Year in Review: Insurance trends of 2016

December 2016    |    By Indrani Nadarajah

Abstract: 2016 began on a hopeful note on the back of the Paris Climate Conference. In April, the PBO released a report into the country’s GHG emissions, spelling out the challenges that would have to be overcome for Canada to meet its target. Canada’s first ministers are now finalizing a national climate change strategy. This year, flood cover also became less of a murky issue as insurers begin to offer it to householders. 2016 also provided the backdrop for Canada’s costliest ever natural disaster – the Alberta fires. Unfortunately, the apparent lack of cyber preparedness continues to be a problem for many companies with large-sale hacks making the news. Lastly, the impending legalization of recreational marijuana could present a growth opportunity for the insurance industry.

At the Paris climate conference (COP21) in December 2015, 195 countries adopted the first-ever universal, legally binding global climate deal. The agreement sets out a global action plan to put the world on track to limit global warming to well below 2°C.

Canada agreed to a 30% reduction in greenhouse gases from 2005 levels by 2030. First ministers are now finalizing the details of a national strategy to achieve that-- the Pan-Canadian Framework on Clean Growth and Climate Change.

The road, experts acknowledge, will be long and difficult, because of the diversity of the source of emissions. In April, the Parliamentary Budget Officer (PBO), Jean-Denis Frechette, released a 94-page report on Canada’s Greenhouse Gas Emissions: Development, Prospects and Reductions. Frechette concluded that to meet Canada's international target of 30% reduction in GHGs by 2030, Canada will have to bring its emissions down by 208 million tons -- equivalent to taking more than all the gasoline and diesel-powered cars and trucks (including off-road vehicles) off the road. The bulk of the reductions will come from the three sectors that contribute most to current emissions – transportation, oil and gas production and distribution, and electricity generation.

"The actions undertaken so far by various levels of government, though substantial, will not be sufficient to achieve that target," it warned. It adds though, “that the cost to Canada’s economy of allowing a temperature increase of 2 degrees Celsius or more could be substantial – if not directly, then indirectly from elsewhere.”

Natural Catastrophes in Canada

This added cost the PBO flags in its report is something the insurance industry is all too aware of. Preliminary sigma estimates from Swiss Re report that total economic losses from disaster events in the first half of 2016 surged 38% from the previous corresponding period, to US$71 billion. The global insurance industry covered US$31 billion, or 44% of the total losses. Natural catastrophes accounted for US$68 billion (compared with US$46 billion in the first half of 2015). The remaining costs came from man-made disasters.

A 2015 annual forest assessment by Natural Resources Canada warns that global warming will contribute to a 50% increase in large fires, new tree diseases and more insect infestations. The State of Canada’s Forests report, released in October, explains that even if the world manages to limit global warming to two degrees Celsius above pre-industrial levels, that increase translates into a four-degree Celsius increase for Canada.

The 2015 assessment found that a total of 7,068 forest fires burned about 3.9 million hectares. The number of fires was slightly above the 10-year average, but the area burned was 50% higher than the previous average of 2.4 million hectares.

The Fort McMurray wildfire accounted for 98% of first-half insured catastrophe losses in Canada and is the single most expensive insured disaster in Canadian history, double the 2013 southern Alberta flood, which cost $1.7 billion in insurance claims.

The Conference Board in November calculated that the lion’s share of the $5.3 billion in losses will be absorbed by the insurance industry. (The Insurance Bureau of Canada is estimating $3.6 billion in claims.) Of this, $2.4 billion is in personal property and $1.2 billion in commercial and industrial payments. About 47 million barrels of oil production were lost, costing producers about $1.4 billion in revenues this year.

In an additional advisory, AM Best said that reinsurers would absorb most of the losses, with European reinsurers covering 45% and Bermuda reinsurers, 25%.

