Letters to the Editor (September 01, 2003)

Dear Editor,

Don Callahan is likely correct in his statement that “I cautiously (my emphasis) add that Canadian licensed reinsurers, regardless of the precarious position of their parents, will have sufficient capital to support run-offs view of strong scrutiny in this country” (CU July 2003 “Reinsurance Perspective: 2004 Treaty Outlook”)

However it is critical for buyers of reinsurance, especially liability or accident benefits reinsurance (i.e. long tail business) to note the following:

Canada does have a strong regulatory governance system. But, it is not perfect and nothing suggests that it could not fail in its solvency monitoring of insurance and reinsurance companies. Who really knows if the current reserves of any reinsurer are adequate? (Haven’t we already seen a major surprise earlier this year with severe reserve deficiencies with a major Ontario primary insurer?)

For those insurers purchasing their reinsurance from unlicensed markets, OSFI (the Office of the Superintendent of Financial Services) offers no “regulatory scrutiny”. Admittedly their are other checks and balances available to these insurers (i.e. Collateral, LOCs, etc.). But still not OSFI oversight (with the exception of limiting the ceding to unlicensed markets to 25% of a total cession).

Purchasing reinsurance with AAA/AA reinsurers or similarly rated reinsurers provides “peace of mind” reinsurance, plus other benefits such as greater capacity, consistency, lower capital charge, and other value-added services.

Would you pay the same for an AAA bond versus a single-B bond, especially if the rate of return were the same? I doubt it! You would likely be prepared to pay more, it’s just better value! Management should not have to worry about having to report to their board that they have a reinsurance collectable problem. Managers have too many other issues on their plate.

Don is right though, when he says, “deal with the blue chip players”. How could you go wrong (on the security issue) with dealing with AAA/AA markets?

“Long tail business should be placed with a reinsurer that is certain to be around to pay those losses. Why would anyone put long tail business in a company with inadequate capital? It would be taking a credit risk… by buying insurance for long tail coverages, unsure whether or not it will be paid later on.” – As quoted by Hank Greenberg, chairman, AIG.

Yours truly,

Gerald A Wolfe, Sr Vice President

GeneralCologne Re.

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Dear Editor,

My name is Craig Rowe. I am writing as Vice President of the Newfoundland and Labrador Risk and Insurance Management Society, and I will give my background to illustrate my perspective on this issue.

I have been in the insurance industry for 14 years. I have worked for an insurance company, insurance brokerage and insurance adjusting company. I am currently a risk manager. For those who may not know, a risk manager is responsible for controlling the cost of risk for his/her organization. A big part of that cost of risk is insurance, which makes risk managers professional insurance buyers. I am on local and national committees of RIMS (Risk and Insurance Management Society). I am also on local and national committees of the Insurance Institute of Canada. I have spoken throughout Canada and in the U.S. on insurance and risk management topics and have recently written a book entitled “Insurance Premiums are Killing My Business – Controlling insurance and claims costs for small to mid-sized business”.

I see some major flaws in the Grimes’ [Newfoundland Premier Roger Grimes] automobile insurance plan that has been leaked to the media. Grimes is denying that the leak is the final plan, however, many elements of the plan have been proposed by his government before. (See Pg. 68 of this issue).

There are many parts to the plan, but there are a few elements that cause the greatest amount of concern. My concern, and that of risk managers in the province, is that if implemented, the Grimes plan will cause insurers to pull out of Newfoundland and Labrador. Obviously, this will hurt competition, and as a result, have a negative impact for consumers. The parts of the plan that cause concern are:

1. The “choice system” that they are proposing will give drivers the choice of whether to buy the right to claim for general damages, or give up that right. This has only been used in four or five states, with varied results, and has just been implemented in Saskatchewan. Because Saskatchewan auto is government run, not private as it is in Newfoundland, and because it is new, it is unproven and it is too early for us to know whether it’s worth copying. As well, in a province with less than half a million people, insurers are not going to be willing to bear the administrative cost of two auto systems, and will leave.

2. The proposed changes to the underwriting guidelines that restrict insurers’ ability to rate or limit coverage based on age, sex, etc. goes against the basic principles of insurance. Insurance companies are experts at determining future losses based on past losses. Young drivers have more accidents, more severe accidents, more fatalities, and more serious injuries than other age groups. If they get charged more, that is not discrimination! If I have had ten accidents and you have had none, I’m sure you don’t want to pay the same rate as me! If this is implemented, insurers will pull out of Newfoundland and Labrador.

3. Legislating a 30% rate reduction is totally absurd, and unreasonable! Insurance companies have their rates approved by the PUB [Public Utilities Board] based on their expected losses, and what they need to make money. Their auto results in the province have been poor for many years, return on investment is at an all time low and they are losing money. Even if these measures do cause expenses to decrease it will take several years for this to trickle down the system. Forcing them to reduce rates before it makes financial sense to do so will cause them to leave.

These measures will cause insurers to leave the province. As an insurance buyer, I know that the best thing we can do for rates is to have many insurers in the marketplace, which will result in healthy competition. Insurers have already left the province over the past few years and I fear that many more will pull out if these measures are implemented. This will be devastating to the insurance market, and to consumers.

The Grimes government does need to do something about automobile insurance rates. This can be achieved by getting a handle on the cost of general damage claims. A cap, such as that implemented in Nova Scotia and New Brunswick, is a good start. Limiting the amount of contingency fees that plaintiff lawyers can charge their clients is another way. The very last thing that Grimes, or any government, should do is to impose unnecessary restrictions on insurers that will result in Newfoundland and Labrador being a less attractive place to do business!

Sincerely,

Craig A. Rowe Vice President

Newfoundland and Labrador Risk and Insurance Management Society