P&C Industry Year in Review

December 2017    |    14 minute read   |    By Indrani Nadarajah

2017 was a year of market-defining catastrophes globally. There were the three hurricanes that pummelled the Caribbean, and the wildfires that razed through California and British Columbia. Canadians were not spared the impacts of drought and floods. Mindful of the growing risks posed by a changing climate, the Government of Canada pushed ahead with its plan to enforce a carbon tax program. It also convened a National Roundtable on Flood Risk to explore “whole-of-society” ways to tackle floods. The environmental accountability question also reached the Supreme Court, which has agreed to review a ruling that allows bankrupt oil companies to abandon wells without the need to finance cleanup operations.


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A year of market-defining catastrophes

After five years of below-average loss experience, 2017 is shaping up to be the “most expensive catastrophe loss year ever for the p&c sector,” say reinsurers.  Swiss Re estimated at the end of October that the total insured market losses of the industry caused by natural disasters was approximately US$95 billion.

Swiss Re’s share of the claims from the hurricanes which barrelled across the Caribbean and parts of the United States was estimated to be US$3.6 billion, while its share from the two earthquakes in Mexico was estimated to be US$ 175 million. Munich Re reports that it expects to take a US$3.2 billion hit from the three hurricanes.

Queen’s University environmentalist, Edward Struzik, predicts Canada will endure more “mega-fires” as the climate heats up. This year’s wildfire season in British Columbia, which saw over 1.216 million hectares burned, is officially the worst on record according to B.C. Wildfire, eclipsing the 1958 record of  855,000 hectares of forest burned.  The Insurance Bureau of Canada has stated that the two B.C. fires have caused more than $127 million in insured damage. Fortunately, the fires did not cause any fatalities.

The California wildfires, which began in October, killed at least 43 people and injured another 185. The California Department of Insurance reported that at least 19,000 residential, commercial and auto claims have been filed with payouts exceeding US$3.32 billion. This total was expected to rise to as high as US$8 billion. In that case, the 2017 event will have the distinction of being the costliest insured wildfire event ever recorded.

Flood risk deepens

Blair Feltmate, head of the Intact Centre on Climate Adaptation at the University of Waterloo and chair of the Government Panel on Adapting to Climate Change, told Global News that for every 1 degree Celsius increase in temperature, there is a 7% in air moisture, which results in increased rainfall.  Temperatures in Canada have already risen between 2 and 3 degrees Celsius over the past 100 years, he added. This year, floods have caused over $590million in insured damage across Canada.

Long term, the flood problem is only going to escalate with potentially devastating consequences. Mayor David Kogon of Amherst, N.S., said this year that sea levels are projected to rise in the Bay of Fundy over the next 15 to 20 years to the point where the Isthmus of Chignecto, which connects the province to the rest of Canada, will flood even without a storm surge.  The province is at risk of becoming an island “within decades” if action is not taken to upgrade the 275-year-old dikes that prevent flooding of the isthmus. About $50 million in trade flows through the isthmus daily via road and rail ($20 billion annually).

The Government of Canada hosted a National Roundtable on Flood Risk on November 16. It was a closed-door session, but in his opening remarks, the Honourable Ralph Goodale, Minister of Public Safety and Emergency Preparedness, emphasized that a whole-of-society approach was required to more effectively tackle the flood problem. Goodale said using the Disaster Financial Assistance Arrangements (DFAA) as the de-facto insurer for residential flooding in Canada is “simply not sustainable,” and that “we need to find ways to develop practical, affordable, commercial insurance alternatives.”

Since its inception in 1970, the DFAA has provided over $4.3 billion in post-disaster funding, with nearly 45% of that amount paid out since 2011. A Parliamentary Budget Officer report last year estimated the DFAA can expect average annual costs of $673 million dollars (based on IBC estimates) over the next five years, and this figure is just for floods.

The Government of Canada is also investing $83 million to improve weather forecasting services. The funds will go to at least 20 new weather radar facilities and related infrastructure, to be upgraded by the spring of 2023. Environment Canada has been endowed with a supercomputer to help it more accurately predict weather.  The Government of Canada is also supporting the waterflow prediction capabilities of organizations like the Global Institute for Water Security at the University of Saskatchewan. “These investments will help provide more timely information and sound advice about imminent threats,” Goodale explained.

Over the coming decade, the Government of Canada will transfer more than $9 billion in federal funding to provinces and territories for green infrastructure projects. The purpose of this funding is to help communities cope much better with the effects of climate change- related issues like flooding.

The DFAA next comes up for review in 2018. “I would like to see the burden on the DFAA reduced so that we’re not focused so much on cleaning up messes,” Goodale told the meeting.

Drought vulnerability and impact

Canada is also vulnerable to droughts. This year, Regina saw its driest July in 130 years with only 1.8 millimetres of precipitation during the month. That makes it the second driest July on record, behind July 1887 when 1.5 millimetres of rain fell.  The drought that has lasted almost a year continues across central and southern Saskatchewan, according to the Canadian Drought Monitor.

Drought brings big losses- the drought that hit Canada's growing regions in Western Canada in 2015 left a hole in the national economy of at least $5 billion, and also caused beef prices to surge. It is thought to have contributed to the loss of about 41,000 jobs.

