Energy Industry

‘Among the Largest Catastrophe Losses in Canadian History’

Business interruption losses from the Alberta fire will be "massive" according to experts.
By: | May 12, 2016 • 4 min read

About 2,400 structures in and around Fort McMurray lie in ruins in the middle of 700 charred square miles of northern Alberta.

The oil sands boom town, once known as “Fort Make Money,” is now going to cost money — at least $4 billion (C$5 billion) by early estimates — to rebuild after a monster wildfire swept around and through parts of town the first week of May.


The immediate insurance question is not the property loss in town; that is quite straightforward.

Rather, it is the length of the oil sands outage and two stages of business-interruption (BI) claims: immediate losses for the time out of operation, as well as possible contingent losses for refiners that rely on the oil sands for raw materials.

At the peak of the fire, 1 million barrels a day of oil sands production was taken out of service — about 40 percent of total output, and roughly one-quarter of all Canadian oil production.

Some operations have already airlifted in skeleton crews to begin safety checks in advance of resuming operations, but the bulk of production is expected to remain out of service for several weeks, if not a month or more.

The wildfires “will be a huge BI event,” said Paul Cutbush, senior vice president catastrophe management at Aon Benfield Analytics in Toronto.

“Even with no damage we will have to see when workers are allowed to come back — and then how many and how soon. A lot of these facilities have been used for evacuations, a goodwill gesture. A great deal will depend on manuscript wording for each policy.”

Waiting periods for BI claims will likely not be as large a factor as in past large losses, Cutbush noted. “It used to be that 90 days was standard. Today, that is shorter, 60 days, maybe even just 30.”

It may take longer than that to get claims sorted, because the size and scope of the fire has presented so many new unknowns.

“The biggest thing is getting people back to work,” said Cutbush, but they need places to live and shop.

“It is our understanding that a lot of the housing in the area was rental or temporary housing for oil sands and services workers.” That means not just property claims for the assets themselves, but lost value from their revenue.

Utilities and infrastructure also have to be inspected, repaired or replaced.

“There is also the issue of ash-contaminated water,” said Cutbush. “The Athabasca River is used for injection water, but ash can make the water caustic and not suitable for use without treatment.”Canadian Disaster Losses chart

The fires continue to rage uncontrolled, but are now in the deep boreal forest south and east of town. The evacuation order and state of emergency for the area remained in effect as of May 11.

During a press tour through the town, Alberta Premier Rachel Notley gave the first official estimate of initial recovery time: “First responders and repair crews have weeks of work ahead of them to make the city safe. I’m advised that we will be able to provide a schedule for return within two weeks.”

Official numbers said 88,000 people, were evacuated, but a local source puts the number closer to 100,000, counting transient workers.

Remarkably, there has been no loss of life, not even any major injuries. And the vast oil sands mining and processing operations that sprawl for more than 100 miles in every direction around Fort McMurray were undamaged.

On May 10, Notley met with industry officials and was told the operations were secure.

“The magnitude of the current destruction suggest that the new fires will generate among the largest catastrophe losses in Canadian history, affecting both personal and commercial property writers,” according to an initial evaluation by the ratings agency Moody’s.

“I suspect some of the [energy companies’ insurance] coverage may be on the lean side.” — Jason Mercer, assistant vice president and analyst, Moody’s

“Early estimates of the wildfires peg the cost of damages rising to C$5 billion or around 1.5 percent of Alberta’s GDP — an estimate that could increase,” Moody’s reported.

“The Fort McMurray fires destroyed four times as many buildings as the Slave Lake [Alberta] wildfire of May 2011, which cost Canadian property and casualty insurers more than C$700 million in pretax losses.”

“Home and auto insurance coverage in Canada is substantially similar to that in the U.S.,” said Jason Mercer, assistant vice president and analyst at Moody’s in Toronto, who co-wrote the report.

“The only notable difference is that some lines, such as workers’ compensation, are typically government issued.”


BI is also similar in the two countries, Mercer noted. “There is named peril and all-risk. Both are available, but my sense is that all-risk is probably more difficult to get and more expensive, if only because of the higher number and cost of major losses in the province.

