Fuelling business prosperity

Government’s role in fostering a sustainable commercial insurance market

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Contents

Introduction

Taxes

Climate Proong

Tort Law Reform

Commercial Trucking

Cyber Risk

Risk Management

Conclusion

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The availability and aordability

of capital to backstop commercial

enterprise provides essential risk

mitigation, ensuring business

continuity and fostering economic

growth. A stable, healthy commercial

insurance market supports job

creation, encourages innovation and

enhances global competitiveness.

A recent report quantied the impact

of the commercial insurance industry

on the Canadian economy. It found

that the industry contributes nearly

$15 billion to Canada’s GDP, and

provides about 115,000 jobs and

$8 billion in labour income.

After a few tumultuous years, the

Canadian and global commercial

insurance market is now in a state

of transition. There continues to

be signicant uncertainty due to a

variety of macroeconomic factors

including geopolitical tensions

causing societal and/or political

polarizations, persistent supply chain

and labour challenges, and a rising

trend of natural catastrophe and

extreme weather losses.

A healthy commercial insurance

market is fundamental to the success

of Canada’s economy. Small and

medium-sized enterprises (SMEs)

make a signicant contribution to

employment and economic growth.

Recent challenges in the commercial

insurance landscape have led to

dicult market conditions, but

governments can play a role in

enhancing the market.

Introduction

A thriving commercial insurance market is crucial for the economy.

Insurance Bureau of Canada

(IBC) has developed policy

recommendations for

governments that aim at

enhancing the sustainability of

Canada’s commercial insurance

market, lowering costs of

commercial insurance products

and improving competition,

which will lead to better

outcomes for businesses and

organizations. This report

highlights tangible measures

that governments can take to

enhance the risk landscape for

businesses while empowering

continued prosperity.

Insurance

premium tax

Retail

sales tax

Alberta 4.00 –

British Columbia (auto and property insurance) 4.40 –

British Columbia (excluding auto and property, i.e. commercial liability) 4.00 –

Manitoba (property insurance)

4.00 –

Manitoba (excluding property)

3.00 7.00

New Brunswick 3.00 –

Newfoundland and Labrador (auto and personal property insurance)

5.00 –

Newfoundland and Labrador (excluding auto and personal property) 5.00 15.0

Northwest Territories 3.00 –

Nova Scotia 4.00 –

Nunavut 3.00 –

Ontario (auto insurance) 3.00 –

Ontario (property insurance) 3.50 8.0

Ontario (excluding property and auto, i.e. commercial liability) 3.00 8.0

Prince Edward Island 4.00 –

Quebec

3.30 9.0

Saskatchewan (auto insurance) 5.00 6.0

Saskatchewan (hail insurance) 3.00 –

Saskatchewan (excluding auto and hail) 4.00 6.0

Yukon

4.00 –

1 Manitoba premium tax rate on property insurance is 4% except on aircraft, auto or hail insurance, and insurance against loss or damage to an automobile

caused by re. A rate of 3% applies to those. A temporary elimination of the Retail Sales Tax on real property insurance premiums is in eect as of July 1,

2020. The RST on all other insurance premiums is left at 7%.

2 In Newfoundland and Labrador, the Retail Sales Tax on auto insurance premiums was eliminated eective April 15, 2019. Non-owned auto, which is a

third party liability coverage reported under general liability, is considered an exempt auto insurance coverage. The Retail Sales Tax on property insurance

premiums was also eliminated permanently eective April 7 2023.

3 Insurance premium tax rates includes compensation tax. The temporary surcharge of 0.18 in Quebec expired in March 31, 2022, and the 0.30%

compensation tax will become permanent from April 1, 2024.

4 Eective January 1, 2021, Yukon increased the insurance premium tax rate to 4% from 2%.

Source: IBC

Taxes

Tax Rates (%) on Premiums by Province or Territory, as of March 2024

Provinces and Territories should abolish specic taxes on insurance products,

which increase the total cost of insurance and discourage adequate levels of

insurance coverage.

Maintaining adequate insurance cover

enables individuals and businesses to

recover faster and get on with the task

of rebuilding after a loss event. However,

current transaction taxes at the provincial

and territorial level drive up the cost of

premiums. Depending on the province or

territory, government taxes can reach up

to 20% of the premium, resulting from an

overlaying of taxes, otherwise known as a

tax on a tax. Taxes are a signicant nancial

cost driver of insurance and should not act

as a deterrence to obtaining appropriate

insurance coverage for businesses.

For example:

In Ontario, a small business

owner named Linda insures her

business property and faces

certain tax obligations on her

insurance premium. Linda’s

annual insurance premium is

$12,000, which includes a 3.5%

insurance premium tax (IPT)

totaling $405.80.

Additionally, Ontario applies an

8% retail sales tax that amounts

to $960, which is levied on the

total insurance cost, inclusive of

the IPT.

In total, Linda’s payment is

$13,365.80 when considering

both the IPT and the sales tax.

