Make catastrophic loss an insured peril, insurance executive says

Property insurers should consider offering “catastrophic” coverage for policyholders to address the lack of overland flood coverage in Canada, while an aging population is going to affect property and casualty insurers as governments try to download health costs to carriers covering accident benefits, an insurance executive suggested this week.

“I personally think that it’s time that the industry took a look at the possibility of calling catastrophe an insured peril, instead of trying to call catastrophes insured perils within that definition,” said Philip Cook, chief executive officer of Omega Insurance Holdings Inc. 

“There has to be a way that our industry can define a catastrophic loss for the policyholder in the same way that we define catastrophic loss for our reinsurers, whether it’s the number of your neighbours that had the same problem, whether it’s the time span, whatever the description. I think that if catastrophic loss was an insured peril, more people would buy it and that is really the key to the solution of the flood.”

Cook made his comments Thursday during the CIP Society Industry Trends breakfast at the National Club in downtown Toronto. At the event, which was organized by the Insurance Institute of Ontario, Cook was commenting on trends and his own predictions in the property and casualty insurance sector, as well as in financial services.

One of the major issues facing P&C is climate change, he noted.

“Climate change is not a trend,” he said. “Climate change is happening. It’s a change in the landscape but what is happening from that is a trend.”

Climate change will put pressure on infrastructure, Cook suggested, alluding to the floods last June in southern Alberta as well as to the July 8 rainstorm in Toronto. Those events ranked No. 1 and No. 3 respectively on the list of costliest natural disasters in Canadian history.

“Our industry did an exceptional job of responding to that situation except for the coverage,” he said of overland flooding. “It’s kind of disappointing, and I think it’s going to become an issue as we move forward, that we weren’t able to address the coverage issue for overland flooding.”

A new class of peril called catastrophe would be one way of covering risk from floods, ice storms or earthquakes, he suggested.

Earthquakes are a trend affecting P&C, Cook suggested, noting there are an average of 1,500 earthquakes a year in Canada, most of which are in the north or off the west coast.

 “Whether any of those will become an issue for us as insurers I’m not sure,” he said. “I think there’s a very good chance that there will be a wakeup call. Whether it’s a very significant wakeup call or not I’m not sure.”

He noted the federal government’s Earthquake Exposure Sound Practices (Guideline B-9), released last year by the Office of the Superintendent of Financial Institutions, which took effect Jan 1.

“That certainly has some new elements to it and all of us, as of two weeks ago, are under the new regime for calculating earthquake exposure,” Cook said.

Other new OSFI guidelines are affecting the industry include Guideline E-18, on stress testing, and Guideline E-19 – the Own Risk and Solvency Assessment. Those, Cook said, “will become topics of conversation as we go forward through this year” with new regulations.

“Risk management has always been what we do best,’ he said. “However, we generally apply that expertise to our policyholders, now we have to apply those same criteria and those same practices in to our own business.”

Cook predicted an aging population will also affect the industry in the future.

“A baby that’s born now may well live to 150,” Cook said, suggesting it will create a strain on the health care system.

 “I think that’s also going to start to become more apparent as a risk for the insurance industry, and not just the life industry but on our accident benefits side and no fault side,” as governments intend “to download some of those costs on to the P&C side,” he said. “I think that’s going to be a trend.”