Looking Skwyward

Everyone is poised for another summer storm season, with intermediaries and companies alike crossing their fingers for a rare, mild season. This year, however, there is another participant in the annual ritual: the consumer.

Consumers have long been affected by the weather – one reason the insurance industry exists. The main worry for consumers has been property damage caused by severe weather and an aging infrastructure. But this year, there’s another concern: affordability.

Premiums are on the rise in Alberta; so are deductibles. But limits are going down. So what are the numbers… and why?

In Alberta, it is not uncommon to have seen 20% to 30% increases on home premiums since January. There are even cases where 30% to 50% increases have been applied. That is a lot.

Most homeowners now carry a $1,000 policy deductible. Peril deductibles such as wind and hail, or sewer back-up, are now often issued by carriers at $1,500 or $2,500 – sometimes with the option to buy down; sometimes not.

Peril limits like sewer back-up are being introduced. And depending on the rating territory, sometimes as precise as the six-digit postal code, coverage may not be offered. In some cases, insurers are issuing renewals with a $10,000 limit. Last year, it was unlimited. That, too, is dramatic.

WEATHERING THE RISK

The changes have been in the works prior to last June’s floods in Southern Alberta. The Insurance Brokers Association of Alberta (IBAA) identified the issues prior to 2013’s storm season and announced its Property Insurance Forum at its AGM in May. Held in September, the forum gathered stakeholders who have influence on the property insurance industry. With 16 participants and more than 80 observers, the Superintendent, Institute for Catastrophic Loss Reduction, various insurers and other government bodies and associations, were invited to provide insight into how weather and insurance may be managed.

While the meeting was designed to share information and different perspectives rather than draw conclusions, it is clear that the consumer has been most affected by the dramatic changes. Clients now need to determine the cost of clean-up, reconstruction and replacement of contents for their basements, now that policy limits do not always apply.

Few consumers have the technical knowledge to determine this, and expect their insurance provider to help determine values.

Brokers, too, have been affected by the changes. Errors and omissions (E&O) exposures have increased substantially.

What happens when a client with a $20,000 sewer back-up limit suffers a loss costing $90,000 to repair and replace? With insurers placing different limits and different criteria on availability, brokers must be diligent in where coverage is placed, especially renewal business.

For example, if a broker has five markets and three have put in sewer back-up limits, it is not feasible for a broker to move the home portfolios to the two remaining markets without the limits. This is particularly the case when the majority of companies are telling brokers it is not if, but rather when, they introduce limits.

And, of course, how many insurers would be willing to let a broker move a partial book and still retain a contract?

Communication and documentation are key processes the broker must also determine. Is a phone call to the client required or is a letter sufficient? Are client signatures required acknowledging new limits? Brokers generally do not want to see a loss not covered when it could have been, and no broker wants an E&O claim.

MAXIMIZING THE VALUE PROPOSITION

With all the changes, the broker value proposition has never been stronger. Brokers offer advice and choice. If one market cannot provide suitable coverage and pricing, then the option exists to move the client to another company that offers a better match.

The average consumer cannot navigate the complexities of home insurance. As the very nature of the broker role is to act as an advocate for clients, brokers are compelled to bring advice and choice to the conversation.

Direct writers and captive agents do not face the same number of risks as brokers. Choice of insurer is not an option and as a direct representative of the company, the E&O exposure dissipates. Uninsured or unsatisfied clients are left to pursue the insurer alone.

Agents and direct writers provide advice, but accountability is limited to the reporting relationship with their employer or supplier. Of course, most agents do not want to see clients suffer an uncovered loss either.

FACING UNEXPECTED HAZARDS

All insurers have concerns with underwriting profitability and reinsurance costs. During the Alberta floods, some direct writers had very tight wordings that excluded most of the damage.

By covering the losses, these companies did so at their own cost without the benefit of reinsurance support. Since their premiums did not incorporate the cost of these risks, the costs were multiplied. Add increases on reinsurance for 2014, and costs for all insurers are increasing.

Insurers also have public relations to manage – just ask the direct writers who suffered communications nightmares after denying sewer back-up coverage during the Alberta floods.

With limits on sewer back-up now in play, many insurers seem to believe that the potential PR pitfalls have been avoided. Truth is, the issue has just been transferred to another communications hazard. When an insured has a $20,000 limit, which may or may not have been effectively communicated, and suffers a $100,000 loss, he will be upset, especially if he feels that he was treated unfairly. Put this into a catastrophe situation, and PR Nightmare – The Sequel, begins.

With PR headaches, consumer unrest and potential issues of availability, affordability and sustainability surrounding property insurance, it is not unreasonable that consumers may begin contacting elected officials. When that occurs, government intervention may be expected, which is not what most industry players want.

It happened in 2004 with auto insurance in Alberta, leading to government reform. The result was a stable product, but the years of process were costly and tumultuous, which is why IBAA is advocating to insurers the need for a moderate approach in returning property insurance to profitability.

DEALING WITH INCONSISTENCIES

Continuing in the PR vein, flood insurance for personal property is not available in Canada, yet it is available for commercial property on an optional basis. This cannot help but be confusing for consumers.

Canada is the only G7 country not offering flood cover. Moreover, reinsurers are very interested in Canada as a flood market. Consumers and intermediaries also want it. But without updated flood maps and mitigation projects, and a defined government role, primary insurers are nervous.

IBAA believes the insurance industry as a whole is well-suited to provide a profitable flood solution. Most likely this will require a national solution, with most reinsurers believing it needs to be mandatory.

The future of property insurance will be chaotic and confusing for the next few years, especially for the consumer, while insurers determine the right formulas. Eventually, it will likely level out with insurers offering similar sub-limits, deductibles and rating platforms.

Brokers, and to an extent other intermediaries, will experience several months of difficult challenges as they determine how to manage their portfolios, E&O exposures and conversations with clients. Change can be hard, especially with so many unknown variables, but soon becomes the norm.

In the meantime, everyone waits for the summer storm season… watching the skies.