November 2018
YOUR GUIDE TO INSURANCE ANCE SUCCESS. SINCEE 1934 1
SHOOTING STAR HOW SUREX DIRECT BECAME CANADA’S FASTEST-GROWING INSURANCE BUSINESS
REINSURERS STILL LOVE CANADA Why bad weather, low growth and other challenges haven’t fazed them
Deniss oi Duboi
cu
INTERVIEW
Surex Direct’s Lance Miller
DESJARDINS EXEC ON DISTRIBUTION INNOVATION
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LESSONS FROM A DIGITAL BROKERAGE DYNAMO
WHY TORNADOES DON’T SCARE THE INDUSTRY
HOW TO TALK POT WITH YOUR CLIENTS
CONTENTS
Volume 85, No. 10 | NOVEMBER 2018 YOUR GUIDE TO INSURANCE SUCCESS. SINCE 1934
CANADIANUNDERWRITER.CA
FE AT U R E S
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SUREX’S SUCCESS STORY How an online brokerage launched in a small Alberta town posted a 3,097% growth rate in just five years
32
STANDING PAT Why reinsurers have the backs of primary insurers despite challenges with severe weather and low growth rates
36
POLLUTION COVERAGE Media are filled with stories of high-stakes pollution litigtation claims that are not typically covered in CGL policies. So why aren’t more clients buying the coverage?
40
FIGHTING FLOOD LOSSES Why insurers are taking a broader, societal approach to resolving flood claims arising from climate change
Isure president and founder Dario Battista
canadianunderwriter.ca | November 2018
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Inventive together XL is now part of the AXA family. With innovation, expertise and creative talent we’ll bring you solutions for even your most complex risks. So if you’re moving your business and the world forward, we’re the partner to help you do it.
Find out more on axaxl.com AXA, the AXA and XL logos are trademarks of AXA SA or its affiliates. AXA XL is a division of AXA Group providing products and services through four business groups: AXA XL Insurance, AXA XL Reinsurance, AXA XL Art & Lifestyle and AXA XL Risk Consulting © 2018 AXA SA or its affiliates. In Canada, insurance coverages are underwritten by XL Specialty Insurance Company - Canadian Branch and AXA Insurance Company - Canadian branch. Coverages may also be underwritten by Lloyd’s Syndicate #2003. Coverages underwritten by Lloyd’s Syndicate #2003 are placed on behalf of the member of Syndicate #2003 by Catlin Canada Inc. Lloyd’s ratings are independent of Group. Not all of the insurers do business in all jurisdictions nor is coverage available in all jurisdictions.
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FROM THE EDITOR
HANDBOOK
62 HOW I DID IT
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45 Captive Audience
PERSPECTIVES
How to use captives in your multinational programs and keep regulators happy
Dario Battista shares a key reason why he was among the first to transform his business into a digital brokerage
Readers respond to our recent stories on car surfing, address fraud and tornadoes
49 Send in the Drones
IN EVERY ISSUE
DECLARATIONS
51 Rising Interest Rates
11 Tornado claims Why twisters cost insurers less money than you’d expect
Planning a merger or an acquisition? How interest rates affect your value
15 Rise of the machines
55 Questions about Pot
How insurers can stop covering stupidity
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What you need to know before using drones to improve your ROI
Data analytics is a prime use of A.I., but don’t count humans out of their jobs yet
Strategies for pricing cannabis risk correctly
cu
Protecting board members from pollution claims that pre-date their terms
INTERVIEW
20 Denis Dubois Desjardins head offers new insights about distribution channels – including the omni-channel.
12 16 19 19 46 46 50
SURVEY SAYS NEW OFFERS BIG MOVES SUMMARY BY THE NUMBERS TRUSTED ADVISOR CROWDSOURCED
57 Cost of Pollution
59 Weaponized Cars Cyberhackers, automated vehicles, what could go wrong?
CORRECTIONS In the October 2018 edition of Canadian Underwriter, Barry Lorenzetti was incorrectly identified as having a B.A. in Business/Commerce. He in fact has a Bachelor degree in Arts. Also, in the October 2018 edition, one of the co-founding members of Shumka, Craig & Moore Adjusters, Rich Moore, was incorrectly identified as “Chris.” Canadian Underwriter apologizes for the errors.
COVER: Photography by Tanya Plonka canadianunderwriter.ca | November 2018
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FROM THE EDITOR MANAGING DIRECTOR, INSURANCE MEDIA GROUP
Ian Portsmouth ian@canadianunderwriter.ca (416) 510-6800 EDITOR-IN-CHIEF
David Gambrill david@canadianunderwriter.ca (416) 510-6793 ASSOCIATE EDITOR
Greg Meckbach gmeckbach@canadianunderwriter.ca ONLINE EDITOR
Jason Contant jcontant@canadianunderwriter.ca ART DIRECTOR
Excluding stupidity
Ellie Robinson DIRECTOR, BUSINESS DEVELOPMENT
Sandra Parente
The purpose of insurance is not to bankroll high-risk, reckless behaviours
ACCOUNT REPRESENTATIVE
Jonathan Hogg PRODUCTION MANAGER
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eople do stupid things. Sometimes behaviours are so obviously reckless that the injuries or damage they cause appear less like “accidents” and more like the predictable outcomes of deliberate acts. A key difference is that accidents are covered by insurance but deliberate, unlawful acts are not. And so we pose the question: are wildly stupid decisions “accidents”? Consider the following examples: EXHIBIT A: Only one hour after recreational marijuana was legalized in Canada, Winnipeg police issued their first ticket to a driver for consuming cannabis in a car. Fortunately, the driver did not crash into someone and cause an injury, or else it would have been Winnipeg’s first test of auto insurance liability for driving impaired while stoned. EXHIBIT B: An Ontario judge ruled recently that it was “reckless and foolish” for a young woman to ride standing on the back bumper of a car with her friends. The woman fell from the vehicle when the driver swerved, causing serious injury. She was insured for the “accident” because a judge deemed car surfing to be an ordinary use of an automobile (even if said use is illegal). In each example, someone had a clear choice between commiting an an act that carried a high risk of injury or damage, or not committing the act, which reduced the risk. If an insured forsakes the safer option for the high-risk option, should the insurer reward that behaviour with coverage? We say no. How to exclude stupidity from insurance policies? Borrow from existing legal language. Legal waivers, contracts and agreements routinely enforce accountability and responsibility by saying someone “knew or ought to have known” that their actions would cause harm. Inserting similar language in auto insurance policies would exclude coverage when people clearly knew or ought to have known that their actions would carry a high risk of injury or damage. It’s time to stop rewarding blatantly stupid decisions that predictably lead to damage or injury. Insurance dollars are better directed to people who find themselves in harm’s way through no fault of their own.
ISSN Print: 0008-525 ISSN Digital: 1923-34
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Car surfing covered by auto insurance, court finds September 27 The Story: A young woman was standing on the bumper of a moving vehicle when she fell off and hit her head on the concrete, an example of “car surfing.” An Ontario judge found she was entitled to accident benefits because, although her behaviour was “reckless and foolish,” she was nevertheless “using the vehicle for its normal purpose of transportation.”
Frank Cain says: Check out Illegal Use under 7.2.2 of the Ontario Auto Policy (OAP 1) booklet – “Dangerous operation of motor vehicles.” With ex-cathedra judgements as in the above article, it could be that the OAP 1 booklet isn’t worth the paper it’s printed on. Shame!
Joe says: Section 7 [of the OAP 1 booklet] does not apply to accident benefits. If you read the OAP 1, not even violation of section 8 statutory conditions affects accident benefits. The dispute in this case is whether its an “accident” or not. That’s all that will affect his claim.
canadianunderwriter
What made the Dunrobin tornado so unique
W E B S IT E
September 24 The story: A tornado that struck Dunrobin, Ont. on Sept. 21 was only the second EF-3 twister in 120 years to touch down in the province in September or later. The last time it happened was in September 1898, in what is now known as St. Catharines.
Marc Dubois commented: Almost surgical in their destruction, tornadoes, although spectacular events, cause much less insured damage than community-wide flooding and more widespread wind events. We can be thankful these devastating weather phenomenon are not more widespread in Canada.
Michelle Stewart says: I think car surfing or riding on the roof of a vehicle, etc. is one of the stupidest things a person can do. That girl should not have been allowed to claim for injuries. It’s her own fault.... Make all those things illegal to do. Just like texting, driving drunk, and being stoned are illegal. Doing dumb things like that and getting compensated for them because a person gets hurt is why our premiums are way up. Change the laws! Stop it!
Mario Chin says: So, this is why insurance rate will never come down, especially in Ontario. Why do we have rules about how to use or drive a car safely? I guess its true, we really can NO longer teach kids/people the lesson of being responsible for your own actions.
Scott says: Abnormal actions and incidents stemming remotely from the auto, but primarily by the negligence of the injured party, should not have damages borne by society. Car surfing enthusiasts’ claims should not be validated by the fact that someone equally stupid had car surfed before. Seriously? That is the litmus test now?
Josie says: Why are we covering illegal acts, regardless of Section B? The statutory conditions apply to the entire policy: (2) “The insured must not permit or allow the use of the automobile for (c) any illicit or prohibited trade or transportation.” (…) I am pretty sure this counts as illicit transportation. Why is it the courts don’t apply the wording properly? I think it’s because the insurance company has the money, and the victim, no matter how stupid they are, does not.
Robert says: This judge should be removed from the bench immediately. And this woman’s benefits should be revoked immediately. That’s not part of driving or riding in a car – that’s an idiotic thing to say. Unfortunately, you can’t legislate against stupidity.
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November 2018 | Canadian Underwriter
Top 5 signs an insured may be committing address fraud September 20 The story: A lawyer with Regan Desjardins LLP discussed how insurers can recognize accident benefit fraud. He outlined a number of indicators showing when an insured might be lying about an address.
Wilfred Saulnier commented: What do you mean an ‘insured’? I think a lot of these insurance companies may also be committing a fraud. The only ones who seem to know how much you’re paying, or what the company is charging, are the buyer and the seller (i.e. the insurer). That should be examined too. I’ve been buying insurance for as long as I can remember and neither one of us have EVER HAD A CLAIM and yet my policy every year crawls up.
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declarations HIGHLIGHTS
Survey Says... p.12 l Actuaries to A.I. p.15 l New Offers p.16 l Big Moves p.19
TORNADO CLAIMS
Flash in the pan Unleashing a destructive power that inspires Hollywood movies, twisters would seem to be an insurer’s worst nightmare. So why aren’t they? B Y J A S O N C O N T A N T, Online Editor
Packing windspeeds of up to 265 km/h, an EF-3 tornado in September tore through Dunrobin, Ont., a suburb of the nation’s capital, killing one person and demolishing an estimated 30 homes. The twister then moved on to Mont Bleu in Gatineau Que., where it razed an estimated 50 homes, and an apartment complex housing 600 people. In total, six tornadoes touched down in the Ottawa area that day, Environment Canada confirms. Twitter feeds were abuzz with images of ambulances attending the injured, 80-foot pine trees uprooted, and some homes turned into piles of tinder. At the height of the
INTEREST RATE HIKE | OCT. 24
As expected, following the new trade deal between the United States, Mexico and Canada (USMCA), the Bank of Canada raised its trend-setting interest rate to 1.75%, its highest level in about a decade.
ordeal, hundreds of thousands of residents were without power. The estimated insured costs of the damage? Nearly $300 million – about $200 million for the damage in Dunrobin, and $100 million for losses in Gatineau. While the scale of the damage in Ottawa-Gatineau is undeniable, it is also rare. Historically, claims costs from tornado events tend not to be high as scenes of the damage may imply. “While the carnage may seem very dramatic – even spectacular at times – insured damage has thus far tended to be quite manageable from an industry perspective,” Glenn McGillivray, man-
aging director of the Institute for Catastrophic Loss Reduction (ICLR) writes in an October blog. Consider the EF-4 tornado that struck the community of Alonsa in southern Manitoba on Aug. 3, 2018. That twister claimed the life of 77-year-old Jack Furrie and destroyed or severely damaged several residences, cottages and outbuildings. How many claims related specifically to the tornado? Only two, reports Winnipeg-based Wawanesa Mutual Insurance Company. “We also saw approximately 170 claims in the Parkland region of Manitoba related to the wind and hail storm that
SIGN OF HARD MARKET | OCT. 23
Insurance companies are rating by peril, a Nova Scotia brokerage reported, signaling the hardening of property lines in the province.
canadianunderwriter.ca | November 2018
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DECLARATIONS passed through at the same time,” says Wawanesa spokesman David Hultin. The same (relatively light) claims pattern for the Alonsa tornado is reflected elsewhere in the province’s history. Canada’s strongest tornado, the only one ever recorded in Canada as F5 on the Fujita Scale, occurred in Elie, Man. in June 2007. The Elie twister did not cause any deaths, but it destroyed or damaged several homes and vehicles. However, even though its devastating wind speeds reached between 420 km/h and 510 km/h, the tornado caused only $20.5-million worth of insured damage, which didn’t even crack the industry’s catastrophe threshold of $25 million. Before the Ottawa-Gatineau twisters, the costliest tornado in modern Canadian history was the July 1987 event in Edmonton, which cost insurers $278.1 million (in 2016 dollars). That event saw winds exceeding 315 km/h. Compare these tornado losses to Canada’s costliest wildfire (about $4 billion insured), its costliest riverine flood ($1.7 billion), its costliest urban flood ($1 billion) and its costliest hailstorm ($570 million). So why do tornadoes usually cost less than other disasters? For one thing, tornadoes rarely ‘get into town’ in Canada, McGillivray said. In the case of the Alonsa tornado, the vast majority of the 12.5 km-long damage path consisted of aspen/poplar forests and grasslands, noted Sarah Stevenson, a Ph.D student in wind engineering at Western University in London, Ont. The location of the tornado in Alonsa was not unusual. Most tornadoes in Canada occur in central or south-central Alberta and Saskatchewan, southern Manitoba, southern Ontario and down through the St. Lawrence Valley, McGillivray said. “However, tornadoes are not restricted to this area, as we have experienced tornadoes in every province, including northern porINSURER WEIGHS APPEAL TO HIGH COURT | OCT. 22
Aviva Canada reported it is considering its legal options after the New Brunswick Court of Appeal ruled the insurer must pay a Catholic diocese about $3.4 million towards costs of settling sexual abuse claims dating back to the 1950s.