A 2016 University of Calgary publication, titled Vulnerability and Adaptation to Drought, concludes that droughts will become longer and more severe on the Canadian Prairies in the future. If future droughts last for more than three years and result in total crop failure, institutional supports like crop insurance programs could be compromised.

Introduction of a national carbon tax framework

In December 2016, the Government of Canada, along with most provinces and territories, agreed to the Pan-Canadian Framework on Clean Growth and Climate Change to meet greenhouse gas emissions reduction targets and grow the economy.

Pricing carbon pollution is central to the framework.  Under the 2015 Paris Agreement, Canada must cut almost 200 million tonnes of emissions by 2030 to meet its target of reducing greenhouse gases to 30% below 2005 levels.

The Government decrees that by 2018, all Canadian jurisdictions are required to have carbon pricing in place to tackle greenhouse gas emissions. Jurisdictions without a plan will have one imposed by the Federal Government.  The federal plan is based on the Alberta carbon program, which imposes a direct tax on heating and transportation fuels and also incorporates a separate levy on large emitters that do not cut emissions by a targeted amount.  The proposed price on carbon dioxide pollution starts at $10 a tonne in 2018, rising $10 each year to $50 a tonne by 2022. There will be a review of the program in 2022, which will also take into account actions taken by other countries, the Government announced.

The announcement has not been welcomed by all and is highly contentious in some jurisdictions. Manitoba will introduce a carbon tax of $25 a tonne next year and will cap it at that rate, even though the Federal Government has insisted it will have to go up. Meanwhile, Saskatchewan, which has vehemently opposed the carbon tax earlier this year, says it will release its own plan for how it will reduce carbon emissions by year end. At the time of writing, no details have been released.

Supreme Court to hear Redwater Energy Corp. appeal

Canada’s Supreme Court has agreed to review a ruling that allows bankrupt energy companies to walk away from their abandoned oil wells without addressing their clean up. The Alberta Energy Regulator (AER), and the Orphan Well Association (which is tasked with cleaning up abandoned wells) formally applied to the Supreme Court in July for leave to appeal the Redwater Energy Corp. decision.

“For the past two years, we have worked very hard at all levels of court to ensure the consequences of the Redwater decisions are fully understood,” said AER president and CEO Jim Ellis. “The decision has already had a significant impact in Alberta – and its consequences will go well beyond our borders to all other provinces. All Canadians are impacted by the Redwater decision.”

Calgary-based Redwater Energy Corp. filed for bankruptcy last year. Redwater and ATB Financial, its lender, wanted to sell off the assets to repay creditors. Grant Thornton, the receiver, had notified the regulator that it would only assume control of 20 of Redwater’s 127 oil wells. The value of the wells was less than the potential cleanup costs. The AER said it would not permit the transfer of the 20 producing wells unless the non-producing wells were sold with them, or security posted for the cleanup costs.

In May 2016, an Alberta Queen's Bench judge ruled in favour of the bankruptcy trustee of Redwater, Grant Thornton.

In a 2-1 decision released in April, the Alberta Court of Appeal upheld the lower court ruling, reiterating that valid federal legislation (in this case the Bankruptcy and Insolvency Act) prevails over valid provincial legislation (in this case the Oil and Gas Conservation Act and the Pipeline Act). British Columbia and Saskatchewan had both participated in the appeal as interested parties in support of the AER because the case could act as a precedent in other provinces.

Since the Redwater decision in May 2016, about 1,600 AER-licensed sites have been disclaimed by receivers with estimated liabilities of more than $100 million.

A September 2017 C.D. Howe report said the number of orphaned wells in Alberta has ballooned from fewer than 100 to 3,200 in the past five years. Moreover, the number of wells not sufficiently sealed nor reclaimed now totals just less than 155,000, or about 34% of the some 450,000 wells in Alberta. C.D. Howe estimated that the total social cost of plugging abandoned oil wells could be as high as $8 billion. Alberta is also currently reviewing its policy concerning end-of-life oil wells.

Fighting cybercrime

The string of high profile hacks continued this year. Perhaps most notably, the security of credit rating agency Equifax was impacted. The private financial information of about 143 million US customers and a confirmed 19,000 (up from a previously quoted 8,000) Canadian individuals was compromised.

Equifax acknowledged that the breach occurred in mid-May, but it only discovered intruders had compromised its systems on July 29. It was another month before the company disclosed the breach. It was actually the second time the company had been breached this year.

A judge is now weighing the merits of two proposed class-action lawsuits against Equifax in Canada and is expected to rule in December. One lawsuit represented by Sotos LLP is seeking $550 million in damages on behalf of Canadian victims. “The scope of the privacy breach is unlike virtually any other previous breach,” explains Sotos Partner Jean-Marc Leclerc. “Retailers typically do not store information about social insurance numbers, or track bills, or keep records of items purchased with credit. Equifax does. Fighting identity theft takes years, during which a consumer’s ability to obtain anything with credit is compromised: purchasing a house; renting an apartment; or obtaining a credit card or line of credit, for example.”

