Still Movement

8th Annual National Insurance Conference of Canada
Ottawa

Those attending the 8th Annual National Insurance Conference of Canada, September 21-23 in Ottawa, had their choice of sessions ranging from the future of distribution to evolving reinsurance models and the prospect of insurance-linked securities in Canada.

ILS NOT A REPLACEMENT FOR REINSURANCE

Canada is a “nice fit” for alternative sources of capital, including insurance-linked securities (ILS), Michael Stahel, a partner with LGT Insurance-Linked Strategies at LGT Capital Management, said during a panel discussion at the National Insurance Conference of Canada (NICC), produced by MSA Research and held in downtown Ottawa.

“Canada would be a very nice fit in order to transfer more of this risk into the capital market,” Stahel told attendees of the session.

“Should you do all your reinsurance purchase directly with us? No. That is not the way to go,” he advised. “You should try to transfer some of your risk directly to the capital market. It will give you some leverage in your negotiations with your reinsurance (provider) because there is a second option,” he opined.

Michael Brisebois, chief financial officer for TD Insurance’s life and general insurance business, suggested that ILS has some advantages over traditional reinsurance. “We can diversify the counterparties that we deal with, and have options as it relates to our reinsurance coverage, which obviously becomes particularly useful when there is a bad Cat year, either domestically or internationally,” Brisebois said of catastrophe bonds.

By the end of June 2014, there was more than US$20 billion worth of catastrophe bonds outstanding, James Lee, director of debt and solutions coverage for Deutsche Bank Securities Inc., pointed out. “Barring any event, the amount outstanding will continue to increase,” Lee reported.

“I personally don’t view this as replacement for traditional reinsurance,” Brisebois said of ILS. “It is something that supplements and complements traditional reinsurance,” he suggested, emphasizing this is especially important for reinstatements, following an event that triggers cat bond coverage.

LESSONS FROM FUKUSHIMA

The operator of Canada’s largest nuclear power plant has simulated the effect of flooding or a tornado hitting the facility, a move meant to show how external events can influence operations, a lesson made clear with the disaster at Japan’s Fukushima Daiichi nuclear power plant.

“One of the areas where we hadn’t looked as strongly was external events on reactors and Fukushima focused our attention on that,” Frank Saunders, vice president of nuclear oversight and regulatory affairs at Bruce Power, said during a session at the National Insurance Conference of Canada.

Saunders noted Bruce Power, which operates a nuclear power plant on the shores of Lake Huron, has simulated the effects of flooding, a large wave coming from the lake and a tornado similar to the August 2011 twister that hit Goderich, about 50 kilometres away.

“It was what you call a very low probability event,” he said of the disaster caused when a tsunami hit the Japanese power plant following the Tohoku earthquake on March 11, 2011.

“Generally, we talk about frequencies that are in the range of one in 100,000 years to one in 10 million years as being the range of likelihood of occurrence of these things,” Saunders reported.

The challenge for Bruce Power officials “was to go look at our own events and decide whether there was something like that that could happen in Ontario that might cause our systems to fail in a way that we didn’t expect,” he added.

Bruce Power aims to protect its plant against “highly unlikely events which have a significant consequence to them,” Saunders said, adding the scenario considered involved two feet of rain falling over a six-hour period.

“We assumed that all the ditches and all the culverts and everything were plugged, and assumed a huge wash off the lake with something in the order of 10-metre waves coming in off Lake Huron, to do this analysis,” he relayed.

Insurance for nuclear power was also discussed.

Bill C-22, the Energy Safety and Security Act, was tabled September 15 for third reading in the House of Commons.

Dave McCauley, director of the uranium and radioactive waste division at Natural Resources Canada, noted during the session that the bill proposes creating a new law, the Nuclear Liability and Compensation Act, which if passed without amendments, will increase absolute liability for nuclear operators to $650 million upon Royal Assent. After that, the limit will be increased over a period of three years, to $1 billion, McCauley said.

NO STRENGTH IN BEING ONE-TRICK PONY

Being solely a natural catastrophe player or an alternative capital player is unlikely to prove a sustainable model, Eric Smith, president and chief executive officer of Swiss Re America, commented during the National Insurance Conference of Canada in Ottawa.

“If you are just a nat Cat player or you are just an alternative capital player, and that is all you are going to do, we don’t see that as a sustainable long-term model,” Smith said during a panel discussion.

“Being able to take traditional solutions and being able to pair it up with alternative capital or ILS sometimes make the best sense,” he noted. “The winds are going to blow, the floods are going to come, the earth is going to shake.”

Business models in reinsurance that are not just capacity providers, but more, are really able to cope and to deal with the challenges of today, suggested co-panelist Peter Röder, a member of Munich Re’s board of management.

