Mind the Gap

$11 billion is a big number. That is the latest estimate of the amount Canadian homes and commercial properties are undervalued. It provides a tangible measure of just how far off much of the in-force property business currently sitting on insurance companies’ books truly is.

SCM Risk Management Services suggests that 70% of existing policies are underinsured by 33%, resulting in the above-cited shortfall in a variety of potential total loss scenarios. These include a major earthquake, fire outbreak, severe windstorm or — perhaps most importantly, given recent industry claims experience — a water-damage event. Given that Guaranteed Replacement Cost (GRC) prevails in most property insurance policies in Canada, the insurance industry is on the hook for the aforementioned funding gap.

Insurers and brokers agree the underinsurance problem can easily range from 30 to 40%, which is an equally big number when it comes to accuracy. (Imagine if your employer “underestimated” your salary by 30% or if you were selling your home and a realtor undervalued its list price by 40%).

“We have a significant gap in ITV, no question,” says Catherine Coulson, vice president of personal insurance for The Economical Insurance Group. “I think industry-wide it is easily in the 30% range, and in specific regions, such as parts of Western Canada, it could be much higher.”

An exact number is difficult to determine, since many different technology tools are spitting out various different numbers.

“Right now you are getting brokers using one calculator, a company using another and an inspection firm using another,” notes Rick Orr, first vice president for the Insurance Brokers Association of Ontario (IBAO) and a principal with Orr Insurance Brokers in Stratford, Ontario. “Even though they are all gathering the same data sets, the results can be way off. And 30-40% is not acceptable.”

The significant data gap raises two key questions. First, how did the ITV calculations become so skewed from actual reconstruction costs in the first place? And second, what can be done to shrink the percentage down to a much more accurate number? Many cite a range of 10% or under as a much more acceptable variation in ITV accuracy calculations.

ITV Calculation

ITV calculation problems are not a new issue for the industry. Broker associations, including the IBAO and Insurance Brokers Association of British Columbia (IBABC), have publicly questioned the validity and regional variance of some ITV calculator programs, including the program offered by MSB, a major player in the field of building inspection. Other ITV vendors in Canada have either launched new versions (e2Value in fall 2009) or issued a short-form calculator (PowerSoft in October 2009) to streamline broker collection of accurate property valuation data.

However, even with these changes, many sources argue that the two most prominent issues in building calculation accuracy today are: poor data quality (or missing data) at the point of sale; and inability to compare in-force property ITV calculations to actual industry loss data.

The first issue highlights the old saw in technology: garbage in, garbage out. “What contributes to the ITV discrepancy is often the inadequacy of data,” says Brenda Rose, a vice president with brokerage Firstbrook Cassie and Anderson. “Sometimes we have to use bits of information to calculate the estimated values. The numbers you plug into the calculator have to be right. When I have a question mark on an indicator, how do we know that any of this is credible or accurate?”

The second factor points to the glaring absence of any official, industry-wide loss data registry. “If insurers were willing to share loss data, which would obviously be anonymous, it would be a very useful exercise to everyone’s benefit,” notes Rose. “There are all kinds of reasons why some companies have not shared data. The fact is we have not gotten there yet as an industry.”

New ITV Technology

Several new tools, notably SCM Risk Management Services’ iClarify and iv3 Solutions, have come forward to address at least some of these ITV shortcomings. However, the companies behind these services stress they are not competing with the three main existing ITV software vendors in the Canadian market. Instead, these tools are known as “data validation” services designed to improve the quality of information at the front and back-end of the property insurance valuation process.

“When people first heard about iClarify, many thought we were trying to launch another ITV software calculator,” says Greg McCutcheon, president of SCM Risk Management Services. “That is not the case at all. We have a data validation engine that can be used on the front end to help brokers get accurate information or on the back end for companies to verify existing ITV calculations based on real, aggregated industry data.”

SCM Risk Management Services, part of the SCM Group of adjusting and loss inspection services, has access to 3-million home inspection files, as well as a database of 18,000 total loss files and 65,000 partial loss files. In addition, it offers street-level visual data (purchased from ILOOKABOUT), claims history (from CGI), neigbourhood profile data and overview satellite images to brokers to validate the data they collect from consumers. According to SCM, brokers will be assigned a “confidence value” on the replacement cost value indicated for a certain property based on how much information is available.

SCM has worked with Compu-Quote’s rating engine to make this information available to brokers. “It really improves the workflow, as a broker can get that data right at the point of sale,” notes Mc-Cutcheon. “Our data validation tool will populate the data for a certain neighborhood based on the information we have on the characteristics of that region and will also show pictures of a house and the street.”

For insurance companies, SCM also provides an indexing tool through which an insurer can run its existing portfolio against a database to find discrepancies in ITV calculations. “We can take a look at an insurer’s book and pinpoint areas where they are drastically underinsured,” observes McCutcheon. “We have enough information that we can apply it to show which risks are way off in terms of values. This is a tool for precision.”

