Drenched In Claims

Back in his stand-up days, comedian Bill Cosby performed a sketch in which he enacts an imaginary conversation between Noah and the Lord, in which the Lord first reveals plans to destroy the world.

“How are you going to do it?” Noah asks, still somewhat unable to believe that he’s really talking to the Lord.

“I’m going to make it rain 4,000 days and drown them right out,” the Lord’s voice booms.

“Right,” replies Noah skeptically. “Listen to this, you’ll save water: make it rain for 40 days and 40 nights and wait for the sewers to back up.”

“Right!” the Lord says in agreement.

At least in both the Bible and Cosby’s sketch, the Lord’s plans for the Earth are revealed in advance, so that people have time to prepare. But for Canadian insurers, in 2008, the flood of property claims related to water came without warning. And in fact, the deluge came without a major catastrophe. It cascaded around us in the form of hail, sleet, rain and snow — and it kept coming and coming and coming, in one steady, sustained, relentless stream of precipitation. Some claims people referred to the 2008 homeowner/property results as a “death by 1,000 rainfalls,” while others referred to the various weather-related storms as “mini-cats.” However they were described, water damage — particularly in Ontario — is a big reason why property claims ratios jumped significantly in 2008.

Of course, property insurance wasn’t the only line of business drowning in a flood of claims. Auto insurance lines have been besieged by “no fault” accident benefits (AB) claims; so much so that the product once again, as in 2003, is in desperate need of reform. The accident benefits (AB) or “no fault” side of Ontario’s auto product is of particular concern to claims executives, who have no trouble suggesting avenues for potential reform.

RAINING CLAIMS

The industry’s overall statistics of claims incurred, as well as Environment Canada’s precipitation numbers for the year, provide the bare bones of the main story on the property side in Canada in 2008.

For the past three years, insurers’ nine-year Q3 financial and claims results in property lines have steadily moved in one direction — up. Federally regulated institutions reporting to Canada’s solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI), have, for example, paid out more than Cdn$2.75 billion in personal property claims over the first nine months of 2008. For Canadian insurers writing property claims in Canada, that amounted to 76.1% of the premiums they took in for personal property lines of business. Just two short years ago, claims payments represented only 63.5% of personal property premiums taken in by Canadian insurers.

A similar trend is playing out on the commercial property side. Canadian and foreign (re)insurers paid out Cdn$2.25 billion in commercial property claims during the first nine months of 2008, whereas during the same period in 2006, they paid out slightly more than Cdn$1.5 billion.

So what accounts for the rise in claims incurred on property lines?

“Weather has been a really important factor this past year,” says Nora Hohman, vice president of claims for The Dominion. “It’s been interesting because, unlike some years in which we’ve had major catastrophes, we have not faced those as a company [in 2008] and I don’t think the industry has. Rather than being nailed by catastrophes, we’ve jokingly called it ‘Death by a Thousand Rainfalls.’ It’s just been so consistent. That, I think, has definitely affected the property results.” John Greb, vice president of claims for the Allstate Canada Group of Companies, says his company in the early winter months of 2008 saw “an above-average frequency of auto and homeowner claims that never seemed to end. When it did, we barely caught our breath before facing numerous spring and summer storms.”

Environment Canada data for Ontario bears out these observations. Monitoring stations located at Pearson International Airport, located in the northwest part of Toronto, have already recorded unsurpassed levels of precipitation in 2008. Thus far, precipitation levels this year at Pearson have reached 980 millimeters, beating the old record of 971 millimeters established in 1977 — and that’s not including the recent dump of almost 50 centimeters of snow in the Greater Toronto Area in mid-December. Downtown Toronto, which has seen 1,235 millimeters of precipitation this past year, is nowhere near breaking its record, which is 1,840 millimeters (established in 1840). Nevertheless, most other areas in Ontario have already broken or are close to breaking records. North Bay and Peterborough have set precipitation records, for example, and Sarnia and Wiarton are inching closer to their all-time high levels.

Perhaps the exception that proves the rule, The Co-operators, which writes about Cdn$709 million in property premiums, actually saw its property claims frequency go down in 2008. Still, the company reports, severity was an issue where water damage was concerned. “Although our frequency has dropped for property claims in 2008, our losses incurred have increased year-over-year at a rate higher than inflation, and claims severity has increased,” company spokesman Leonard Sharman said in an e-mail. “Double-digit increases have been experienced for all peril types, with the largest relative changes driven by water damage and fuel escape.”

