Insurers face terrorism “coverage gap”, says study

A new study from A.M. Best Canada suggests Canadian insurers will face a “coverage gap”, with reinsurers reluctant to write terrorism coverage in their January 1 renewals, despite primary contracts covering the risk that go well into 2002.
The report, authored by general manager Joel Baker, notes that insurers can also expect reinsurance rate increases of between 30-70%, tighter terms and more focus on loss control from their reinsurers.
All of this comes as a result of the September 11 terrorist attacks in the U.S. which, although having little direct impact on Canadian insurers, will dramatically affect their business moving ahead.
Another gap insurers face is the possible exclusion of “fire-following” terrorist acts by reinsurers, given primary insurers are required to include fire-following coverage in their contracts. “Unless specialist reinsurance cover is made available, the federal or provincial governments may be called upon to act as excess reinsurers of last resort,” Baker writes.
The rating agency is concerned about “marginally capitalized” Canadian companies with heavy cat exposures, such as those offering coverage in urban areas of British Columbia. “Higher costs and reduced capacity may force these companies to purchase less reinsurance and increase their retentions, further exposing their capital base.”
September 11 is not the only problem facing insurers, however. Inadequate pricing in the Ontario auto market is also dragging the industry down, and despite some rates increases allowed by the regulator there, A.M. Best suggests increase will not keep pace with reinsurance rates. Investment income will also be an issue moving forward.
The rating agency predicts the industry’s combined ratio will top 110% in 2001, and that a recovery will not be seen until the last quarter of 2002 or early 2003.
Companies less reliant on reinsurance will benefit the most from hardening rates, including Wawanesa, Axa Assurances and Kingsway, A.M. Best predicts. Baker also suggests some mid-size foreign companies whose Canadian operations are underperforming may exit the market altogether.