The Risk Factor – How insurers are analyzing ways to address a shortfall

    In the past decade, severe weather events have pummelled Canada, accounting for eight of the 10 highest financial loss years in history. Insurance companies are taking a corresponding hit. But weather alone is not raining down on businesses and their insurance needs. Cybercrime, supply chain disruptions, class-action lawsuits, directors’ and officers’ liability … it’s a deluge of risks facing businesses.

    The Risk Factor
    Forest fire near Port Alice. Nearly 8,700 square kilometres of land were burned in B.C. in 2021 due to wildfires, making it the third worst year on record.

    Three days before the town of Lytton, B.C. burned to the ground, Craig Stewart and his family stopped at a delightful cafe in town, during the hottest temperatures ever recorded in Canada. 

    The coffee shop later burned down.

    “It was very sad,” says Stewart, vice president of federal affairs at the Insurance Bureau of Canada (IBC), an industry association that represents Canada’s private business, home and auto insurers. During their travels, the Stewarts saw the damage brought by B.C.’s wildfires, an ironic twist for Stewart, who leads IBC’s disaster, resilience and climate change work.

    “Canada is a riskier place than most,” he says from Ottawa. “We have more floods, more hailstorms, more windstorms. We’re warming at twice the rate of the rest of the world. In the last 15 years, claims payouts have more than quadrupled.” 

    One mind-boggling example was the June 13, 2020, hailstorm in Alberta. It resulted in 100,000 claims, costing $1.4-billion, putting it in the top 10 of Canada’s costliest natural disasters. The storm lasted 20 minutes, Stewart says.

    Four years earlier, the Fort McMurray wildfire resulted in $5.3-billion of loss — Canada’s costliest loss event. And in 2020, during the pandemic, Fort McMurray was hit again when the Athabasca River flooded the downtown, adding a further $562-million in damage.

    Insurance Evolves

    Bryce Kumka has lived in Fort McMurray since 2007, weathering flame, flood and virus. 

    “The challenge in Canada, we’re a large country, with a lot of climate zones and not a lot of people,” he says. “There’s significant risk but not a lot of policyholders to pay into the pot.” 

    In 2020, two threats overlapped. 

    “We were slapped with a flood in the middle of COVID,” says Kumka, a senior account executive with Rogers Insurance in Fort McMurray. The one in a 100-year flood shut down the city’s downtown, causing significant damage. It took some businesses half a year to reopen. Some never reappeared, while others, like hotels, who had been shuttered, opened quickly to accommodate displaced residents.

    South Vancouver Island may not be northern Alberta, but the unpredictability and unprecedented payouts associated with climate change have caused insurers to adopt a harder stance which often means steep increases to insurance policies across the board.

    In 2019, Lloyd’s of London pulled back operations in Canada, due to financial losses over the previous decade. There has also been consolidation among insurance companies, such as Aviva and Intact. Still, companies like the Zurich Insurance Group have stepped in. 

    “Choice is still there,” Stewart says, noting there are more than 200 insurers operating in Canada. But shopping around is required.

    To remain profitable, insurance companies are adapting. 

    “Insurers are realizing the importance of good climate-ready data,” Stewart says. “Our models reflect past history. That’s insufficient now. The past does not reflect the future.” 

    One perfect example: the day the Fort McMurray wildfire started, it was not classified in the top 25 in Canada for fire risk, yet went on to be the largest claim in Canadian history.

    So wildfire and flooding mapping need to be finessed. Currently, predictive models for insurance rates operate at street levels, but Stewart says the goal is to map right down to property levels. Such predictive mapping would clearly show high risk areas. Semi-rural areas around Victoria face known fire risks, windstorms regularly pummel the Coast and the possibility of a major earthquake and resulting tsunami are forever lurking.

    Saying No

    So, how do business owners recognize their risks? On South Vancouver Island, earthquake risk is well known. According to Stewart, B.C. has one of the highest buy-in rates in the world for earthquake coverage, with about 60 per cent of businesses and residences holding policies.

    Compare that to Montreal, which is rated as having the second-highest probability for an earthquake in Canada, yet only four per cent of the insured have earthquake coverage. Tsunami coverage, meanwhile, reveals a gap. 

    “It’s not a peril most insurers cover,” he says. While difficult to address, it needs to be dealt with.

    And as public sentiment hardens, with taxpayers less willing to subsidize those who decide to start businesses in high risk areas, Stewart says good behaviour by those seeking insurance should be encouraged. 

    “We need to end government bailouts of those who build in harm’s way,” he says. 

    That includes new builds on flood plains or areas prone to wildfires and lacking fire protection. One example this past summer, sure to be repeated, is that builders in B.C. weren’t able to secure insurance if their projects were near an active wildfire or, in some cases, up to 100 kilometres away. In Australia, some insurers are not covering properties in high fire zones. In the U.S., the pricing for natural disaster insurance is rapidly climbing in susceptible regions. Even Alberta’s oilsands are having problems getting insurance, Kumka says.

    Climate Change and Beyond, Mounting Risks

    One item that’s had no trouble breaching the U.S.-Canada border is litigation related to insurance liability and how it’s affecting businesses. In the U.S., there are huge class-action lawsuits against companies, often major carbon emitters, says Janis Sarra, a UBC professor at the Allard School of Law. Company bosses are being sued for not showing due diligence and to protect them, directors’ and officers’ insurance are used. 