In keeping with the experience of the insurance industry generally, Irene Bianchi, vice president of claims and corporate services at RSA, says her company saw “the worst three quarters of weather that we’ve had in a significant amount of time.” Although most of the claims activity was centered for the most part in Ontario, other areas of Canada have been equally hard hit, she noted.

Jim Haskins, executive vice president of claims and procurement at Aviva, notes that claims frequency increased during the earlier part of the year throughout Canada. “Specifically, weather related claims, both catastrophe and non-catastrophe, drove increased frequency in auto and property,” he observes. “Regions with extreme weather patterns experienced greater movement in frequency; heavy snow accumulation followed by sudden thawing (Quebec and Atlantic), severe rainstorms (Quebec and Ontario), hurricanes (Atlantic) and hailstorms (Ontario and West), for example. As the more volatile weather has subsided, frequency has begun to return to more expected levels.”

Some would argue the effects of the volatile weather haven’t yet really subsided. In the first nine months of 2008, for example, Vancouver saw 548 millimeters of precipitation. Extrapolating from this figure, if the city received an average monthly amount of precipitation that the Vancouver International Airport typically records during the months of October to December, the city’s 2008 precipitation levels would easily surpass the 900-millimeter mark. The East Coast has also seen its share of precipitation. The Halifax International Airport weather station has reported 1,1149 millimeters of precipitation over the first nine months of this year (excluding May, for which data was unavailable). Assuming average amounts of precipitation for the months of October through December, Nova Scotia is due to see well over its annual average of 1,452 millimeters’ worth of annual rain and snowfall.

The unrelenting precipitation came in various forms — hail, sleet, rain and snow. Many of the water damage claims related to flooding due to sewer backup (overland flooding is not typically covered under a homeowners’ policy), hail damage to roofs and windows, the expensive nature of property located in finished basements and collapsed pools as a result of heavy snowfall.

Commercial property claim results were similarly affected by water damage. Two years ago, during the first nine months of 2006, commercial property claims payments for Canadian and foreign insurers stood at just over Cdn$1 billion and claims ratios in these lines were between 43% and 54%. In 2008, they have thus far paid out Cdn$2 billion in commercial property claims, with claims ratios coming in at around 67% to 74%.

The weird thing about what happened in 2008 is that, despite the seemingly catastrophic dimensions of property claims losses, there wasn’t a single, concentrated weather-related catastrophe. In comparison, Toronto and other parts of southwestern Ontario in 2005 were hit by a “microburst” storm that caused a record level of Cdn$500 million in insured damages. “Certainly the focus of our claims world has been on the potential for these large, large storms — you know the 1-in-50-year event, the 1-in-100-year event — and the kinds of events we saw in 2005, with the Toronto GTA storm,” Hohman said. “This year was not that. It was just so much precipitation over a sustained period of time.”

As a result, claims departments were busy all year, raising a different breed of operational issues, as Bianchi notes. “We started calling them internally ‘mini-cats’ because they are of short duration in terms of time frame, but fairly devastating,” she said. “They require a lot of response. A lot of our adjusters need to get out there and to service these people.”

Some claims departments are in fact calling for a whole new shift in the way water damage is underwritten. “This is an issue for a number of reasons, from my perspective,” says ING Canada senior vice president of claims Peter Weightman. “One is that we’ve got a product that was built for fire and not water. That’s a challenge… We’ve got to look at it from a product revision point of view. Looking at it as a transition from fire to water, we have to do a much better job of what I’ll call geographic mapping.” Weightman notes that in the United States, for example, “an army corps of engineers has every inch of that place mapped.” In Canada, however, a similarly detailed mapping of the country’s geography is missing. And there isn’t a coordinated, national-level infrastructure mapping of aging sewer systems, for example, because the data required for such a map is housed within the municipalities. “So there isn’t really any kind of national base for this,” Weightman says. “That is why the industry, to avoid [premium price increases and restriction of coverage], needs to make sure we do product revisions, better geographic mapping and more refined pricing, so that people who don’t have the exposure aren’t subsidizing those that do.”

Claims departments are also focusing on loss control and mitigation initiatives. Bianchi notes that, compounding the poor results in the property lines, “we had the majority of those claims occur in the GTA, where lot of people have very nice, expensive finished basements in their homes. So instead of dealing with regular, unfinished basements that maybe only had laundry machines experiencing the water damage problem, we’re dealing with a beautiful basement that the family spends a lot of time in — basements that are very well-equipped with big-screen TVs, nice laminate flooring and beautiful furniture.”

