Property and casualty insurers are still reeling from a summer that brought forth the costliest disaster in Canadian history.
Canada's insurance watchdog says the industry's risk-management strategies must improve to better handle the rising costs of the catastrophic weather events that have caused losses to swell to about $1-billion a year.
Julie Dickson, head of the Office of the Superintendent of Financial Institutions Canada (OSFI), quoted the Queen while speaking at the National Insurance Conference of Canada in Gatineau, Que., on Monday, calling the year an annus horribilis for insurers.
Extreme weather events such as the flooding in Alberta and the Greater Toronto Area this summer, in combination with the Lac Mégantic train disaster and other events such as hailstorms, have pushed insured damages to new highs and put pressure on insurers' profitability.
In light of these events, Ms. Dickson says companies need to keep an eye on pricing of insurance contracts and high-quality risk modelling to meet future weather and other disaster challenges.
She points to a risk-management method that transfers some of the costs of a big disaster to investors in the capital markets through insurance-linked securities, including catastrophe bonds. These investments take some of the pressure off insurers as well as reinsurance companies, which get left holding the bag during major destructive events.
While the so-called cat bonds are attractive to investors seeking yield in a low interest rate environment, they can result in steep losses if disaster strikes.
So Ms. Dickson's support of these securities comes with a warning: "While issuance of catastrophe bonds may be a good addition to a company's risk management tools, investments in catastrophe bonds could present risks to investors, she said. "Particularly if the investments are being made in a search for yield, without regard to an understanding of the risks involved."
But she is also focused on investors that have an understanding of the risks involved. Pension funds are often major cat bond buyers, and Ms. Dickson said there is international concern brewing over just how big the investment from institutional investors (such as pension funds) is becoming.
"Such excess funding or capital can put downward pressure on premium rates, and assuming those rates were properly reflective of risk, this is not what should be happening," she said.
(Jacqueline Nelson is a Globe and Mail Financial Services Reporter.)
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