The Costliest Year on Record Worldwide

Taking a look at the highs and lows of 2017 and how it impacted personal and business claims alike. In this episode of Risky Business, Colin Rooke and Paul Martin reflect on the past year and discuss how we can plan accordingly for the year ahead.

Listen to the full episode here, or read the full transcript below.

Paul Martin: Welcome to Risky Business Commercial Insurance with Butler Byers. I’m business commentator Paul Martin, and you’ve heard me and Colin Rooke, the commercial risk reduction specialist from Butler Byers Commercial Insurance, talk about all of the issues related to their step-by-step risk assessment system. But today, we’re going to take a little step back. It’s the start of a new year and probably a good time to reflect on what did we learn from last year? Colin, good morning. Welcome, and I just wanted to put that question to you.

Colin Rooke: Thank you, Paul.

Paul Martin: I mean, we talked lot last year about how the face of the industry is changing and how, as a customer, as someone who buys insurance, there are ways that I can play that in my favor. But now that we’ve got year end behind us and we’re looking into the new year, I mean, do you have some assessments on what did we learn last year, what were the big picture issues that came up?

Colin Rooke: Yeah, so we talked a little bit about … Last year was a bad year for natural catastrophes, and that’s really an understatement. Last year was the costliest year on record worldwide, and the scary thing is that wasn’t an anomaly, because previously, in North America, anyway, 2016 was the costliest year on record. All the reports are showing that that trend is continuing and there’s no signs that with climate change, that … There’s no indication that that’s going to change any time soon, and just to … We’ve talked about the effect on reinsurance and what does that mean to policy holders. Quite frankly, if the insurance companies that are insuring … Whether it’s your home or your business, if they’re losing, in a lot of cases, billions of dollars, paying out claims, I mean, that’s ultimately going to affect what you pay for your policy.

Colin Rooke: But to make it a little more real and not just sort of a topic you and I are discussing, I wanted to reference … So, every year, the magazine publication Canadian Underwriter, they speak with every CEO of every top insurance company in Canada, and they … What they do is they ask for their summary of okay, how did 2017 go, and what are you predicting for 2018? Now, this would be … In our world, this would be the major publication, I would say, most brokers would definitely read in some fashion. So, it’s a very credible, again, magazine, and so going through all that, being a new year, every single CEO but one, the main focus of their address was natural disasters and a hardening of … Or, potential hardening of the insurance market. You know, quite frankly, they are concerned.

Paul Martin: Sorry, let me just interrupt for a second. You used the term hardening of the market. Perhaps you could explain that for those of us who aren’t as familiar with the industry terminology as you are.

Colin Rooke: Yeah, so a hardening of the insurance market would mean that due to losses or competition where other insurance companies are cutting rate … We refer to it as buying business. So, once they do that, the losses start to mount up. They realized they’re looking at quarterly results and there’s a trend here. We’re not making any money. The industry gets together and they say, “We have to all charge more. None of this fighting for scraps. We’ve all lost in different areas, different lines of business, and we need a shift to higher pricing.” A lot of that’s driven by the cost of reinsurance. So, your insurance company has a book of business and they’re buying reinsurance from another company to insure a portion of their book.

Colin Rooke: So, quite frankly, if the losses … If there’s another Fort McMurray, the losses aren’t so great they can’t recover from it. So, when everyone’s losing money, reinsurance says, “We need to charge a lot more for this reinsurance, and therefore, everyone must price adjust. Now, a soft market would be the opposite of that. Insurance is fairly cheap, and there’s a lot of players fighting for new business, and you can often drive the rates down, just, again, due to increased competition, but that only lasts so long. But the real, again, scary thought is usually something like a hardening of a market will be a class of business, a line of business where everyone’s fighting for it.

Colin Rooke: So, let’s say it’s commercial property and they say … You’ve got all these companies just going after that class of business, and they’re undercutting, undercutting, undercutting, undercutting. Then, again, the losses come in and they either have to get out of the business or they got to charge more. But that’s something you can predict and that’s something you can change. But what’s happening now is, again, these natural catastrophes are causing them to charge more, and unless those go away, unless we change our practices, I don’t see any change from this … It’s not even a true move to a hard market, it’s just increased cost of insurance year over year over time due to these massive payouts.

Paul Martin: So, there’s a few things that I’m taking from this. First of all, the real high level piece is expect insurance costs and your premiums to go up.

Colin Rooke: Absolutely.

