Canada’s small and medium-sized businesses are facing increased difficulty in securing adequate and affordable insurance coverage. Rapidly escalating insurance costs are having a negative impact on individual businesses and the Canadian economy.
The insurance industry and insurers are in the business of making money for their stockholders. Failure to do so reduces investor confidence, which in turn reduces investment capital and the ability for the insurer to insure risk. A major component of an insurer’s revenue in the past has been from both investment income and capital appreciation from investments in the stock market. During the last two years, both of these have had a severe negative impact on the industry’s earnings.
Reports from the Insurance Bureau of Canada indicate that recent insurance industry year-end financial results have been disappointing with the poor performances attributable to an increase in claims costs and poor investment returns. Unfortunately, internationally based insurance companies are not as regulated in their investments as are Canadian insurance companies. This allows them to make potentially high-risk investments.
All recent reports and indications are that 2001 and 2002 claims costs continue to escalate and these costs will continue to rise given the associated cost settlements and the increased costs of materials, adjusters, medical and legal, and reinsurance costs.
Each insurer has a particular expertise or preference for risk. In other words, there are classes of insurance that are preferred by certain carriers and those that are not. Across the industry, the insurers’ undesirable risk list is growing and now includes buildings under construction, taxi cabs, accounts with claims regardless of the class, roofing contractors, and vacant properties, just to name a few.
As clients insure their assets, likewise insurance carriers purchase reinsurance to assist in the placement of coverage or to protect themselves against catastrophic events. Since September 11th, 2001 the reinsurance industry has had a significant impact to its results which has caused a number of them to become insolvent. As a result, the insurance companies have increased their charges to the insurers by a minimum each year of 30 to 40 percent. This has had an adverse impact on small and medium-sized businesses seeking to renew or establish new insurance policies. The impact ranges from an increase of 30 to 40 percent in premiums (there have been instances of increases of upwards of 1000 percent) to reductions in or the complete elimination of coverage, as well as higher deductibles and limited access to coverage.
Recommendations
That a forum be created by the federal government in conjunction with the provinces, territories and key stakeholders to:
• Verify rate increases and availability,
• the causes,
• what actions could be taken by government on both a short term and long term basis to improve the shortage of reinsurance capacity in the marketplace
• Recommend to various levels of government what regulations could be developed, of a risk management nature, to minimize the likelihood of such insurance premium spikes in the future.
The forum would include, but would not be limited to, representation from the following groups:
• Federal government, OSFI
• Provincial and territorial Superintendents of Financial Institutions
• Insurance Bureau of Canada
• Reinsurance Company representatives
• Insurance Brokers Association of Canada
• Canadian Chamber of Commerce
• Canadian Bar Association