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November 2018 | Canadian Underwriter
SURVEY SAYS…
INSURANCE INDUSTRY LOBBY The industry is facing several issues, including auto reform and climate change, that can only be resolved by changes to current insurance rules and regulations. With this in mind:
In your opinion, how effective have the insurance industry’s recent efforts to lobby Canada’s federal and provincial governments been?
9%
Highly Effective
Regardless of the effectiveness of these lobbying efforts, what’s your opinion of the approach taken by the insurance industry to lobby governments?
22%
16%
Very Correct
22%
Don’t Know
Don’t Know
8%
Highly Ineffective
41%
Somewhat Effective
26%
Somewhat Ineffective
3%
Highly Incorrect
40%
13%
Somewhat Correct
Somewhat Incorrect
How much does the insurance industry need to intensify its lobbying efforts to fix pricing issues with auto insurance?
9% Don’t Know
4%
Not at all
3%
Slightly
66% Greatly
18%
Moderately
tions of provinces, and in two of three territories,” he said. From 1980 to 2009, 1,843 tornadoes were recorded in Canada, the vast majority (91.9%) of which were F0 or F1 (winds between 60-170 km/h). Canada gets about 62 tornadoes a year, the second highest occurrence in the world after the United States. The strongest tornado to touch down in the Ottawa-Gatineau area was unusual for the time of year. The last F3 to strike in Canada as late as September was in Merritton, Ont. (now known as St. Catharines) in 1898. INTACT CALLS FOR BROKER LOBBY | OCT. 18
The Ottawa-Gatineau event is sure to raise the possibility of a powerful EF-5 strike on a major Canadian city in the future. But is such a ‘killer tornado’ scenario likely? Probably not, says McGillivray. “In my view, insurers should be more concerned about a strike from a well-placed, lesser tornado that is statistically more likely, and that could have fairly serious consequences. Such an event could be of particular concern to a small local/regional writer that may have concentration issues in a given area and a cat reinsurance program that may not be up to the job.”
Facing an imminent hard market in auto insurance lines, brokers need to intensify their lobbying efforts to inform Ontario MPPs about the pricing issues associated with the auto insurance product, Intact Insurance president Louis Gagnon urged brokers attending the 2018 IBAO broker convention.
Creating value for brokers means listening and constantly refining what we do. Tom Reikman, SVP & Chief Distribution Officer
The benefits of innovation are often clouded by the challenges of transforming how we do business. We get it — this type of change forces us to rethink each aspect of our operations as we improve and strengthen the experience for brokers and customers. At Economical®, we’re continuing to listen and incorporate feedback to refine programs like Vyne™. We stand behind our promise to equip brokers for the future and protect what matters most to our customers. We thank our teams and broker partners as we work together to make insurance better — one step at a time.
Get ready for the future, with us. economical.com PROPERTY | AUTO | BUSINESS Economical Insurance includes the following companies: Economical Mutual Insurance Company, Family Insurance Solutions Inc., Sonnet Insurance Company, Petline Insurance Company. ©2018 Economical Insurance. All Economical intellectual property belongs to Economical Mutual Insurance Company. All other intellectual property is the property of their respective owners.
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I
n a rapidly changing external environment, both brokers and customers are demanding more from their insurance providers. More ways to interact, more ways to optimize processes and ultimately more ways to deliver the best service possible.
"K@HLR SGD KHSLTR SDRS ENQ AQNJDQR 6D TMCDQRS@MC SG@S SGD BK@HLR OQNBDRR HR @ SQTD SDRS NE @ AQNJDQ¼R QDK@SHNMRGHO VHSG @ BKHDMS R RTBG VD JMDV VD G@C SN DUNKUD NTQ BK@HLR NEEDQHMF SN NEEDQ LNQD SQ@MRO@QDMBX SN BTRSNLDQR @MC SGDQDENQD BDLDMS SGDHQ SQTRS HM SGD @CUHRNQX QNKD NE SGDHQ HMRTQ@MBD AQNJDQ That’s where RSA Claims Point™ comes in. The portal, which features a clean interface and intuitive navigation, is designed to be a value-added service that helps brokers easily steer their customers through the claims process. Claims can be submitted at any time, from any device and the system automatically provides status updates via email. This online status tracking and proactive email functionality, combined with the ability to share documents – including images of receipts, damage to property and estimates and the ability to search claims by policy number, claim number, insured name, policy type, date range or claim status – provides increased transparency across the board. The tool also ensures that an adjuster is automatically assigned on the same day a claim is submitted. By revamping our claims process, we’ve freed TO QDRNTQBDR SN QDRNKUD NTQ AQNJDQRŒ BTRSNLDQ BK@HLR LNQD DEãBHDMSKX than ever before. The result? Better, quicker claims service for our broker partners and their customers. In a claims scenario, many will still choose to call and seek reassurance from a skilled adjuster, who can talk them through the process and allay any concerns they might have. However, we also have a high volume of smaller, more transactional claims where the most important driver of satisfaction is ease of submission and speed of resolution. This could range from hail damage to the insured’s home to a vandalized vehicle or a collision. In these instances, RSA Claims Point™ is a fantastic alternative to existing phone methods of claims submissions.
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That’s why we’ve taken one of the more routine aspects of insurance – the submission and processing of claims – and made it even better with the launch of RSA Claims Point™. Our new online portal aims to put brokers in the driver’s seat to steer clients through the claims process EQNL RS@QS SN ãMHRG ENQ @KK /DQRNM@K (MRTQ@MBD @TSN @MC OQNODQSX BK@HLR
.TQ TKSHL@SD FN@K HR SN GDKO NTQ AQNJDQR R@UD SHLD @CLHMHRSQ@SHUDKX @KKNVHMF SGDL SN ENBTR NM NEEDQHMF U@KT@AKD BNTMRDK SN SGDHQ BTRSNLDQR 12 "K@HLR /NHMSÈ V@R CDRHFMDC SN QDHMENQBD SGD AQNJDQ¼R ONRHSHNM @R @ SQTRSDC @CUHRNQ SN SGDHQ BKHDMSR
BBDRR SN E@RSDQ BK@HLR OQNBDRRHMF !QNJDQR VHKK AD @AKD SN @BBDRR 12 "K@HLR /NHMSÈ SGQNTFG SGD DWHRSHMF 12 AQNJDQ ONQS@K !Q@UN 3GD LNLDMS @ AQNJDQ ADFHMR SN RTALHS @ BK@HL @ BK@HL MTLADQ VHKK AD FDMDQ@SDC 6GDM RTALHSSDC SGD BK@HL VHKK QDBDHUD SGD R@LD KDUDK NE B@QD @MC @SSDMSHNM @R @ BK@HL RTALHSSDC SQ@CHSHNM@KKX M DWODQHDMBDC @CITRSDQ VHKK AD @RRHFMDC SN SGD B@RD @MC VHKK BNLLTMHB@SD SGD MDWS RSDOR SN SGD BTRSNLDQ 3GD RODDC NE QDRNKTSHNM VHKK CDODMC NM SGD SXOD @MC RDUDQHSX NE SGD BK@HL The portal is fully integrated in our internal claims adjustment system so that the information is always up-to-date. The submission process is started the moment a claim is submitted. If at any point through the process the customer or broker feels more comfortable to speak to an adjuster, they can request the adjuster to help complete the draft claim.
6G@S¼R MDWS 12 "K@HLR /NHMSÈ VHKK AD @U@HK@AKD SN AQNJDQR M@SHNMVHCD AX )@MT@QX (M @M DEENQS SN LDDS @MC DWBDDC AQNJDQ DWODBS@SHNMR VD G@UD ADDM OHKNSHMF NTQ 12 "K@HLR /NHMSÈ SNNK VHSG RDKDBS AQNJDQR 3N C@SD AQNJDQ QDUHDVR G@UD ADDM ONRHSHUD DRODBH@KKX @QNTMC SGD ONQS@K¼R D@RD NE TRD Through the use of RSA Claims Point™, brokers will soon be able to have their clients self-serve to start a claim and view their claim on their own. That will allow them to focus on what they do best: providing customized counsel that represents their customers’ best interest.
Jullie Hands brings more than 24 years of experience in claims, and has been Vice President, Claims Technology at RSA Canada since 2015. Hands holds an MBA from the University of Bradford.
DECLARATIONS
DATA ANALYTICS
From actuaries to AI Why the machine takeover of analytics is a good thing for insurers B Y G R E G M E C K B A C H , Associate Editor
Data analytics has been the core business of insurance for centuries, but the role of analyzing data is beginning to pass from humans to machines, said speakers appearing at the recent Insurance Analytics Canada Summit in Toronto. For 200 years, before the term “data science” came into existence, insurers already had people called “actuaries” analyzing data, said speaker Eugene Wen, Manulife Financial Corp.’s vice president of group advanced analytics. In fact, the property and casualty insurance industry has been driven by data and analytics ever since the 1500s, because actuaries have always had to calculate the probability that property will be damaged or lost, he adds.
CLOCKING THE FIRST POT TICKET | OCT. 18
One hour after pot became legal in Winnipeg, a driver was ticketed for consuming cannabis in a motor vehicle. The offence carries a $672 fine. It’s not clear if the person ticketed was driving.
Analyzing data: The rise of the machines. AI is when computers mimic human cognition and activities (identifying patterns, for example). Machine learning, a subset of AI, is when software performs certain functions without being explicitly programmed to do so. Artificial intelligence (AI) and machine learning can help insurers make better decisions about what price to charge for insurance, and how much money they need on hand in reserves, Wen observed. In commercial lines, Intact Insurance, Canada’s largest property and casualty insurer, is using machine learning to generate questions that are easy for cli-
ents to answer during the underwriting process. “Taking more than an hour to fill out a commercial lines application should be unacceptable in this day and age,” said Achraf Louitri, director of research and development at Intact. In addition, advanced technology is helping the company to underwrite auto insurance, by analyzing data gleaned from telematics (the technology used to monitor driver behavior). Intact has now collected data on more than 3.7-billion kilometres driven, Louitri reported. Using machine learning, Intact is trying to come up with pricing models that promote safer driving habits. Machines are increasingly required to process and analyze massive amounts
A.P. REID’S ONTARIO ACQUISITION | OCT 14
National brokerage A.P. Reid Insurance Limited announced its intention to acquire Ontario brokerage Wardell Insurance Limited, effective Jan. 1, 2019.
canadianunderwriter.ca | November 2018
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DECLARATIONS NEW OFFERS of data, a process known as “data mining.” Today, data include images, voice conversations and email. It is much less costly to store this kind of data than it was 15 years go. Forbes magazine estimates 2.5- quintillion bytes of data are created each day; about 90% of the world’s data has been amassed over the past two years. AI is about deriving insights from this data, said Clement Brunet, research and analytics director for The Co-operators Group Ltd. He cited the example of Rollin’ Justin, a robot created by the German Aerospace Centre’s Institute of Robotics and Mechatronics. That robot is designed to catch objects thrown at it. “Before, if you were to build a robot like that, you would have to explicitly program the laws of physics and the calculation, so it could expect where the ball would be given its current trajectory and place in space,” Brunet said. “Now, if you want to train a robot like that, you just have to throw balls at it and it’s going to figure it out by catching and dropping balls.” The same principle applies to insurance. Programmers train algorithms “by exposing them to data,” Brunet explained. Machine learning is used for a variety of data analysis applications, including setting rates, said Baiju Devani, vice president of enterprise analytics at Aviva Canada. “I tell people that my goal is to make sure that I am out of a job in a few years, because a lot of these things can be automated.” But will machines fully replace humans? For now, machines are supported by humans. “I would not say we are necessarily looking for people with years and years of hands-on experience,” said Cindy Forbes, Manulife’s executive vice president and chief analytics officer, when asked what the company looks for when hiring data analysts. “We are quite open to people with some experience, but who we can develop and grow.” TORNADO DAMAGE HITS $300 MILLION | OCT. 17
Insurers paid out $300 million in claims after two tornadoes struck the OttawaGatineau area in late September. Two-thirds of the damage occurred on the Ontario side, reported CatIQ.
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November 2018 | Canadian Underwriter
DUUO BY CO-OPERATORS Vendor: The Co-operators Target Audience: Home-sharing hosts What it does: Covers additional home-sharing risks that are not typically covered by standard home insurance policies
An on-demand, pay-per-use product for home-sharing hosts who rent their properties using popular platforms such as Airbnb. Available at an average cost of $8 per night, the product is purchased only for the nights that guests are renting a property The policy provides coverage for the full replacement cost of a home and its contents, plus additional protection specific to home-sharing such as vandalism, infestation, liquor liability, and loss of income, among other things. It also covers commercial liability for a limit of $2 million. The product is being offered in Ontario first, then in British Columbia and Alberta. The remaining provinces and territories will follow.
HOME CYBER PROTECTION Vendor: Boiler Inspection and Insurance Company of Canada Target Audience: Personal lines insureds What it does: Protects against cyberattacks, cyber extortion, online fraud and data breaches
A suite of cyber coverages and services involving smartphones, computers and connected home devices. The product bundles the following coverages: • Cyberattack: Covers costs to remove malware on a computing or connected home device, recover data and restore systems • Cyber extortion: Covers payment of ransom when approved; also Includes professional assistance on how best to respond to a ransomware attack. • Online fraud: Includes coverage for losses due to identity theft, unauthorized bank and credit card transfers, forgery of cheques, counterfeit currency, and intentional and criminal deception. • Data breach: Includes coverage for forensic IT and legal reviews, notification, fraud alert and identity recovery services when private, non-business data entrusted to an individual is lost, stolen or published. Home Cyber Protection is added to personal lines policies of insurance companies that partner with BI&I, covering individuals and family members insured by those policies.
APRIL LANDLORD PROTECTION Vendor: APRIL Canada Target audience: Landlords What it does: Provides unpaid rents and damage insurance for landlords in Ontario and Quebec
APRIL landlord protection covers unpaid rents arising from rent arrears, a tenant’s death or property that cannot be occupied by another tenant. It also covers theft or damage caused by tenants. Coverage for either unpaid rents or theft & damage (or both) is available as a standalone policy or an endorsement to an APRIL property and liability rental policy. The product is available to property owners who rent out all or part of their properties. Coverage for unpaid rent includes 24 weeks of rent for defaulting tenants; units that are impossible to rent (only if the claim is covered under damage by tenants); or failure to vacate. Up to four weeks of rent is covered if a tenant vacates before the end of the lease without respecting proper notice, dies or is released by a court from his or her lease obligations due to hardship. Maximum limits are $25,000 per rented unit or $100,000 per year. For a minimum deductible of $1,000, tenant damage offers theft coverage up to $50,000; malicious damage up to $50,000; accidental damage up to $25,000; and non-malicious damage and pet damage.
