September 30, 2010 by
Canada’s property and casualty insurance industry is conducting research into the possibility of offering overland flood insurance, which is not currently available, as part of a homeowner’s policy. Panelists at the National Insurance Conference of Canada (NICC) in Montreal noted there is an important distinction between what consumers and insurers define as “flood.”
Whereas insurance policies cover basement flooding related to sewer backup, they do not cover damage caused to homes arising from overland flood.
Paul Kovacs, CEO of the Institute for Catastrophic Loss Reduction (ICLR), moderated a panel on water damage, ‘Water and Brimstone,’ at the NICC in Montreal on Sept. 22. Kovacs said an ICLR study of 2,000 homeowners across the country a few years ago indicates consumers are clearly confused about whether flood is covered under their homeowers’ policies.
“Seventy per cent believed they had [overland] flood insurance,” Kovacs said. “[Insurers] don’t sell any.”
Now that water is about five times more likely than fire to cause damage to a home, it is important for insurers to be on the same page as their customers on the issue of flooding, the panelists said.
“When we think about the challenges today, and you put yourselves in the shoes of the consumer . . . the most frustrating and least understood peril is water,” panelist Kathy Bardswick, president and CEO of The Co-Operators, said. “I want to suggest that we are very intently focused on flood, as we should be, but we need to keep in perspective that ‘flood’ is really our term. We understand what that means. But the consumer sees ‘flood’ as sewer backup and water damage, all in the pool of terms called ‘water’ and water risk, and what it does to their homes. That is an important issue that we need to start thinking about.”
The big question for insurers has always been “adverse selection.” Essentially, how will insurers be able to cover the water risks of homeowners fairly, without shouldering a competitive disadvantage by agreeing to insure high-risk homeowners living in areas plagued by water damage incidents?
One possibility is to consider an “opt-in, opt-out” method of coverage, in which consumers would choose whether or not they want flood coverage for their homes.
But a joint study by Swiss Re and the ICLR, soon to be released, suggests the problem might be addressed instead by way of “bundling.” That is, water coverage would be bundled into the homeowner’s policy along with coverage for fire, theft and other perils.
“The bundling effect is really the more appropriate way to go,” panelist Sharon Ludlow, president and CEO of Swiss Re Canada, said. “We came to the conclusion that in the United Kingdom, which is the jurisdiction that had the most ideal model, that is something we could use here in Canada. There clearly is a long way to go.”
Other considerations would be to have a type of ‘facility association’ or risk-pool approach for extremely high water damage risks, along the lines of what is offered in auto insurance.
Also, extensive and consistent flood mapping across the country would be a prerequisite for being able to offer coverage for overland flood. •