Premium hikes ignite fury among Canadian execs; risks managers resort to self-insurance or simply go without coverage in their battle against skyrocketing rate increases

Premium hikes ignite fury among Canadian execs; risks managers resort to self-insurance or simply go without coverage in their battle against skyrocketing rate increases – global risks

David Kasub

In Canada, risk managers are singing the same old refrain as their U.S. counterparts to the south: Premiums are rising, coverage is dropping; where it will all lead, there’s just no telling. Last year SITQ Inc. of Montreal, Canada’s largest real estate owner, saw property insurance rates for $16 billion worth of office building shopping center, industrial, and residential space rise a whopping 250 percent.

Gary Carter, SITQ’s director of risk management, says that like other risk managers his options were limited. While he wasn’t able to do much to get his insurers to relax their rates, he did take a closet look at his policies.

“We took a look at our environmental insurance, stuff where maybe we don’t necessarily want to go the insurance route,” says Carter. “So we spent quite a bit of money last year … testing, removing underground tanks, getting rid of PCBs and all of the stuff that you would generally find in a typical office building.”

Carter’s not alone in searching for ways to mitigate premium increases. Nearly every business in the country is feeling the pinch and having to scrape by with less coverage, according to a spokesman for the Canadian business lobby. “In addition to increased premiums, we are also finding our members are not getting the coverage they once had,” said Andre Piche, director of national affairs for the Canadian Federation of Independent Businesses.

Another company feeling the pinch is Quebecor Media Inc. The corporation, which has interests in cable and telecommunications services, has seen premiums rise by 50 percent to 150 percent. Its insurance policies are now choked with new restrictions and exclusions, says Michele Turcotte, the company’s director of risk management.

The company’s subsidiaries, Nurun Inc. and Mindready Solution Inc., develop transactional Web sites for companies like GM and Loreal Canada. The subsidiaries promise to protect their clients’ confidential in formation.

The trouble is, little or no case law exists when it comes to providing professional liability insurance in the event a client suffers a financial loss because its Web site developer has failed to keep proprietary product information confidential, for example. As a result, obtaining coverage to meet that cyber risk is often a lost cause. Like Carter, Turcotte’s only immediate solution has been to reduce the risk.

In Toronto, meantime, risk manages are recovering from another problem: Severe Acute Respiratory Syndrome, or SARS, which has had a devastating effect upon a city acknowledged to be the driving engine behind the Canadian economy. Against SARS, specific insurance policies don’t even exist.

“In terms of actual insurance coverage there really isn’t anything that’s available such as additions to coverage or special lines of coverage for SARS,” says Rupak Mazumdar, president of the Toronto chapter of the Risk and Insurance Management Society Inc. “What risk managers are being encouraged to do is to engage more in risk prevention and to try to work with the HR departments to reduce SARS exposures themselves.”

In the wake of more than 35 deaths from the disease, the Toronto chapter of RIMS will conduct a forum this fall specifically aimed at providing its 400-strong membership with strategies for managing the risk associated with SARS.

Early-warning checklists, preventative tip sheets and broader procedural plans in the event an outbreak does occur are just some of the things Mazumdar hopes his membership will adopt to reduce the risk of another outbreak. But he says that risk managers who have focussed exclusively on purchasing insurance as a way to protect their employers will be at a disadvantage when dealing with a major health epidemic or even the larger hardened market. “The risk managers who had a more holistic program, where they would balance insurance efforts with risk management programs, loss prevention and so on, those are the ones who are more successful now.”

An Infernal Dilemma

When a spark from an errant blowtorch turned Calgary’s Waterfort Condominium project into a burning inferno last year, it also ignited questions about what this fire–along with major fires in Toronto and Ottawa–would mean for their insurance rates.

The answer wasn’t long in coming. Canadian builders reported a tenfold increase in builders risk insurance because of the fires, and outright refusals by insurance companies to cover residential developers. As a result, builders risk insurance has quickly outstripped the cost of labor and materials as the No. 1 issue in the construction industry. “It has shot from nowhere on the screen to the No. 1 concern of our members in the last two years,” says Don Johnston, senior director of technology and policy for the Canadian Home Builders Association. “Builders have suddenly been confronted with dramatically rising insurance costs, significantly shrinking coverages and lots of new conditions.”