That’s part of what makes loss control and mitigation measures crucial, says Weightman, whose company is working to encourage homeowners to install water backflow valves. These valves are installed into basement drains so that water goes down the drain but is prevented by the valve from coming back up.

Also, the Insurance Bureau of Canada and the Institute for Catastrophic Loss Reduction (ICLR) are calling for municipalities to upgrade their storm water and sewer systems, including new and larger pipes designed to accommodate the heavier rainfalls.

FLOOD OF AB CLAIMS

Water is not the only thing garnering the attention of claims departments these days. “At the industry level, it’s a bit like the old movie Casablanca with Claude Reins in it,” Weightman observes. “Claude was the cop and when they said, ‘We’ve got a problem,’ he says, ‘Go round up the usual suspects.’ In the insurance business, the usual suspects include Ontario auto. In Ontario specifically, the area of big concern is the accident benefits part.”

A number of claims managers and industry representatives observe that the corollary of a “rich” AB system is an auto insurance product that uses up almost 5% of an Ontarian’s disposable income. That reflects insurers’ rising costs on the AB side.

Two years ago, Canadian and foreign insurers paid out more than Cdn$1.6 billion in personal accident benefits in the first nine months of 2006. That figure is more than Cdn$2.1 billion after the first nine months of 2008. In that same two-year period, claims ratios for many Canadian auto insurers increased from around 67% to between 98.8% and 125% (with figures over 100% representing losses for insurers).

In Ontario particularly, AB claims are increasingly putting a strain on insurers’ claims budgets for a variety of different reasons. “In Ontario, specifically, we continued to see upward pressure on accident benefit costs driven by escalating medical, rehabilitation, attendant care and assessment costs,” Haskins says.

Many listed rising AB assessment costs as a chief concern. “We quickly saw an increase in assessments that have had a significant impact on costs,” says Greb. “Multiple and prolonged treatment plans and an increase in the number of claims falling outside the pre-approved frameworks continue to circumvent the intent of the [Ontario auto] reforms [in 2003]. Ancillary benefits, including homemaking and home maintenance for soft-tissue injuries, are being submitted at an alarming and unsustainable rate.”

The increase in the number of medical assessments is particularly noteworthy, says Linda Paccanaro, vice president of claims at Kingsway General Insurance Company. The sheer number of them raises problems for insurers that might want to challenge their cost and/or validity. “I just finished an analysis here where we looked at a sample of files and said: ‘These are files that we’re disputing from the perspective of this treatment,'” Paccanaro said. “How much does it cost us to have the assessments done, versus paying the treatments? The assessment costs were 50% of the original treatment submission. The process of not being able to do a dispute without doing an assessment is very expensive.”

On top of that, the assessment costs went up, Paccanaro says. “If you’ve gone for a chiropractic assessment anytime recently, the cost in the past 10 years has more than doubled.”

Exacerbating the situation is the fact that auto insurance benefits in Ontario are no longer conceived to be a last line of defence for the victim, merely offsetting monies that could be obtained elsewhere for certain medical treatments. For example, “awhile back, OHIP decided it would no longer fund physiotherapy and chiropractics,” says Paccanaro. “But the accident benefits plan pays for that. So now [AB insurers] pay for Dollar 1 rather than being an offset.”

So escalating costs on the AB side is a combination of the cost of the services going up, fewer offsets and, Paccanaro adds, “there seems to be more usage, although I don’t have any empirical evidence to quantify that.”

These and other concerns are the basis of industry submissions to the Ontario government as part of its mandatory five-year review of the auto insurance product. The Financial Services Commission of Ontario (FSCO) has received at least 17 submissions from insurance companies and industry representatives, all hoping for the government to make lasting, sweeping refoms.

