INS2050 - Study 1 - Insurance Industry in Canada2017

INS2050 – Integrated Insurance Applications
 Define the purpose, characteristics &

principles of insurance
 Explain the vital role of insurance on our

economy…..continued….
INS2050 - Study 1 The Insurance

Industry in Canada 2
 Discuss the reasons for customer
dissatisfaction with the industry
 Outline the use and effect of reinsurance
 Identify areas of challenge facing the industry

 Provides financial security for types of
accidental loss
 Intangible
◦ = promise to indemnify another; risk is transferred

to insurer

 Combined funds collected (premiums) are
used to indemnify those who’ve had a loss
◦ Also used to cover operating costs of the insurer

plus taxes etc.

 Insurance prevents need for individual to set
aside large sums of money, since it operates
on a pool concept
◦ Based on a nominal premium

 Premiums of the many pay the losses of the
few (essence of risk sharing)
◦ Law of Averages & Law of Large Numbers applies

◦ Principle of fairness
◦ Insurers spread risk geographically
 Share risk via formation of risk pools
◦ Price of risk transfer must be affordable to the
consumer

 Premium is commensurate with the risk
◦ Insurer’s capital is structured to meet probability of

loss
◦ If premium is too high:

 Adverse Risk Selection may occur = insured has more
knowledge about the physical risk than the insurer
 Poorer risks usually stay with their existing company

 “Tails”
◦ Amount of time between an incident and the
determination of a claim
◦ Both short tail & long tail losses
◦ See Case Study – page 1-6
 Catastrophes happen!
 Loss amounts continue to escalate

 Long-Tail Catastrophic Auto Injury Claims
◦ Claims from years ago are now worth much more
◦ Difficult to predict outcome of claims that have not

occurred and will remain open for years

◦ Soft-tissue caps (Alta, NB, NS, Ont) are keeping

small claims under control
◦ Reforms have not addressed effect of catastrophic

injuries

◦ Reinsurers have questioned :

 Adequate claim reserving at primary company level
 Late reporting of severe claims
 Impact of medical and health care inflation on claims
 Re-pricing in certain excess layers

 Effect of Inflation on Reinsurers
◦ Inflation has a greater effect on reinsurers than on
insurers
 Statistical Data on Catastrophic Injuries

◦ Lack of data available
◦ Industry bases rates on intuition
◦ These types of injuries have not decreased

 Catastrophic Impairment Redefined
◦ Expanded definition of catastrophic impairment is

now in use
 Includes psychological disorders and pre-existing

injuries
 Traditionally - results in 55% or greater, impairment of
the whole person
 Now, psych disorders can be 25% (adding to total)
 Reinsurers move to upper layers to meet rising awards

 Primary Company Reporting
◦ Reinsurers are monitoring more closely

◦ Some have been slow in putting up adequate
reserves
◦ Fewer reinsurers are willing to write auto excess of
loss
◦ Severity of claims grows despite insurers’ ability to
manage health care related claims

 Canadian industry is “mature” (really????)
 Effects of Insurance:
◦ Banks willing to issue mortgages
◦ Developers willing to advance funds to contractors
◦ Retailers willing to accept risk of operating
◦ Professionals willing to provide their services
◦ Manufacturers willing to ship goods
◦ People willing to sanction use of autos

 Protects people & corporations from financial
ruin (think potential liability losses)
◦ Kelowna forest fire & Ontario/Quebec ice storm
 No mortgages; no loans; huge malpractice

risks; professional risk

 Insurance provides foundation to economy
◦ Allows activities to flourish
 Employs 104,000+
◦ - purchase goods & pay taxes

 Assets invested in bonds, stocks, mortgages,
real estate
 Stabilizes economy & contributes in direct

way
 Economy grows – industry grows

 Legal obligation to buy auto insurance
 Heavy taxation of the industry

 Product is “vapour”; intangible
◦ No pride of ownership
◦ Use only when suffer loss (negative)
 Positive – provides peace of mind

 Contact with consumer must be positive,
helpful, competent
 “What we have here is a failure to

communicate”……

 “Consumers don’t know what they don’t
know”
 Responsibility is on industry to explain,

explain, explain….
◦ Plain-language policies promote understanding
 Only way that the consumer will understand

the way the system works

 Will misunderstandings ever go away?
 Info to consumers:
◦ What constitutes a good risk and a bad risk
◦ What considerations must be factored into pricing a
risk
◦ Why rates go up, even when one hasn’t had a claim
◦ Why a healthy, profitable insurance industry
benefits everyone

 Industry is mature
 Product lines are standardized
 Insurance Companies
◦ Diverse and multicultural
◦ Many foreign-owned companies
◦ Many Canadian companies
◦ Much choice available including some government-
run options

 Residual Market Mechanisms
◦ Facility Association
 Operates in most provinces
 Provides last resort insurance for consumers
 Membership is mandatory for insurers writing auto

insurance
 Goal is to put themselves out of business (have no

need for them to operate)

 Distribution Channels
◦ Independent Brokers
◦ Agents
◦ Cooperatives
◦ Direct Response

