Is Alberta next?
Over the last 10 years, a series of catastrophic wildfires in California, amounting to billions of dollars in losses, have forced some major insurance companies to stop writing homeowners policies in high-risk areas of the western U.S. state.
While Allstate Corp completely halted writing new homeowners policies there in 2007, insurers like Farmers Insurance and State Farm have become more selective about the areas they cover, according to a September 2015 Reuters article. This insurance cherry-picking has left the Golden State’s nearly 2 million householders to either sign up for less comprehensive state plans or turn to costly specialty policies from companies insuring unusual risk, such as kidnapping or rare art.
Here in Canada, floods, hurricanes, earthquakes, and wildfires, have forced local insurance industries to pull hard on the reins when it comes to product offerings. Alberta, specifically, has experienced a rough decade of natural disasters, having seemingly been in an all-out brawl with Mother Nature for the past 25 years.
Seven of the top 10 costliest natural catastrophes in Canadian history have occurred in Alberta, according to the Insurance Bureau of Canada (IBC), causing $8.2 billion in insured damage and considerably larger economic losses – all since 2009.
The devastating Fort McMurray wildfire that hit Alberta in May is now the costliest insurance disaster in Canadian history, estimated by the IBC to have caused $3.58 billion in losses from over 50,000 personal property, commercial and auto claims. Before then, the costliest fire-related disaster in Canadian history was the 2011 wildfire at Slave Lake in the same province. The floods in Alberta in 2013 are the second costliest, totalling $1.8 billion in insured damages.
With the second half of 2016’s numbers still rolling in, president of MSA Research Inc., Joel Baker, feels that, for many property writers, 2016 will be remembered as a “lost year” and will likely go down in history as the worst in decades for Canada’s general insurance sector.
“Income will be muted and a significant number of primary companies will show outright losses,” Baker says.
The brunt of this year’s losses will be swallowed by reinsurers, says Baker, which in the case of Swiss Re Ltd. means a reported deterioration of its combined ratio in P&C reinsurance of 8.1 points, from 92.9 per cent in Q2 2015 to 101 percent in the three months ending June this year.
The global reinsurer attributed the drop due to wildfires in northern Alberta and the earthquakes in Japan.
While the MSA has not heard of any major withdrawals in Alberta, Baker says all writers are carefully monitoring aggregation risk in the province. It will likely take reinsurers many, many decades of benign Alberta revenue to claw back these losses, if ever, he says.
Insurers have Alberta covered
The good news: insurers are certain Alberta will not suffer the same fate as California.
Jason Storah, Aviva Canada’s executive vice-president: Broker Distribution, says there is an obligation for insurers to really make sure they are underwriting all of the risks in Alberta appropriately, rather than applying a broad brush over the province.
“I think it really forces insurance companies and brokers to step up in terms of engaging with their customers and educating those customers,” Storah says. “There is never a better time to prove the value of insurance and what you are there for your customers to do, than when there’s a claim.” But while there’s nothing like a crisis to bring people together, Storah says the industry still has a long way to go. “We believe the best thing you can do is prevent an accident in the first place.”
Patrick Lundy, president and CEO, Zurich Canada, says the insurer is fully committed to serving customers in the Alberta market and writing new business there. “Alberta is an important area of the country for Zurich’s business and we have had multiple offices in the province since 1957. We have key customers in Alberta in the energy, construction, municipal and commercial real estate sectors, as well as manufacturing, retail and hospitality. The wildfires in Fort McMurray, or any of the other major catastrophes that have occurred in the province in recent years, have not changed our outlook.”
RSA’s president and CEO, Martin Thompson, says he is enormously proud of the way RSA managed to serve its customers affected by the Fort McMurray wildfires. “In fact, it’s been a major factor for RSA lengthening a number of major relationships in both the personal and commercial side, with national clients committing to new and lengthened relationships.” RSA has spent the last two years investing in reshaping its operating model, which helped considerably in elevating its capacity to help customers when the Fort McMurray fires hit.
Bill Adams, the IBC’s vice-president of Western and Pacific region, firmly believes that in the face of adversity, there is always a silver lining – even in the case of natural catastrophes.
“We see that the people impacted ultimately become better insurance consumers,” Adams says. “It forces them to understand the claims process and what they have bought.”
He says brokers now have a real opportunity to speak differently to their clients, because whoever is able to better serve the customer will be the real winners down the road.
The pricing challenge
However, as insurance companies fork out billions of dollars, Albertans are already beginning to pay more for insurance premiums, Adams says.
“But there is no single event, even one of this magnitude, that will, in and of itself, trigger premium increases,” Adams says of the wildfire. “The insurance industry really looks at long-term trends and claims as an indicator of where premiums will go. This wildfire is the largest, but unfortunately it’s one in a series of significant claim events that have taken place in Alberta over the last couple of years.”
Baker is adamant that reinsurance terms will tighten and rates will definitely go up.
“The losses in Alberta are especially challenging for small regional property writers in the province,” he says. “Reinsurance rates will be going up substantially at renewal time … [and] primary rates will have to follow suit – despite Alberta’s sputtering economy.”
Swiss Re’s view is that the price environment for P&C reinsurance continues to be challenging “with continued price erosion in property” forcing it to take “measures to reduce natural catastrophe capacity in specific segments,” according to a July news release issued by the reinsurer. “Even though abundant capital continues to pressure rates, it does so to a much lesser extent than previously,” the release stated.
But finances are the least of insurers’ concerns when something like Fort McMurray happens, says RSA’s Thompson. “Our net losses [from Fort McMurray claims] were a little over $80 million, but that’s what we’re here for. If we can’t be here for our customers in those moments, then insurers have failed their customers. Our priority is not to worry about the finances; our priority is to ensure the people who pay the premiums are well looked after. That’s why they buy insurance.”
Lessons learned, insights gained
At Zurich, technological innovation, combined with a datadriven, fact-based approach, are enabling the insurer to “think differently about exposures and help businesses manage risks like never before,” says Lundy. “We have made significant investments in North America to build capabilities to harness data and have accessible analytics. We’re investing in predictive analytics to better understand our customers’ risks, and better deliver and enhance our offerings.”
Learning from the catastrophes allows brokers to demonstrate their value and help be an advocate for customers, Storah says, adding that the fine print has been the enemy in the past.
“At Aviva, we feel that we have an obligation to get away from the fine print to help them understand what they are buying, and do the right thing for their customers.”
And while Mother Nature has been particularly unkind to Alberta, the IBC hopes that, when there are catastrophic events, it galvanizes the value of insurance to customers. “That’s where the rubber hits the road in our industry,” Adams says. “You get better and better every time this happens. Once the dust settles, you reflect on what you learned and what can be done in the future.”
Copyright © 2016 Transcontinental Media G.P. This article first appeared in the November 2016 edition of Canadian Insurance Top Broker magazine