Leslie Cormack-Wilson, a broker with Wilson M. Beck Insurance Services in Vancouver, says that along with a poor overall investment climate and a lack of new capital, has come a lack of capacity to fully insure the construction industry against fire.

“It’s usually about 33 cents on the dollar that insurance companies have to put into for federal reserve. So if they’re selling a million dollars worth of coverage they’ve got to put $333,000 in reserve. Well if they can’t get enough capacity to back them up, they can’t write much premium.”

The result, says Carter, is that as many as 25 insurance companies are doing the work that used to be done by a single insurance company. “So if you need a billion dollars worth of coverage, well you’re going to have to get a lot of these people together to gel up to a billion. It’s just more expensive.”

Many companies, says Valerie Martin. a senior risk management analyst with an Ottawa based software development company, are either self-insuring a portion of their risk through higher deductibles or not purchasing insurance at all.

“That is a difficult thing to do because most organizations will find that they can’t do business with their customers if they aren’t able to provide some proof of insurance.” Nor does improved operational risk management or higher deductibles eliminate the need for insurance.

Niver Rubenyan, director of operational risk for Sun Life Financial Services of Canada Inc., “hates” to relate premiums to risk management directly “only because having rates go tip doesn’t mean that you should get rid of that coverage.”

“I don’t necessarily think that the savings from the premium side is a sufficient reason to make those kinds of decisions. If insurance is so expensive it’s just not an option then you have to look at other options, but you can’t really leave yourself out to dry. You can’t leave yourself exposed just because premiums are too high.”

Part of Canada’s problem is that with two to three percent of the world market, it remains a relatively small player on the global insurance stage. Two-thirds of its property/casualty market is headquartered outside the country, so that anything affecting insurance companies in the United States or Europe has an impact on the Canadian insurance market.

More significantly, says Richard Snow, a broker with Toronto-based BF Lorenzetti and Associates Inc., Canada has vied with Australia year after year for the cheapest insurance rates in the world. Where a $100 million-property schedule marketed in the United States two years ago “would have been a rate of around three cents on property insurance, a smaller property schedule in Canada would have been rated at below a penny.”

“So in insurers’ minds, to bring the current rate level to what they felt would be more adequate you’re looking at increases of 100 percent, 200 percent, 300 percent. That’s what we saw last year and that had a substantial impact on everyone’s insurance costs across Canada. We just got ridiculously competitive in this country.”

RELATED ARTICLE: Time to pay the piper.

Globally, insurance premiums are rising for three main reasons: First, insurers wrote very aggressive policies during the 1990s that have cost them more than expected. Underwriters fought hard for customers by loosening terms on a range of insurance policies–from workers’ compensation insurance to medical-malpractice packages to directors’ and officers’ liability coverage.

Second, rates of return for insurance company reserves have been declining with the stock market for the past two years. And third, the loss of $30 billion to $60 billion in reserves from the attack of Sept. 11th, 2001, lowered those returns further.

A U.S. Senate committee estimates that by 1999 insurers were paying out, on average, $1.07 in claims and related expenses for every $1 of premium received on business coverage. Insurers could sustain these losses during the bull market of the ’90s through investment income on premiums. Now financial markets–along with investment yields–have gone south.

The companies have also been hurt because claims on the policies they wrote in recent years have come in much higher than they originally estimated. Sept. 11th, 2001 only made matters worse.

These trends appear to be reflected in Europe, which incurred additional major losses due to flooding last year, and in Canada hit hard by fire losses. In fact, Canada saw its worst record for property/casualty in 2001 and had even weaker financial results for 2002.

According to the Insurance Bureau of Canada (IBC) 77 percent of companies reported lower investment income last year which caused a deterioration of return on equity (ROE) for 53 percent of the companies. The industry ROE dropped to 1.6 percent–the lowest level on record. Since 1997, industry earnings dropped from $2 billion to $0.5 billion dollars, due to the growth in claims, unfavorable reserve development and weakness in investment markets.

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