Flood

Before the Fort McMurray wildfire, the largest single catastrophe event in Canada was the 2013 Alberta floods, where the federal and provincial governments picked up most of the tab. The cost to insurers was about $1.7 billion because residential flood insurance was unavailable at the time.

Early this year, the Insurance Bureau of Canada (in conjunction with LexisNexis) produced flood maps to quantify the extent of flood risk across the country. The data shows that 20% of Canadian households could be qualified as high risk, and about 10% of those would be considered very high risk -- about 1.8 million households.

Flood maps are a critical starting point. Flood mitigation is also crucial, especially when a warming climate brings with it more rain. As yet, Canada is unprepared to deal with the threat, despite the fact that flood is the country’s most frequently occurring natural hazard. All 10 Canadian provinces and Yukon achieved an average grade of C- in flood preparedness, a new report from the Intact Centre on Climate Adaptation at the University of Waterloo, Climate Change and the Preparedness of Canadian Provinces and Yukon to Limit Potential Flood Damage, concludes.

Ontario scored the highest grade, a B-.

Canada can do better, when dealing with the threat of floods. As a starting point, perhaps, “municipalities should not be able to override direction from the provinces or Yukon that restricts development in flood-prone areas, or that mandates flood-resilient design,” one of the report’s recommendations points out.

In November, the City of Edmonton released preliminary neighbourhood flood maps as part an ongoing flood mitigation assessment. Flood mitigation projects are estimated to cost about $2.4 billion. There are nine preliminary maps that cover four areas of the city; the fifth area is an industrial part of Edmonton, which will be studied in the future.

More companies are also beginning to offer overland flood insurance. Aviva, the Co-operators and RSA Canada offer overland cover – defined as fresh water from rivers, lakes or water accumulated as a result of heavy rainfall. At last check, the list had expanded to include Economical Insurance and Gore Mutual.

Economical Insurance and its group insurance subsidiary, Economical Select, offers Waterwise, a Water Damage Extension (WDE) endorsement in Alberta, Ontario, New Brunswick, Nova Scotia and Prince Edward Island. 

Intact Insurance, in conjunction with Novex Insurance, launched a comprehensive water damage coverage. Its “enhanced water damage” is an endorsement and has four components: Sewer Back-up, Water and Sewer Lines, Overland Water and Ground Water.

In October, Unica Insurance launched a single-product offering that provides coverage for damage caused by Overland Flooding, Ground Water, Surface Water and Sewer Backup. This coverage is available on Unica’s homeowners, Tenant and Rented Dwelling products. 

Cyber Risks

Yahoo Inc. is facing a gross negligence lawsuit from a user, Ronald Schwartz, demanding that the company compensate users for any damages resulting from fraud and to foot the bill for measures to identify and safeguard compromised accounts. Bloomberg reports that similar lawsuits have been filed in Illinois and San Diego.

Computer hackers, which Yahoo claims to be “state-sponsored”, stole personal information from 500 million Yahoo accounts. This is thought to be the biggest digital break-in at an email provider. The breach is thought to date back to late 2014. 

Meanwhile, in Canada, Casino Rama Resort  became aware of a hack on November 4, involving IT, financial, employee and patron information, with some data more than a decade old.  The casino said there is “no indication” that the hacker continues to have access to its system, but “it is possible, however, that the hacker will publish information that was stolen previously.”

Class-action lawyers have since announced plans for a proposed lawsuit that would seek $50 million in damages and another $10 million in punitive damages from Casino Rama.

Cyber Resilience Not Improving

Despite the widespread news of high profile hacks, cyber resilience is still not improving, a study conducted by Resilient, an IBM Company and Ponemon Institute initiative, reveals. In 2016, only 32% of respondents believed their cyber resilience was high, down from 2015’s 35%. Companies that did report improved cyber resilience attributed it to an investment in training or staff (54% of respondents) or engaging a managed security services provider (42%).

This year’s study also reported that the average consolidated total cost of a data breach in Canada was $6.03 million, up 12.3% from 2015. The average cost per lost or stolen record rose 10.6% year on year to $278.

