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Canada’s solvency regulator wants to make sure that insurance companies have enough capital to cover the costs of your clients’ earthquake claims, but new guidelines from the regulator may in fact reduce earthquake coverage for clients, industry lawyers and brokers say.
The Office of the Superintendent of Financial Institutions (OSFI) is proposing changes to Guideline B-9 Earthquake Exposure Sound Practices, due to take effect in Canada effective January 1, 2014.
The Insurance Bureau of Canada (IBC) reports that it is expecting to see a version of the revised guidelines this week.
One controversial part of the revised guidelines is a requirement for insurance companies to set aside enough capital to cover their earthquake risks across the entire country.
“Earthquake PMLs [Probable Maximum Loss estimates] have historically been based on the larger of the British Columbia or Quebec PMLs,” OSFI states. “This approach understates the PML for insurers with significant exposures in both earthquake zones. It also ignores earthquake exposure elsewhere.”
But the solution, which is for insurance companies to reserve more money to pay earthquake claims, may actually lead to a lack of earthquake coverage for broker clients, B.C.’s broker association told Insurance Business.
“The Canada-wide calculation requirement arguably pushes insurers to a level of capitalization and reinsurance protection that is so beyond other global jurisdiction models as to make us stand out and perhaps generate adverse connotation,” Insurance Brokers Association of B.C. Chuck Byrne told Insurance Business. “Consumers are the bill-payers in this exercise, and are already choosing to walk away from the coverage based on today’s offer. Even without the Canada-wide element, local prices and deductibles have not reached their maximum. How is this the ‘right’ approach?”
An analysis by insurance law firm Cassels Brock suggests a potential earthquake coverage availability issue looming in the future.
“It can be argued that OSFI is simply tackling the uncertainty surrounding earthquake exposure by requiring insurers to throw more money at the problem,” the firm said in its online post, OSFI Shakes up Earthquake Exposure Sound Practices. “The anticipated costs of meeting the new requirements and the possibility of higher capital requirements may induce insurers to withdraw their business from select markets.”
“Throwing more money at the problem to be ‘prudent’ has the disquieting effect of pushing more consumers off the coverage,” Byrne agreed. “Everyone – even OSFI – would likely agree that this is not their intention. In fact, their long-term goal would, or should, be the exact opposite: to encourage a higher take-up rate for earthquake insurance.”
Currently, earthquake insurance take-up in B.C. is less than 60%, whereas in eastern Ontario and Quebec, it is less than 10%.
Cassels Brock said the new guidelines could also lead insurers to create local provincial companies, which would reduce reinsurance costs (provincially-licensed insurers would not come under the OSFI requirements). But “local provincial companies would be more at risk from an earthquake than a Canada-wide company is,” the firm said.