This additional expenditure of

$1,365.80 to the government

underscores the nancial burden

that insurance taxes place on

small businesses in Ontario.

Item Amount Notes

Base premium $11,594.20 Amount actually received by Insurer

IPT (3.5%) 405.80 Remitted to Provincial Government

Insurance Premium Paid (DWP) $12,000.00 Amount quoted to Linda as premium

RST (8%) $960.00 Remitted to Provincial Government

Total Amount Paid $12,960.00 Total amount paid by Linda to the insurer

Total Additional Cost to Linda $1,365.80 Total amount remitted to provincial government. Additional

business cost to Linda, on top of her insurance premium

Recommendation

I) Provincial and territorial governments should eliminate or reduce insurance premium tax and retail sales

tax on insurance products to reduce costs for businesses.

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Climate Proofing

Support ood mitigation and adaptation eorts, and amend building codes

and land-use planning to build in the right way and in the right places.

Canada is becoming a riskier place

to insure, as the severity, frequency

and costs of catastrophic weather

events continue to increase. Insured

losses related to severe weather in

Canada now routinely exceed

$2 billion annually. In 2022 and 2023,

insured losses across the country from

severe weather exceeded $3 billion.

By comparison, between 2001 and

2010, Canadian insurers averaged

$701 million a year in losses related

to severe weather when adjusted

for ination.

IBC continues to engage with the

federal and provincial governments

on ways to improve the climate

resilience of communities across the

country. Governments have a critical

role to play in helping businesses

adapt to the impacts of climate

change. A focused approach is

essential to building resilience against

the escalating risks associated with

extreme weather events. Adapting to

these new realities is critical and can

be achieved by investing in resilient

infrastructure, ood prevention and

response measures. These solutions

are paramount for fostering a secure

business environment.

IBC advocates for strategic measures

at the community and property levels

aimed at enhancing physical resilience

to climate-related challenges. These

measures include updating building

codes to improve the physical

resilience of commercial buildings and

incenting resilient retrots of existing

buildings. Improved infrastructure and

judicious land-use planning to avoid

construction in high-risk areas would

help improve community resilience.

SMEs need to be an integral part

of climate-proong initiatives that

underscore the importance of tailored

strategies to safeguard their interests.

Recommendations

I) Stronger building codes for commercial buildings: To fortify the physical resilience of commercial

structures, governments must implement stronger building codes that specically address the unique

vulnerabilities of small businesses. These codes should encompass measures to mitigate the risks

associated with extreme weather events, ensuring that commercial buildings are better equipped to

withstand these challenges.

II) Infrastructure investments and land-use planning: A crucial step in safeguarding businesses from the

impact of severe weather events is prudent land-use planning, particularly in avoiding development in

high-risk ood zones. To reduce risk at the community level, local investments in climate-resilient

infrastructure are needed, including avoiding construction of commercial buildings in areas prone to

extreme weather events and advocating for local investments in community resilience. These eorts will

minimize the risk of damage and better ensure the safety and continuity of businesses and communities.

Tort Law Reform

Create a more proportionate joint and several liability (JSL) framework.

JSL is a legal principle that allows

a wronged party to sue any or all

responsible parties and collect the

total damages awarded against

all from any or one defendant

(for example, if one defendant is

insolvent).

The existing JSL frameworks in

many jurisdictions across Canada

(namely, in British Columbia, Alberta,

Manitoba, Ontario and Nova Scotia)

place an inequitable burden on

certain defendants, such as liquor-

serving hospitality establishments,

even when found minimally liable.

These defendants are often required

to cover the majority of damages

due to the insolvency and exhausted

insurance coverage limits of the

other parties involved. This system

introduces pricing uncertainty and

ties up funds in case reserves for

insurers. Costly litigation persists for

insurers, even when policyholders

are deemed not liable, contributing

to increased premiums and resource

strain in the legal sector. This situation

creates uncertainty for businesses and

insurers operating in a given market.

For example:

Tom owns a small landscaping business that partners with a larger construction rm on a residential development

project. His company is responsible for the project’s aesthetic elements, like planting and garden design, while the

construction rm handles the structural work.

During the project, a poorly constructed retaining wall collapses, causing property damage and minor injuries. The

investigation attributes most of the blame to the construction rm for using substandard materials (90% liable) and a

smaller portion to an architectural consultant for awed design (9% liable). Tom’s landscaping business is found only

1% liable, having inadequately assessed the soil’s suitability for the intended plants, which marginally contributed to

the wall’s instability.

When the court assigns liability for the damages, both the construction rm and the consultant are embroiled in

nancial diculties and legal complications. They are unable to pay their shares. Tom’s business is pursued for the

entire amount. The overwhelming burden of the entire judgement for damages places his small business in jeopardy.

Recommendation

I) Introduce JSL reforms that distribute damages based on full proportionate liability, balancing

responsibility among defendants.

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Commercial Trucking

Address the escalating challenges in commercial trucking with sensible public

policy solutions.