Paul Martin: That’s kind of the near term reality and it’s not because of anything other than holy smokes, the claims have been enormous because of all of these natural disasters, whether they’re a couple of hurricanes that hit the US, those fires we talked about. Whether it was For Mac a year ago, or BC this year, or California. You know, you don’t have to look very far in the news to be able to see natural disasters going on on an ongoing basis.

Colin Rooke: Exactly, and the insurance industry is really bound together on this topic, and they are … They’re drawing a line in the sand and they’re saying that the infrastructure needs to change; that cities and municipalities need to change their building codes, their regulations and their … They’re even going as far to say as people need to really reevaluate where they’re choosing to live, because insurance companies can’t be the crutch or the excuse for faulty infrastructure. They’re saying and they’re showing that they’re not prepared to just keep paying and paying and paying.

They’re even going as far to say as people need to really reevaluate where they’re choosing to live, because insurance companies can’t be the crutch or the excuse for faulty infrastructure.

Colin Rooke: So, we don’t talk a lot about personal lines insurance on the show, but anyone listening right now will know, or should know, I’ll say, that there’s been a lot of changes on sewer backup coverage for your home, and there’s also been a lot of changes to the term flood, or flooding, and to the wordings around those policies. What it means is the infrastructure isn’t there, and sewer backup claims are just mounting year over year after year, and they’re so costly that these companies are drastically reducing what they will pay in the event of a claim.

Colin Rooke: They’re doing that because they’re saying, again, “We’re okay with the one-offs. We’re okay with freak accidents, but we’re not okay when a whole city isn’t built right, and therefore, there’s whole blocks that year over year over year are having the same problems.” So, in some cases, you can’t get it at all. In others, depending on where you live, the rate is extreme. We have clients that are seeing 60% increases in premium and it all has to do with water loss, whether they’ve had it in their particular home or not. But again, that’s the industry pushing back, saying, “We’re not okay with this. We can’t afford to be okay with this.”

Paul Martin: Colin, we’ve got to take a little break, and we’re going to come back and I want to continue to explore this, because you’ve raised some very interesting concepts here. Traditionally, when we talk on this show, it’s about what I, as a business owner, can do to improve my appearance, if I can put it that way, to an insurance company, and in that way, be able to lower my premiums. But you’re saying now that it might … Sometimes there isn’t even things I can do. This is a much bigger picture in that we’re talking about maybe even the way we build our communities may have to be coming under review, if we hope to be able to insure them.

Colin Rooke: Yeah, and we’ll get to the okay, how does … What does that mean to me, as a business owner? I mean, there is light at the end of the tunnel, but yeah, I mean, if there’s not Canada-wide changes and if there … If we don’t do something, the problem’s going to continue to grow.

Paul Martin: All right, let’s take a little break. You’re listening to Colin Rooke, the commercial risk reduction specialist with Butler Byers Commercial Insurance. This is Risky Business, I’m Paul Martin. We’ll be back right after this break. Well, welcome back to Risky Business Commercial Insurance with Butler Byers. As always, Paul Martin here as your host. Joining me in studio is Colin Rooke, the commercial risk reduction specialist with Butler Byers Commercial Insurance. Colin, just before the break, we were talking about … I guess, over the past couple of years as we’ve done this show, we’ve talked about natural disasters and how they have an impact on the cost of insurance and the way insurance companies think. It seems like we crossed kind of an imaginary line in 2017, with the number of them, where insurance companies are saying, “We’re actually going to rewrite the rules here,” and that as a buyer of insurance and an owner of assets that I want to insure, this is a new game for me, isn’t it?

Colin Rooke: It is. Again, these are risks that an insurance company can’t send a loss control expert and say, “We’ve got some concerns about the storage in this facility, or how close this item is to a heat source.” These aren’t risks where they can, on an individual basis, come in, make changes, and then raise their comfort zone. These are risks that, I mean, they can predict, but they’re risks that, again, at the individual level, they’re not able to make enough change that it will satisfy their level of risk tolerance. So, what they’re saying is things are going to continue to … The costs are going to keep rising if these natural disasters, if these costs don’t come in line.

Colin Rooke: Another issue that we’re seeing across Canada is the cost of auto claims, and if you think about it, if you look in your vehicle now and compare it from 10 years ago, 20 years ago, the technology that’s involved today … Now we have self-driving vehicles, we’ve got smart vehicles, we’ve got electric vehicles. An accident today is far more costly than an accident 10 years ago, 15 years ago, and especially 20 years ago. So, it’s just another … It’s another area where our environment is changing at such a rapid level that the insurance companies can’t really adjust pricing fast enough to keep in line, and again, the losses are mounting. For example, there’s talks that in British Columbia soon, they’re going to have the highest auto insurance rates in Canada because they just … Realize that it’s public over there, but it’s going to be … They just can’t recoup. The payments are too great.