“More than half of the major losses in recent years in Canada have been in Alberta.”

Mercer also emphasized that the price of oil has been depressed for almost two years, leading some operators to tighten their belts – including insurance protection.

“I suspect some of the coverage may be on the lean side,” he said.

It will also depend whether companies have limited BI coverage — which would cover losses beginning with the evacuation and ending with the “all clear,” or extended coverage, which would “could run until there is a return to the profit level pre-event.”

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Focus: Cyber

Expanding Cyber BI

Cyber business interruption insurance is a thriving market, but growth carries the threat of a mega-loss. 
By: | March 5, 2018 • 7 min read

Lingering hopes that large-scale cyber attack might be a once-in-a-lifetime event were dashed last year. The four-day WannaCry ransomware strike in May across 150 countries targeted more than 300,000 computers running Microsoft Windows. A month later, NotPetya hit multinationals ranging from Danish shipping firm Maersk to pharmaceutical giant Merck.


Maersk’s chairman, Jim Hagemann Snabe, revealed at this year’s Davos summit that NotPetya shut down most of the group’s network. While it was replacing 45,000 PCs and 4,000 servers, freight transactions had to be completed manually. The combined cost of business interruption and rebuilding the system was up to $300 million.

Merck’s CFO Robert Davis told investors that its NotPetya bill included $135 million in lost sales plus $175 million in additional costs. Fellow victims FedEx and French construction group Saint Gobain reported similar financial hits from lost business and clean-up costs.

The fast-expanding world of cryptocurrencies is also increasingly targeted. Echoes of the 2014 hack that triggered the collapse of Bitcoin exchange Mt. Gox emerged this January when Japanese cryptocurrency exchange Coincheck pledged to repay customers $500 million stolen by hackers in a cyber heist.

The size and scope of last summer’s attacks accelerated discussions on both sides of the Atlantic, between risk managers and brokers seeking more comprehensive cyber business interruption insurance products.

It also recently persuaded Pool Re, the UK’s terrorism reinsurance pool set up 25 years ago after bomb attacks in London’s financial quarter, to announce that from April its cover will extend to include material damage and direct BI resulting from acts of terrorism using a cyber trigger.

“The threat from a cyber attack is evident, and businesses have become increasingly concerned about the extensive repercussions these types of attacks could have on them,” said Pool Re’s chief, Julian Enoizi. “This was a clear gap in our coverage which left businesses potentially exposed.”

Shifting Focus

Development of cyber BI insurance to date reveals something of a transatlantic divide, said Hans Allnutt, head of cyber and data risk at international law firm DAC Beachcroft. The first U.S. mainstream cyber insurance products were a response to California’s data security and breach notification legislation in 2003.

Jimaan Sané, technology underwriter, Beazley

Of more recent vintage, Europe’s first cyber policies’ wordings initially reflected U.S. wordings, with the focus on data breaches. “So underwriters had to innovate and push hard on other areas of cyber cover, particularly BI and cyber crimes such as ransomware demands and distributed denial of service attacks,” said Allnut.

“Europe now has regulation coming up this May in the form of the General Data Protection Regulation across the EU, so the focus has essentially come full circle.”

Cyber insurance policies also provide a degree of cover for BI resulting from one of three main triggers, said Jimaan Sané, technology underwriter for specialist insurer Beazley. “First is the malicious-type trigger, where the system goes down or an outage results directly from a hack.

“Second is any incident involving negligence — the so-called ‘fat finger’ — where human or operational error causes a loss or there has been failure to upgrade or maintain the system. Third is any broader unplanned outage that hits either the company or anyone on which it relies, such as a service provider.”

The importance of cyber BI covering negligent acts in addition to phishing and social engineering attacks was underlined by last May’s IT meltdown suffered by airline BA.

This was triggered by a technician who switched off and then reconnected the power supply to BA’s data center, physically damaging servers and distribution panels.

Compensating delayed passengers cost the company around $80 million, although the bill fell short of the $461 million operational error loss suffered by Knight Capital in 2012, which pushed it close to bankruptcy and decimated its share price.