 Advantages to Direct Response
◦ Consumers are in control of the sales process
◦ Pro advice with no commission costs or fees paid
◦ Technology-enabled sales and services
◦ Extended hours of access for consumers

 Managing Risk with Reinsurance
◦ Market traditionally offers facultative and
proportional treaty reinsurance
◦ Four Basic Functions:

 Financing
 Stabilizing
 Capacity
 Protection against catastrophes

 World events affect Canadian insurance
marketplace
 Deploying Capital
◦ Supply of available insurance = capacity for
insurers
◦ Corporate tax rate has been reduced to attract
business

 Deploying Capital
◦ Canada’s insurance-regime is multi-tiered

 Regulations are from both federal and provincial
governments
 Can tie up capital and make it difficult to quickly and

cheaply untie, depending on size, complexity and legal
structure of the operation

 Regulatory system oversees:
◦ Minimum capital tests

◦ Corporate governance
◦ Reserving practices
◦ Investment holdings
◦ Transfers of capital out of the country
◦ Mandated use of letters of credit and trusts for
foreign branches

 Such “deals” often:
◦ Reduction of capacity in tight markets
◦ Give smaller reinsurance market
◦ Give other reinsurers opportunity to grow

 Rates begin with reinsurers
 Retrocession process = reinsurers

transferring risk to other reinsurers
 Canada may have good year, result-wise

but…if reinsurers are affected by other areas
(ie. Hurricane Sandy) rates still will rise

 Experience will lead to expertise in things
such as have been in the past:
◦ Asbestos, mould, large natural catastrophes,

products liability, political risk, corporate scandals,
environmental liability, terrorism and litigiousness
of society

 Canadian industry varies from very informal
to very rigid
 Individual companies are all alike yet all

dissimilar

 Positive
◦ Exchange of info, analysis and opinions
 Negative
◦ Company structure doesn’t allow it to react quickly

 OSFI controls tightly
 Some day-to-day flexibility of investments
 Many foreign-owned insurers have their

Canadian investment portfolios handled by
entries located outside the country

 Too many insurers?
 Too few insureds shop their insurance needs
 Insurers undercut rates

◦ Decrease prices
◦ Use more liberal policy terms and conditions
◦ Create soft markets
◦ Cycle (spiral) never ceases

 Challenges
◦ Globalization
◦ Rapid technological advances
◦ Public image issues
◦ Volatile investment markets
◦ Increasingly severe weather
◦ Growing competition
◦ Mounting shareholder and regulatory scrutiny
◦ Downloading & offloading by government


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INS2050 – Integrated Insurance Applications

 Define the purpose, characteristics &

 Explain the vital role of insurance on our

INS2050 - Study 1 The Insurance

 Outline the use and effect of reinsurance

 Identify areas of challenge facing the industry

INS2050 - Study 1 The Insurance

◦ = promise to indemnify another; risk is transferred

INS2050 - Study 1 The Insurance

◦ Also used to cover operating costs of the insurer

INS2050 - Study 1 The Insurance

◦ Based on a nominal premium

INS2050 - Study 1 The Insurance

◦ Law of Averages & Law of Large Numbers applies

INS2050 - Study 1 The Insurance

◦ Insurer’s capital is structured to meet probability of

◦ If premium is too high:

 Poorer risks usually stay with their existing company

INS2050 - Study 1 The Insurance

 Loss amounts continue to escalate

INS2050 - Study 1 The Insurance

◦ Claims from years ago are now worth much more

◦ Difficult to predict outcome of claims that have not

INS2050 - Study 1 The Insurance

◦ Soft-tissue caps (Alta, NB, NS, Ont) are keeping

◦ Reforms have not addressed effect of catastrophic

INS2050 - Study 1 The Insurance

◦ Reinsurers have questioned :

 Late reporting of severe claims

 Impact of medical and health care inflation on claims

 Re-pricing in certain excess layers

INS2050 - Study 1 The Insurance

 Statistical Data on Catastrophic Injuries

INS2050 - Study 1 The Insurance

◦ Expanded definition of catastrophic impairment is

 Includes psychological disorders and pre-existing

INS2050 - Study 1 The Insurance

◦ Reinsurers are monitoring more closely

INS2050 - Study 1 The Insurance

INS2050 - Study 1 The Insurance

 No mortgages; no loans; huge malpractice

INS2050 - Study 1 The Insurance

INS2050 - Study 1 The Insurance

 Stabilizes economy & contributes in direct

 Economy grows – industry grows

INS2050 - Study 1 The Insurance

 Heavy taxation of the industry

INS2050 - Study 1 The Insurance

◦ Use only when suffer loss (negative)

 Positive – provides peace of mind

INS2050 - Study 1 The Insurance

 “What we have here is a failure to

INS2050 - Study 1 The Insurance

 Responsibility is on industry to explain,

 Only way that the consumer will understand

INS2050 - Study 1 The Insurance

INS2050 - Study 1 The Insurance

INS2050 - Study 1 The Insurance

 Provides last resort insurance for consumers

 Membership is mandatory for insurers writing auto

 Goal is to put themselves out of business (have no

INS2050 - Study 1 The Insurance

INS2050 - Study 1 The Insurance