CORONER URGES IGNITION LOCKS | OCT. 16
A Quebec coroner called on the province to implement a rule that would force repeat drunk drivers to have their vehicles fitted with ignition locks for at least a decade.
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DECLARATIONS BIG MOVES
SUMMARY
Farm Mutual Re CEO retires Steve Smith, president and CEO of Farm Mutual Re since 2003, is retiring at the end of August 2019.
REGULATORY GUIDANCE
Fair treatment of customers CCIR/CISRO Canada’s insurance regulators have released a new guidance paper explaining their “overarching expectations” regarding market conduct for brokers, agents and carriers. The paper, Guidance conduct of insurance business and fair treatment of customers, was released Sept. 27 by the Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO). In the paper’s commentary, CCIR and CISRO propose that a carrier should have a duty to report to a regulator any “intermediary with whom they have transacted that may be unsuitable or not duly authorized, which could result in impairing the fair treatment of customers.” Although brokers and agents are often involved in serving customers, the carrier is ultimately “responsible for servicing policies” and “ensuring that intermediaries have appropriate policies and procedures in place in respect of the policy servicing activities,” the regulators point out. CCIR and CISRO added that carriers need to “be satisfied that the involved intermediaries are providing information to customers in such a manner that will assist them in making an informed decision.” The paper also includes guidelines for customer complaints. Companies are expected to “establish policies and procedures to deal with received complaints in a fair manner,” CCIR and CISRO said in the guide. These include keeping a record of each complaint and the measures the company took to resolve the complaint. Insurers and intermediaries must make sure customers are informed about products before buying them. Customers need to be told about key features such as conditions, exclusions, restrictions and fees of products.
WHO: Steve Smith CURRENT ROLE: President, CEO, Farm Mutual Re P&C EXPERIENCE: 30+ years PROFILE: Led anti-fraud efforts as chief operating officer of Kingsway General from 1991 through to 2003.
After more than 30 years in the property and casualty insurance industry, Steve Smith will hang up his hat next summer. Currently president and CEO of Farm Mutual Re, Smith is retiring at the end of August 2019. At press time, Cambridge, Ont.-based Farm Mutual Re was recruiting for Smith’s successor. Founded as Farm Mutual Reinsurance Plan in 1959, the company adopted the new name of Farm Mutual Re in 2017. Smith joined the reinsurer in 2003 after serving for 12 years as executive vice president and chief operating officer of Kingsway General Insurance Company. Before joining Kingsway in 1991, Smith had been vice president and general manager of Heritage General Insurance Company. At Kingsway, Smith had a reputation of taking a hard line on fraud. He was quoted by The Globe and Mail in 2003 as saying the insurance industry is getting “nickeled and dimed to death” by auto fraud in Ontario.
Igal Mayer, founder of Shop Insurance Canada, as well as the former CEO of Aviva Canada, Aviva UK and Aviva Europe, is now CEO of Kanetix Ltd. The online quote provider was acquired by Ontario Teachers’ Pension Plan in August.
OTTAWA BROKERAGES MERGE | OCT 10
The Rhodes & Williams Group of Companies, a brokerage in Ottawa, merged with Caiger-Watson Insurance Brokers Ltd., which has served in the Ottawa area since 1961.
Mark Hughes, founder of Sintra Engineering Inc. in May 1997, is now vice president of Western Canada for CEP-Sintra. The company formed in 2017, when Sintra merged with CEP Forensic Inc. The CEO of CEP-Sintra, which employs 100 people, is Jean-François Joubert.
Sarah Hirst, district manager for Northern Alberta at ClaimsPro, is the new president of the Canadian Independent Adjusters’ Association. Hirst was elected at CIAA’s AGM in August. She succeeds Monica Kuzyk, vice president of Curo Claims Services.
GUIDANCE CONDUCT OF INSURANCE BUSINESS AND FAIR TREATMENT OF CUSTOMERS
CYBER INSURANCE SPENDING | OCT. 15
Canadian businesses reported spending $14 billion on cybersecurity in 2017. One in five companies reported they were affected by a cyber-attack last year, Statistics Canada reported.
canadianunderwriter.ca | November 2018
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cu
INTERVIEW
DENIS DUBOIS, Executive Vice President, Property and Casualty Insurance, Desjardins
DISTRIBUTION MODELS
CHANGING THE CHANNEL The property and casualty insurance industry is like a cable TV network: you can choose from among a variety of channels – broker, direct, multi-channel and omni-channel.Desjardins’ Denis Dubois explains what they all mean, and tells CU how distribution channels may evolve in the future.
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November 2018 | Canadian Underwriter
cu | Desjardins has a precise understanding of what the term “channel” means. And it all starts with the concept of a network. Can you define the term “network” for us? We did some work internally at Desjardins to make sure we understood each other on these concepts. We developed our own language, which I will explain to you. The first thing we have defined within the organization is our different approach. Here I am talking about our exclusive agents, which we refer to as Desjardins agents. For us, that is a “network.” Then, we have our pure mass direct approach – Desjardins Insurance, for example. That’s another network. Then we have a group insurance business, The Personal, which is another network. We define these as “networks.”
cu |How do you differentiate between the networks? The reason why we have different networks is that there are different sets of customers out there; these customers do not respond to an insurance purchase the same way. That’s why we have those different networks, to serve those different profiles of customers.
cu | So how do you define the term “channel” then? Within each of our networks, we have what we call different “channels” for serving each customer profile. Let’s take the example of the exclusive agent network, the Desjardins Exclusive Agent Network. Within this network, we have a multi-channel approach. For example, when a customer does business with an exclusive agent in the physical presence of an office, that’s a channel. The physical location is a channel. Also, customers can do business with our agents after-hours using our client call centre (CCC). That’s our CCC channel. Also, customers can do business on the web or mobile; those are other channels.
Within the Desjardins Exclusive Agent Network, we have multiple channels.
cu | How would a multi-channel concept apply to your direct network? It’s the same in the direct network as in the exclusive agent network. However, in the direct network, because the customers are more self-sufficient and price-sensitive, we don’t have the physical channel in that world. It’s heavily weighted in the CCC and web and mobile channels.
cu | How would you define an “omni-channel”?
The reason why we have different networks is that there are different sets of customers out there; these customers do not respond to the insurance purchase the same way.
An omni-channel is when you are going from one channel to another one within what we call a network. For example, if you are a customer being served by the Desjardins Exclusive Agent Network, it’s seamless for you to move from the web (one channel) to an agent (another channel). Let’s say you are doing an online quote in real time and you need additional information. In an omni-channel world, you may call into the CCC, and the person on the other end of the line would be able to know exactly where you are in the process and help you along. The reality is that today we cu | Is there a channel have very few players who are able to that best suits the times? do that. Whatever strategy you have, you clearly need to adapt to evolving customer needs. Things are changing quickly. cu | Why is that? People today have less time. That’s true When we as an industry built the digital channel, we developed some con- of everyone, given the lifestyle that we nection between the different channels, have today. You cannot do a quote or a but they are not seamless. The different claim the same way you were doing it 20 years ago: people today don’t have channels were not developed in a way that each channel would interact seam- 20 minutes, 30 minutes – or worse, an hour – to spend on getting a quote. So, lessly within another. So, the concept when you see that trend, you need to of an omni-channel is really the idea adapt, whatever your model is. Digital is that information can be recognized another obvious one: whether you are a completely no matter where you are broker or an exclusive agent, it’s true of in the process, and regardless of what everyone, you need to offer convenience. channel you are in. Historically, the systems within insurance organizations If it’s Saturday night and your customer wants to access information on their were generally not developed in this fashion. And so very few organizations banking files, MSN account, or even if they want to work with John Doe, can say they offer fully-fledged you still want to offer those options. omni-channel service.
Continued on page 22 canadianunderwriter.ca | November 2018
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INTERVIEW
Continued from page 21
Whatever your business model happens to be, you need to develop your digital capacity. You have no choice, you have no other option. If you don’t, you will not die the next day, but you will start to see your market share erode, slowly but surely.
cu | How are consumer expectations putting pressure on today’s insurance business models? Pressure comes from being able to serve consumers faster. You have models now that can provide an auto quote within two minutes. So, even if consumers want advice – maybe they wish to speak to a broker or an exclusive agent, for example, because they are not feeling comfortable making their decision – once they start to hear that it takes two minutes to get a quote, once they start to do non-insurance tasks digitally and discover the process is so convenient and simple, they start to ask questions of insurance professionals: ‘Why are you asking me that question? Is it relevant today?’”
cu | How do insurance organizations adapt to changing consumer expectations? There is pressure on insurers for two main reasons. First, finding the right solution for your business model is not simple. You need to find out how to make the new solution fit into your current context. For example, as an exclusive agent, I have a relationship with clients who come to my office; how do I build a digital channel within that concept? It’s a huge investment. Second, and this is true of everything in life, it’s about changing paradigms. It’s about the culture of your organization. When you start to bring people together to say, ‘Something is happening out there and we need to adapt,’ obviously it becomes challenging in some organizations to go through that change. It’s about managing change of that nature. It’s not easy.”
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cu | How do you see insurance business models evolving in the future? The first thing is, every business model needs to simplify everything in the value chain and evolve the digital channel. Second, we need to use digital capabilities and analytics to enrich the interactions with our clients. We are moving from a low-frequency contact
PROFILE
DENIS DUBOIS Title: Executive Vice President, Property Properr ty and Casualty (P&C) Insurance, Desjardins D jar Des jardin dinss w th wi Education: Graduated in 1993 with Bachelor’s degree in Actuarial Science from Université Laval. Credentials: Fellow of the Canadian dian e Institute of Actuaries and of the Casualty Actuarial Society. d Industry Experience: First joined Desjardins Group in 2003 and held a ositions series of senior management positions within DGIG. After heading up business development and sales forr The Personal, DGIG’s group insurance ce subsidiary, he was appointed vice president of claims, and then vice president of market development and general manager of Ontario, Atlantic and Western Regions. He then took on the role of chief integration officer and managed the integration of State Farm Canada into Desjardins Group in 2015. Before his current appointment, Mr. Dubois was senior vice president and chief operating officer of DGIG’s subsidiaries.
relationship to one that provides frequent value-added advice that cultivates relationship-building. Many other trends will affect the business model, such as autonomous vehicles, the sharing economy, blockchain, etc., but it is not clear at this time what the magnitude of the impact of these events might be. Organizations must adapt. It is a very exciting time.
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TOP BROKER SUMMIT is an educational event that brings together senior insurance brokers and insurance executives in a mutually beneficial forum. Attendees are made up of top-producing insurance brokers, broker owners, broker management and insurers.
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Is Your Company Ready to Be Digital?
Relentless Adaptation: Best Practices for Today’s Digital Economy
You live in one of the most connected countries in the world. Digital media has drastically changed your life and the lives of everyone around you. Has your company embraced it? Learn how to be successful online by listening to Darrell’s keynote packed with real examples and insights on how your company can build a digital plan to move the needle.
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Jennifer Hughey hughey.jennifer@gmail.com
Amber Mac, writer for Fast Company, speaker, author, entrepreneur
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Sandra Parente sandra@newcom.ca | 416-510-5114
We obsess over innovation. But innovation is overrated. If you look at the smart companies that are prized for “innovation,” you will see that they are actually masters of “adaptation”— of knowing when to adjust, when to speed up, and when to capitalize. This big picture talk sheds light on how to adapt, and how to win, in our fastforward economy.
