December 11th, 2008

Canada: Reinsurance Market 2008

Posted at 12:55 AM ET

William Gore, Senior Vice President

2008 Reinsurance Market Position

Beginning with the January 2008 renewals, catastrophe pricing dropped an average of 8 percent to 12 percent. However, the reductions varied widely due to regional and specialized accounts. Rate decreases resulted from several factors.

The absence of serious catastrophes in Canada in 2007 (and globally) for a second consecutive year meant reinsurers were aggressive in their efforts to write more business in non-U.S. aggregating regions, such as Canada.

Industry consolidation, increased net retentions, and a movement from proportional to excess of loss covers, continued in 2007. Existing reinsurers, looking to balance these effects, were keen to minimize the resulting decrease in reinsurance premiums, by seeking larger shares on the remaining business. New market entrants sought to participate on these covers as well.

Increased primary market competition in 2007 has led to a general expectation for reduced reinsurance prices as well.

New Issues and Updates

In British Columbia, a long-awaited legislative amendment to the Fire Act was shelved quietly. The act was intended to clarify how the law would deal with fire following an earthquake. This issue will remain unresolved for now.

The absence of a significant catastrophe loss event in 2007 did not automatically translate to a painless loss year. Many smaller events occurred, though they were contained within the net retentions of insurance companies in many cases. The primary insurance market bore the brunt of the losses, leaving reinsurers relatively unscathed. Consequently, there has been a growing interest in aggregate catastrophe protection.

Insurance-to-value (ITV), and ultimately the question of premium adequacy, is of growing concern to the Canadian market. With the rapid increase in real estate values (particularly in the high-growth resource regions), many of the annual inflation factors used at renewal to update insured values have been inadequate. The guaranteed replacement cost (GRC) riders found in most homeowner policies have compounded the problem. This coverage provides for the reconstruction of a home beyond the limit shown in the policy if necessary. The issue really came to light after the 2003 Kelowna forest fires, where a shortage of skilled labor and materials caused rebuilding delays and significantly increased initial loss estimates.

Catastrophe Exposure

Canada is exposed to a number of climatic hazards, including windstorm, tornado, flood, hail, and winter storm - as well as the earthquake and related fire geological hazards. Earthquake is potentially the most severe of all the natural hazards. While the frequency and damage have been minor in modern times, seismologists at the Geological Survey of Canada have identified southwestern British Columbia (on the west coast) and the St. Lawrence and Ottawa River valley areas (in the eastern provinces of Quebec and Ontario) as the most active and vulnerable locations in the country.

Previous estimates of the economic damage from a major seismic event in British Columbia have been approximately CAD30 billion (USD28.8 billion), and insured losses could reach as high as CAD15 billion (USD14.4 billion) not all of which can be reinsured. The insurance loss estimate for a major earthquake in Quebec and eastern Ontario is CAD5 billion (USD4.8 billion). These estimates are now somewhat dated and are currently being reviewed by the Insurance Bureau of Canada (IBC).

The most common Canadian catastrophe loss is flood/sewer backup, which has caused the greatest aggregate property damage. Commercial risks are often insured against flood damage under all-risk policies. Private insurance companies generally do not cover flood losses to residential properties, but they do cover sewer backup, often with a defined sub-limit.

Strong coastal winds, inland windstorms and tornados occur in Canada, although wind speeds north of the 49 parallel typically do not reach the velocities seen in the United States. However, the first officially recognized case of an F5-level tornado occurred on June 22, 2007 in Elie, Manitoba. F5 is the highest rating on the Fujita tornado damage scale.

Major Natural Disasters: 1996 to 2008
Total Flood Wind/Storm/Tornado Hail/Ice/Snow Other
59 22 22 14 1

Source: IBC Fact Book 2008

Damage from hurricanes has been rare, as they normally diminish in intensity before reaching the Canadian border. Hurricane Juan did cause some damage to the East Coast in 2003, but it was not significant from a reinsurance perspective. Hurricane Hazel, in 1954, was an exception, causing severe flood damage in southern Ontario. If a similar hurricane were to occur today, the potential damage could exceed anything yet experienced in Canada.

Hail also falls regularly, particularly in the “prairie provinces” of Alberta, Manitoba and Saskatchewan. It is the third most common type of catastrophe loss.

Largest Canadian Catastrophe Losses
Date Cause Province/Region Economic Damage* Insured Loss*
August 2005 Flood Ontario N/A 530/508.8
January 1998 Ice Storm Ontario/Quebec/Atlantic 3,500/3,360 1,990/1,910
July 1996 Flood Quebec/Saguenay 1,150/1,104 210/200

*Since 1995 and adjusted for inflation (2008 CAD/USD millions)
Source: Guy Carpenter & Company, LLC

An ice storm in 1998 affected both Canada and the northeastern United States and was one of the 30 largest worldwide losses ever recorded by the insurance industry. Still the largest Canadian loss on record at CAD3.5 billion (USD3.4 billion), the storm left millions of people without power for an extended period of time in the middle of winter and caused extensive property damage. While the average insurance claim was small, the total number of claims submitted to Canadian insurers approached 800,000. Changes have been made as a result of the lessons learned from this storm, including improvements made to the power grid infrastructure and amendments to policy wordings that would substantially reduce the overall insured loss if a similar event were to occur today.

The 2005 Ontario loss is an example of urban flooding caused by extreme rainfall. Some experts believe that global climate change could make such events more frequent and severe. Combined with increasing urbanization and a strained public infrastructure, the resulting damage is sure to challenge the insurance industry, particularly as a recent survey found that a majority of policyholders are unaware that overland flooding is generally excluded under most policies.

While not included in the chart above, the Calgary hailstorm in 1991 caused approximately CAD350 million (USD336 million) in economic damages. Adjusted for inflation, the loss today would be nearly CAD700 million (USD672 million). One modeling company has suggested that, with demographic shift and continually rising real estate prices, the loss actually would reach CAD2 billion (USD1.92 billion).

Insurance Availability

Direct premium written for both personal and commercial property amounted to approximately CAD11.6 billion (USD11.1 billion), approximately 33 percent of all lines of business, according to Canadian Underwriter magazine.

Insurance coverage for climatic and seismic hazards is readily available and affordable. In all provinces except Quebec, the basic fire policy covers fire loss from most causes, including earthquake and terror. In Quebec, approximately 55 percent of commercial businesses buy earthquake coverage, but fewer than 5 percent of homeowners policies are endorsed for this peril. In British Columbia, where the risk of earthquake is relatively high, 65 percent of homeowners have taken up earthquake coverage (possibly more in the Greater Vancouver Area).

See all World Catastrophe Country Reports >>

Additional Contributor

  • George Socha, Vice President

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