“It means being a partner for innovation with our clients. It means also to develop tailor-made solutions for our client in terms of capital relief for adverse loss development covers,” Röder said.

“If you are smaller player, more single line, it’s going to be hard to compete in the future,” Smith suggested.

“It would be good for the world if some of the capital would also move into some of those areas that are presently uninsured,” Röder noted. “The capital is not moving there because they are mostly unmodelled risks,” he said. “That is certainly something we need to work on.”

NEED FOR HARMONIZATION

There is a need for harmonization across the country to ensure consistency in provincial regulation of “incidental” sellers of insurance, attendees heard during a session at the recent National Insurance Conference of Canada.

These incidental sellers include freight forwarders, deposit-taking institutions and vehicle and equipment dealers.

“I think it would be wonderful to have some harmonization across Canada,” Gordon Goodman, a partner with Cassels Brock & Blackwell LLP, said during a panel discussion.

Saskatchewan and Alberta allow certain categories of companies – such as auto dealers, deposit-taking institutions and travel agents – to get restricted insurance agent licences. In essence, this allows those agents to sell only certain types of coverage under certain conditions.

A recently passed regulation in Manitoba, which takes effect next year, will allow some restricted agents to sell, among other things, cargo, creditor’s life and loss of employment, mortgage, funeral expense, portable electronics and some coverages with rented vehicles.

Manitoba, as is the case with Saskatchewan and Alberta, will have restrictions on what types of businesses could apply for restricted agent licences. Provincial law will prohibit restricted agents from making available their goods and services “conditional upon” the consumer buying insurance from them.

“It’s nice to have the regulation,” Goodman said of the restricted agent regulations, adding he supports having “some harmonization across Canada.”

MANDATED AUTO RATE DECREASE NOT DOABLE

The Ontario government’s mandated target to reduce auto insurance rates an average of 15% reduction is absolutely not doable, Barbara Sulzenko-Laurie, vice president of policy development for the Insurance Bureau of Canada, said during the National Insurance Conference of Canada.

Taking part in a panel discussion, Sulzenko-Laurie responded “absolutely not,” when asked whether or not the reduction is achievable.

The mandated rate decreases are already proving unsustainable, Bob Tisdale, president and chief operating officer for Pembridge Insurance Company, argued during the same panel.

“Our three companies took some of the largest rate decreases in the industry in Ontario, as the Ontario government tries to reach its 15% rate reduction,” Tisdale told attendees. Five months later, though, (the Financial Services Commission of Ontario) “has approved rate increases for two of our three companies,” he reported, referring to increases that were to take effect in October 2014.

Sulzenko-Laurie noted recent figures from the General Insurance Statistical Agency show cost-per-vehicle increases across almost all sub-coverages in Ontario auto. “The point that we’re trying to make to (the government) is that as politically embarrassing as it may be to not meet the 15% target, it’s going to be a lot more politically embarrassing if they have to oversee rising premiums during their time in office,” she told session attendees.

BROKERS MUST REINVENT THEIR BUSINESSES

As technology such as telematics and driverless vehicles become more widely commercially available, brokers will come under increased pressure to provide value or risk losing ground, attendees heard during a session at the National Insurance Conference of Canada.

It does not mean there is no longer room for other (often brick-and-mortar) choices, but businesses will need to adapt, suggested Doug Stephens, a Canadian retail industry futurist.

Stephens suggested two models are poised for success in the coming years: the high-fidelity model, which provides consumers a very rich, hands-on and service-oriented experience curated to their needs; and a high-utility model, which offers a plug-and-play, 24/7 experience that requires no hand-holding for customers.

“What is dying is everything else in the middle,” Stephens argued. As such, to remain competitive, brokers need to offer a specialized experience and expertise for consumers.

As options for insurance become more abundant, Stephens noted that brokers can act as specialists who can help sift through the abundance of choices available and find what is best for a customer.

IMPACT OF COMBINING INSURANCE, OTHER PRODUCTS

Combining property and casualty insurance products, through distribution, with other products helps improve both customer retention and margins, speakers suggested at the National Insurance Conference of Canada.

Stephane Morency, senior vice president of development and commercial lines at Desjardins General Insurance Group, said that combining different products is “something that is good for retention, it’s good for the margins, it’s good for the customer because he has a one-stop shop.”

George Cooke, president of Martello Associates Consulting and panel moderator, asked panelists about the combination of p&c insurance with other financial products.

Combining p&c with other financial products can be a “win-win” for both consumers and for those selling insurance, suggested Vincent Vandendael, director of international markets at Lloyd’s of London.

“Insurers do know that the more products they have with the same customer, the higher the retention rate is,” Vandendael said.