It is a maxim in the insurance industry that disasters are good for business. After all, until people see someone else hit by a calamity, they are not motivated to buy insurance. Lately, however, the industry’s claims record for natural disasters has been too much of a good thing. Since 1983, Canadian insurance payouts for damage done by hail, floods, ice, earthquakes and other acts of nature have been roughly doubling every five years; with last year’s ice storm in eastern Canada they reached a single-year record of $1.5 billion. The trend is not limited to Canada, as illustrated by Munich Reinsurance Co., the world’s largest company selling coverage against exceptional losses to retail insurers. Last month, Munich released a study showing that globally, annual losses to natural disasters have risen 900 per cent since 1960, with insurance claims rocketing up by 1,500 per cent Remarkably enough, until now little of that soaring cost has found its way into premiums for home and property insurance. But the financial conditions that made that possible are changing.
The current forecast: higher premiums ahead.
Driving the expected increase in part is a growing consensus among insurers that more, and worse, natural disasters are on the way. “It is a fact,” says Terry Squire, president of Guelph, Ont.-based Co-operators Group Ltd., “that we are having more events, and the loss potential is rising substantially.” Scientific explanations for increasingly extreme weather range from the much-debated global warming phenomenon to dimly understood climatic cycles. And not all calamitous claims are weatherrelated: the world’s record disaster loss came from an earthquake in Kobe, Japan, in 1995. Increasing urban populations, rising property values and deteriorating infrastructures also contribute to the soaring cost of damage claims. In a chilling forecast of what could lie ahead, scientific and insurance industry experts who gathered late last
month in Vancouver to discuss disaster risk heard estimates that an earthquake under that city (which geologists say is overdue) would do a terrifying $30 billion worth of damage in a matter of seconds.
With costs soaring already, and more losses ahead, why have consumers not yet felt the pinch? The main reason, says Toronto
actuary Jim Christie, who helps insurance companies predict their exposure to potential losses, has been the extended bull run on North American stock markets. All insurers are required to set capital aside as a buffer against any large claims. In the short term, at least, returns from the investment of that capital can cover any difference between premiums and benefit payouts. Thanks to the market, notes Squire, “we were able to offset losses with the sale of equities at a profit. It’s been an extraordinarily happy coincidence.”
But one that has just about run its serendipitous course. For starters, most analysts consider the bull market in equities to be overdue for a correction. At the same time, experts say, competition among the country’s 230 or so property and casualty insurers has unleashed an unsustainable price war in premiums in many markets. “They’re all losing money now,” says Vancouver insurance broker David Edgar. “They’ll go through maybe a year of this, then they’ll start raising prices.” Individual companies have already moved to limit their exposure. In the last four years, most have closely examined where they underwrite coverage—and consciously scaled back their business in especially vulnerable areas such as the low-lying community of Richmond, south of Vancouver, where an earthquake could rupture dikes holding back the Fraser River and inundate large areas. Another tactic: higher deductibles. In the case of Cooperators, deductibles for earthquake coverage have risen from one or two per cent of the insured loss to as much as 10 per cent.
Collectively, the industry is also reacting. A year ago, the Insurance Council of Canada (the largest industry association) established the Institute for Catastrophic Loss Reduction in Toronto, with a budget of about $500,000 a year to explore new ways to contain losses. It sponsored last month’s meeting about earthquakes in Vancouver, one of a series meant to acquaint insurers with the scale of damage they can expect from various natural disasters (others will examine hail, flooding and hurricanes). In May, the institute plans to unveil a proposal for a national disaster mitigation strategy, which will call on government to invest up to $100 million a year in floodrestraining dikes, reinforcement of major structures and other preventive measures.
But some disasters cannot be easily contained. In fact, not all can even be covered by insurance: Canadian homeowners cannot buy flood insurance, although Americans can through U.S. government-backed policies sold by private insurers. Dams and dikes, meanwhile, are little defence against an earthquake. It seems certain that losses to natural disasters will continue to rise. And, concedes Squire, in another uncomfortable truism of the insurance industry: “In the end, policyholders always pay their own losses.”
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