Insurers should ensure consumers are ‘better able to understand’ home insurance policies: CCIR

In a paper released Wednesday, Canada’s insurance regulators’ association suggests that insurers need to better educate consumers so they can understand the terms – including limitations, exclusions and deductibles – of their property insurance contracts, while sharing aggregated property risk data can help with updating building codes.

In Findings Report & Position Paper: Natural Catastrophes and Personal Property Insurance, the Canadian Council of Insurance Regulators (CCIR) stated there is “value and need for direct and clear communications with consumers and intermediaries regarding coverages.”

That position paper was based on feedback from an Issues Paper, published in July, 2016, in which CCIR consulted with stakeholders on natural catastrophes and personal property insurance.

CCIR said in its position paper that it “encourages stakeholders to better collaborate so that aggregated risk data is made more readily available to support the conditions necessary to enhance preparedness, as well as the affordability and availability of natural catastrophe insurance.”

CCIR’s members include the federal Office of the Superintendent of Financial Institutions as well as each province and territory’s insurance regulator.

The issues paper “included an overview and examples of models and data related to water damage and flooding, earthquakes, wildfires and severe weather that are currently utilized in Canada,” CCIR noted, adding it asked stakeholders whether there are other risk modelling tools or options that insurers “commonly use” that enhance risk management.

“Given the role of modelling results and data inputs, a number of respondents emphasized the importance of and opportunities for collaboration, research partnerships and information sharing among stakeholders, including governments, private sectors, academia, insurers and homeowners,” CCIR said in its findings report and position paper. Such information-sharing, according to stakeholder feedback, “can assist in updating building codes, identifying infrastructural needs, inform decisions regarding the location of future developments and equip homeowners with information on methods to mitigate their personal risks,” CCIR added.

CCIR also asked how product development initiated in response to natural catastrophes, noting that overland flood coverage was generally unavailable for homeowners as of 2013.

“With the events in summer 2013, in Toronto and Calgary in particular, the risks of and lack of coverage for overland flood gained prominence,” CCIR stated.

On July 8, 2013, a rain storm over the Toronto area was estimated, by Property Claim Services Canada at the time, to have resulted in about $940 million in insured losses.

The floods affecting southern Alberta in the early summer of 2013 cost the industry about $1.7 billion, Bill Adams, vice president western and Pacific for Insurance Bureau of Canada, reported earlier. In a press conference in July, 2016, Adams said there were about $6 billion in total economic losses from the 2013 Alberta floods and the most of the $1.7 billion in insured losses were from sewer backup.

In its position paper released Aug. 9, 2017, CCIR noted that since 2013, “many personal property insurers have introduced coverages for overland flooding,” while others “are still in the launch or development stage.”

The CCIR study “looked at policy wordings, the types of coverages that are currently available, the impact natural catastrophes are having on consumer awareness and other changes taking place in the insurance marketplace,” the council reported.

“It is important to note that in Canada there is no price, form or underwriting regulation of personal property insurance,” CCIR added. “While insurance regulators oversee the conduct of the insurance business, this gives insurers the latitude to be innovative in design and development of products for natural catastrophe coverage.”

Among other things, CCIR is recommending that insurers incorporate three principles into the development of natural catastrophe coverage for homeowners. They should “ensure products provide adequate coverage for the identified risk,” that the products are “complimentary to the risk transfer function of insurance and incent the prevention and mitigation of the risks consumers face from natural catastrophes” and that they ensure that consumers “are better able to understand” their policies.

“We heard from respondents that the public and consumers possess a limited understanding of insurance in general,” CCIR warned. “Its abstract nature and the complexity of contracts and coverages create difficulties in terms of the consumer’s ability to understand insurance. This lack of knowledge naturally extends into property insurance coverages, policies, terms, endorsements, deductibles, limitations and exemptions related to natural catastrophes insurance.”

Stakeholders also indicated that consumers “also tend not to understand how government disaster relief programs operate.”

CCIR said the views in the paper should not be interpreted as legal opinions and reflect the conditions and results of CCIR’s analysis as of June 1, 2017. The findings do “not necessarily represent the official position or views of any particular provincial, territorial or federal government or agency,” CCIR added.