinsurers will be faced with many challenges in 2014. However, along with uncertainty comes opportunity and as long as our market continues to exercise sound underwriting principles and practices, we will endure.

7  Frank RueckertSenior Vice President, Canadian Treaty DepartmentHannover Re

Whether a market-changing event or not, if one looks at the specific experience of the respective clients, the flood losses in southern Alberta and Toronto will likely be a driver for renewal pricing. The losses combined are expected to be close to the $3-billion mark. Already at recent renewals, there were a few quite significant upward price adjustments for loss-affected accounts.

The losses in the Canadian market space will have an impact especially on reinsurers who have been hit, perhaps eliciting some effort to try to recoup some money. Overall, it is anticipated that the property per risk and the property Cat prices, especially for those affected layers, will have an upward movement.

There must be a rethinking of how flood losses are dealt with, in general, and what industry as a whole is willing to bear. Is it still viable to hold the distinction between a sewer back-up loss and a normal flood loss? Without the distinction, is general flood/water coverage affordable at all, and what is the role of the government in this regard? If the distinction is held up, will sewer back-up coverage only be included via endorsements or become mandatory? And what about sub-limits and deductibles?

On a global basis, one threat is that Canada has been overall a profitable market and a good market with regard to the long-term relationships between primary companies and reinsurers. The recent major losses could result in some new capacity, for example, from London or from other markets. Those new markets, or potentially new markets, have not experienced claims. As such, they may be willing to provide capacity that is cheaper than reinsurers who have been here for a long time and have suffered those losses, are willing to provide.

However, reinsurers who suffered losses cannot go wild and expect a payback over a very short period – say, two years. On the other hand, there is a need for some price adjustment upwards.

Finding the right balance is essential, or reinsurer clients might be pushed to other alternatives.

8  Steve SmithPresident & Chief Executive OfficerFarm Mutual Reinsurance Plan

From the reinsurers’ perspective, the story for 2013 is two-fold. Obviously, the Calgary and Toronto floods top everyone’s agenda with respect to market impact events. The second is the misguided mandate to reduce Ontario auto insurance premiums by an arbitrary 15% without any proper analysis or industry input.

The severity of weather events continues to be a clear trend, particularly in the urban areas that are at the mercy of aging and inadequate infrastructures. With regard to the regional mutuals, their rural focus and spread of risk enabled them to, by and large, escape the wrath of the two aforementioned storms.

While overland flood is “not covered,” the insurance industry, in the face of great reputational risk, has in fact responded to a large portion of the losses through either realizing ambiguous and conflicted wordings or ex-gratia responses.

Recognizing that Canada is the only G8 country that does not currently provide some form of flood insurance response, it would appear that the Canadian insurance industry is on the cusp of developing and providing an overland flood cover. If the industry is going to pay the claims anyway, let’s develop a workable flood model, clean up the wordings, provide the cover and charge for it.

With respect to Ontario auto, the reduction in auto rates will result in pressure on reinsurance rates as the reforms that are theoretically driving the primary rate reduction will not reduce reinsurers losses.

Reinsurers’ exposure remains the same; serious injuries driving excess claims have not changed. As a result, excess of loss casualty rates relative to primary rates will be likely seen to increase.

As far as the outlook for investments, the expected return on fixed income portfolios remains extremely volatile, if not absolutely dismal. This anticipated volatility will place continued emphasis on reinsurance underwriting results reflected by a firm market and firm pricing.

9  Matt SpensieriVice President, ReinsuranceCatlin Canada Inc.

Last year at this time, catastrophe loss(es), or the absence thereof, were seen as the main driver in the reinsurance market.

Hurricane Sandy had just impacted the U.S. East Coast, leaving thousands homeless and billions of dollars of losses. While a few companies in Canada suffered losses from Sandy, 2012 was essentially a non-event with respect to Cat losses. While there was a little upward movement, for the most part it was a very stable renewal market.

Fast forward 12 months, and a lot has changed. June brought unprecedented flooding in Alberta. A few weeks later, July arrived with a month’s worth of rain falling in the Greater Toronto Area in a matter of hours. Both of these events caused billions of dollars in losses, with a significant portion falling upon reinsurers to pay.

The train derailment and subsequent explosions brought a huge tragedy to the town of Lac-Mégantic, Quebec. There was a tremendous loss of lives, destruction of property and pollution of land and water. The ultimate cost of this loss will not be known for many, many years – and no doubt some portion will be paid by reinsurers.

While many exposures are considered when pricing a catastrophe cover, it would be fair to say the main driver is the peril of earthquake. The Office of the Superintendent of Financial Institutions of Canada (OSFI) requirements provide guidance to insurers as to minimum limits required. Most insurers in Canada have earthquake exposures in their portfolios, thereby significantly influencing their catastrophe purchasing decisions/requirements.

If we focus solely on the “flooding events” of 2013, the cost of these losses alone will far outstrip “all” catastrophe premium for “all” perils collected by reinsurers for Canada, not just for 2013, but for a few years. To put this another way, we may be pricing for earthquake, but we seem to be missing the cost of other perils, one of which is flood.

The main influence of the supply/demand marketplace continues to be price. For 2014, there is expectation that adjustments will be made to programs that have suffered losses in 2013… but perhaps much more is required.

10  Matt WolfeSenior Vice President & Managing Director CanadaBeach and Associates Ltd.

“It is not necessary to change. Survival is not mandatory.” — W. Edwards Deming

We could speak at length about the recent Canadian catastrophe losses (which will cost Canadian reinsurers approximately $1.5 billion against a total Canadian reinsurance market premium base of about $2 billion). However, two trends that are occurring now in the global reinsurance marketplace may have a larger long-term impact.

Throughout the world, reinsurers are seeing their clients materially reduce their non-property catastrophe reinsurance cessions while simultaneously having to compete with non-traditional capacity on property catastrophe programs. 2013 has seen a number of very large insurers sharply reduce their reinsurance spend, the latest of which was Allianz Group announcing it will reduce its non-property catastrophe reinsurance spend by over $700 million.

In addition to facing a sharp reduction in this much-needed diversifying (non-property catastrophe) premium, reinsurers are facing significant pricing pressure from non-traditional capacity in the property catastrophe space, as clearly evidenced by the double-digit rate reductions seen at July 1 in the United States property catastrophe market.

In Canada, reinsurers have experienced a material contraction in non-catastrophe premium ceded to them in recent years, but thus far they have not experienced downwards pricing pressure from non-traditional capital. However, it is inevitable that this capital will look to participate in Canada. They will seek to offset their peak exposures (such as California quake and Florida wind) by adding diversifying exposures such as British Columbia quake.

What do these two issues mean for reinsurers? Vincent Van Gogh said, “The fishermen know that the sea is dangerous and the storm terrible, but they have never found these dangers sufficient reason for remaining ashore.”

And neither should reinsurers!

Reinsurers will need to partner with non-traditional capacity as opposed to competing with it, they will need to innovate and create new products which meet the changing needs of their clients, and they will need to form strategic alliances where their value proposition goes beyond capacity.