October 2, 2016 by Angela Stelmakowich, Editor
42nd Annual RIMS Canada Conference
Resilience, the theme of the 2016 RIMS Canada Conference, could likely find no more welcome and knowing host than Calgary. As the home of the majority of Canada’s Top 10 insured losses for natural disasters ever, Alberta served as a fitting venue to discuss all manner of risk management: from resiliency to mergers and acquisitions, business interruption and flood coverage.
RESILIENCY SHOULD BE EVERYONE’S GOAL
Every organization, regardless of size or sector, can be hit by some sort of disaster so each needs to ensure steps are taken to become resilient, Darius Delon, chair of the RIMS Canada Council, suggested during the opening ceremonies of the 2016 RIMS Canada Conference.
Emphasizing that no one is exempt, Delon told attendees that when risk managers develop their teams, these should include incident response, emergency response planning and business continuity planning expertise.
Practising both incident response and business continuity on a regular basis “is critical to the continued success of your resilience,” he argued. “Being prepared for these eventualities that we don’t want to have happen is a hallmark of resilience,” he added.
Calgary Mayor Naheed Nenshi told attendees “it’s incredibly important” for governments and quasi-governmental agencies “to be able to think about the appropriate way to manage risk, the appropriate way for us to think about what risks should we be taking, how should we be taking it.”
Asked Nenshi, “Is the risk of loss so infinitesimally small that it’s preventing us from making serious investments or doing serious things to improve the quality of life for people in our community?”
The job of risk professionals is “to not only control or mitigate risk, but to embrace it, and to enable risk-taking as a natural part of doing business and align them with the organization’s strategy,” Julie Pemberton, president of Risk and Insurance Management Society (RIMS) Inc., told attendees.
“Risk mitigation is not cheap, it’s not easy, but it’s critical. It’s critical in a world of climate change, it’s critical in a world where we think about emergencies and risks in new ways and it takes hard work,” Nenshi emphasized.
M&A COULD SUPPORT DEMAND FOR MORE R&W COVER
The future looks good for mergers and acquisitions (M&A) activity, which will likely also fuel demand for representations and warranties (R&W) insurance, André Legrand suggested at the 2016 RIMS Canada Conference.
There are some current factors – the United Kingdom Brexit vote and the United States presidential election were specifically noted – that have created instability not only in the U.K., but very much in Canada, Legrand, a senior partner with Norton Rose Fulbright’s Montreal office, said during the session, The Mergers and Acquisitions Insurance Explosion.
“These two things are obviously temporary, but do have an effect on M&A activity and it is expected once these two factors have been dealt with, the future looks good in terms of M&A activity,” he told attendees.
R&W insurance provides buyers and sellers protection from financial loss if there are any misrepresentations or inaccuracies in representations or
In the short term for Canada, Legrand pointed out that a few issues pop up that might bolster R&W insurance demand. For example, he cited “transactions in Alberta’s energy market, which could boom given the number of companies in financial difficulties.”
In addition, he noted, “on the horizon, analysts are predicting a high level of activity in the marijuana sector given the legalization of the product.”
Legrand’s expectation is certain organizations, pharma companies, will look to “move in now that the fear factor, whatever factor, is slowly shifting away.”
GROWING GAP BETWEEN INSURED AND ECONOMIC LOSSES
A dramatic loss scenario around disaster events is developing globally, contributing to a widening gap between insured and economic losses, Alex Kaplan, senior vice president of global partnerships for Swiss Re, suggested during a session at the 2016 RIMS Canada Conference.
“If you tie urbanization together with globalization and the onslaught of potential for climate change, it creates a very dramatic loss scenario,” Kaplan said.
Though events have increased in both severity and frequency, that is likely only part of the story, he suggested. “Really, what’s driving this is the change in the exposure,” he explained, noting it is “the massive accumulation of assets in the most disaster-prone areas (for example, by water) that are leading to these losses,” Kaplan said.
“The alarming trend is the divergence between the insured portion and the total economic losses over time,” he told attendees of the session.