Another issue that we’re seeing across Canada is the cost of auto claims, and if you think about it, if you look in your vehicle now and compare it from 10 years ago, 20 years ago.

Paul Martin: The landscape is changing without question. Now, the logical question that flows from this, Colin, and this is where we need your advice as an insurance professional, is I’m faced with this problem or this challenge coming forward. How do I position myself, as a business owner, to be able to combat it, to cope with it, to mitigate it, to whatever term you want to put on it, to make … Just to lessen the blow of what I can expect?

Colin Rooke: Yeah, so again, with these reports from the CEOs of the top insurance companies in Canada, it’s not all doom and gloom. I mean, they do provide a light at the end of the tunnel. So, they reference okay, what can industry do? What can the business owners do … All of them, and I mean all of them reference robust, proactive risk management strategies as the only method to reduce premiums in the short and long-term, and the only method to ensure that they remain low. The only way to turn the tides is that every business has to look at risk differently. So, if they’re paying out major claims for forest fires, hurricanes, floods, hail, that’s one thing, but then if they’re also paying out claims on the individual level for all sorts of risks that could have been avoided, had just a little bit of risk management been implemented, again, the two combined just … It’s not viable.

Colin Rooke: So, the only indication, the only predictor that … We can go to our clients and say, “Look. Prices are going to up. No longer is there going to be bidding wars for your business, but that doesn’t mean that you need to see staggering rate increases. You might not see your rate increase at all; you might see your rate decrease, because now, it is so important that you are best in class, that you are shed in the best light possible, that you have a plan that we are working on. It’s a proactive model, and it’s a plan that we are then sharing with the insurance industry to reduce their comfort zone.”

Paul Martin: The chickens, as they say, are coming home to roost. I mean, I think back to your conversations with me over the last few years as we’ve done this show, for example. You’ve been harping week after week after week on this notion of the step by step assessment. It’s actually put in place a plan that you’re going to manage your risk, and that will make you much more attractive to the insurance company. Now, in the face of the challenges insurers are faced with and covering the cost of all of these natural disasters, they are going to get much more stringent about this. Never has it been more important or more worthwhile to sit down with you and walk through your step by step plan, then, at the beginning of 2018.

Colin Rooke: You know, and it makes total sense. I mean, if you look at, again, an auto example and you said, “Okay. I’ve never been taught how to drive a car and I’m going to buy one, I’m going to plate it, and I’m going to go out into traffic,” versus someone that says, “I took the courses, I took defensive driving, I’ve done a lot of reading. I’ve done everything it would take. In fact, I even bought a vehicle suitable to my driving style. It’s safe, it doesn’t go very fast.” If you had this report of everything you did on a proactive basis prior to hitting the road and you were able to show that to an auto insurer, who are they going to feel more comfortable working with? It’s the same for business. Now, you might have a culture of safety. You might have a disaster recovery plan. You might be so risk-adverse that the chances of you having a claim are zero, but if the market doesn’t know that, there’s no way you’re able to take advantage of any savings that could be yours.

Paul Martin: We’ve got maybe a minute left, so we’re going to have to summarize this thing, as much as I would like to continue this conversation, Colin, because it’s so informative and enlightening, but if you had to summarize in 30 seconds … We’ve concluded 2017, we entered 2018. Just remind us again, what are the big picture issues I need to be thinking about as a business owner looking at my insurance needs for the coming year?

Colin Rooke: Yeah, you need to look at proactive risk management. You need to have a plan in place to reduce your risk-related cost, and this whole show has been about insurance premiums. I mean, we haven’t talked about any risk that our client are self-insuring and the impact there, but I mean, the takeaway message is if you don’t want staggering increases to your insurance premiums, plan now.

Paul Martin: Colin, as always, very insightful. Thank you for your time and just bringing this wealth of knowledge that you have to bear on this subject for us. You’ve been listening with Colin Rooke, the commercial risk reduction specialist with Butler Byers Insurance. This is Risky Business Commercial Insurance with Butler Byers, and as always, I’m Paul Martin. We’ll talk to you next time.

Colin Rooke: Thanks, Paul.