Canadian Lawyer

LEGAL REPORT/Personal Injury/Insurance Law Big payouts Major disasters — both environmental and accidental — have hit the insurance industry hard. I t's been a stormy year for the insurance industry, with several major events emptying insurers' pockets: The Alberta and Toronto floods; the Lac-Mégantic, Que., rail accident; December's ice storms; January 2014's blizzards. Good riddance to 2013, but high claims from the year will continue to haunt insurers well into 2014, with the extraordinary costs having a lasting effect. Canada's had events in the past that resulted in large insurance losses. Alberta suffered from extreme floods in 2005. Ontario's 1998 ice storm resulted in the highest insurance losses for any natural disaster in the province's history. But last year's string of weather-related catastrophes and large-scale accidents show insurers the high costs of these events, which are happening at a more frequent rate. With no sign these types of events will decrease in the future, the insurance industry needs to work towards reducing its costs or risk paying too high a price that will cripple both insurers and taxpayers in the end. Some of the effects from last year's events are already being felt. The Alberta and Toronto floods have resulted in two of the most expensive claims in Canadian history, with estimates of over $2.5 billion. Because of the large amounts, much of those costs are being paid by reinsurers, the safety net for insurers. With the events of 2013, reinsurers have taken a hit and will want to recoup their losses — likely with increased rates. This has already begun, with the renewal process of many reinsur- ance contracts taking place on Jan. 1. Vancouver lawyer Eric Dolden explains, if the reinsurers have a high-severity loss, such as a billion-dollar flood, they will then charge insurers more when it's time to renew the insurance contract. "If the reinsured's premium goes up by 30 or 40 per cent, because they've been hit by natural disasters, they're going to pass those costs on to you in terms of what they charge for your home insurance, your car, or your business." However, Jordan Solway, general counsel, corporate secretary, and senior vice president of claims at Munich Reinsurance Co. of Canada, says the large losses from 2013 may not result in as great an increase in premiums as some may think. "In Canada, the expectation was that these events were going to have a measurable impact on pricing this year," says Solway. "But what happened was the relatively benign U.S. hurricane season, which meant that there was significant downward pressure on rates in the U.S., and some of that capital came to Canada." At the end of 2013, there was more capital available to reinsurers than there otherwise would have been, which did affect pricing. "In spite of monumental and unprecedented losses in Canada, rates didn't move upwards to the extent they probably should have because reinsurance is a global business and capital moves around quite frequently." He adds capital was not materially impacted by losses outside of Canada and it moves around quite readily. While reinsurance is primarily a con- cern for property insurers, Dolden says insurers on the liability side are also facing increases. One of the important issues is having adequate insurance coverage. With the LacMégantic derailment, the rail company was only required to carry $25 million in liability insurance. However, the costs of clean up and compensation far exceed those policy limits. "Because of that disaster, the federal government through its regulatory agency is demanding that railways carry higher limits of liability insurance," says Dolden. "So if a railway goes from just carrying $25 million in insurance to $200 million, the costs of that are greater and the potential for insurers to pay more increases correspondingly." Dolden warns this could become an issue in B.C. and Alberta, where there's potential for pipeline development. "Pipelines have traditionally only had to carry lower limits of insurance. Because of concerns about damage to the environment, what's happening now is the regulatory bodies are going to demand higher insurance limits." He adds the government will also bring in legislation eliminating any cap on what has to be paid out because of environmental damage. "That's going to flow through to the liability industry as we face a spectre of larger environmental losses." To limit the high costs of doing business, insurance companies will now have to consider how to handle high-risk policies, which could involve looking into whether insureds have risk-management measures in place to ensure safety in their businesses. www.CANADIAN L a w ye r m a g . c o m F e b r uary 2014 47 Scott Page By Siobhan McClelland

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