The Insurance Bureau of Canada’s submission is perhaps the most comprehensive among them. In the area of accident benefits, the IBC has suggested a broad reform package, listing no fewer than 25 recommendations for reform. Specific recommendations for alleviating AB pressures facing insurers include:

• the establishment of a maximum limit of Cdn$25,000 for medical-rehab assessments for non-catastrophic claimants (the limit would remain at Cdn$100,000 for people staying in hospital fo r two consecutive days after the injury);

• redefining the medical/rehab package for minor injuries, so that people with sprain and strain injuries, skin wounds and non-extensive burns or subsequent pain or psychological syndromes would receive no access to in-home and work-site assessments. Ancillary benefits for housekeeping/home maintenance and caregiving support for this injury class would be limited to two weeks following the collision;

• no housekeeping/home maintenance or caregiving benefits for people who have not incurred an economic loss, and an aggregate, Cdn$20,000 limit for the attendant care benefit;

• removing geographical boundaries for the location of examinations;

• ceasing the accumulation of interest costs when old claims are re-opened;

• changing the definition of health care providers to clarify the class of people allowed to authorize treatment plans; and

• developing guidelines around Future Care plans.

“There’s a balance that needs to be achieved between premiums and benefits,” says Don Forgeron, IBC’s vice president of Ontario, commenting on FSCO’s five-year review. “Nobody wants to see motor vehicle accident victims not receive the proper level of treatment. The industry doesn’t want to see that, health care providers don’t want to see that, government doesn’t want to see that. But there has to be a balance between the treatment we provide and the premium that we pay, and I think most Ontarians would agree that that balance is completely out of sync at the moment and is weighted heavily toward the treatment. I think elected officials know this and the challenge for them is, once you’ve given a benefit, how do you take it back? That’s a very real and a very difficult challenge, but these are challenging times. Tough decisions are going to be made by government over the next three years as they work through this recession. We think this is a prime opportunity to make some tough decisions as it relates to auto insurance to get this system back on a footing that is in sync with where consumers want it to be.”

Of course, Ontario is not the only “usual suspect” when it comes to problems with the Canadian auto insurance product.¹ Ontario auto reform aside, perhaps the story of the year in auto insurance in 2008 has been, like Parliament, prorogued into 2009.

“The minor injury cap challenges in the West and East were on the horizon in 2006 and continue to run their course,” Greb says. “While we await the decisions, we must continue to deliver the message that if the caps are not upheld, claim costs will escalate rapidly and lead to availability and affordability issues for consumers.”

The Alberta Court of the Queen’s Bench early in 2008 found that the province’s Cdn$4,000 cap on minor injuries was unconstitutional on Charter grounds because it discriminated against whiplash injury victims. Trial lawyers mounted similar constitutional challenges against auto insurance caps in Nova Scotia, New Brunswick and most recently in P. E. I. The Alberta Court of Appeal has already heard the government’s appeal and some thought the court would issue a decision in late 2008. But as of press time in late December, a decision has yet to be rendered. And don’t expect a decision on the Atlantic provinces anytime soon. Some claims executives expected a decision on the Nova Scotia cap by Christmas of 2008, but that no longer appears likely. In New Brunswick, some say a cap decision may not be rendered until as late as Summer or Fall 2009.

Interestingly, Haskins says, for Aviva “auto BI [bodily injury] frequency in Alberta and Nova Scotia has decreased pending the outcome of the Constitutional challenges.” Which is not to say the challenges are of no concern to the industry. IBC has calculated that Alberta insurers are accumulating Cdn$400 million annually in unfunded liability in the absence of a cap.

What are insurers’ strategies for dealing with this uncertainty related to the outcome of the cap?

“You would have two choices,” Paccanaro says. “You could reserve it as a case file, as if the cap didn’t exist. And then if [the Alberta cap litigation] is settled or the cap applies, you could then reduce your reserve. Or you’re going to reserve it as if the cap is standing, and put a provision over in the financial area to account for it. Somehow or other, you need to think about the risk related to that cap not holding from a financial perspective. Otherwise, you’re going to be operating at one loss ratio and then, when the decision’s made, your loss ratio is going to change immediately.”

1. Ontario gains its “usual suspect” status because it accounts for about Cdn$9.6 billion of auto insurance premiums written in 2007. In comparison, the entire Canadian auto insurance market wrote Cdn$20 billion in auto insurance premiums in 2000.

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“We saw the worst three quarters of weather that we’ve had in a significant amount of time.”

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Some refer to the 2008 homeowner/property results as a “death by 1,000 rainfalls,” while others refer to the various weather-related storms as “mini-cats.” However they were described, water damage is a big reason why property claims ratios jumped significantly in 2008.

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“We’ve got a product that was built for fire and not water. That’s a challenge.”

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” Ancillary benefits, including homemaking and home maintenance for soft-tissue injuries, are being submitted at an alarming and unsustainable rate.”