Capacity Crunch

Winter storms in B.C., floods in Alberta, and a costly neighbourhood fire in Edmonton have recently drawn attention to a capacity crunch in the superheated building markets in Western Canada, and particularly in Alberta.

Given how difficult it is to find available repair shops and building contractors in Alberta and B.C. these days, policyholders can expect to wait longer for their lives to get back to normal after larger, catastrophic damage events occur. The effect of the booming Western economies is akin to that of a demand surge, but without the accompanying catastrophe.

“Every [insurance] company in Alberta is facing that challenge,” says Jim Rivait, IBC’s vice-president, Prairies, NWT and Nunavut. He notes a building contractor crunch that occurred when a fire caused between Cdn$20-25 million of damage to houses in a south Edmonton-area in July 2007.

“What you heard from the fire (in Edmonton) — and this is from some of the people who had their houses burned — they reported they’re looking at 12 to 16 months to get back in,” Rivait observed. He said three years ago, new homes in the area could be built in about eight months.

For insurance companies in Alberta and B.C., the environment has led to problems finding available contractors. “It’s also increased the expenses that come from having [to provide policyholders with] alternate accommodation for a much-longer period of time,” Rivait notes. In addition, the quality of repairs has become an issue, as people in search of a buck are firing ladders onto their pick-up trucks and heading out to cash in on the shortage of much-needed tradespeople.

The capacity issue is not isolated to the building trades in Alberta, and to a lesser degree B.C. A similar crunch is happening in Alberta’s collision repair industry, insurers note.

LONGER WAIT = BIGGER COST

“What we’re finding as an industry is that in Alberta, the labour market shortage there has been contributing significantly to our costs,” says Irene Bianchi, vice president of claims at Royal & SunAlliance. “It’s fairly difficult to get vehicles repaired in what we would consider to be a timely fashion. Sometimes it’s taking 4-6 weeks to get repairs done, which is unusual to say the least.”

The fact that it can take up to three months to get a vehicle fixed in Alberta has increased claims costs for insurers. An insurer must pay more, for example, to cover policyholders for the costs of renting a replacement vehicle. Rivait notes policyholders in Alberta can very quickly reach policy limits of between $500-$900 for a rental vehicle while they wait for their vehicle to be repaired.

“We’ve had some horror stories where the rental car bill was more than $3,300 for one person,” Rivait says. “That’s more than their insurance costs [to repair the vehicle].”

Rivait said his experience has been that policyholders are willing to wait longer to have their accommodations repaired than their vehicles. And so IBC has started negotiating with an unspecified automotive service repair association, which represents the body shops, to try and figure out ways to better serve the customer.

“We’re trying to come up with ways that may help streamline the process,” Rivait said. That may mean insurers doing some of the administrative work that has been downloaded on auto body shops over time, so the repair shops can focus on getting the car done on time. It may also mean, in some cases, reducing the number of appraisals that brokers typically ask their clients to obtain.

“A broker may say to a client: ‘You have to go get two or three appraisals,'” Rivait says. “Well, that takes time. And of all the shops that do those appraisals, obviously only one gets the work, so the other [shops] are spending a lot of time [on appraisals] for no value. It takes away from their ability and time to be working on other vehicles. We’re trying to look at the process and system for getting the car appraised and into the repair process more efficiently.”

PREFERRED SHOPS

To help ease the crunch, individual insurers have established “preferred shop” arrangements with auto repair centres. Individual shops in the networks have a pre-determined level of authority to electronically send an estimate to an insurer for approval and, once approved, get to work on the car immediately. This bypasses the need for policyholders to look for multiple appraisals, says Larry Lythgoe, vice president of claims for ING Canada.

Bianchi notes Royal & SunAlliance also has a preferred shop network. “We have made arrangements with preferred vendors, and part of those arrangements is that we will get first response from them because of the kinds of contracts we’ve made with them,” she says. “We need to be able to sustain those relationships, so that if we do have any kind of catastrophic losses, we do have the capacity.”

What happens when there’s a severe capacity shortage and one auto body shop is the “preferred shop” of two or more individual insurers? In this scenario, the competition for scarce resources is settled “basically on the strength of the relationships, and the amount of work that each company is doing with the shop or contractor,” Lythgoe says.

These types of relationships with preferred shops can therefore “actually become a competitive advantage if one can deliver and another one can’t,” observes Lindsay Olsen, IBC vice-president, B.C. and Yukon.

Lythgoe noted national companies have the added advantage, particularly in catastrophe situations, of having the option to pool resources from other areas of the country in times of a severe capacity crunch.

Olsen differentiates between the effects of the economy and those of catastrophes. “It’s one thing to have a plan in place to handle a disaster or cat loss of some sort, but it’s an entirely different thing to cope with an ongoing labour shortage,” she says.

Speaking about the contractor shortage in B.C., she observes that B.C. towns close to the Alberta border are losing some people in their local construction field to Alberta’s oil fields. And Vancouver’s hosting of the 2010 Winter Olympics has resulted in a booming construction sector in the province. “So the construction sector is pretty busy, and finding trades to deliver in a timely manner can be a little challenging,” she said.

It appears insurers are not negotiating with contractor associations along the same lines as IBC’s negotiations with auto repair shop associations. Which isn’t to say insurers don’t have relationships with their contractors: they do.

For example, Lythgoe says ING has formed ongoing, longstanding relationships with its building contractors based on a similar ‘preferred shop’ model it uses in its relationships with collision repair shops.

TIME IS MONEY

Members in ING’s building contractor network have time guidelines to follow, and they must agree in advance to provide service 24/7. Contractors in the network are dispatched, write up an electronic estimate, take additional photos and submit them to the insurer. “They have a pre-defined level of authority where they can start to do the repairs almost from the inception of the assignment,” says Lythgoe.

Olsen notes that during the Vancouver winter storms, which resulted in more than 9,000 claims and Cdn$130 million in damages, insurers had established a kind of “triage” system for handling property claims. “The thing about those B.C. storms is that there were some very significant losses, but there weren’t all that many of those,” she says. “There were an awful lot of less-critical claims, where repairs were cosmetic as much as anything else and it did take many weeks for some of those to be dealt with.

“A lot of companies had it triaged, where those who really needed the help got it first and some of the others took a bit longer…It was pretty broadly understood that those who needed imminent [repairs] were going to be given priority and dealt with first. I think there wa
s a lot of understanding, acceptance and support among the public of that.”