Regulatory risk on the rise, notes IBC CEO

The events of 2013 have demonstrated the insurance industry in Canada is facing a significant tide of risks, including regulatory risks, Don Forgeron, president and CEO of the Insurance Bureau of Canada, noted at IBC's 2013 Regulatory Affairs Symposium in downtown Toronto Thursday.

"Clearly, we are at a historic moment in the tone and scope of regulatory activity around the world after the great recession of 2008," Forgeron told attendees.
Citing the Insurance Banana Skins report for 2013, produced by the Centre for the Study of Financial Innovation and PwC, Forgeron noted that natural catastrophes have been identified as the top risk for property and casualty insurers globally.
However, the report lists regulatory risk as the number two global risk in 2013. "Let's pause to consider that for a moment... second only to natural catastrophes," Forgeron said.
"Insurers are now operating in an environment characterized by a rising tide of regulatory and legislative issues and initiatives," he pointed out. This long list includes ongoing auto insurance reforms, GST review, excess taxation of reinsurance transactions, Canadian capital framework changes, new accounting standards for insurance contracts, the International Association of Insurance Supervisors' proposed new international capital standard and the risk of uncertainty itself.
"Regulators are always focusing on risks: insurance risk, market risk, credit risk, to name a few," Forgeron said. "Well, now regulatory risk has joined those clear and certain risks, at least from the perspective of insurers," he told attendees.
"The pendulum of regulation must not swing too far," Forgeron cautioned. If that happens, "it endangers healthy and robust insurance markets, and, therefore, availability and affordability of products," he said.
Another major risk has been political, Forgeron said. Citing Ontario auto, "political gamesmanship posed a serious threat this spring when the Ontario government announced plans, pushed by the opposition, to target a 15% rate reduction for auto insurance," he told attendees. "At the time, without a clear commitment to cutting the costs of delivering Ontario's troubled auto product, this had the potential to do serious damage," he said.
"The good news is that since the original announcement, the government has made clear its intentions to bring in cost reductions measures to reach the 15% target," Forgeron said.
The industry is already facing challenges. Looking at the industry's results, "by almost every measure, the first half of 2013 was weaker than the first half of last year. This is reflected in the loss ratio that is five percentage points higher; weaker returns on equity and on investment," Forgeron said.
2013 appears to be well on its way to producing insured losses from catastrophes well above $3 billion. The Alberta floods currently exceed $1.7 billion in insured losses and anticipated losses for the July flooding in and around Toronto have increased since the preliminary $850 million estimate was released in mid-August, with the last figure at more than $940 million.
"Both these figures are likely to go higher," Forgeron said. "We will likely see a year in which insurance cat losses nationally rise to well above $3 billion," he noted. "The trend is clear. In the previous four years, losses due to catastrophes were near or above $1 billion. We have tripled that in 2013."
Alberta, once again, is of concern. "Looking specifically at total cat losses for Alberta, the last few years shows a distrubing trend - over three years, almost $3 billion and over five years, closing in on $4 billion."
Compare that to the rest of the country, which witnessed slightly more than $2 billion for three years, just over $2.5 billion for four years and slightly more than $3 billion for five years, Forgeron said.
"In this era of rising risks, of economic volatility, and increased severe weather, insurers and regulators need to work even harder to engage in solutions that keep consumers in mind for the long haul," he emphasized.
"We will continue to advocate for the right balance between effective regulation and the needs of a thriving industry. These are not mutually exclusive, but complementary," Forgeron suggested.
Long-term thinking, which the industry and regulators must share, "is vital in light of global and national risks we now face," said Forgeron. "We need to work together to ensure we can meet those challenges fully, responsibily and with a sense of shared urgency to protect Canadians."

Source:  http://www.canadianunderwriter.ca/news/regulatory-risk-on-the-rise-notes-ibc-ceo/1002693489/