Border Crossing

Canada’s tendency to adopt U.S. regulatory trends often negatively impacts Canada’s insurance market, Kingsway Financial Services president and CEO Bill Star told guests attending the February 2006 Property Casualty Underwriters Club’s (PCUC) luncheon, entitled ‘Industry Outlook Past Year, This Year and Next.’

Star made his comments in the context of predicting financial results for Canada’s property and casualty industry in 2006. He predicted a financially mediocre year in 2006, driven in part by lowered auto rates in Ontario.

Star noted events in the U.S. insurance market and regulatory scene constantly influence the Canadian insurance market. This past year, for example, U.S. regulations have forced many Canadian companies to dole out additional dollars to ensure compliance, necessitating a potential increase in premiums, he said.

Star said the pinnacle of costly U.S. regulation is the Sarbanes-Oxley (SOX) Act. Although SOX may not be a concern for all Canadian insurers, he said, it is of paramount significance to any company that is publicly traded in the U.S. market.

“If a Canadian company is listed on the New York Stock Exchange, they will be exposed to the huge amount of work and millions of dollars it takes to be compliant with SOX,” he said.

“We run into situations here in Canada where regulators start following some of the regulations they see in the U.S. But when it comes to SOX, and the millions it’s costing Canadian companies to comply with it, is it really worth it?”

Another U.S. issue rippling Canadian insurance waters flows from New York state Attorney General Eliot Spitzer’s insurance investigations. Although the business misconduct targeted by Spitzer does not appear to be a Canadian reality, Star observed that some Canadian regulators believe that if the U.S. is adopting Spitzer-related regulations, then Canada should as well.

But within the Canadian context, Spitzer has “caused more problems than he has solved,” Star said.

“When you look at contingency fees and other benefits, it’s usually profit-sharing that is being done, because your agent or broker is producing good profit for you,” he said. “If regulations force us to stop paying them a commission up-front, then it is likely insurers will start to see commission rates go up.”

CONSTRUCTION COSTS

Unusual weather-related occurrences and mounting property damage claims are becoming a more frequent reality in Canada, Star observed. Along with property damage comes rebuilding and construction – areas of mounting concern to insurers, Star said. “A growing, costly problem springing up in the U.S. and creeping into Canada are construction defects,” he said. “We are seeing more and more claims coming from contractors.

“For example, in B.C. there was a lot of cracking in building structures – particularly in high rises – and as a result of the cracking there was leaking and property damage.”

Insurers providing the warranty coverage on these construction claims will be required to pay for the damage, which could potentially have been a result of construction defects.

Auto insurance is another high-cost problem perturbing Canada’s insurers, Star said. “The [Ontario] government has introduced bill after bill, resulting in people being able to collect on ridiculous auto injury claims.” he said. “The government has not helped us: Ontario’s no-fault insurance has become quite expensive.”

Star said Ontario’s no-fault insurance is at fault for increasing the province’s auto premiums. “When you introduce a no-fault program, it means the person in each car – the wrong-doer and the innocent party – are both going to pay equally. As a result, in many cases, this doubles the cost of the claims. When this happens, insurance premiums obviously have to go up.”

2006-2007 FINANCIAL PROSPECTS

Star said rate reductions beginning in 2004, specifically in auto insurance, are much to blame for the reductions seen in 2005.

“You have to remember that Ontario auto insurance represents about 30% of all the premiums collected in property and casualty in Canada,” Star said. “So, the rate reductions that we’ve seen in that area means the earned premiums coming through in 2005 will be lower.

“Government-instigated reductions in auto came down again in 2005. And while accident frequency decreased, it had not decreased enough to support the lower rates we are seeing.”

As a result of the lower rates charged in 2005, Star suspects 2006 will be a mediocre year for the insurance industry. In fact, Star predicts companies may begin to invest more time and skills and “tighten up” on underwriting practices.

“In 2006 we could easily get to the point of having underwriting losses again and the investment income is not enough to cover all of those losses. Hopefully companies will be aware enough to move towards underwriting improvement.”

As for the prognosis for 2007, Star struck a positive note. “I expect in 2007 the industry will be back to better underwriting, tougher conditions and a slight hardening of the market.”