The Pomenon Institute noted, “Since first conducting this research, the cost of data breach has not fluctuated significantly. Thus, suggesting it is a permanent cost organizations need to be prepared to deal with and incorporate in their data protection strategies.”

The first Secretary of the US’s Homeland Security Department, Tom Ridge, who is also chairman of Rudge Global, said at an address at the Empire Club of Canada last month that the scourge of terrorism is a permanent condition now, and this “is a reality which we must accept.”

Organizations must be resilient enough to recover quickly in order to manage the fallout, he said. Ridge Global (through its subsidiary Ridge Canada) now offers cyber insurance policies of up to $50 million, targeting small and mid-sized businesses in Canada

Canadian property and casualty insurers should also bolster their defences and those of their clients against cyber threats by developing a culture of cyber security, recommends a new research report, Cyber Risks: Implications for the Insurance Industry in Canada.

The report cites a 2014 study by Intel’s McAfee and the Center for Strategic and International Studies, Net Losses: Estimating the Global Cost of Cybercrime which calculates that the global impact of cybercrime is similar to “estimates by the United Nations of the international production, trafficking and sales of illicit drugs (US$400 billion) and the worldwide damage resulting from vehicle collisions (US$518 billion).”

However, a paucity of data is impeding the expansion of cyber insurance. “When a serious effort is made to collect data about the likelihood and consequences of cyberattacks, it will likely take more than a decade until sufficient information is available to support a rigorous actuarial analysis of the risks. Insurability will likely extend to a variety of cyber risks over the long term, but the primary focus of cyber insurance over the next five to ten years is expected to remain on data breach and identity theft,” write the report’s authors.

Supreme Court Delivers Decision on Ledcor

On September 15, 2016, the Supreme Court of Canada released its decision on Ledcor Construction vs Northbridge Indemnity.

Briefly, Station Lands Ltd. retained Ledcor Construction as a construction manager to coordinate construction of Edmonton’s EPCOR Tower. The building’s windows were supplied and installed by a trade contractor. Another trade contractor, Bristol Cleaning, was retained by Station Lands to carry out an industrial clean on the windows. Bristol Cleaning damaged the windows by using inappropriate tools and methods. The glass had to be replaced at considerable expense, which Bristol Cleaning paid for.

Bristol Cleaning sought coverage under Station Lands’ Builders Risk policy, which was rejected as the insurers asserted the windows’ damage was not covered due to the “making good faulty workmanship” exclusion.  Station Lands’ “Builders Risk” policy covered “all risks of direct physical loss or damage…” but excluded “The cost of making good faulty workmanship … unless physical damage … results, in which event this policy shall insure such resulting damage”.

The trial court decided the exclusion clause was ambiguous and employing the contra proferentem rule, ruled that the insurers were liable for the damage. The Alberta Court of Appeal reversed this decision, saying that the exclusion clause was not ambiguous at all. The Appeal Court then devised and applied a new test – “physical or systemic connectedness” – to determine whether physical damage was excluded as the “cost of making good faulty workmanship”, or covered as “resulting damage” as per the policy wordings. The Appeal Court ruled that the damage was excluded from coverage because it was directly caused by the intentional scraping and wiping motions utilized by the cleaners, and was therefore not accidental or fortuitous. The damage to the windows was directly connected to the cleaning method employed by Bristol, and therefore fell within the parameters of the “cost of making good faulty workmanship”.

The Supreme Court of Canada, however, disagreed with the Appeal Court’s finding of connected damage and found the insurer liable for the cost of replacing the windows.

The Supreme Court upheld the Trial Court’s finding that the exclusion clause was ambiguous. The Court resolved the ambiguity by focussing on the wording of both the exclusion and the exception clauses in light of the parties’ “reasonable” expectations and the purpose behind the insurance policy.