This same divide is also playing out in Canada, he suggested, noting insurance losses from events for the last five years have been in excess of $1 billion “and that continues to climb.”
Canada sees an average of 20 to 25 large or medium-scale events annually, Kaplan reported. “Again, a lot of it has to do with the concentration of exposure,” he pointed out.
“We have a new fiscal reality that changes our risk retention, our risk appetite,” Mark Day, executive director of risk management and insurance at Alberta Treasury Board and Finance, noted during the session.
Despite challenges and the new fiscal reality, “a lot of lessons have been learned from recent disasters,” such as the Slave Lake, Alberta wildfire in 2011, the southern Alberta flooding in 2013 and the Fort McMurray wildfire in 2016, Day said.
As it stands, “mitigation is a key driver for the province. Most costs are not covered by the DFAA (Disaster Financial Assistance Arrangements program) and can be the most significant spend,” he told attendees.
BUDGETS MUST NOT TRUMP RESILIENCY PLANS
Resiliency plans are unlikely to ever be perfect, but they are an increasingly important element of an organization’s response to crisis, attendees of the 2016 RIMS Canada Conference heard.
During the plenary session, Resilience: 9/11 and how it changed the industry, Neil Harrison, global head of claims for Aon Risk Solutions, and Alan Kurth, risk manager for Marsh & McLennan Companies, shared their personal experiences and insights following the terror attacks in New York City September 11, 2001. Harrison said Aon lost 190 colleagues, while Kurth reported that Marsh lost 295 colleagues.
Despite the clear need for – and the value of – resiliency plans, “the issue that we all struggle with as risk managers is there’s budgets,” Kurth told those assembled. “You have to figure out what are the most critical business assets and you have to deploy the resources where it makes most.”
One concern is getting “funds to allocate to something where your management would rather take it and invest it into something that can make money,” Kurth suggested. “None of that is going to happen if anything happens to the fort. You really have to spend the time and have the plans to focus on the critical aspect of your business for when that crisis does happen,” he emphasized.
“Any company, any firm, any organization can only spend its dollar once,” Harrison pointed out. “It’s sometimes easy to invest in something that’s perhaps a little more exciting than the risk management arena is perceived to be if we haven’t been through an event recently. So, complacency, to me, is a big risk.”
Kurth’s advice would be to make business resiliency plans broad. “If you make them too specific, you’re going to find yourself not being able to think out of the box and you have to be adaptable when it happens,” he said.
As well, testing is critical. “Although all the testing in the world is probably not going to come out perfect when you have your crisis, you will be better off when you’re faced with it,” Kurth said.
To risk managers, Harrison said he is not “sure any of us are yet spending as much time as we can scenario planning and testing policies.”
That said, “have we as an industry progressed? Overall, are we better prepared? The answer is yes,” he noted. “Can we declare victory? The answer is no.”
TAKING STEPS TO ADDRESS BUSINESS INTERRUPTION
Assuming certain costs may be a good thing for companies experiencing a business interruption (BI) and looking to get operations back up and running, Glenn Nadworny, a claims adjuster with Crawford Global Technical Services, suggested at the 2016 RIMS Canada Conference.
“There is going to be some costs that the insured incurs during and after the loss, which are both necessary and prudent for them to reduce their loss of property and interruption of their business and also to continue their operations in as normal a manner as possible,” Nadworny explained to attendees of the session, Business Interruption: Minimizing the cost of business interruption losses.
“These costs are understood by insurers to be beneficial in reducing the ultimate business loss to the insured,” he pointed out.
“Some of the key items to minimize potential business interruption loss is getting other professionals involved early in the process,” emphasized Jay Strano, managing director of Crawford Forensic Accounting.
Strano emphasized the need to have “a dialogue with the insured about what’s going on with their business.”
All potential risks associated with the loss should be outlined based on the specific insurance policy and on the business environment, notes a slide from the presentation. Factors to consider regarding the insured’s business include products and services; production capacity (manufacturing versus retail); building capacity; marketing ability, experience and management depth; contracts, leases, etc.; seasonality, location, operating hours, etc.; multiple lines of business; and ability to make up sales
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