Falling oil prices, rising floodwaters and an NDP government shape Alberta’s insurance market

The day after last month’s provincial election turfed the Progressive Conservatives dynasty from power in Alberta, a handful of federal NDP-ers sang “Four Strong Winds” at a caucus meeting. You know the one: “Think I’ll go out to Alberta / Weather’s good there in the fall…”

The song was a nice piece of Canadiana, but there’s a wicked Alberta Clipper sweeping the Prairie province, from a new government to a weak price for the stuff they squeeze out of the Athabasca oil sands. And the insurance industry out there is starting to feel a bit of a breeze.

Even before the floodwaters began to inundate southern Alberta two years ago, property was top of mind for the province, according to Insurance Brokers Association of Alberta CEO George Hodgson.

“Property insurance, I think Canadawide, has not been economically viable for some time,” he says. “And so, the insurance companies were already looking at what they could do to turn this around. They’ve started [with] some rate changes, some deductible changes. And so far, the public has been, for the most part, reasonably quiet on it—and you know, I don’t know whether I see that changing immediately. It may change down the road, when those higher deductibles that hardly matter today might matter when they have a claim. But for the most part, the catastrophic losses in southern Alberta due to the floods, the Slave Lake fire [in 2011], hail storms and whatnot have made the public keenly aware that this is costing insurance companies a lot of money.

“And so they’re somewhat forgiving for some reasonable changes and of course, [can you] define what reasonable is? I don’t know. Everything is reasonable until it’s not, right?”

Another way the market has responded is by offering overland flood insurance, long thought to be prohibitively expensive. Calgary’s Beaufort Group was first to bring out a product, last summer. (One skeptical broker told The Globe and Mail, “Is it available? Not really en masse.”)

Now a bigger player has also gotten its feet wet, so to speak: Aviva Canada, as Top Broker reported in our 2015 preview issue. Aviva announced in February that Alberta and Ontario would be the first provinces to have access to the endorsement, which “responds to losses that result from the accumulation or run-off of surface waters, including torrential rainfall when water enters the property.”

In a statement, Aviva Canada president Sharon Ludlow said, “Our goal is to make this coverage accessible and affordable for the vast majority of our customers.”

With flying colours

For the insurance industry, worries over recruitment have been around longer than some boomer brokers. But Hodgson says the problem in his province isn’t finding people who want to get into the industry— the problem is letting them in. “The barrier right now is the licensing exams. We have an abysmal pass rate.” At its lowest, the pass rate had dipped into the 20 percent range. It’s up around 40 percent now, he says, but the IBAA would like to see it creep “somewhere north of 60.”

This wasn’t a reflection on the caliber of people trying to break into the industry, Hodgson says, but on the content of the exam.

“Most people believe that an exam to enter into a profession probably should be a technical exam for the most part. And this exam goes a little bit beyond that.” That means questions about office procedures and reading body language— soft skills that are in no way exclusive to the insurance industry. “And as a consequence, I believe that writers of the exam tended to take their eye off the ball, the technical ball, thereby reducing their pass rate at the tech level.”

Though the industry’s main goal in recruitment is to bring in young blood to replace “us baby boomers,” in Hodgson’s words, it wasn’t only young people having trouble with the revamped exam.

Catherine Cake, Fort Saskatchewan branch manager for Drayden Insurance, says, “I think the issues with the exams are regardless of someone’s age or ability to take an exam… You have people who are very well-educated who are having trouble with it also.”

Hodgson and Cake add, however, the Alberta Insurance Council has heard their concerns and is reviewing the curriculum to bring the pass rate back up. In the meantime, the IBAA has also suggested the council accept the Canadian Accredited Insurance Broker (CAIB) designation as a substitute for the provincial exam.

All quiet on the western front…maybe

It’s early days in the newer, more orange Alberta, and it’s still unclear how the NDP will handle the insurance industry. Hodgson says the sector took a back seat during the campaign, which was instead dominated by discussions of accountability and leadership.

Just before dropping the writ, the NDP’s Tory predecessors tabled a budget that included a slight tax hike on insurance premiums, from three percent to four. That budget died on the order paper, but some are worried about what the new governing party could do to the province’s economy.

Jeff Cuell, a broker with Van Helden Agencies in Calgary, says, “Given the NDP’s track record with private enterprise, it could have at least as harmful an impact on the sector as the commodity price.”

During the campaign, the New Democrats did not lay out specific plans for the energy sector, but did say they would strike a committee to review the royalty agreement between oil-and-gas companies and the province. (The royalties operate on a sliding scale and are tied to the price of crude.)

But one economist says the new regime might look just a bit like the old one. For Maclean’s, University of Alberta energy policy professor Andrew Leach wrote that “an NDP government would certainly lead to changes in Alberta, but perhaps not of the radical sort feared by many in the province. In fact, on many issues, it’s hard to find a lot of daylight between NDP policies and those of the other two front-running parties. Their answers give you enough room to believe the worst, if that’s what you want to believe, but also leave room for benefit of the doubt.”

All it takes is a quick glance at oil prices to guess the top economic issue in Alberta these days. West Texas Intermediate—the benchmark for crude in North America— was flirting with the $100/barrel mark this time last year. Now, it’s lower than $60/ barrel. (Western Canada Select—the stuff from Fort McMurray and environs, which is heavier than WTI—trades at a discount to WTI.) It’s been a rough ride, and the insurers are feeling it, too.

Cuell says the industry started to see the effects of WTI’s dip—which began last summer and got worse in the fall—at the beginning of this year, when policies came up for renewal. “We have seen some temporary shutdowns, particularly in the contract and services sector. There’s just not enough activity to support service rig operators, that type of thing,” he says. “The other areas would be [that] companies obviously are revising exploration and production estimates downwards, which ultimately translates to lower premiums and commission dollars to the retail broker.”

He adds that the effects are being felt across the province—no surprise, since the energy sector accounts for about a quarter of Alberta’s GDP. “I’ve got clients in remote, northwestern Alberta on the oil-field service side… activity is half what it was at this time last year. It’s probably percolating right through the province.”

Cuell says brokers need to be “nimble” to help clients through the slowdown. “You can’t just go to a client with a boilerplatetype solution in a slow economic phase that’s shot the marketplace.”

If there is a silver lining to crude’s nosedive, it’s that all industries in Alberta are taking good, hard looks at their portfolios, says Catherine Cake of Drayden Insurance. “We’re seeing a lot more client diversification, which is what even the province is trying to do: trying to diversify themselves. So that’s definitely been a positive out of the whole thing.” accumulation or run-off of surface waters, including torrential rainfall when water enters the property.” In a statement, Aviva Canada president Sharon Ludlow said, “Our goal is to make this coverage accessible and affordable for the vast majority of our customers.”

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Copyright 2015 Rogers Publishing Ltd. This article first appeared in the June / July 2015 edition of Canadian Insurance Top Broker magazine

This story was originally published by Canadian Insurance Top Broker.