FOR REGISTRATION INFORMATION
Melissa Arnott melissaa@newcom.ca
CONFERENCE AGENDA November 26, 2018 • Ritz-Carlton Hotel, Toronto 7:45 – 8:30 a.m. Registration and Breakfast
Saad Mered, CEO & Chief Agent, Zurich Canada Steve Phillips, EVP & COO, Sovereign General Insurance Company Chris Harness, Chief Information Officer, Northbridge Insurance
8:30 – 8:40 a.m. Opening Remarks 8:40 – 9:40 a.m. SESSION ONE – Opening Keynote IS YOUR COMPANY READY TO BE DIGITAL? You live in one of the m most connected countries in the world. Digital m media has drastically changed your life and the lives of everyone around you. Has your company embraced it? Learn how tto be successful online by listening to Darrell’s keynote packed with real examples and insights on how your company can build a digital plan to move the needle. Presenter: Darrell Keezor, CEO & Founder, Candybox Marketing 9:40 – 9:55 a.m. Networking Break 9:55 – 11:05 a.m. SESSION TWO – Roll Up Your Sleeves with Canada’s Top C-Suite Executives INSURER C-SUITE SMALL GROUP DISCUSSIONS Replacing the traditional panel discussion, this new interactive format will focus on sharing new ideas and knowledge through forward-thinking content and heightened audience engagement. This interactive session encourages delegates to discuss and debate critical broker/insurer issues with the Presidents and CXO’s of a select group of insurance companies in an exclusive “thinktank” environment. C-Suites will then reconvene on stage for the last 15 minutes of the session to share their insights from their discussions. Executives: Mike George, President & CEO, Trisura Guarantee Insurance Company
11:05 – 11:25 a.m. Networking Break 11:25 a.m. – 12:10 p.m. SESSION THREE BEHIND THE WHEEL OF DISRUPTION: WHAT’S DRIVING YOUR CONSUMERS? Technological innovation, and how consumers embrace it, continues to disrupt long established business models. How do we know what is coming, and more importantly, how will it affect the ever-changing ways consumers want to be engaged? The answer lies in understanding the forces that drive how consumers want to interact with brands and ultimately make a purchase. The consumer experience, from how retail goods are purchased to ordering take-out and ride sharing, are setting the minimum standards for the next wave of InsurTech and FinTech that is about to disrupt the insurance and financial services industry. This session explores six driving forces that is shaping consumer behaviour and ultimately the future of business, including your business. Presenter: Andrew Lo, Insurtech Innovator, Former CEO of Kanetix Ltd. 12:10 – 1:20 p.m. Lunch, followed by presentation Lunch Presentation AI IS EVERYWHERE The robot revolution is happening, and artificial intelligence is everywhere, from manufacturing and transportation, to finance, customer service, and even creative industries. With the launch
of fully automated Amazon convenience stores and the proliferation of social media chatbots that engage with customers, smart machines are changing the face of business in the 21st century. But what does this rapid rise of AI mean for the workforce, for your business… and for your personal life? Presenter: Ramona Pringle, CBC Technology Expert & Director, Transmedia Zone Media Incubator (This session is made possible by the Insurance Institute) 1:25 – 2:10 p.m. SESSION FIVE - TBA 2:10 – 2:35 p.m. Networking Break 2:35 – 3:00 p.m. Peer-to-Peer Awards Presentation 3:00 – 4:00 p.m. SESSION SIX – Closing Keynote RELENTLESS ADAPTATION: BEST PRACTICES FOR TODAY’S DIGITAL ECONOMY We obsess over innovation. But innovation is overrated. If you look at the smart companies that are prized for “innovation,” you will see that they are actually masters of “adaptation”—of knowing when to adjust, when to speed up, and when to capitalize. This big picture talk sheds light on how to adapt, and how to win, in our fast-forward economy. Presenter: Amber Mac, writer for Fast Company, speaker, author, entrepreneur 4:00 p.m. Closing Remarks, Closing Cocktail and CE Credit Verification
*Agenda subject to change
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FEATURE l SUREX’S GROWTH GURUS
DIGITAL BROKERAGE
Growth Gurus SurexDirect.com increased its revenue by 3,097% in five years, making it Canada’s fastest-growing insurance business. How they did it and what’s in store By Danielle Kubes
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November 2018 | Canadian Underwriter
SUREX’S GROWTH GURUS l FEATURE
L
ance Miller, owner of Surex Insurance Brokers, bought his insurance business for $1 million. It was 2005 and he set it up in the tiny town of Magrath, Alta. Leveraging everything he had, he resolved to succeed. Then he heard about a potential change in the Bank Act, which might have created an opportunity for banks to creep into the insurance business. “I thought, ‘Man, if the banks get into insurance, it’s going to bury me,’” Miller recalls thinking at the time. “So, I started really thinking about why a consumer would buy insurance from a bank. Or, really, what would make a consumer want to buy insurance from a person.” A lightbulb went off. Customers want ease and convenience, Miller reasoned. They want to be able to buy insurance from their computer or phone with minimum hassle. They don’t want insurance to be complicated; they don’t want 15 pages of small-type documents to read or fill out. They don’t want to search for a stamp to mail a document back to an insurance organization, nor do they want to drive to an office for a drop-off. In fact, they don’t want to deal with it at all. They want insurance to be in the background of their lives; something to support their activities and lifestyle, not a process to endure. Inspired by this realization, Miller set about creating a new kind of insurance business, one that didn’t depend on walk-ins and brick-and-mortar stores. It didn’t even depend on any face-to-face contact. He convinced a fellow entrepreneur, Matt Alston (who was then based in the United States), to join him in Canada to work on the new venture. A co-founder of the venture, Alston is currently the company’s chief operating officer, while Miller is CEO. Together, they started small in the cramped basement of Miller’s traditional insurance office, which had no windows and a hand-me-down server. Such were the humble beginnings of SurexDirect. com, one of Canada’s first online brokerages. Launched in March 2011, SurexDirect.com now
Surex Direct co-founders Matt Alston (left) and Lance Miller launched Alberta’s fastest growing business in the basement of Miller’s traditional insurance office (pictured here)
Photo; Tanya Plonka
canadianunderwriter.ca | November 2018
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Aviva Enterprise™
Business insurance to keep your clients moving forward
In today’s changing commercial landscape, Aviva recognizes that your client’s business doesn’t stand still – and neither should their insurance. Aviva Enterprise™ &+02/ + " ,ƛ"/0 1%" Ɲ"5& &)&16 1, 201,*&7" -,)& 6 #,/ +6 20&+"00Ǿ &+ +6 0"$*"+1 +! 1 &),/ &1 1, Ɯ1 6,2/ )&"+10ȉ 0-" &Ɯ +""!0ǽ And it includes all locations and operations on one Property & Casualty policy. "0&$+"! 1, (""- ,3"/ $" 0&*-)"Ǿ "ƛ" 1&3" +! /"0-,+0&3"Ǿ 1%" -,)& 6 "3,)3"0 4&1% 1%" % +$&+$ +""!0 ,# 20&+"00Ǿ 0, 6,2/ )&"+10 + " ,+Ɯ!"+1 1%"6 have the protection they want, when they need it. Business Insurance – Property | Casualty | Auto | Equipment Breakdown | Umbrella
Photo; Tanya Plonka
SUREX’S GROWTH GURUS l FEATURE
boasts an annual premium revenue of more than $62 million, ranking it 22nd overall in the 2018 Growth 500 ranking of Canada’s Fastest-Growing Companies. It finished first for overall growth in Alberta. The company had six full-time employees after its first full year; now it employs more than 130 people and offers personal lines coverage in six provinces and two territories. So how did Miller and Alston do it? How did they set up shop in a town of 2,300 residents and create one of the country’s most successful and fast-growing online insurance companies? Certainly, it didn’t happen overnight.
The learning curve was steep, and they had to throw bundles of cash down the well.“When we first started, we thought we were going to build a website,” Miller says. It was going to be selfserve, people were going to come to do insurance, and it was going to be easy – all we had to invest was $30,000.” Well, ha, ha, ha. “Several million dollars later, we’re where we are now,” Miller says. “We’ve learned that online insurance isn’t as simple as putting up a web page. It’s far more in-depth, and it’s a far different business than a traditional brick-andmortar business.” The online business is so different,
Simple. Ȃ /$1 ѵ .+*).$1 ѵ
aviva.ca/avivaenterprise
Aviva and the Aviva logo are trademarks used under license by the licensor. Aviva Enterprise™ is a trademark owned by Aviva Canada Inc. The Aviva Enterprise™ policy is underwritten by Aviva Insurance Company of Canada. "/*0 +! ,+!&1&,+0 --)6ǽ ,/ "5 1 1"/*0Ǿ !"Ɯ+&1&,+0Ǿ )&*&1 1&,+0 +! extensions, refer to the actual policy wordings.
FEATURE l SUREX’S GROWTH GURUS in fact, that Miller and Alston moved it out of the basement of the traditional brokerage just a year after they started. Business operations in an online brokerage are quite distinct from those in a traditional brokerage, Miller points out. Expenses provide a glaring example. For a traditional brokerage, staffing is usually the major expense; in online brokerages, investment dollars generally go towards lead-generation. Surex has relatively minor staffing
costs, having changed its compensation model. Brokers are now paid 100% by commission, and not by salary. The new model has allowed the company to save money on staffing and re-invest that right back into the business, helping to propel their rapid growth. As a bonus, their brokers can focus on servicing clients instead of sourcing them. “Our hope is to provide our brokers with all the tools they can handle,” Miller says. “They are extremely motivated
Appointment Ann Hildreth The Boiler Inspection and Insurance Company of Canada (BI&I) is pleased to welcome Ann Hildreth as Vice President, Technical Risks and Renewable Energy. Ann is a recognized high hazard equipment breakdown industry leader and for many years was Machinery Risk Solutions Practice Leader with Marsh Canada. Ann holds the Canadian Risk Management Designation and is a Chartered Insurance Professional. BI&I’s Technical Risk Division provides advanced technical expertise to power generation, energy and resource based clients. All Risk Property coverage is offered in addition to equipment breakdown in all classes of renewable energy. The Boiler Inspection and Insurance Company of Canada, a member of HSB Group and part of Munich Re’s Risk Solutions family, provides the industry-leading range of specialty and equipment breakdown insurance coverages for business and home.
Starting a digital brokerage 5 Takeaways Responses by Lance Miller, SurexDirect.com
Q | What lessons did you learn that would still apply today if a person were to start up a digital brokerage?
A | Be prepared to invest time and money to digitize. Remember that going digital isn’t a strategy in and of itself. You have to start with trying to solve a consumer issue and then look at technology for solutions to the problem. Q | How did you finance the venture? Would the options differ today? A | We bootstrapped our growth and I would do it that way again. Bootstrapping is when an entrepreneur starts a company with little capital; for example, building your company using personal finances or from the operating revenues of the new company. It teaches discipline and keeps you nimble. When you have limited funds, you don’t fall in love with your own ideas. If something doesn’t work, you fail fast and move on to try something else.
Q | How did you ensure not only that you grew, but that the business you brought in was profitable?
A| Visit biico.com
This is a great question and still something we work on daily. We started by using the standard theories behind profitable business – like high credit and clean Motor Vehicle Records (MVRs), to name a couple. We are finding now that with Artificial Intelligence, we can do even better: AI recognizes patterns that the human eye can’t.
Q | How did you hire staff for the new venture? A | My business partner, Matt Alston, spent his professional career prior to Surex recruiting awesome sales people. He has a knack for finding superstars and that is what we look for. Culture is extremely important in our business because we are constantly changing; we need people who can adapt on the fly, and Matt and our managers know how to find them.
Q | If you had to do it over again today, what would you have done differently? A | Absolutely nothing. We did make some mistakes along the way, but we learned from them and it made us better.
SUREX’S GROWTH GURUS l FEATURE
… first and foremost Surex is looking for brokers who understand the mindset of their customers — what’s important to them and how to appeal to them. to sell to and service that client, because they want that long-term commission on that client. It’s a different mentality than paying someone a salary and he or she just needs to show up and do their job for that day. Because of that difference, we’ve hired fantastic staff — we have staff who really care about their customers, and who really care about growing their book of business. For us, that makes it a scalable model.” When Surex hires, it looks primarily for people who know how to deal with people. It helps to be an industry expert, but first and foremost Surex is looking for brokers who understand the mindset of their customers — what’s important to them and how to appeal to them. Miller says it’s easy to teach someone about insurance, especially since Surex has largely simplified and automated the on-boarding process. But it’s a lot harder to teach someone interpersonal skills. Since earnings are driven entirely by commissions, brokers can work as much or as little as they choose. Brokers on the team can work remotely and hold team meetings through an online conferencing system. (Working remotely is essential for a company that has its office in a town consisting of less people than a single block in downtown Toronto.) “Allowing people to work from home has been a great advantage to us because there’s a lot of fantastic moms who want to work in the industry, or individuals who currently have to drive an hour
or two a day back and forth to work,” Miller says. “Now they can spend that time working, rather than in their car. So, I think we provide a really good employment opportunity for people who are self-motivated and know what they want to achieve.” Profit expectations mark another difference between online and traditional brokerages. An online business is likely to take a few years to break even on a policy; in contrast, a standard brokerage expects to turn a profit almost immediately, or at least sometime during the first year. Also, the pace of innovation generally differs between online and traditional brokerages. Constant innovation is essential for success in a digital-first brokerage. “We just continually reinvent,” Miller says. “Because it is a new distribution model, there’s lots to learn. Every time we make a change, we’re evaluating that change and determining what went right, what went wrong, and re-adapting – so it’s very fluid.” Miller largely credits the success of Surex to being so nimble. The company runs differently than it did six months ago, never mind a full year ago. It cuts its losses quickly and moves on. This is proving to be a challenge as the company grows, but Surex is still trying to retain the spirit of a smaller business. So where does the company go from here? First off, they will soon be fine-tuning their quoting process for small package commercial business. Besides that, artificial intelligence (AI) seems to be the next frontier. Once the stuff of futuristic movies, AI is increasingly employed by companies like Surex, which recently hired a full-time staffer with a Ph.D in AI. His role consists of examining business operations to discover efficiencies. What can AI do better and faster, so brokers can focus on tasks that add value to the brokerage? More importantly, how can AI aid brokers in assessing their clients for risk? “We have no doubt AI is going to increase our profitability as a company.” Miller says. “The online marketplace is just now growing, it’s just emerging. And we have our big, hairy audacious goal…to be the dominant player in the industry.”
Appointment Till Heydel The Boiler Inspection and Insurance Company of Canada (BI&I) is pleased to welcome Till Heydel as Vice President, Strategy and Development. Till will assume lead responsibility for the company’s innovation and strategic initiatives. Till joins BI&I as a seasoned leader in global client, marketing and innovation management within Munich Re Group’s Property and Casualty business. He holds a Master of Business Administration from the University of Applied Sciences in Nuremberg, Germany. The Boiler Inspection and Insurance Company of Canada, a member of HSB Group and part of Munich Re’s Risk Solutions family, provides the industry-leading range of specialty and equipment breakdown insurance coverages for business and home. Visit biico.com
FEATURE l REINSURANCE
REINSURANCE OUTLOOK
Power of Small How the small pie of Canada’s reinsurance market can be both a blessing and a curse By David Gambrill, Editor-in-Chief, Canadian Underwriter
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REINSURANCE l FEATURE
Canada’s reinsurance marketplace, featuring a relatively small piece of the global premium pie, creates a challenge for reinsurers to grow their business. So why do reinsurers remain optimistic about their future prospects?
