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FALL 2005

In this Issue:

The Effect Of Global Catastrophes On Insurance Rates And Conditions In Canada
Market Forecast
Capital Accumulation Plans (CAPs)

The Effect Of Global Catastrophes On Insurance Rates And Conditions In Canada

Effect Of Global Catastrophies The number one question insurance brokers and insurers everywhere are being asked right now is how Katrina, Rita and Wilma will affect insurance rates. As might be expected, the answer is not a simple one or two word response because there are many factors to be taken into account.

Looking at the big picture, total insured losses from these events have yet to be fully tallied and until they are the impact on the global market will be impossible to predict. We also have to recognize that the impact will vary considerably from one local market to another, as it will from one insurer to another and one risk class to another.

However, based on our experience and what we observe in the Canadian market, here are some of the key things to consider:

Where was the marketplace headed prior to these catastrophic events?

Over the first two quarters of 2005, Canadian Property and Casualty rates declined, on average, about 10% and were expected to decline further in the second half of the year. Although these reductions applied to many (but not all) classes of business, and individual client experience varied depending on circumstances, there is no question, the trend has been downward.

Historically, when a catastrophe occurs during a period of rate decline, the catastrophe tends to retard the reductions but only on a short term basis – a month or a quarter, at best. It has only been when rates have been on the upswing that a catastrophe has tended to tighten rates up immediately on a long-term, sustained basis.

In the Katrina/Rita/Wilma case, the Canadian marketplace is likely to see rate reductions slow down or stop until early 2006 then pick up again.
What is your insurer’s appetite for reinsurance?

Reinsurers tend to be more heavily impacted by global events than insurers since much of what they underwrite is catastrophic reinsurance that responds only to large, world-wide events. As a result, the less dependent your insurer(s) is(are) on reinsurance, the less impact a catastrophic event occurring outside of Canada will have on your rates. In Canada, insurers’ reinsurance to premium ratios range from less than 2% to more than 50% with most of the major carriers at about 20%. On an aggregate basis this means Canada is relatively insulated from the impacts on reinsurers.
Will insurers' appetite for risk change?

For the most part, no. However, insurers appetite for wind and water risk has certainly waned particularly for property or operations in coastal areas. So, while they still might write these exposures, it will be under dramatically different terms and conditions. Deductibles for these perils will most certainly be an issue.
What about Canadian catastrophes?

Catastrophic events that occur in Canada will have a much greater impact on Canadian insurance markets than events which occur elsewhere.

On August 19, a severe storm passed through the Toronto area causing an estimated $500 million in insured losses from wind and water damage. This event is likely to have more of an impact on domestic property rates than the trio of hurricanes that hit coastal U.S.

Having said that, insurers actually set aside a small portion of every premium for catastrophic events. It is only when losses exceed even those predicted under catastrophe modeling that rates may be subject to increase. In the case of the August 19 Toronto storm, losses should be contained within the insurers’ expected loss range resulting in little rate impact.

In the short term then, we foresee a temporary slowdown of rate reductions in the Canadian market resulting from Katrina/Rita/Wilma but not a permanent tightening.

Market Forecast

In our Spring Market Report, we accurately forecasted that the market was softening and rates were coming down. By mid-year, rates had, in fact, declined by 10% on average. Of course, individual clients may have experienced different results, including increased premiums, depending on their specific exposures.

We also forecasted that because insurers were looking to grow their gross writings by 10% to 15% in a slow growth economy, rates could be expected to further decline in the last two quarters of the year as insurers fought over a limited marketplace. It now looks as though that will not be the case. Weather related losses associated with hurricanes Katrina, Rita and Wilma and, more significantly for the Canadian market, the August 19 storm in Toronto make it doubtful the marketplace will reduce rates much further for the balance of 2005. However, as we noted in the previous article, this is likely to be a temporary slowing and declines will resume in the first half of 2006.

Looking beyond the first half of 2006, we expect the rate of decline to slow as insurers realize that they will not be able to attain their goal of 10% to 15% growth in gross written premiums by further reducing rates.

Again, we caution, that our forecast is a broad overview of the market and individual circumstances will dictate rates for each client and vary by class of insurance.

Capital Accumulation Plans (CAPs)

Capital Accumulation Plans (CAPs) are defined as any employer-sponsored savings plan where employee members are given choices for investing their money. Up until very recently, there has been little or no onus on plan sponsors to help plan members understand their options and develop appropriate strategies for their future.

That will change effective December 31, 2005 when any plan sponsors with a CAP plan are expected to comply with new Capital Accumulation Plan Guidelines developed and put forward by the Joint Forum of Financial Market Regulators. The Guidelines are very extensive and detailed and are aimed at ensuring good plan governance is practiced consistently in pension plans across Canada.

The purpose of the guideline are:

Describe the rights and responsibilities of CAP sponsors, service providers and CAP members.
Ensure CAP members have the information and assistance they need to make investment decisions in a CAP
Ensure that there’s a similar regulatory result for all CAP products and services regardless of the regulatory system that applies to them.

Plan sponsors have had 2 years to review their practices and prepare for compliance. Those clients we have met with to advise on their level of compliance have generally come up short. In most cases, for instance, they are not holding the regular employee information meetings required by the Guidelines despite the fact that such meetings, when held, are very well received by plan members.

These Guidelines are an industry wide process that will involve all insurance companies. To view the final version of the Guidelines, go to www.capsa-acor.org.

CALL US WITH YOUR QUESTIONS, COMMENTS OR CONCERNS

If you have any questions, comments or concerns about the matters addressed in the HKMB Market Report, please contact us. We would be happy to discuss them with you.