Mistaken Assumption

Awareness of potentially huge BI losses resulting from cyber attack was heightened by well-publicized hacks suffered by retailers such as Target and Home Depot in late 2013 and 2014, said Matt Kletzli, SVP and head of management liability at Victor O. Schinnerer & Company.


However, the incidents didn’t initially alarm smaller, less high-profile businesses, which assumed they wouldn’t be similarly targeted.

“But perpetrators employing bots and ransomware set out to expose any firms with weaknesses in their system,” he added.

“Suddenly, smaller firms found that even when they weren’t themselves targeted, many of those around them had fallen victim to attacks. Awareness started to lift, as the focus moved from large, headline-grabbing attacks to more everyday incidents.”

Publications such as the Director’s Handbook of Cyber-Risk Oversight, issued by the National Association of Corporate Directors and the Internet Security Alliance fixed the issue firmly on boardroom agendas.

“What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.” — Jimaan Sané, technology underwriter, Beazley

Reformed ex-hackers were recruited to offer board members their insights into the most vulnerable points across the company’s systems — in much the same way as forger-turned-security-expert Frank Abagnale Jr., subject of the Spielberg biopic “Catch Me If You Can.”

There also has been an increasing focus on systemic risk related to cyber attacks. Allnutt cites “Business Blackout,” a July 2015 study by Lloyd’s of London and the Cambridge University’s Centre for Risk Studies.

This detailed analysis of what could result from a major cyber attack on America’s power grid predicted a cost to the U.S. economy of hundreds of billions and claims to the insurance industry totalling upwards of $21.4 billion.

Lloyd’s described the scenario as both “technologically possible” and “improbable.” Three years on, however, it appears less fanciful.

In January, the head of the UK’s National Cyber Security Centre, Ciaran Martin, said the UK had been fortunate in so far averting a ‘category one’ attack. A C1 would shut down the financial services sector on which the country relies heavily and other vital infrastructure. It was a case of “when, not if” such an assault would be launched, he warned.

AI: Friend or Foe?

Despite daunting potential financial losses, pioneers of cyber BI insurance such as Beazley, Zurich, AIG and Chubb now see new competitors in the market. Capacity is growing steadily, said Allnutt.

“Not only is cyber insurance a new product, it also offers a new source of premium revenue so there is considerable appetite for taking it on,” he added. “However, whilst most insurers are comfortable with the liability aspects of cyber risk; not all insurers are covering loss of income.”

Matt Kletzli, SVP and head of management liability, Victor O. Schinnerer & Company

Kletzli added that available products include several well-written, broad cyber coverages that take into account all types of potential cyber attack and don’t attempt to limit cover by applying a narrow definition of BI loss.

“It’s a rapidly-evolving coverage — and needs to be — in order to keep up with changing circumstances,” he said.

The good news, according to a Fitch report, is that the cyber loss ratio has been reduced to 45 percent as more companies buy cover and the market continues to expand, bringing down the size of the average loss.

“The bad news is that at cyber events, talk is regularly turning to ‘what will be the Hurricane Katrina-type event’ for the cyber market?” said Kletzli.

“What’s worse is that with hurricane losses, underwriters know which regions are most at risk, whereas cyber is a global risk and insurers potentially face huge aggregation.”


Nor is the advent of robotics and artificial intelligence (AI) necessarily cause for optimism. As Allnutt noted, while AI can potentially be used to decode malware, by the same token sophisticated criminals can employ it to develop new malware and escalate the ‘computer versus computer’ battle.

“The trend towards greater automation of business means that we can expect more incidents involving loss of income,” said Sané. “What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.

“We’re likely to see a growing number of attacks where the aim is to cause disruption, rather than demand a ransom.

“The paradox of cyber BI is that the more sophisticated your organization and the more it embraces automation, the bigger the potential impact when an outage does occur. Those old-fashioned businesses still reliant on traditional processes generally aren’t affected as much and incur smaller losses.” &

Graham Buck is editor of He can be reached at