F
or Canada’s reinsurers, the country's relatively small premium pie presents a number of unique challenges. First, it remains a challenging market in which to grow. And second, the number of natural catastrophes is steadily increasing; thus, so are reinsurers' claims costs. And yet, reinsurers are still bullish on Canada. It is a stable, mature market that has only one major modeled peril that represents a potential threat to a reinsurers’ capital – earthquake. That’s an ideal situation for a global reinsurer that is keen to spread its risks across a worldwide book of business. “Canada remains one of the more interesting markets for reinsurers, primarily because it diversifies the large global peak risks,” observes Monica Ningen, CEO and president of Swiss Re Canada. “If you were a small reinsurer, it might be harder for you if your only peak peril was B.C. quake. The B.C. quake is big – it is a peak peril – but from a Swiss Re standpoint, we see it as diversifying our other global peak perils.” Earthquake also provides a bread-and-butter premium base for reinsurers. Canada’s solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI), requires federally regulated insurance companies to have access to enough capital to honour insurance claims after a major
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FEATURE l REINSURANCE
“The Fort McMurray wildfire, the largest insured loss in Canadian history, simply proves the point that the country’s reinsurance marketplace remains a good place to spread risk across global balance sheets.” earthquake. Insurance Bureau of Canada (IBC) commissioned an earthquake study in October 2013; it estimated the overall insured damage following a Magnitude-9 earthquake in British Columbia would be $20.4 billion. To put that into perspective, all of Canada’s federally regulated insurers wrote approximately $48 billion in premiums in 2017. A B.C. earthquake would wipe out just under half of the country’s total insurance premium base in one shot. “With Vancouver and Victoria in the West and Ottawa-Montreal in the East, tremendous economic values are concentrated right above those zones, making local and national economies extremely vulnerable,” says Philipp Wassenberg, president and CEO at Munich Re Canada and Temple Insurance. “OSFI takes this into consideration by mandating all Canadian insurers to reinsure their earthquake risks in these zones in any given year. This provides a guaranteed income for reinsurers, and this comes with a significant downside, of course, because the limits that are bought will need to cover 1-in-500-year events by 2022.” In addition to earthquake, Canada is home to two emerging non-modeled perils – wildfires and floods. In Alberta, the 2016 Fort McMurray wildfire cost the Canadian property and casualty insurance industry a record $3.8 billion. Five of the next Top 10 claims events over the past 11 years were caused by flood. This year, bad weather across Canada has cost insurers $1.4 billion already, primarily due to storms in Ontario and Quebec. 34
November 2018 | Canadian Underwriter
Have these non-periled events given reinsurers doing business in Canada any cause for concern? Jan Zimmermann, head of property and casualty at the Hannover Re Canadian Branch, observes that the Fort McMurray wildfire, the largest insured loss in Canadian history, simply proves the point that the country's reinsurance marketplace remains a good place to spread risk across global balance sheets. “Yes, we had the largest loss event ever with Fort McMurray,” Zimmermann observes. “But looking at it two years later, the market was able to absorb that shock-loss without any major dislocation. That tells me that, despite having a large-scale catastrophe in Canada, the country still seems to be a good place to diversify risk for companies that are focusing on North America in general. “It's a good place for reinsurers that may be more threatened by hurricanes in the U.S. and the Caribbean or, on a worldwide basis, earthquakes in Japan or European storms.” At the 2018 Insurance Brokers Association of Ontario (IBAO) Convention in October, Travelers Canada president and CEO Heather Masterton noted that many of these natural catastrophe losses have been retained by the primary insurers, with not much passed along to reinsurers. Steve Smith, president and CEO of Farm Mutual Re, says there is still a lot of capacity in the Canadian reinsurance marketplace. “Are the climate, storms and weather-related losses changing our per-
spective a little bit?” he says. “I think so. I mean, rates are moving upward slowly. But there is still a strong appetite to participate. You’re not seeing [reinsurance] treaties come in short of their 100% authorizations. When you start seeing companies coming up with 60% or 70% authorizations, then I think you know you have a problem. But when you are seeing 120% or 130% authorizations, the capacity is there. They are still interested.” But increasing the size of the reinsurance premium pie in Canada remains a challenge. Canada’s marketplace of primary insurance companies, clients of the the reinsurers, is shrinking. Once around 500 insurers, now it is down to 198 private property and casualty insurance companies, according to the Insurance Bureau of Canada’s 2018 Fact Book. The concentration of risk among primary insurers means it is a challenge for Canadian reinsurers to find “uncorrelated” opportunities to spread the risk. “For example, if a big storm hits Toronto, it hits Aviva, it hits Intact, it hits TD Insurance – and the same reinsurers are on all the same programs," Smith explains. “These large primary [insurers in Canada] have significant concentration risks. By the same token, though, the reinsurer is on every program in Canada. So, for [reinsurers] to find uncorrelated risk is really difficult.” Farm Mutual Re is rural, providing an illustration of uncorrelated risk. “So, for instance, when the heavy storms hit Calgary and Toronto [in 2013, causing collective flood damage of $3 billion], we didn’t have a loss,” Smith says. “But when a tornado hit Goderich [in Ontario], we were a third of the Goderich loss [estimated at $110 million]. The reinsurers are trying to find uncorrelated opportunities, but there are not that many.” Also lacking are opportunities for growth. “The Canadian reinsurance market has been mainly stagnant over the past decade, with no sign of significant upward or downward development yet,” reports Wassenberg. “Nevertheless, a somewhat similar trend observed in the U.S. has been partly reversed after last year’s Hurricane events. Apparently,
REINSURANCE l FEATURE some primary insurers there positively reassessed the effectiveness and usefulness of reinsurance.� The Reinsurance Research Council (RRC) represents a majority of Canada’s property and casualty reinsurers, with approximately 19 to 22 members in any given year over the past decade. Last year, RRC’s members wrote net premiums of $4.9 billion (with Lloyd’s Underwriters accounting for $3.4 billion of that) — only half a percentage point more than the year before. Over the past decade, annual growth rates for reinsurance premium have typically hovered around 3%, RRC statistics show. “It’s not happening,� Joseph El-Sayegh, president and CEO of SCOR Canada Reinsurance Company, says of growth. “The measurement will end up being for us more growth in market share than in growth by premium.� El-Sayegh says he does not see room for much more growth in the future,
SURPASSING INDUSTRY STANDARDS
unless one of two things happen. The ďŹ rst would be a new product coming to the market. Some are optimistic about growth opportunities arising out of totally new products like cyber, for example. “We expect cyber insurance to have exponential growth rates in the coming years,â€? says Wassenberg. Cannabis and ood are similarly cited as potential areas for reinsurers to grow. Another catalyst for growth in the Canadian reinsurance market could be a regulatory change, El Sayegh notes. Regulatory change affecting reinsurance in Canada is forthcoming. OSFI’s June 2018 guidance paper on reinsurance highlights a concern about the emergence of the “leveraged business modelâ€? in Canadian reinsurance. For example, a high policy limit is written, and the reinsurance is provided by entities located outside Canada (examples would be parent companies or unregistered reinsurers operating outside Can-
ada). OSFI wants to make sure those funds can easily be owed back to Canada when catastrophic claims occur. To allay the concern, OSFI is proposing a requirement that federally regulated insurers do any one of the following: • require a primary insurer that is ceding a risk to reduce the concentration in its reinsurance panel • arrange for the injection of additional capital • have the unregistered reinsurance entity or group provide additional collateral • reduce policy limits (e.g., by using subscription policies). “OSFI’s mandate to tighten up or impose a lot of capital restrictions doesn't really make a lot of sense for a lot of reinsurance members on the RCC,â€? says Smith. “I think what OSFI is trying to deal with is true fronting operations, but [their proposal is] affecting everybody.â€?
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FEATURE l LIABILITY
ENVIRONMENTAL INSURANCE
Pollution Protection Pollution claims can be spectacularly damaging when they happen, and they are often excluded from CGL commercial insurance policies. So why aren’t more contractors buying environmental insurance, and how can brokers reverse the trend? By Brooke Smith
M
edia reports these days are filled with news of highstakes pollution claims, emphasizing the importance of pollution insurance coverage. Most recently, the Heiltsuk Nation in B.C. launched a civil lawsuit last month against the Federal Government of Canada, the B.C. provincial government and the U.S.-based Kirby Corporation over an incident two years ago, when a Kirby-operated tugboat and associated barge ran aground a reef near Bella Bella, B.C., spilling approximately 110,000 li-
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November 2018 | Canadian Underwriter
tres of diesel fuel into the water. The incident happened at 1 a.m. and the second mate had fallen asleep while on watch, according to a Transport Canada investigation into the matter. In a financial filing with the Securities Exchange Commission (SEC), Kirby reported that it “has various insurance policies covering liabilities including pollution, property, marine and general liability and believes that it has satisfactory insurance coverage for the cost of cleanup and salvage operations as well as other potential liabilities arising from the incident.”
Unlike Kirby, however, not all Canadian companies have pollution coverage in place. The coverage is not required, and so many companies will go without, perhaps not realizing all the different pollution risks they face. Pollution exposures Petrochemicals aren’t the only materials that can create environmental hazards. “There’s a belief that you only need environmental insurance for hazardous materials,” says Justin Perry, senior vice president and national practice leader of the environ-
LIABILITY l FEATURE
mental services group of Aon Risk Solutions (ARS) Canada. “The reality is environmental insurance responds to a lot more than just chemicals and hazardous materials.” There’s dirt, mould, asbestos – even water. Chlorinated (tap) water spilling on your kitchen floor is nothing to fret about. But if that same chlorinated water spills into a river or lake, it’s now a pollutant that can cause severe damage not only to the environment, but also to the polluter’s coffers if they have no coverage. “Anything could be considered a
pollutant if it’s in the wrong place at the wrong time,” says Miles Foxworth, an environmental underwriter at Beazley. Several environmental contaminants are associated with the construction industry. More than 1.4 million Canadians are employed in construction trades and professions, and these workers install, repair or renovate work worth $241 billion a year, according to BuildForce Canada. A boon to our economy, contract work includes hauling, installing and remediating poten-
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FEATURE l LIABILITY
Top 3 tips for selling environmental pollution policies
tially hazardous materials. Consider asbestos. Canada officially banned products containing asbestos just Worried your contractor clients have a dangerous pollution exposure this year. In other words, a three-year-old risk for which they are not covered? Having trouble convincing them why building could have pipes containing the they need contractors pollution liability? Consider these three tips. deadly substance. The health effects are subject to numerous court claims in both Watch Show them Canada and the United States. According the news. the money. to a Government of Canada estimate, asBring contractors’ attention to any Provide contractors with real claims bestos was responsible for roughly 1,900 newsworthy stories involving ollutants. examples – and the costs. “We provide cases of lung cancer cases and 430 cases “Unfortunate as it is, a lot of people real-world claims examples to brokers of of mesothelioma in 2011. buy when they’re afraid,” says Foxworth. things that have happened,” says Miles But asbestos is typically not covered “When big events happen in the news, Foxworth, an environmental underwriter under a standard-form commercial inoftentimes that’s an easy way to with Beazley. “It’s easy to talk about surance policy, as observed by Brian educate clients. You’ll have costs right theoretical situations and then brokers Cane, a senior vice president of constructhere in the news, how it’s millions of may say, ‘Well, yes, it’s possible, but it might tion underwriting at ENCON Group. “A dollars to clean up. Those large never happen.’ But if you can actually show contractor doing a minor renovation numbers tend to scare people into them real examples, it really wakes them project in a relatively new building could actually realizing they have the up – especially for smaller contractors start cutting pipes,” says Cane. “Unbeexposure as well.” that can’t take a big hit.” knownst to the contractor, some of the materials they are cutting may contain asbestos and the asbestos spreads into the building’s ventilation system. The Fill in the gaps. next thing you know, they have to shut Explain what’s covered and not covered in a commercial general liability (CGL) down the building to clean the ventipolicy. “Brokers have to highlight the gaps that exist when you rely only on your CGL lation system. That type of loss would policy for coverage,” says Brian Cane, senior vice president of construction underwriting not typically be covered by a CGL [comwith ENCON Group. “It’s a common misconception that a sudden accidental pollution mercial general liability] policy because endorsement, which is purchased under a CGL policy, will provide you with plenty of almost all CGL policies have asbestos coverage for most pollution incidents.” exclusions.” It’s the same exclusion for mould, another common hazardous material you might run across in the conwhich is the project owner. The require- get [an environmental policy] into your struction industry. ment is then pushed down from the proj- cost, it may make your project uncomect owner to the contractor to evidence petitive – especially if the owner is not Environmental coverage requiring this of you.” Unfortunately, an environmental insur- insurance.” However, while larger construction Sometimes, smaller contractors may ance policy is not always an easy sell according to insurers. Unlike auto in- companies and contractors likely have think their CGL policy – which protects surance, environmental insurance is the budget for this type of coverage, the a business against liability claims that not a mandatory coverage. “There’s no smaller ones do not. The average Ca- result from bodily injury and property requirement in Canada where environ- nadian construction company is small, damage stemming from the company’s mental insurance is required – yet,” says according to BuildForce Canada. In the operations – will be enough to cover them Perry. “Where we’re seeing a big move- non-residential sector, almost 50% have in the event of an environmental accident. ment in the last 10 to 15 years is around five or fewer employees; in the residen- But that’s not necessarily true. “If you’re contractual requirements to perform tial sector, it’s nearly 70% of companies. relying on a CGL policy for environmental “Small, family-owned or individu- coverage, well, virtually, every CGL policy work for someone else.” In other words, carrying environmen- al-owned businesses are really just trying has a pollution exclusion,” says Cane. Contractors can get some environtal insurance is emerging as a best prac- to cut costs,” Foxworth says. “They want tice. “In order to get a permit to develop, to buy the coverages they’re required to mental coverage under a CGL policy, in a lot of municipalities or cities are actu- have. They don’t want to have to pay for the form of a sudden accidental pollution endorsement, which attaches to the ally saying to contractors that they must things that may or may not happen.” Perry agrees, particularly if a contrac- CGL policy. “The primary intent of that buy environmental insurance to get the construction permit,” says Perry. “The tor is bidding for a project. “If your peers endorsement is to provide coverage for requirement is made to the applicant, aren’t doing it, and now you have to bud- pollutants that a contractor brings to a 38
November 2018 | Canadian Underwriter
LIABILITY l FEATURE job site,” Cane says. Still, “it’s a common misconception that this endorsement will provide [contractors] with plenty of coverage for most pollution incidents.” Adds Perry: “It’s an element of coverage that’s very useful for general liability risks, explosions, fires or something falls off a truck or a building. It’s there for that instant bang/boom injury.” But that instant bang/boom is just that–instant. A time element is attached to sudden and accidental. For example, if a pollutant gets into soil, that pollutant must be detected within 120 hours of the start of the discharge. The pollution incident must also be reported to the insurer within 120 hours of being detected. (Some versions of the endorsement provide for 240 hours of reporting.) “Contractors should realize,” Cane says, “that most pollution losses occur over a period much longer that 120 or even 240 hours.” So, what are contractors to do? Ac-
cording to Cane, almost all businesses – contractors, consultants, property owners, building owners – should consider purchasing environmental liability insurance as part of a comprehensive risk management program. “It’s sound risk management for any organization.” George Boire, environmental practice leader with Marsh Canada, points out that environmental insurance is almost always discretionary in Canada. Whether the insurance is sound risk management, “the company itself, with the help of their broker/advisor, has to make an assessment on whether it thinks the exposure is broad enough to justify the cost.” Brokers Can Help Oftentimes, contractors don’t think they have an exposure, simply because they’re not manufacturing or distributing hazardous chemicals, says Foxworth. “Anything that can be released
can be a pollutant, even fresh water. People don’t think about that.” Brokers can help educate clients think about their environmental risks. One way is through claims examples. “We have actual claims examples we can share with our brokers, and they can in turn share with their clients to help convince them they need the coverage,” says Cane. Boire admits there is a challenge associated with clearly explaining to clients that they have an exposure — only to discover they don’t purchase the coverage. “In many cases, if they don’t have to buy it…they’re not going to,” he says. “Sometimes you’re not able to convince them. Then you have to move on and try again next year.”