Canada’s economy relies on the safe,

ecient delivery of goods, and the

trucking sector plays a crucial role

in transporting goods. However, in

recent years, insurance claims costs

have surpassed premiums collected,

resulting in elevated losses for

insurers.

A high turnover of experienced drivers

(due to retirement and prohibitive

costs), inadequate training, fraudulent

activities and increased liability claims

highlight the need for sustainable

practices in the sector. Recognizing

the urgent need to address these

issues, IBC has worked with trucking

organizations across Canada to

develop comprehensive solutions.

The proposed measures include an

enhanced mandatory driver training

framework, the establishment of

a centralized database to combat

fraud, and rules requiring trucking

operators to provide drivers with their

complete employment and driving

history information. These initiatives

are designed to stabilize the market,

reduce fraud and facilitate accurate

underwriting, ultimately fostering

a more sustainable commercial

trucking sector.

Recommendations

I) Driver training and accreditation, and trainer certications: To improve overall driver competency

and address the challenge of inadequate training, governments must work to implement standardized

systems for better training, accreditation and new trainer certications. This will ensure that drivers receive

comprehensive, standardized training, leading to a more highly skilled and safer workforce .

II) Centralized database to verify risk information: To eectively combat fraud, the establishment of a

centralized database is crucial. The database would serve as a way for insurers to verify risk information,

enabling them to make underwriting decisions informed by reliable data. A centralized system will also

enhance eciency in identifying and preventing fraudulent activities within the trucking industry.

III) Provide truck drivers with ownership of their driving and employment history: With a record-high

demand for truckers, some operators try to prevent drivers from nding a new employer by denying them

access to their record of employment and driving history. This can create insurance complications, particularly

if a driver cannot prove their level of experience. The government should mandate trucking companies to

provide these records to assist those seeking new employment opportunities. This could be addressed by

creating an accessible database where insurers could verify driving claims and infraction histories.

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Cyber Risk

Establish a robust policy framework for cyber security within Canada by

bringing together government agencies, the tech industry, nancial services

sectors and business groups.

In today’s tech-driven world,

businesses face an increasing risk of

a cyber threat. It is more crucial than

ever, especially for small enterprises,

to bolster their cyber resilience. As the

digital landscape evolves, the need

for comprehensive cyber insurance

grows. This type of coverage acts as a

safety net, shielding businesses from

the nancial losses associated with

cyber incidents such as data breaches

and ransomware attacks.

Encouragingly, the cyber insurance

market in Canada is evolving,

providing a broader range of options

specically designed to meet the

distinct needs of businesses.

Nonetheless, there is still room for

government action to foster a more

sustainable cyber risk ecosystem,

enhancing resilience and broadening

access to cyber insurance.

Recommendations

I) The federal government should improve Cybersecure Canada, its cyber security certication program.

Because of the evolving nature of cyber threats, the program could be more eective if it had an ongoing

certication requirement. Further, adoption of the program may be enhanced if the government: (i) tied

the program to an incentive, (ii) incorporated the program into an existing and trusted certication,

(iii) subsidized the program and (iv) made the certication process less onerous for businesses.

II) The government should look to leverage its procurement process to create minimum standards and

incentives for businesses to improve cyber security controls by requiring prospective vendors to meet

cyber hygiene standards that are commensurate with the size of the business and level of risk based on

the amount and sensitivity of the data that the business processes.

III) The government should play a leading role in educating businesses on the critical importance of

cyber hygiene.

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Risk Management

Businesses must play a role in mitigating their risks.

Successful risk management planning

starts at the top, with the owner,

CEO and other key executives

communicating about risk at all

levels of the organization. Even a

small business or organization faces

exposures that make having a strong

risk management plan important.

Risk management is the process of

identifying, evaluating, controlling

or eliminating potential risks that

may arise in a business environment.

The goal of risk management is to

minimize the negative impacts on

reputation, nances and operations

while maximizing opportunities

for growth.

After prioritizing risks, businesses

and organizations need to develop

strategies for mitigating them. This

can involve implementing new

policies or procedures, investing in

insurance coverage or developing

contingency plans.

It is important to continually monitor

and reassess risk management

strategies as conditions change over

time. Risk management should not

be viewed as a one-time event but

rather an ongoing process to ensure

long-term success for a business or

organization.

Taking the time to understand risks

and putting a robust risk management

strategy in place will not only help

protect a business or organization

from preventable losses, it can help

reduce insurance costs.

Recommendation

I) The government should incent all businesses to develop, implement and regularly review a comprehensive,

proactive risk-management strategy to reduce or eliminate the chance of loss or damage.

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Conclusion

The success of businesses is essential to Canada’s economic vitality. This report oers

targeted recommendations for government actions to create a more sustainable

business environment.

The recommendations focus on reducing tax burdens, adapting to climate change,

reforming tort laws, tackling challenges in commercial trucking, and enhancing

cybersecurity measures. These initiatives will contribute to a stronger commercial

insurance ecosystem, better equipped to support Canadian businesses.

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