Established Rates Shift

The Canadian economy began to re-emerge last year from the global recession as evidenced by a surge in building, remodeling and reconstruction activity. However, worldwide market forces continued to impact on many costs in the Canadian property insurance industry.

Even though the economic crisis in Canada isn’t nearly as extreme as the downturn in the United States, many well-established trends for rates of construction materials and labour showed significant shifts. Comprehensive information on cost research and assignment trends can do much to help risk managers and claims managers identify emerging trends and make informed business decisions.

Xactware experts analyzed hundreds of thousands of structural repair assignments, totalling more than $1.3 billion, and monitored more than 14,000 individual material, labour and equipment rates in 37 economic markets across Canada in 2010.

Claims assignment analysis

Several catastrophes struck various parts of Canada in 2010, causing widespread damage and stimulating reconstruction activity. By year’s end, the property assignments reported to Xactware totaled 136,927 for a value of more than $1.32 billion, which is significantly higher than the nearly $1.1 billion total reported in 2009. Losses related to water (70,869 assignments), wind (12,102 assignments) and hail (9,080 assignments) accounted for the majority of all property losses – about 67 per cent – reported to Xactware last year.

The average value of property assignments in Canada reported to Xactware in 2010 was also much higher than in the previous year, $9,659 compared to $9,007 (see Table 1). The month-by-month analysis of claims assignment volume and value shown in this table illustrate how major disasters drove property loss activity throughout the year.

For example, an immense record-setting hailstorm pummeled Calgary and southern Alberta with golf ball-sized hail on July 12. In the aftermath of that storm, the total value of claims assignments swelled to a high of $148.3 million in August, as shown in Table 2. The storm also contributed to the total number of hail-related property losses, which numbered 9,080 at the end of 2010 – more than double the number of hail losses recorded in 2009.

Hurricane Igor followed, leading to high claims activity in September and October. The storm struck Newfoundland and Labrador in September, causing more than $65 million in damages from wind, backed-up sewers, fallen trees and water. As the impact of these storms subsided, claims-handling activity gradually declined until the end of the year.

Although both the value and volume of claims assignments analyzed by Xactware were significantly higher in 2010 as compared to 2009, many costs associated with the building industry deflated throughout the year. The sluggish economy even reversed many long-running trends for construction rates.

Reconstruction costs

Many well-established assumptions about building costs have been challenged by the recent economic chaos. For example, based on trends from previous years, many insurance professionals could have reasonably assumed that the cost to rebuild a home in Canada increased in 2010. However, data collected by Xactware reveals that reconstruction costs have actually dropped since 2009. The national average decreased 0.8 per cent, which appears small at first glance, but eight of the 10 Canadian provinces report significant declines. This trend is also telling because over the past 20 years, year-end national reconstruction costs have rarely trended downward.

Only Newfoundland and Manitoba reported increases in the average cost to rebuild, as all other provinces reported declines, as shown in Table 3. Reconstruction costs declined most dramatically in New Brunswick (down 4.87 per cent) and Prince Edward Island (down 2.04 per cent).

Lumber costs

Rate changes for commonly used lumber products also illustrate the volatility of the current market. Lumber costs steadily declined between 2007 and 2009. But lumber bucked the overall materials trend in 2010. Lumber costs were up 12.72 per cent by the end of 2010, as shown in Table 4.

Worldwide lumber prices are heavily influenced by the Canadian lumber industry. Ballooning exports to developing countries, particularly China, kept the demand for lumber high in 2010. At the same time damage from the pine beetle and other supply constraints are continuing to exert price pressure on lumber.

Better data, better decisions

Current data that accurately depicts trends for commonly used materials is increasingly important for insurance professionals. Even small changes can have a significant impact on claims payouts and risk. For instance, 34.75 per cent of all Canadian structural claim assignments analyzed by Xactware in 2010 included drywall repair. At the same time, the average cost of drywall materials increased 3.45 per cent (as shown by Table 5), which represents significant added risk for underwriters. Reliable cost information allows insurers to identify these trends as they develop so they can quickly act to minimize the risk that they and their policyholders face.

The economic crisis has shown the strength of the Canadian market and its property insurance industry, but it has also shown that trends for claims assignments and building costs can shift rapidly. They also serve as a reminder of the difficulty of forecasting cost and claims trends. Fortunately, insurers can use up-to-date and reliable information to quickly make the best decisions for both their policyholders and their organizations, even in less-than-ideal market conditions.

All claims activity noted in this article is based on claims assignments reported to Xactware’s XactAnalysis assignment and analytical network.

Joel Dagenais is president of AXP Software, and a Canadian and international consultant for Xactware.