    “We know this will come to Canada from the U.S.,” says Sarra. “Insurers will want to know companies are thinking about climate change.”

    In 2021, several class-action lawsuits were certified in Canada against over a dozen insurance companies because they said no to business interruption claims related to COVID.

    +10.4% The annual rate of increase
    for commercial insurance from 2019 to 2020.

    But class-action lawsuits are but one legal hammer. Small and medium-sized Canadian businesses are in court for a variety of reasons, says Denise Hall, the national broking leader at Aon Risk Solutions in Toronto.

    Upticks in bankruptcies (many the result of COVID) and employment claims, which can be driven by diversity and inclusion requirements and job losses, are demonstrating that businesses need coverage. Hall says insurance companies are very good at defending policy holders. Even if lawsuits reveal insufficient merit, the cost to defend remains high and a solid insurance policy will protect the company, Hall says.

    Another area is errors and omissions insurance (also known as professional liability), which is company-specific and depends on what the business is doing. In Victoria, for example, tech companies, accountants, lawyers, engineers and architects would buy E&O insurance to cover third-party claims for mistakes or negligence caused by employees or the company.

    One ubiquitous challenge is cyber risk. Few businesses anywhere are untouched, says Yarko Petriw, a senior vice president with Aon, based in Vancouver. All that’s required is an email address for phishing, spoofing or ransomware to worm their way in.

    Aon’s team alone sees three claims per day in Canada — just one company in one country. And that’s for companies with cyber coverage, recognizing that there are businesses without coverage, whose incidents may not be known. 

    “It’s a huge risk,” says Petriw. 

    And COVID has made it worse, as criminals, who could be anywhere, are preying on fears and vulnerabilities exposed by the pandemic. Heaping more risk on the cybercrime front is that because more people are working from home, the chances of clicking on an infected email or opening that nasty attachment are more likely, Hall adds.

    And also brought home by the pandemic are supply chain interruptions caused by logistical challenges, product shortages, a labour crunch and weather events.

    Aluminum, flowers, Ikea furniture, chicken wings are just a few examples. And shortages snowball. An example: the semiconductor drought has exerted a heavy toll on vehicle manufacturing and tech companies. 

    Companies should be aware of their potential supply chain weaknesses and come up with strategies to handle them, such as having a second supplier in cases of pandemics, weather disruptions or political risk.

    Petriw admits the insurance industry hasn’t done an adequate job to address supply chain interference. 

    “There are dozens of products that deal with sub components of the disruptions, but there’s not a single catch-all policy to catch all the risks,” he says. 

    COVID has highlighted the problem, and Petriw expects insurers are analyzing ways to address the shortfall. 

    “It’s an evolution,” he says. ′

    Buying insurance the Need-to-Knows

    Purchasing insurance for a business today is unlike 30 years ago when options were far fewer. Insurers still have to generate profit for investors, but they are also partners with businesses, UBC professor Janice Sarra says. Insurers today will want to know if companies are thinking about climate change, risks related to transitioning to a net-zero economy and employment equity.

    Courses are available that teach businesses about climate risks, and Sarra suggests businesses designate an employee to keep an eye on developments in the ever-evolving sphere. 

    “A business should know what exactly does my insurance cover,” says Sarra.

    When businesses initially purchase or renew insurance, they are given a questionnaire from the insurer, seeking information about the company. 

    “Insurers take that data very seriously. The quality of the data is important. The more detail, the better,” says Yarko Petriw, senior vice president with Aon. 

    If the insurer has to make assumptions because the business provided generic or brief answers, the underwriting will be conservative. Honesty and clear answers are the best. And if your business is performing well, say so. 

    “Tell your story in as fulsome a manner as possible,” says Petriw. 

    It may feel like a hard slog to go into detail, but it could mean an easing of premiums and/or coverage improvements.

    Companies should also commit to the ongoing, not annual, evaluation of their business, says Denise Hall at Aon Risk Solutions. This means ensuring the insurance covers what the company is actually doing. She cited the example of a Victoria company that expanded into Ontario. Insurance should be upgraded to cover the new location.

    Businesses should also know what risks are transferred to insurance policies. An example would be a small business owner who thinks they don’t need crime insurance, which deals with employee theft of money or property. 

    “A business needs a real crystal-clear knowledge of risk,” she says.

    Businesses also need to carefully evaluate who they are partnering with and how strong the insurer is. Some insurers may offer lower premiums, but that translates into less coverage, Hall says. Does the insurer have good bedside manners? Will it fight the client for hours over a $20 claim? Hall recommends using an insurance broker to analyze the many policy options.

    For Kumka, the natural calamity veteran, a disaster recovery plan is key. 

    “You want to get back into business as soon as possible,” says Kumka. “You want to sit down with your team and figure out what to do if the storefront disappears.” 

    In his office, all computer components are off the ground and there is no paper; it’s all in the cloud, he says. And if a weather event is approaching, remove as much as you can from the business premises.

    The menaces of climate change, cybercrime and other risks are predicted to only grow in Canada. Having lived through the rebuild, restoration and rebirth of Fort McMurray in both 2016 and 2020, Kumka says the insurance market will continue to take on higher risks, but at a corresponding price. 

    “Will you get super good deals? No,” he says. “Make sure the client recognizes risk.”