At least 30 class action lawsuits have also been filed against the credit reporting company in the U.S. 

In another high-profile cyber event, Uber acknowledged it had concealed a massive global breach of the personal information of 57 million customers and drivers in October 2016. Uber also admitted it had paid the hackers responsible US$100,000 to delete the data and keep the breach quiet.

The average cost of cybercrime globally climbed to US$11.7 million per organization, a 23% increase from US$9.5 million reported in 2016, according to new research from Accenture and the Ponemon Institute. Companies in the United States incurred the highest total average cost at US$21 million, while Germany experienced the most significant increase in total cybercrime costs – from US$7.84 million to US$11.5 million.

The Cost of Cyber Crime Study, now in its eighth year, noted that the companies surveyed suffered 130 breaches per year, a 27.4% increase over 2016 and almost double what it was five years ago. Companies in the financial services and energy sectors were the worst hit, with an average annual cost of US$18.28 million and US$17.20 million, respectively.

In a separate study, IBM said Canada was the second most expensive country for data breaches, costing an average of $255 per lost or stolen record in 2017, lower than the previous year’s $278. Twenty-seven companies participated in the study.

Not surprisingly, given the media publicity over cyber hacking, global cyber premium volume is set to surge up to eight times within a decade, calculates Fitch Ratings. The agency reports that the global market for stand-alone cyber coverage is estimated to hover between US$2.5 billion and US$3.5 billion annually. “We expect cyber insurance business to be ratings neutral for most highly rated insurers with sound underwriting, particularly as it represents a relatively modest percentage of individual insurers’ overall premium volume and risk exposure,” the ratings firm said in a press release.

Marijuana legalization around the corner

The federal government's plan to legalize recreational use of marijuana by next summer is a step closer. At the end of November, Bill C-45 moved on to the Senate after it received final approval in the House of Commons.

Meanwhile, provinces are releasing new regulations to prepare for the upcoming legalization of recreational cannabis, slated for July 1, 2018.

In Ontario, for example, the proposed Ontario Cannabis Act 2017 will allow the Liquor Control Board of Ontario (LCBO) to oversee approximately 150 standalone cannabis retail stores, as part of its “safe and sensible framework” to manage the Government of Canada’s plan to legalize cannabis by July 2018. The Act would also ban the use of cannabis in public places, workplaces and vehicles.

Loblaw Companies Ltd. is preparing for the more widespread availability of cannabis, with its Shoppers’ Drug Mart subsidiary recently advertising for a medical marijuana brand manager.

Provinces are gearing up to deal with the problems of drug-impaired driving, but conclusive information is lacking at the moment. Last September, Manitoba Public Insurance (MPI) launched a campaign to highlight the risks of driving under the influence of drugs. In March, MPI released a survey showing that one in 10 Manitoba drivers who participated in voluntary roadside surveys tested positive for drugs. Of the 1,230 drivers who participated in the survey, 124 tested positive for drugs.

The lack of comprehensive data is a problem for insurers working to properly assess the risk not only while driving, but also while at work, say commentators.

“An employee who is under the influence of marijuana while at work could injure others, including customers, third parties or employees,” Leszek Bialy, Zurich Canada vice president and head of alternative risk transfer, said at the RIMS Canada Conference.

Looking ahead

At the end of October, before this year’s hurricane season, companies were expecting a softening, moderating market. However, as JLT Re Global CEO Mike Reynolds points out, 2017 will be only the third year on record in which global insured catastrophe losses have exceeded US$100 billion (along with 2005 and 2011). “We expect the losses of 2017 to change perceptions of risk going forward,” he said.  But the impact will probably be muted – JLT Re explained that the reinsurance market entered this year’s hurricane season cushioned by US$60 billion of excess capital. “Any net reduction to sector capital is expected to be manageable due to continued capital generation by major traditional players and, perhaps more importantly, sustained capital inflows from alternative sources.”

Guy Carpenter acknowledges that despite the costly loss events have been very costly, there appears to be little risk to insurers’ solvency, but individual insurers’ earnings will be impacted.

Guy Carpenter vice chairman David Priebe says, “[D]espite years of low reinsurance rates and low interest rates that have reduced the industry’s profitability since the last rate increase after Hurricane Katrina, we do not expect a similar price revision this time around. Reinsurers have built up capital during the recent favorable years, while capital-market investors seeking non-correlated investments have put record amounts of money into catastrophe coverages.”

ADVANTAGE Monthly trends papers

This paper is part of an open online library of ADVANTAGE Monthly trends papers, published by the CIP Society for the benefit of its members and of the p&c insurance industry. The trends papers provide a detailed analysis of emerging trends and issues, include context and impact, and commentary from experts in the field.

The CIP Society represents more than 18,000 graduates of the Insurance Institute’s Fellowship (FCIP) and Chartered Insurance Professional (CIP) programs. As the professionals’ division of the Insurance Institute of Canada, the Society’s mission is to advance the education, experience, ethics and excellence of our members. The Society provides a number of programs that promote the CIP and FCIP designations, continuous professional development, professional ethics, mentoring, national leaderships awards, and research on the issues impacting the p&c insurance industry in Canada.