Brooke Smith has been an editor with various publications over the past 10 years, including a managing editor of Benefits Canada.
INSURANCE MANAGEMENT – PROPERTY AND CASUALTY ONTARIO GRADUATE CERTIFICATE
BUSINESS AT ITS BEST business.humber.ca canadianunderwriter.ca | November 2018
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FEATURE l CLIMATE
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CLIMATE l FEATURE
FLOOD INSURANCE
Treading Water Insurers have introduced many new products to cover water damage arising from catastrophic flood events, but the industry can’t solve the flood risk issue on its own. Here’s how they can improve their own response – and how Canadian governments can help By Sarah Cunningham-Scharf
ater damage prevention is simply too large of an issue for property and casualty insurers to address through individual product initiatives leading Canadian home, car and business insurers to call for a new collaborative approach to reduce Canadians’ exposure to overland flood claims. It’s called a “whole-of-society” approach, according to the Insurance Bureau of Canada (IBC). “It’s up to governments, individuals, insurers, the whole gamut [of society] to collaborate – because climate risk is very complex, and we each have a role to play,” explains Craig Stewart, IBC’s vice president of federal affairs. Continued on page 42
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FEATURE l CLIMATE l Continued from page 41
“It’s going to have to be an industry solution. I want to provide a competitive product to consumers, but I also want to provide a service to all Canadians.” The industry’s response to overland flood Canada’s P&C insurance industry is relatively new to the business of covering overland flood damage. Historically, the industry concentrated on reducing risk associated with fire, not water. But the modern-day effects of climate change have brought the issue of flood damage into high relief. “Over 85% of insured losses since 2000 have been due to water,” Stewart says. “Although as an industry we handle wildfire and wind events quite well, we still haven’t figured out how to handle overland flood. And a big part of that is the unpredictability of the peril.” Water damage is in the foreground once again this year, given a spate of bad weather in Ontario and Quebec. Ontario bore the brunt of two back-to-back water-related weather catastrophes in April and May, leading to a collective industry loss of roughly $600 million in the first half of 2018. “In terms of the number of catastrophes that involve flooding in Ontario, the year of 2018 has seen a significant amount, and is currently tied with 2017 for the most within the CatIQ database, back to 2008,” says Laura Twidle, director of catastrophic loss analysis at Catastrophe Indices and Quantification Inc. (CatIQ). Not long ago, the industry had a very limited response to water damage claims. In fact, before 2015, homeowner 42
November 2018 | Canadian Underwriter
insurance policies simply didn’t cover overland flood damage, though coverage did exist for water damage in homes caused by sewer back-up. “The whole industry thought flood was uninsurable for residences,” says Phil Gibson, chief underwriting officer at Aviva Canada. That attitude changed after the notorious Calgary and Toronto floods of 2013. In addition to causing almost $3 billion in insured damage (including loss adjustment expenses), those devastating floods resulted in “some not-so-positive media stories for some insurers who didn’t necessarily pay all the claims because they weren’t a part of [existing property] coverage,” recalls Steve Cohen, Chief Underwriting Officer at RSA. That potent combination—massive claims payouts and an overall reputational setback—led to a 180-degree shift in how the insurance industry protects Canadians from the peril of overland water. But the industry’s early response to overland flood risk appeared to be more piecemeal than cohesive: individual insurers were simply competing with one another to offer consumers different types of flood coverage packages. As insurers began to develop flood policies, they took a misstep, says Jason Thistlethwaite, an assistant professor at the University of Waterloo’s School of Environment, Enterprise and Development. “The industry raced off in response to some of these reputational concerns to develop this overland flood insurance product. And they’ve done so without the right conditions in place to support sustainability. We have flood insurance in Canada, but not for those who need it most.” Thistlethwaite believes flood policies are currently too expensive for some Canadians and denounces policies for excluding coverage for homeowners who live in high-risk geographies like urban areas or floodplains. This isn’t the fault of the insurance industry, though, he continues. “That’s insurers doing prudent and sound risk management. Insurers aren’t a charity, they’re doing what’s right by their business.” Gibson agrees the insurance industry alone can’t improve the affordability and
accessibility of flood policies, because after all, insurers are businesses. “It’s going to have to be an industry solution,” he says. “I want to provide a competitive product to consumers, but I also want to provide a service to all Canadians.” What the insurance industry can do One thing the industry can do is improve the way it predicts flood damage. Current climate change risk models are faulty, Thistlethwaite says, especially those that still rely on historical data that doesn’t account for the increasing frequency of weather events. Insurance companies typically assess product pricing based on historical claims patterns; to date, there hasn’t been a lot of data collected regarding overland flood claims. “Over time, when [insurers] see the risk increase, they’ll be able to segment the market and raise rates,” Thistlethwaite says. “That assumption is based on a lot of confidence in what is a very uncertain area of risk management – managing the influence of something like climate change on the local environment.” Some insurers have access to data enabling more modern, predictive models, helping them to improve the pricing of weather-related policies. By reducing the exposure that insurers accept when they cover the peril, the models allow companies to offer coverage for overland flood while still finding some measure of profitability. But, as overland water events become commonplace, it’s becoming clear that predictive risk models aren’t enough to mitigate the immense risk that flood poses to both Canadians and the insurance industry. And if insurers’ data alone isn’t enough to increase Canadians’ access to overland water protection, something must change in how we plan for, think about, and insure the risk of flood, says Thistlethwaite. Otherwise, “flood insurance will be a product available for the rich individual property owners, and also available for communities that have a lot of socioeconomic advantages, because they’ll be the ones that could put tax dollars towards measures within their communities that reduce risk.” However, the future may not be so
CLIMATE l FEATURE bleak. Insurers are currently competing to be leaders in managing risk in the era of climate change. They’re looking at predictive models, incorporating climate change into their underwriting, and assessing how infrastructure changes can help, proving that underwriting flood risk remains a good opportunity for the industry. “Because of what we believe is a change in extreme weather, flood could occur anywhere,” says Gibson. Now, two years after its introduction, “over 50 per cent of our homeowners purchase our overland water endorsement.” Educating consumers about flood risk is the next great challenge for the industry. “Canadians aren’t connecting the dots between the severe weather they’re seeing, and how these trends are costing them. And insurers, through their communication channels, can help address that gap,” says Stewart. Brokers are an instrumental part of the education process, since they’re uniquely positioned to mediate a dialogue between insurers and policyholders. “They can provide information [about] what to do in an emergency, how to file a claim should the worst happen, and educate the customer about the coverages on their policy,” says Karen Mican, senior vice president of claims at RSA. The best way to bring up flood coverage with existing customers is during an annual or bi-annual review, suggests Cohen, or even if the customer complains about a premium hike. “That’s a window of opportunity to say, ‘Do you understand what your risks are, and do you understand what it costs to cover those risks? Let’s just make sure you’re getting the best coverage for your money.’ And I think that that is a wonderful opportunity where a broker can never be replaced.” Or, if brokers want to educate new clients, simply include flood risk management in the regular conversation about exposures. “Flood is just part of that conversation,” says Cohen. “It’s business as usual in talking about fire, tax, water and flood.” In addition to offering coverage and educating Canadians about flood risk, insurers can offer price incentives to moti-
… governments could play a role in regulation in terms of building codes, whether that’s allowing new building or rebuilding to occur. Let’s not build in floodplains. Let’s build where it can withstand water. vate Canadians to reduce their flood risk. “Insurers want to be incenting mitigation as much is possible to de-risk communities and individuals, which in turn lessens our own risk,” explains Stewart. Thistlethwaite agrees, and emphasizes incentives like discount should be substantial—not equivalent to a rounding error. “The latest I’ve heard in terms of a range of discounts that could be offered to consumers is between 5% and 15%, which I’m almost positive is within the error of what they think an action could lead to in reduction of risk.” What governments can do In a whole-of-society approach, Canadian governments have a big role to play in changing the way we think about climate risk. “Canada, for the most part, has relied on a 1950s approach to managing risk,” Thistlethwaite says. “That’s build things [blocking the peril], then put people on the protected side. What that’s done, actually, is increase risk, because people have been allowed to build in areas they shouldn’t have been allowed to.”
To reduce Canadian homeowners’ exposure to flooding, governments could “play a role in regulation in terms of building codes, whether that’s allowing new building or rebuilding to occur,” Gibson says. “Let’s not built in floodplains. Let’s build where it can withstand water.” In addition, there should be a more transparent exchange of data between insurers and the federal government. “It’s up to the big government—the one with most tax dollars—to take positions of leadership and convene organizations together and say we’re going to provide [risk mitigation] information to people,” Thistlethwaite says. He references the United Kingdom as a place where collaboration between the government and insurers has helped educate people about the flood risk, allowing homeowners to take actions to protect themselves. “You can type in your postal code and understand whether you need to buy insurance. It talks about how much a flood is likely to cost. Something like this, if it can be done in other countries, can surely be done in a place like Canada that has all these resources.” The federal government started participating in conversations regarding flood risk in November 2017, when it held its National Roundtable on Flood Risk. Since then, “conversations are ongoing between insurers and municipalities about encouraging pricing at the community level,” says Stewart. “Further conversations are occurring around the value of natural infrastructure and incenting the protection of the natural features that protect us.” As for next steps, IBC is giving a presentation to all federal, provincial, and territorial ministers of emergency management on a collaborative approach to flood risk in January 2019. Though Stewart may be optimistic, the challenge is clear. “I’m afraid when you talk about getting the majority of insurers to agree on something, and the government, that is a tall order,” Gibson observes. “In the meantime, it’s up to Canadians to look out for themselves. In the long term, I think we’ll figure it out. But I think in the short term, I don’t have the magic wand to get an industry solution together.” canadianunderwriter.ca | November 2018
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handbook HIGHLIGHTS
Using Drones p.49 l Interest Rates and M&A p.51 l Querying Clients’ Pot Use p.55 l Weaponized Cars p.59
MULTINATIONAL INSURANCE PROGRAMS
Regulatory tentacles Regulators are watching captives carefully. How to avoid getting caught in the grasp of a tax audit B Y R YA N G U S T A F S O N , Head of Multinational, AIG Canada The views expressed in this article are those of the author and do not necessarily reflect the opinions of AIG Canada.
T
he rapid expansion of regulatory change and corresponding scrutiny by regulators worldwide makes it increasingly challenging to manage multinational insurance programs. As regulatory landscapes continuously shift, the need for companies to carefully consider how they structure multinational insurance remains constant. There are many options: • ensconcing coverage in multiple local policies • relying on a single global policy • combining both in a global controlled master program. Some structures are drawing more regulatory attention than others. As such, it is increasingly important to ensure that multinational programs are compliant with all local requirements. Captives are especially vulnerable to
scrutiny under the OECD’s Base Erosion and Profit Shifting (BEPS) protocol, which references tax avoidance strategies that exploit gaps and mismatches in tax rules, because some BEPS language specifically applies to them. This dynamic backdrop underscores the importance of a properly structured multinational insurance program and the potential repercussions if such a program, or a captive insurance program, is deemed non-complaint. Caught in a captive Regulators are watching captives closely to ensure they are formed and operate for insurance purposes. Tax audits are likely to become more prevalent as authorities seek to ensure local premiums are commensurate with the local risk. If premiums and risk do not cor-
relate, regulators may deem the captive to be a tax-evading vehicle. In this case, fines and penalties will be assessed and tax deductions could be inadmissible. Along with this financial exposure, allegations of captive misuse can create far-reaching reputational damage. If a multinational company has a captive, and if it needs to issue policies in other countries for its affiliates, it may be bound by local regulations in those countries. If the jurisdiction in which the multinational affiliate operates requires locally licensed paper to be issued, the captive may likely fall afoul of local rules if it were to issue the policy directly itself. A captive must prioritize regulatory compliance in the same manner as a traditional insurance company, recognizing that the regulatory landscape is quickly evolving. If coverage is deemed non-compliant,
canadianunderwriter.ca | November 2018
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TRUSTED ADVISOR
HANDBOOK the stakeholders may face substantial fines and penalties, as well as lasting business ramifications. Authorities in Switzerland recently voided a non-admitted professional indemnity policy that a local broker purchased from a foreign insurer, leaving the insured without coverage for claims. The broker was also banned from the federal register and prohibited from practicing in Switzerland. The number of additional stakeholders, time zones and language barriers can often result in delays in the implementation of a multinational program. Delays can be costly: if a captive or a traditional insurer fails to issue a policy or insurance certificate on time, the insured could fall out of compliance with local regulations
and contractual requirements. This is a common problem, especially in countries requiring cash before cover. Designing a multinational program will depend on a company’s individual needs, strategies and preferences. A captive can fill a pivotal role, but it should be set up and structured transparently. Also, it should be fronted by a trusted insurer that can provide the checks and balances required to show regulators it is fulfilling its intended purpose as an insurance provider.
Dear Conflicted,
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November 2018 | Canadian Underwriter
— Conflicted Broker
Ryan Gustafson is responsible for managing AIG’s portfolio of complex multinational accounts, including global fronting, captive management and multinational account servicing.
BY THE NUMBERS
What is the #1 thing you look for when evaluating a new job?
I’m trying to contact a small business owner to talk to her about her insurance needs, but she’s impossible to reach. How do I reach her without coming across as too aggressive or pushy?
Patience with small business owners is a virtue. These entrepreneurs are often juggling a lot of different priorities and insurance, a grudge purchase, is not usually the first item on their agenda. Be polite and persistent in trying to catch the business owner at a good time. You can keep trying to meet face-toface, but perhaps this could be done through a detailed phone conversation instead. If you don’t know the owner very well, consider getting to know the company’s gatekeepers: get to know the receptionist, for example, or the administrative assistant who works with the business owner – someone who knows their schedule. They can tell you if she’s in a meeting, or when is the best time to reach her. The gatekeepers will be different for every business. Another thing to ask yourself is whether you really need to speak to the owner – the busiest person in the office – to accomplish your objectives. Are there other people in the business with the authority to make those decisions instead of her? Sometimes as a sales person, you become very focused on reaching the ultimate decision-maker, the business owner. But perhaps if you can talk to the general manager in the business, or somebody else who has the authority to make the decisions, they might be more easily approached. They might be well-positioned to either make that decision themselves and sign that deal, or they may be able to obtain that final ‘Yes’ from the owner on your behalf.
