Canadian Underwriter

Cat After Cat

May 1, 2012   by Andre Fredette

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Catastrophic (CAT) losses in 2011 dominated the mindset of reinsurers both in Canada and around the world. While not the worst of all years seen for CAT losses—I believe 2005 was the worst—2011 will turn out to be the second worst year for insured losses and the worst for economic damage.

In Canada, the largest single CAT loss was the Slave Lake fire, which is currently reserved at approximately $750M. While it may take another 18 months for the rebuilding to be completed, this number could rise further.

The other noticeable items were the frequency of windstorm losses in the prairie provinces. It seemed that some companies were having a CAT loss every weekend during the summer.

In the fall, Hurricane Irene became a large sub tropical storm and finished its existence in Quebec causing more losses.

1-1  Renewals

In Canada over the last three years, the sale of aggregate CAT covers became very popular. The last two years have not been kind to these covers. In 2011 most of these covers generated significant losses for reinsurers. As a result, the 2012 renewals were very difficult for ceding companies. Terms were a lot harder and prices went up considerably. In spite of these improvements for reinsurers, the placing of the covers was also much more difficult as some markets have pulled out of these types of covers. (For more on aggregate covers, see the our cover story for our March issue by clicking here.)

Did I mention that there were some big industrial fires that also added to reinsurers’ woes? Overall, property business was not very profitable for reinsurers in Canada in 2011.

In other parts of the world, Asian losses and losses around the Pacific Rim dominated reinsurers’ minds.

Before getting into the losses themselves, a few words on modeling would be useful. All reinsurers today model for the potential losses they can incur. Generally, a model will assume a loss potential with a return period of 500 years, or what the actuaries would term as the 99.8 percentile. In spite of this conservative modeling, we have seen losses in the last 18 months that have exceeded those limits. These include:

  • February 27, 2010, an 8.8 magnitude quake hit Chile.
  • March 11, 2011, mega thrust magnitude 9 earthquake in North East Japan.
  • February 22, June 13, December 23, 2011, Christchurch, New Zealand experiences three major earthquakes in one year over magnitude 6. These were followed by thousands of minor aftershocks. Liquefaction is a large factor adding to the loss estimates. Overall losses for insurers and reinsurers are estimated at US$15 billion.
  • Thai floods which started towards the end of July and went into December 2011 are estimated to ultimately cost the insurance and reinsurance industry US$20 billion. There are a few special wrinkles to the Thai flood claims.  Most proportional property treaties did not have event limits or caps on their treaties as Thailand was supposed to be a non-CAT country (famous last words). After the 2012 renewal season, they now have event limits or caps. Also, as the flood lasted almost 6 months, the insurance companies are using the 168-hour clause for CAT losses to make multiple CAT loss claims. This is another unexpected wrinkle.
  • The US had more tornado losses in the spring of 2011 than is usual.

As a result of all of the above events reinsurance terms hardened on CAT treaties and property per risk and proportional treaties where the experience showed that price increases were necessary.

Domestic CATs

In Canada, competition and the need to grow market share may expose some companies more than they might imagine in the event of unusual CAT losses.

Currently, most insurance companies give guaranteed replacement cost with no cap on the limit for rebuilding cost as long as the client buys coverage that is seen to be sufficient by the various pricing models the companies use. In an individual fire, this is of no consequence to the insurance company. However, in a large earthquake in an urban area, this clause might be very costly to insurance companies as rebuilding costs and labour costs may be much more than was modeled. Just ask the companies in New Zealand. IAG suffered a loss of $2.8 billion Australian dollars.

Here, the danger is that these uncontrolled costs would go right through the companies’ CAT program and back into their net retention.

If a cap were put in on rebuilding costs (say 25% higher than the insured limit) this would be an incentive for the broker to ensure that his client has updated the values of his home and common sense would also indicate that building in an extra margin for error would be wise. This is not currently the case in Canada. Even in single fires, we see many cases where the ultimate building cost exceeded the insured values.

Likewise, on a similar if less risky note, I believe many companies do not pay enough attention to mapping of windstorm exposure. While they may map earthquake exposure, windstorm exposure probably does not get the attention it deserves.  Again, the need to maximize market share seems to be the overriding factor.

Overall property capacity diminished somewhat during the 2012 renewal season as reinsurers underwrote to a more conservative modeling number.

Given recent history and historical low interest rates on government bonds I would expect that 2012 will continue to see a hardening of property terms on midyear renewals.

Andre Fredette is senior vice president and chief agent for Caisse Centrale de Réassurance (CCR) Canada.


The Top 11 Insured Disasters in Canadian History

Date and place Event Rounded and adjusted for inflation 2010 $million


1998 Jan. southern Quebec Icestorm



2005 Jan. northern Alberta (Suncor oilsands facility) Fire



2011 May 14-17 Alberta (Slave Lake) Fire



2005 Aug. 19 Ontario Wind/rainstorm



2010 Jul. 12-13 Alberta (Calgary and other areas in southern Alberta) Wind and Thunderstorm



1991 Sept. 7 Calgary Hailstorm



2009 Aug. 1-3 Alberta Wind Storm



2005 Jun. 6-8 and June 17-19 Alberta Flooding



1996 Jul. 19-20 Saguenay, Quebec Flooding



1987 Jul. 31 Edmonton Tornado



2003 Aug. 16-Sept. 13 Okanagan Mountain Park and Kelowna, BC Fire


 Source: Insurance Bureau of Canada


Copyright 2012 Rogers Publishing Ltd. This article first appeared in the March 2012 edition of Canadian Insurance Top Broker magazine.

This story was originally published by Canadian Insurance Top Broker.