Due to a pandemic-driven strike to profit, many Canadian municipalities are now encountering a tremendous rise in insurance liability costs. This leaves them no choice but to increase property taxes and even reduce current service provision for city dwellers.
The plunging number of life insurance companies has unfortunately led to a 20-30% surge in premiums. This increase can also be attributed to a litigation-prone climate plus the ambiguity surrounding the payout amounts. Not only do individuals need insurance, but the cities do as well. They cannot do without insurance coverage in the event of road and property accidents, cyber-attacks, and natural catastrophes.
Due to the Covid-19 pandemic, Ontario’s Financial Accountability Office (FAO) remarked in December that the 444 municipalities in the province would come up against a revenue loss of approximately C$2.4 billion (USD 1.9 billion). Additionally, the senior vice-president for public finance of DBRS Morningstar – Travis Shaw, believes all unexpected surges in costs will come as a shock despite the municipal funds allocated to these possibilities.
Property taxes are considered one of the most reliable sources of revenue after transit fees, eradicated because of lockdowns. If property taxes become exorbitant for residents, the cities will be forced to reduce certain expenditures and decrease services. It is legally necessary for the authorities to devise a balanced financial plan.
The most significant deficits in revenue have been in transit and entertainment, whereas the largest expenses were spent on temporary housing and social services, said Ontario’s Financial Accountability Office. Losses in transit fees have taken a blow to large-scale cities the most. However, smaller municipalities also faced financial difficulties because many families, taking advantage of the work from home (WFH) situation, are relocating to smaller cities, searching for more space and affordable accommodation. This creates extra tension on small-scale cities to supply high-quality facilities and services for the new residents.
A smaller pool of insurers
Sandra Zwiers, finance director for the County of Essex, said 350 kilometers southwest of central Toronto had received an extra flow of new inhabitants. This growth defeats the purpose of having a more significant tax base as it has to be used to provide services for citizens.
In Essex, this fiscal year, there has been a rise in premiums of 13% (C$115,780), following an increase of 10.6% last year.
The global premium increases along with harsher underwriting processes can be attributed to the escalation of accident-related litigation against cities, settlements, domestic and international cyber-attacks, and natural catastrophes despite falling bond yields.
Cities all over the world, including America, have been challenged by the higher costs. Similarly, Canadian municipalities even encounter excessive impact because of a small number of insurance companies, dropping population, and the legal obligation to have joint and several liability (J&S) insurance coverages, said DBRS Morningstar.
This type of policy covers the share of settlement amounts that the responsible party cannot afford to pay. This ensures a fair share for the complainant, and they are not ripped off.
Besides increasing premiums, deductibles are higher. Take Essex County as an example, theirs rose from C$25,000 to C$100,000 per occurrence the previous year. Some coverage is also discarded, specifically environmental damage and cyberattacks.
Graydon Smith – the president of the Association of Municipalities Ontario, the mayor of Bracebridge (a town in a cottage district of Muskoka, northern Toronto), reported a surge of C$160,000 in the town’s annual expenses. This consequently results in a 1% increase in property taxes.
He expressed frustration that even though the town’s risk management schemes were as effective as any others, they have failed to put a stop to the 30% increase Bracebridge experienced this year. Insufficiency in liability control could be associated with more extensive hikes, Smith added.
Compared to such towns, municipalities in insurance pools have managed to keep their costs under control. However, this does not amount to their immunity to the impact.
The Waterloo region in Ontario, which owns an eight-municipality pool financed by taxes imposed on its members, is regarded as lower-risk than other cities. Waterloo’s settlement is divided between several parties: the city at fault, the municipality pool, and the excess insurers.
Nevertheless, Waterloo still took a blow with a premium increase of a “modest” 9.8% the previous year. The pool’s risk manager, Brian McEnhill, even anticipated a considerable rise this year to come. He associated the increases with higher-value claims, forcing the region to depend more on insurance providers and a dwindling number of underwriters.
Insurers withdrawing from the market
Mergers and acquisitions have been witnessed to diminish the insurance market. This is evident in the consolidation of Intact Financial Corp (IFC.TO) of Frank Cowan Company in 2019 – the biggest municipal insurer in Canada.
Lloyd’s syndicates, MS Amlin included, and the Ontario Municipal Insurance Exchange (OMEX) are among those who have fled from the Canadian municipal market recently, even though they were the ones who facilitated cities to shift to self-insurance. OMEX also blamed its suspension partly on J&S.
The chief executive of specialty insurance brokerage EQUA Specialty Risk Partners Corporation – David Richards, explained that underwriters’ exit was because of their financial loss on municipal policies. Consequently, the capacity reduces, and underwriters seek other places to make more profits as they only have a certain amount of capital.
J&S is not exclusive to municipal insurance. Nevertheless, massive payouts have been motivated due to the perception that the government is loaded, remarked Pete Karageorgos, the consumer and industry relations director at the Canadian Insurance Bureau.
An exceeding number of towns and cities in Ontario have pleaded for the authority to get rid of J&S by renewing their calls, but this is met with the unwavering refusal from the government.
Some certainty is imperative that a new change can lower insurance premiums in the province. However, a spokesperson from the Ontario Ministry of the Attorney General indicated a lack of evidence to prove a causal relationship between the two.
Kris Bonn – Ontario Trial Lawyers Association President, commented that putting all the blame on J&S is a total “red herring.” To Bonn, the system that ensures the innocently injured victims are well compensated for their losses does much more justice. He articulated that the municipality should pursue them instead if the accused can pay more than their proportionate share.