The Business of Herding Cats

Managing the increasing frequency and severity of catastrophe losses in Canada is becoming an ever-more defining function of the insurance industry. Understanding the impact of these events on communities and the industry is required to enable insurers/reinsurers to effectively manage risks and continue to offer capacity, while at the same time buttress their profitability and financial resilience.

Being able to do so is aided by gaining access to accurate and actionable detailed analytical, insured loss estimates, and geographic and meteorological information on natural and man-made catastrophes in Canada.

Catastrophe Indices and Quantification Inc. (CatIQ) – a company launched in April following consultations with Canada’s insurance/reinsurance community and a sister company to MSA Research Inc. – seeks to provide such information. Guided by a senior advisory committee consisting of leaders from the Institute for Catastrophic Loss Reduction (ICLR), three of the country’s largest insurers, the three largest reinsurance brokers in Canada and a major reinsurer, the goal is to ensure the company continuously serves the needs of the market.

Industry-wide insured loss information and meteorological and spatial information in the aftermath of catastrophes will be available to subscribers. After surveying insurers for loss information and researching an event – Cats affecting multiple insurers and many policyholders, as well as having an estimated industry loss of more than $25 million – will be classified. Mini-cats or kitty-cats, events that are significant, but do not meet the $25-million threshold, are defined as notable events (NEs).

Pooling information available from numerous sources – including universities, storm chasers, media, insurance industry professionals, and the public through social media – is meant to provide accurate and up-to-date information on Cats and NEs to help insurers/reinsurers manage associated risks. By marrying that information with data from advanced meteorological instruments, such as radar, satellite and climate stations, along with reported damage, a footprint for a Cat event and affected areas can be developed.

CREATING A FOOTPRINT

Building on Cat events of the recent past can help provide a helpful view of the future, perhaps demonstrating how insurers/reinsurers can best respond.

CatIQ is currently working with the majority of the insurance industry (more than 75% of the industry on market share basis at this time) on completing a backfill analysis on approximately 70 Cats and many NEs that occurred in Canada from 2008 to 2013. Working with industry, the selected events meet the Cat threshold and all occurred during the backfill period.

The effort is meant to provide the industry with a much-needed historical baseline from which to build. It is anticipated that loss estimates on the backfill Cats will be phased in over the coming months.

Analysis of the backfill events has identified many interesting things about Canada’s recent history of catastrophes (see map above). From first glance, one can see overlapping footprints in southern Ontario, southern Quebec, southern Alberta and southern Saskatchewan, while there are fewer events occurring in the northern regions, Maritimes, British Columbia and Manitoba.

What type of events are most common in what regions? See image to right.

This trend looks very similar to maps that Environment Canada has created on locations prone to severe weather. The data being collected can help provide insight on which regions are prone to which perils and when. As such, the in-depth climatological information can help the industry prepare, underwrite and price for catastrophes.

A QUIET BEGINNING TO 2014

In the first half of 2014, Canada’s insurance industry and policyholders were spared from very large Cats. However, catastrophes in Canada have been anything but predictable.

CatIQ has declared three 2014 Cats as of early July (the storms of June 17 in southern Ontario, including the Angus tornado, the flooding in Saskatchewan and Manitoba that began over the Canada Day long weekend and was ongoing at press time, and the remnants of Hurricane Arthur hitting the Maritimes).

In addition to the three Cats declared so far, many NEs have been identified, including spring flooding events affecting Ontario, Quebec, New Brunswick, southern Manitoba and Alberta, and severe storms in Saskatchewan, Ontario and Quebec.

The delay in Cat activity in early 2014 was due to the extended cold winter that delayed the spring-thaw until April and May. The gradual transition to warmer temperatures eased the stress on local rivers, streams and lakes during the melting season this year. Moving into the second half of 2014, CatIQ is monitoring the impact of the summer severe weather season and the 2014 hurricane season.

It is also necessary to keep an eye out for the potential effects flowing from the likely El Niño. The most recent models predict an 80% chance that El Niño conditions will develop during the fall and winter of 2014, and carry over into 2015. The last two occurrences of El Niño caused above-average temperatures in Canada over the winters of 1997-1998 and 2009-2010.

Although most Canadians would be relieved by warmer temperatures during the winter, this will increase the potential for freezing rain events like what was seen with the ice storm of 1998, until recently the most expensive natural catastrophe in terms of insured losses in Canada’s history.

Other possible effects of the warming include an increased chance of flooding events and severe weather.