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HANDBOOK
DRONE USE
Taking flight Planning to use drone technology? 3 considerations that will help your ROI to take off B Y K A B I R S H A A L , Co-founder, VP of Client Services, Drone Software Canada Inc.
F
or insurers, using drone tech is a positive way to increase employee safety, reduce cycle times in the claims process, decrease costs, delight customers and, ultimately, improve their combined ratio. Being relatively new, however, the technology requires clear thinking to fit within a carrier’s underwriting evaluations, claims processes, fraud detection schemes, and more. The challenge is how best to integrate the technology into existing processes. To get people thinking about the topic, here are my Top 3 considerations for achieving success with drones: 1. Technology 2. Deployment models 3. Measuring results TECHNOLOGY Getting the drone tech right is paramount, or else the entire effort is wasted. Recent advances in artificial technology (AI) and deep learning, for example, offer automated methods of capturing property data and identifying property damage. An automated inspection
solution optimal for insurance can be purchased for as little as $3,500 plus an annual software subscription. Solutions such as these are fully tailored to meet insurance needs and are designed to improve cycle times and policyholder experience first and foremost. Things to look for: • Semi- or fully-automated flight capability (this leads to flight efficiency) • Built-in flight planning (assists with Transport Canada requirements) • Built-in job assignment (resulting in job efficiency) • High resolution imagery • Automatic and ad hoc measurement tools (you may, for example, wish to do more than simply measure the roof or check gradients) • Automatic damage detection (so you don’t have to spend hours inspecting each image) • Data export (resulting in easy integration or compatibility with leading CAD and estimating software) • Accuracy (expect 95% to 100% accuracy in measurements)
Of the dozens of drone solutions available for different industries, only a small handful focus solely on the needs of property and casualty insurance carriers. Fewer still focus on Canada, and even fewer than that have a verifiable track record and are proven to work for insurance inspections. DEPLOYMENT MODELS Fitting an unmanned aerial vehicle (UAV) solution into an insurance company workflow will require the engagement of people; a toggle-switch approach won’t work. A blended approach is recommended. Things to look for: a. Complete training programs (Don’t expect to handle this in-house right away) b. 100% compliance with Transport Canada and Nav Canada requirements and regulations (safety is always a priority) c. Tech support throughout all phases of implementation Broadly, there are two deployment models to consider:
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HANDBOOK CROWDSOURCED
DEPLOYMENT MODELS FIGURE 1
FIGURE 2
In-house drone model
Outsourced drone model
Benefits
Benefits
• • • •
• Immediate returns • Easily scaled at peak demand times • Low financial risk
You own the hardware You control the process You prevent injuries to field employees Better medium- to long-term ROI
Drawbacks
Drawbacks
• More up-front investment • More corporate coordination (IT, training, operations, etc.) • Possible employee resistance • Managing hardware redundancy
• In-house expertise never develops • Customer service can be compromised • Possible employee anxiety
A. In-house model This model includes a couple of options: 1. Equip existing field adjusters with drone tech 2. Use a dedicated, specialized team of qualified pilots to inspect and provide data for desk adjusters. Developing your own dedicated drone program is an investment that will yield tremendous benefits over time, particularly when it comes to reducing your transactional costs. The specifics of any drone program can vary significantly depending on your vendor selection, hardware, and so forth; hence the need to make the right tech choice in the first place. Figure 1 shows some benefits and drawbacks of the in-house drone model. B. Outsourced model Outsourcing the work to drone pilots who can capture claims data will give you an immediate return. It’s a great option when you need to scale up field or desk adjustment labour. For benefits and drawbacks to the outsourced drone model, see Figure 2. There is a third option, which is to do both: use in-house capabilities during periods of business as usual and outsource the work during peak events using flexible contract pilots-for-hire to fill in gaps. This blended solution is often an ideal balance in volatile claims environments. MEASURING RESULTS In the end, the only thing that matters is 50
November 2018 | Canadian Underwriter
whether drone use positively affects the business. Insurers require specific data to help them manage risk and indemnity efficiently; data acquisition and exploitation must be efficient and meaningful. For these reasons, a drone solution is predicated not on the type of drone but on the software that drives it. Ideally, the software should be multi-purpose: it should serve both underwriting and claims functions, thereby improving not only the loss ratio but the underwriting result, too. Ultimately, it should benefit the combined ratio. Things to look for: a. High accuracy (check for proof that measurements and damage detection are very accurate – higher than 90% accuracy is a good starting point) b. Speed (reports should be available within 24 hours; the sooner within that timeframe, the better) c. Better claims and underwriting results (ask your UAV partner for proof – case studies will help) Overall, a UAV solution has to offer a combination of low cost, high impact, easy deployment, and high accuracy. Anything less is a step backwards.
Kabir Shaal has an Associateship of the Chartered Insurance Institute (ACII) designation, an MBA (Systems Thinking), and is a certified Transport Canada-compliant UAV operator. oftware Canada is the exclusive Canadian distributor of patented drone automation and roofing analytics software for property insurance.
HOW TO BUILD A GREAT CHATBOT
Amanda Ketelaars Operations manager, Mitchell & Whale Insurance Brokers, Whitby, Ont. Before you start, think of two things. First, what is the core business purpose of your chatbot? Do you want it to answer common customer questions, collect data, screen prospects or quote new business? Knowing your objectives will enable you to select specific chatbot tools and options that will accomplish your goals. Second, who is going to manage the customers’ expectations when the chatbot is unable to complete the transaction? Chatbots require time to learn, and you’ll need to ‘teach’ them. Someone will have to manage the learning and take over when the chatbot can’t answer the questions.
Jeff ff Roy President and CEO, Excalibur Insurance Group, Clinton, Ont. You need to know how much traffic your website is getting for budgeting purposes. For instance, we find approximately three to five people out of every 100 use the chat function. If you have 500 visitors monthly, that translates into between 15 and 25 chatbot users each month. One piece of advice: find a chatbot that answers your FAQ questions. Most agencies field 20 to 30 questions that everyone asks; make sure your chatbot covers these questions.
Chris Ch i Gory G President, Insurance Portfolio Financial Services, Toronto, Ont. We implemented a chatbot early on this year and we have had a lot of success. Our company’s chatbot gives us an estimated 10 to 12 leads a month. Don’t be afraid to try something out and kick the tires on it.
HANDBOOK
BUSINESS VALUATION
Interest rates are rising. Hooray? The impact on M&A will depend on whether you are a brokerage or an insurer. Here’s why… B Y J A S O N C O N T A N T, Online Editor
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onsolidation is expected to continue in the Canadian P&C insurance industry, as books of business fetch ever-increasing multiples of revenue. But will an anticipated rise in interest rates pour some cold water on some these potential deals? After a new trade deal between the United States, Mexcio and Canada was announced on Oct. 1, the Bank of Canada, as expected, raised its benchmark interest rate in October by a quarter point to 1.75%. It’s the highest the rate has been since 2008. “The premise is that a rising interest rate environment helps [the buyers] in terms of their overall return [and] allows them to build capital to make further acquisitions in the space,” says Ron Stokes, national transaction leader of financial services with Ernst & Young Canada. “I think it is something we expect to see and continue to see: consolidation in the sector.” Generally speaking, both P&C and
life insurers would look to rising interest rates to help them in terms of the interest revenue they would earn on their invested assets, Stokes explains. “On the P&C side, after periods of time where the interest revenue has not been there, you’re starting to see the interest revenue helping a lot of the P&C companies. It’s causing the overall value of the P&C and other insurance companies to raise in the sector.” Insurers have lived in a sustained low-interest-rate environment for quite some time, adds Philip Heywood, partner of financial services deals with PwC Canada. As a result, there has been a strong focus on improving underwriting returns and less reliance on investment income to bolster the bottom line. Personal lines carriers in particular have suffered over the past year, with an increase in auto claims costs and property costs driven by floods, fires and other weather events. “So, increasing
interest rates, as long as that trend continues, will be a welcome improvement in yield, particularly as portfolios mature and investments are replaced with higher-yield investments with stronger coupon rates,” Heywood said. “That’s positive for P&C insurers and will improve their profitability overall.” Stokes points out that rising interest rates are generally positive for P&C companies because they help their overall return. But will this higher overall revenue create a significant difference for P&C companies looking to acquire? “It’s hard to talk about it in generalities, because each of the individual companies will have a different investment portfolio and the interest rates would affect the valuation of their bond and other portfolios,” he says. In an alternate line of reasoning, higher interest rates increase the borrowing costs for a company eager to buy. If a buyer is highly leveraged, and
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HANDBOOK l Business Valuation the cost of debt goes up, the internal rate of return is affected, lowering the value of a potential deal. Plus, investment income is really only one factor in the value of any deal. “There does seem to be a correlation between the public price of an insurer’s stock and interest rates, but I would say the interest rate alone is unlikely to bear a significant jump in M&A,” says Heywood. “I think buyers need to take a holistic view of the expectations around future profitability for the industry, and the ability to price in risk and achieve underwriting and investment returns.” For P&C carriers, an improved profitability outlook from improving interest rates will put upward pressure on valuations. “Many P&C carriers have struggled this year and last year with increased loss ratios,” Heywood said. Buyers should look at the long-term pricing cycle, and take a longer-term view of expected returns and the ability of the in-
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surers to properly price the risks and see attractive returns – both underwriting and investment returns.” Rising interest rates will also affect revenue multiples. Online books of business are sometimes going for five to six times revenue, and general M&A transactions cold fetch three to four times revenue. Interest rates seem unlikely to suppress valuations of distribution businesses such as brokerages and managing general agents. “Typically, the broker commission rates and profit commissions are more tied to underwriting results,” Heywood observes. “I don’t think there will be much direct result or impact from the changes in interest rates to the valuation of brokerage M&A, but more so on the carrier side.” Higher interest rates could affect brokerage M&A, in that large insurers could afford to pay more multiple for a particular business. However, there has not been
a lot of large Canadian insurers buying other insurers or brokerages recently. “I think you are seeing consolidation in the brokerage space as brokers look to increase in scale,” says Stokes. “And you’re also seeing the acquisition of brokers by the [carriers] to help sell the product.” A company with a strong technology value proposition will be a stronger driver of valuation change than interest rates, Heywood adds. The value of an acquisition will increasingly focus on the upside of the technology the buyer is acquiring, rather than historical financial returns or performance, Heywood predicts. “Brokers or carriers that have differentiated tech, particularly around getting customer data and having a holistic view of the customer, will likely be a strategic rationale for doing the deal,” he says. “Therefore, the buyer is going to be keen to lock up that tech advantage and be able to cross-deploy it back into their own premium and policy base.”
ON THE SCENE National Insurance Conference of Canada
Victoria Rochon of Roar Engineering and WICC Ontario enjoys the band at the conference gala.
October 10-12, 2018 Gatineau, Que. More than 400 insurance leaders from Canada and abroad came to Gatineau, Que. for NICC 2018, where some of the hot discussion topics included artificial intelligence, sexual harassment, industry regulation and climate change. Attendees doffed their business suits to don cowboy attire for the Western-themed NICC gala, which featured casino games and a successful silent auction in support of the Women in Insurance Cancer Crusade. Canadian Underwriter was a conference media sponsor.
Distribution models were the topic for (from left) Paul Jackson of Gore Mutual, Dario Battista (isure insurance), Thomas Accardo (Brokerlift) and Matthew Turack (CAA).
Using chips supplied by the conference organizers, these roulette players had nothing to lose at the NICC casino.
Specialty insurance panelists (from left) Rissa Revin of DAS Legal Protection, Gary Hirst (CHES Special Risk) and Karen Barkley (Markel Canada).
Toa Re’s Caroline Kane (left) and Aon Benfield’s Heather Legg at the NICC 2018 welcome reception.