In para 66 of the judgment, Justice Richard Wagner writes, “the purpose behind builders’ risk policies is crucial in determining the parties’ reasonable expectations as to the meaning of the Exclusion Clause. In a nutshell, the purpose of these polices is to provide broad coverage for construction projects, which are singularly susceptible to accidents and errors. This broad coverage — in exchange for relatively high premiums — provides certainty, stability, and peace of mind. It ensures construction projects do not grind to a halt because of disputes and potential litigation about liability for replacement or repair amongst the various contractors involved. In my view, the purpose of broad coverage in the construction context is furthered by an interpretation of the Exclusion Clause that excludes from coverage only the cost of redoing the faulty work itself — in this case, the cost of recleaning the windows.” 

Redoing Bristol’s faulty work did not require Bristol to install windows in good condition.  The cost of the windows’ replacement therefore represents “resulting damage”, which and is covered under the Policy. On the other hand, if Bristol had been responsible for the windows’ installation, and the windows had been damaged during the installation process, the damage done to the windows in such circumstances would not have constituted “resulting damage”. Redoing the faulty work in that instance would have required installing windows in good condition, which would have been excluded from cover.

Justice Wager concludes at para. 96, that "even if I were to determine that the general rules of contractual interpretation do not clarify the ambiguous Exclusion Clause, I would reach the same conclusion on the basis of the contra proferentem rule".

Insurers that had been hoping for a high level of generality from this decision may have been disappointed. Justice Thomas Cromwell confirms that “making good faulty workmanship” means “the cost of redoing the faulty work”. However, applying that principle is dependant on the scope of the faulty work and the nature of redoing it. “Its application … will ultimately be decided on a case‑by‑case basis in light of the particular circumstances of the particular case.”

Commentators have noted that an issue for insurers is the Supreme Court’s reliance on the purpose of the policy in interpreting the policy.  “Courts have increasingly taken the view that policy language determines the outcome on the basis that the insurer has the power to draft the language to meet the intention.  This case suggests that the purpose of a policy or class of policies might be argued in establishing the reasonable interpretation of policy wordings.”

Looking Ahead

Marijuana legislation

In a sign of the “normalization” of marijuana, this year, five life insurers in Canada announced their plans to begin underwriting medical and recreational marijuana users as non-smokers. The five insurers are Sun Life, BMO Life Insurance, Canada Life, London Life, Great-West Life.

Last April, the Federal Health Minister Jane Philpott announced that the government was committed to introducing legislation to legalize marijuana in the spring of 2017, with sales of recreational cannabis likely to commence in 2018. The aim is to keep marijuana away from under-aged users and minimize the power of the criminal element in the trade.

The Federal Government’s Task Force on legalizing marijuana submitted its report on Wednesday, November 30, but details have not been made available yet. It is expected that key recommendations will be released before Christmas.

According to the Health Canada website, there are currently 36 licensed marijuana dispensaries across the country, and about 100,000 Canadians enrolled in the agency’s medical marijuana program.

Statistics Canada estimates that the Canadian medical marijuana market alone will be worth about $1.1 billion by 2020. Deloitte estimates that the recreational marijuana market in Canada, if legalized, could be a $22.1 billion industry, dwarfing the combined sales of beer, wine, and spirits.

Marijuana is big business and insurers are taking note of the opportunity. CGES Special Risk has begun offering commercial general liability (CGL), E&O, Medical Malpractice and Property Program for the Medical Marijuana Industry. General liability is available with limits of up to $5 million per occurrence, as standard, with higher amounts available upon request, the company said. The policies also offer property coverage for theft or damage of product, equipment including furniture fixtures.

Burns & Wilcox Canada also offers a comprehensive Medical Marijuana Program for federally licensed medical marijuana manufacturers. “This coverage is designed to be all-encompassing for businesses,” said Daniel Mason, Property & Casualty Underwriter, Burns & Wilcox Canada, adding that one of the primary risks it covers is against is fire. It also protect against theft during manufacturing and during transit.