Does Canada need a pandemic backstop, too?

Canada’s P&C insurance industry “dodged a bullet” when the courts didn’t automatically read pandemic coverage into business interruption losses, an insurance executive said at the Insurance Institute of Canada’s Industry Trends & Predictions 2024 webinar yesterday.

Phil Cook, chairman of Accelerant Insurance Company of Canada, made his remarks while discussing the need to engage Canada’s federal government in talks about financial backstops for existential threats to the P&C industry.

Such catastrophic threats may not be limited to just floods and earthquakes anymore, Cook said, but also losses arising from wildfires. And, if Canadians want insurers to cover pandemic losses, it’s likely a federal government backstop would be required for that, too.

The industry’s surplus capacity currently sits at $55 billion, the “highest it’s ever been,” Cook said at his annual industry trends event yesterday. That surplus is used to cover all risks in Canada – home, auto, and business.

But if that surplus had been used to cover pandemic-related losses as well, the industry could have been buried by billions of dollars in claims losses, he noted.

“Just to give you a quick few numbers, and this is right from StatsCan as of September last year, there have been just under 7.5 million claims under the five [pandemic] emergency recovery programs from the federal government, and the total payout to date has been $111 billion,” Cook said. “The point I’m making is that we dodged the bullet, frankly, if COVID had been associated with [insurance coverage], and this is just the business interruption settlements that have been done…

“If that did expose us, it would have eliminated the capital and surplus of the entire P&C industry in less than six months, probably close to three.”

Cook noted his comments about industry exposure to major catastrophes considered many different variables. Factors include regulatory capital margins, contagion exposure, and that the $55-billion surplus is spread unevenly among approximately 200 differently-sized Canadian P&C insurers.

Related: Where the feds stand with an earthquake backstop

Even with $55 billion in surplus capital, a major Cat loss would be significant to the industry, Cook observed. “If there was a very significant loss, say of $10 billion, it doesn’t just mean that the [industry’s] surplus goes down by $10 million. It means that their regulatory margins are put into jeopardy, and a significant loss would create a regulatory issue in terms of the target markets.”

And then there is contagion exposure, Cook added. If the industry suffered a significant Cat loss, it’s quite possible some smaller insurers and even medium insurers could go out of business. If this happens, the industry’s compensation fund would invoice surviving insurers to pay the losses of the bankrupt insurers’ policyholders. This, in turn, would put additional financial pressure on the surviving companies, which is what is meant by contagion exposure.

“I’m not offering a doomsday scenario, but it’s just something that we should keep in mind,” Cook said. “It’s further reason why we need to engage governments in this dialogue as an industry and get them committed [to a backstop], and to understand the activity [of how the industry insures Canadians].”

Canadian P&C insurers have been exposed to some pandemic BI coverage losses. Courts in both the U.K. and Canada have both offered a sort of “mixed bag’ of decisions regarding pandemic BI exclusions, assessing each case based on specific policy wordings.

“For those of you that have been following the coverage disputes, particularly on British business interruption, you’ll know that the courts have, I think very sensibly, recognized that that business interruption arising from COVID was never intended to be covered, and in fact is not covered,” Cook said. “There are still a few cases outstanding, but they tend to be ones where the wordings were either a little different from the rest or they had very different exclusionary language.”

Feature image courtesy of iStock.com/Shendart