FIND MORE PHOTOS AT
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Detecting the industry’s frauds BY AMANDA HOLDEN ters Preparing for court: How your BY JOSEPH OPPENHEIM client sees you The next revolut ion in auto safety
BY BRUCE CARRICK
HANDBOOK
PROPERTY INSURANCE
Through a haze Now that legalized pot is a reality, how are insurers assessing their marijuana exposures in home and commercial property lines? B Y D AV I D G A M B R I L L , Editor-in-Chief
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anadians channelling their inner Cheech & Chong reportedly purchased an estimated 150,000 orders of pot within the first 24 hours of legalization. In Manitoba, it took only one hour after legalization for a driver to receive a ticket for consuming cannabis in his car. Did the industry’s worst nightmare come true on Oct. 17? For the insurance industry, it will take some time to get a sense of the true risks associated with the federal government’s introduction of Bill C-45, the Cannabis Act. Among other things, the bill allows adults 18 or 19 and older to: • Grow up to four cannabis plants per household (not per person) for per-
sonal use, from licensed seeds or seedlings from licensed suppliers. • Make legal cannabis-containing products at home, such as food and drinks, provided that dangerous organic solvents are not used to make them. The Cannabis Act is expected to have wide-ranging effects in many areas of insurance, including product liability, driving while impaired, social host liability, property theft, and the list goes on. Of particular interest is what may happen in homeowner and commercial lines. Homeowner insurance The new era of legalized pot is expected to prompt brokers and insurers to ask homeowners about their plans to par-
take; and if so, how much. “One of the big concerns that has been expressed to me over and over [by insurers] is the possibility of people taking advantage of Bill 45, the ability to grow up to four plants in their household, and defining what a ‘household’ is,” says Seth Kornblum, a partner at Beard Winter LLP. “I think that’s probably the largest area of concern.” Enforcement of pot limits is a particularly thorny issue in homeowner lines. Aaron Murray, partner at Beard Winter LLP, observes that even legalized medical marijuana facilities have been known to test the limits of their license. In October, York Regional Police charged two men for the second time in two months
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HANDBOOK l Pot and Property with growing more cannabis than is permitted by their Health Canada licences at a grow-op in King Township. “These investigations are raising significant concerns, as there is once again a blatant disregard for licensed grow limits,” York Regional Police Chief Eric Jolliffe comments in a news release. The same concerns apply now to homeowners. “I think what we are going to see is people taking advantage of the allowable amounts and breaching the restrictions,” Murray predicts. “I think that’s where you are going to see some sort of grey area with claims happening, because there are people going to be pushing the envelope of restrictions.” Can insurers exclude marijuana from their home insurance policies, now that pot is legal? “I suppose insurers could try and put exclusions in there, but because it is legal, I think the best way for them to reflect the risk is got to be on a premium basis,” Murray says. “So, the premiums are going to have to be increased. Insurers are going to try and have to get the knowledge as to what their insureds – and their potential insureds – are doing with respect to recreational cannabis and growing it themselves.” Now that marijuana is legal, it’s open season for insurers and brokers to ask clients questions about their intention to cultivate or consume pot in their homes. During the renewal process, insurers may ask questions
Committed to brokers We’re here to help you achieve your business goals. Ask your SGI CANADA Business Development D l Account M A Manager ffor d details. l
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November 2018 | Canadian Underwriter
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about electricity use, lighting, and the different types of chemicals that may be present to assist the plants to grow bigger and faster. Before issuing policies, insurers may request that clients provide additional security, taller fences, gates, alarms, approval of electrical work, ventilation, things of this nature. In a way, attempting to get at the risk through questions would be no different than trying to assess the risks associated with owning a swimming pool in the backyard. The major difference being that there are all kinds of established regulations around pool safety; not so with marijuana. “There are bylaws that potentially create additional safeguards – for example, fences around swimming pools,” said Kornblum. “The problem with the personal growing of marijuana is that, at the moment, there are no bylaws that address issues raised by Health Canada We are at the moment without any type of regulation, and that should be of great concern to insurers because of the fact that without safeguards for these necessary elements to grow, there is potential for greater risk.” Commercial Lines Low-frequency, high-severity commercial property losses could be the upshot of the legalization of marijuana. For brokers, and for insurers wishing to underwrite licensed pot facilities, the obvious exposures would be theft and property damage. “I see there being more property loss-type claims coming out of these large [marijuana-growing] facilities, particularly the greenhouse facilities,” Murray says. “They’ve got thousands of square feet. You have to think with the amount of money that’s tied up in each of these plants, and how much they are worth, if something goes wrong, and part of that crop is damaged, the claims are going to be huge. Statistics Canada shows the average price for medicinal marijuana across Canada is $8.18 per gram. Based on that figure, what would be the estimated yield for a 1-million-square-foot facility (currently the largest-known facility in Canada)? There is no exact measure for marijuana yields. A Rand Policy Research Paper suggests the yield will vary depending on many factors such as light, heat, outdoor or indoor conditions, etc. The paper cited a study of 77 outdoor illegal grow-ops in the Netherlands that produced an average yield of 1.4 marijuana plants per square foot. Assuming a rough estimate of 125 grams per plant, that would be approximately 175 million grams – or approximately $1.4-billion worth of weed. In a greenhouse scenario, property damage in one part of the facility, depending on where it took place, could be enough to ruin the entire yield. For example, Murray notes he was involved in a case in which a car drove into a tomato greenhouse. While the greenhouse damage from the car was not extensive, the accident took out the greenhouse sprinkler system, which wiped out a substantial portion of the total yield. “The dollar amount tied up in the loss was quite substantial,” Murray said. “And you have to imagine that if something similar to that happened in a marijuana greenhouse, the loss would be exponentially larger.”
HANDBOOK
D&O INSURANCE
Personal price of pollution How to protect corporate executives who are held to account for pollution that pre-dated their time on the board B Y G R E G M E C K B A C H , Associate Editor
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rokers placing directors’ and officers’ (D&O) liability could be leaving clients with a major coverage gap unless board members purchase additional coverage for pollution liability. Most D&O insurance policies have pollution exclusions, observes James Bennett, manager of executive solutions at Trisura Guarantee Insurance Company. This caused a problem six years ago for directors of Northstar Aerospace, whose products are components in the Chinook, Apache and Blackhawk helicopters. Northstar had a factory on polluted land in Cambridge, Ont. at the time. The company went into bankruptcy protection in 2012; creditors included the Ontario Ministry of the Environment (MOE), which issued a pollution cleanup order. In the end, the directors ended up paying millions out of pocket to reim-
burse MOE for the cleanup. Northstar’s directors had D&O insurance but it excluded pollution, recalls Paul Guy, partner with Thornton Grout Finnigan LLP, who represented Northstar’s directors when they challenged the cleanup order. In 2013, a hearing was scheduled before Ontario’s quasi-judicial Environmental Review Tribunal (ERT), but Northstar’s directors settled with the ERT before the hearing was held. The directors paid almost $5 million out of pocket. “It would have been extremely difficult – if not impossible – for the Northstar directors to get insurance for what they ended up having to pay for, because it was a pre-existing contamination,” Guy says. It’s hard to find an insurance policy covering polluted land for the same rea-
son it is difficult to buy insurance for a burning building. The purpose of insurance is to unforeseen accidents rather than known risks. “Northstar was a wakeup call,” says Jennifer Fairfax, an environmental lawyer with Osler, Hoskin & Harcourt LLP, who was not involved in the case. “Some brokers are alive to that.” To address this coverage cap, brokerages such as Aon approached carriers to find coverage for directors and officers who might be held personally responsible for complying with pollution cleanup orders imposed by provincial environment ministries. Canadian insurers have recently started offering “specialized extensions” covering environmental contamination situations that are known and managed, said Justin Perry, senior vice president and na-
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HANDBOOK l D&O Insurance tional practice leader for environmental services at Aon Canada. Such extensions have a dedicated limit for the exclusive benefit of directors in the event that the corporation cannot indemnify in the matter of an insolvency. “It’s exclusively for a government order requiring cleanup of the known condition that you are managing,” says Perry. Specialized extensions tend to have limits of $5 million to $10 million, Perry reports. Clients who are interested in a specialized extension tend to be small to mid-sized firms with control over a property that is a known brownfield. Other potential buyers may include small business clients who are redeveloping brownfield or contaminated lands. “It often takes two to three hours with the entire board or the entire management team to get to where they understand it,” Perry said. “You are talking about the failure (of the corporation) and what does that look like.” When placing D&O, some brokers are looking to add in coverage for pollution, non-indemnifiable losses or claims from security holders, Bennett said. A non-indemnifiable loss describes a situation in which directors and officers are on the hook to pay for something, such as pollution cleanup, and the firm will not or cannot reimburse them. Claims for security holders apply when shareholders sue the directors personally in the name of the company. Brokers need to look carefully at D&O policies, including standard exclusions and some coverages that some carriers are willing to carve back in. Fairfax says she and her colleagues at Osler have observed that D&O liability policies generally do not cover fines or penalties levied by regulators for environmental offences. But sometimes those policies do cover the costs of complying with orders to clean up pollution. Canadian environmental protection laws vary by province and territory. Generally, they are similar to Ontario’s Environmental Protection Act, which gives Ontario’s environment ministry the power to order a corporation or person with “management or control” of a property to clean up pollution. What’s significant is the government can order directors to pay for pollution cleanup regardless of who is at fault. The public policy aim of the law is to protect the environment, not to punish the person who caused the pollution. Northstar is an example where a regulator has “interpreted management or control quite broadly,” says Fairfax. When accepting positions on corporate boards, directors often do not have a “full appreciation as to how bad some of the potential personal liabilities could be,” Guy comments. Many environmental underwriters and lawyers will recommend that clients buying property should have an assessment done to determine whether there is any contamination. “You don’t want to buy something and it turns out there was a gas station there 50 years ago, and there are some gas tanks that we didn’t know are buried that are leaking,” Guy says. An organization big enough to have a risk manager probably has some sort of exposure to environmental liability, says Darius Delon, past chair of Risk and Insurance Management Society (RIMS) Canada Council.
HANDBOOK
FUTURE OF AUTO INSURANCE
Weaponizing driverless cars In an age of connected cars and cyber hackers, what could go wrong? B Y J O H N S A R I C H , Vice President of Corporate Strategy, VUE Software
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n the age of hacking, weaponized driverless cars pose compound liability risks. Considering all the technology built into driverless cars, it’s not a big leap for anyone with an insurance mindset to think of the terrible ways it could go wrong. Hackers are moths drawn to the flames of digital systems. From the hacker’s point of view, the more complex the system – and the more social disorder it’s possible to create – the better. Think of the mega-hacks at the credit bureau Equifax, where 143-million American accounts were compromised, or Yahoo, which reported breaches of every single one of its accounts in 2013 (upwards of 3 billion in total). The hacked data-collecting technology noted above is kids’ stuff compared with the complexity and artificial intelligence needed to power a driverless vehicle. With hacked cars, there is a real risk of losing lives, not just data privacy.
Weaponizing autonomous vehicles We have not yet witnessed a drone-style capacity to control one or multiple vehicles remotely. Even so, too many tragic instances of cars being turned into weapons have already occurred. In one of many examples worldwide, a rental van in Toronto mowed down pedestrians on the sidewalk of a busy downtown intersection in April 2018, killing 10 people and injuring 15 others. The deadly Toronto incident was not defined by authorities as a “terrorist” attack. But as the FBI notes in a 2010 report: “Vehicle ramming offers terrorists with limited access to explosives or weapons an opportunity to conduct a homeland attack with minimal prior training or experience.” The potential for hacking fully-automated cars means that attacks could expand beyond just isolated incidents; there could be coordinated attacks multiplied over many geographies. The risk of fatality increases exponentially,
with no risk of life to the hacker. In a worst-case scenario, hackers operating domestically or remotely could program driverless cars to become autonomous missiles in the middle of big cities. Imagine the damage that could be done by figuring out how to disable the brakes on a moving driverless truck. Even if it’s not taken this far, hackers could remotely disable one or multiple autonomous vehicles, causing pandemonium on a highway during rush hour; or they might shut down an entire fleet of self-driving delivery vehicles, which may at that moment be in multiple locations doing their job. A Wall Street Journal report on hackable cars highlights the potential for other, comparatively tame acts of cybercrime. In “carnapping,” for example, hackers could lock car owners out of their cars and demand a ransom for re-opening the doors. Enough of these digital lockouts would not only amount to a hefty sum in ransom money, but
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HANDBOOK l Weaponized Cars they could put a vehicle manufacturer out of business because of reputational and trust issues. While such a scenario is clearly not life-threatening, the potential to hack into fully-automated cars does raise the issue of insuring the risk. Insurance and driverless cars The safety benefits of driverless cars are sometimes touted as part of a discussion
within the Canadian property and casualty insurance industry. Between 1993 and 2016, there have been an average of 2,234 traffic-related deaths each year in Canada. South of the border, in the United States, there are nearly 36,000 traffic-related deaths every year; 94% of these tragedies are due to “human choice or error.” Remove the factor of human choice, safety advocates say, and the
crash rate goes down. Lives are saved. People don’t get as angry or frustrated during their commute to work. Speeding tickets become a thing of the past. No more points on your licence — because you don’t have a licence. All these wins for drivers are likewise a boon for insurers. Fewer collisions mean lower claims costs, and reduced auto liability losses. All good stuff, right? But what about the pedestrian in Arizona who was killed by an experimental Uber car driving in autonomous mode? Video suggests the human sitting in the driver seat was looking downward at the time. And what about all the other human drivers on the road who aren’t content to drive behind an old-lady robot? The core of the insurance industry is to identify risks, quantify the exposures and price the risk appropriately. The risks associated with autonomous cars could take many forms, and include: For the vehicle manufacturers: • a loss of public trust and corporate reputation For the human drivers: • property loss • personal injury • personal liability for causing a collision, injury or death For pedestrians • property damage, personal injury or loss of life These risks increase exponentially with the potential for hackers to turn these vehicles into weapons. Manufacturers developing autonomous vehicles need to understand the broader risks and do a deeper dive into the potential liabilities. A parallel with Facebook and Twitter comes to mind. By connecting us through these platforms, social media has the power to do enormous good. However, during the origins of their evolution, it appears no one gave serious thought to how they could be misused by those who wish to do us harm. The same could be said for driverless cars. Without addressing the potential downsides, the risk is too great.
John Sarich has more than 25 years of experience in property and casualty insurance at the senior management and board levels.
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ON THE SCENE This lucky angler on the Canadian Litigation Counsel’s boat cruise is Louis Belcourt of Dashwood, Brewer & Phipps.
RIMS Canada Conference September 23-26, 2018 St. John’s, Nfld. Oceans of Opportunity was the fitting tagline of this year’s edition of the RIMS Canada Conference, held September 23-26 in St. John’s, Nfld. By day, hundreds of members of Canada’s risk and insurance community attended seminars at the St. John’s Convention Centre and walked the tradeshow floor at the Mile One Centre. By night, they took over the George Street entertainment district with dinners, parties and an untold number of Screech-in ceremonies that turn “come from aways” into honourary Newfoundlanders. Canadian Underwriter was the conference media sponsor.
A few of the hundreds of guests packing the Welcome Party.
James Eka (left) of CURIE and Paul Bains of Hatch Ltd. on the tradeshow floor
Great Big Sea frontman Alan Doyle rocks the conference Welcome Party. Happy diners between courses at First General’s partner appreciation dinner at the Gypsy Tea Room.
Cirque du Soleil’s Michel Rodrigue accepts the 2018 Donald M. Stuart Award, Canada’s highest honour for risk managers.
FIND MORE PHOTOS AT
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how I did it CHANGE TO A DIGITAL BROKERAGE Dario Battista launched isure in 2006, marking the transformation of his traditional brokerage into a licensed, full-service online insurance brokerage. At the time, isure was among the first in the digital space, Here he shares his insights with brokers who are contemplating a similar move to digital. – As told to David Gambrill
Answering the question of how we did it, one of the main things was our focus on change management and leadership. Managing change is hard to do. In our industry, it is amplified by the fact that brokerages have never needed to change, because they have been profitable. And the fact is, we were a good traditional brokerage at that time, so there was no immediate reason for us to change either. There was no ‘lions-at-the-gate’ thing happening. Everyone can change when that happens. When the house is already on fire, you’re
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going to move. But changing when there is no immediate reason to change is a much more difficult needle to push. When we did the change, it was based on the vision I had of where we needed the business to go. It didn’t need to go digital at that time, but it needed to go there for the future. When that happens, you will get people who will resist; people who will wait and see; and then your early adopters. We had some staff who could not adapt to where we were going. We needed to rebuild that part of the team, for sure.
Also, we had to get all of our insurance partners aligned as well. Without the markets onside, we really didn’t have a product. Today, insurers are all for brokerages going digital, but in the environment 11 years ago, companies didn’t believe so much in the digital approach. Change management was about getting our staff and markets aligned with the new vision. In the end, we were able to demonstrate through a lot of discipline and effort that we could grow in a controlled, profitable way as a digital brokerage.
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