If insurers take a “shotgun approach” and apply inflation-guard adjustments to ITV across the board, as many have done in the past, they penalize the good clients with correct values and they subsidize the poor clients with inaccurate values, according to McCutcheon. Also, this approach ignores variations in inflation across Canada and even across regions. Moreover, it prolongs the painful but necessary process of insurers having to update their current portfolio of property business.

iv3 Solutions is another technology provider targeting accurate property valuations in the property and casualty insurance industry. Its sister company, Solidifi, has specialized in providing property valuation and data analytic services to banks and mortgage lenders for several years. But iv3 thinks there is a big opportunity to share its “unique loss control solution” with property insurers.

“We are not a cost calculator provider for ITV, as this industry already has three companies [i. e. MSB, e2Value and PowerSoft] doing that,” says David Newall, executive vice president of iv3 Solutions. “We work with insurance companies to provide them with improved access to multiple data sources that were simply not available previously.”

Specifically, it offers a service called PropertyIntel Report, which gathers data sets from real estate, municipal tax and mortgage appraisals, and provides this information to insurance companies. Through a partnership with Altus Group, which provides construction cost information, iv3 is able to provide “automated intelligence” about individual properties and their surrounding neighbourhoods.

“This is a very cos
t-effective and efficient solution for insurance companies and their sales force,” says Kevin Walton, executive vice president of corporate development for iv3 Solutions, which also provides home inspection services. “We want to use or repurpose that information for the benefit of the insurance industry. We know this is a different industry (from mortgages), but we believe there is a lot of relevant data insurers can access from our sources.”

iv3 Solutions has marketed its services to insurers over the last nine months, charging a per-property fee for its PropertyIntel Report. Newall says insurance companies are “interested,” but he declined to list specific numbers of contracts. The company is looking at bringing out new services, such as tools for regularly updating valuations on insurers’ current books of business.

SCM Risk Management Services has benefited in its start-up phase from a funding relationship with IBAO, The Economical and one other unnamed insurer.

“This is an issue that brokers deal with everyday in their offices,” says Orr. “So as an association, IBAO decided to dive into this and look for a solution. The amount of data in SCM’s iClarify got us very interested as an association.”

Orr notes that iClarify addresses several concerns of brokers and insurers because it:

• allows brokers to access data easily and do front-line underwriting;

• validates the data supplied to insurance companies; and

• uses actual partial and total loss data for comparison.

The first point is especially important for brokers, according to Orr. “We have been meeting with a lot of markets, trying to get them to buy into this (iClarify),” he says. “Whatever the solution, we believe the broker should be doing the ITV calculation. We are the closest to the customer. Some companies have talked about hiring third parties to do inspections and ITV calculations, but the best solution is to use the brokers.”

Coulson says The Economical participated in iClarify’s startup phase mainly because it addressed broker-company workflow ITV issues. “We are interested in technology that will address tricky problems, but also technology that will help ease of use for brokers,” she notes. “This tool has the potential to do that. It can be integrated into the front-end and make the broker’s work process more efficient.”

As the only ITV vendor to sign a formal agreement with SCM’s iClarify tool, PowerSoft president Chris Lang says improving broker workflow has to be the central goal of any data validation effort. “We support anything that will create a more streamlined process for brokers to validate information on some key data points,” Lang elaborates. “If brokers can easily and quickly verify things like square footage and also get street mapping and photos, that is a great development.”

The IBABC has endorsed the collaboration between PowerSoft and SCM Risk Management Services’ iClarify tool. “(This) is the kind of solution our members have been asking for,” says Chuck Byrne, executive director and chief operating officer of IBABC. “Data verification will save time, and the ability to present defensible calculations based on actual inspections and loss experience will enhance credibility. Having this ability to verify data instantly, at point of sale and in a transparent manner, will resonate well with consumers.”

Fees are always a big question for technology services, and McCutcheon says SCM thought long and hard about how it would charge for using its data validation tool on the front-end. “There are thousands of quotes per month, but some companies don’t get the business.

We understand that companies in the industry don’t want to pay for something unless they get a direct benefit from it. We have developed it so that the company that actually binds the business pays for the data verification. This fee is less than 1% of the premium.”

McCutcheon says for the back-end process of data validation for insurance companies, there is a “tiered-pricing model that takes into account the number of policies and volume. We have also asked for a serious commitment from funding-partner insurance companies; in return they would get guaranteed pricing for five years.”

SCM’s iClarify tool is being rolled out in February with select IBAO brokers. Western Canadian brokers will follow, and then brokers from Quebec and Eastern Canada. “We don’t have a 100% solution,” McCutcheon says. “Our loss data is comprehensive, but we are adding data sets to it all the time. What we have is a big help at the right time.”

Bob Fitzgerald is chair of the Insurance Bureau of Canada (IBC) working group on ITV and an executive vice president with Aviva Canada. In his opinion, “anything that will help us get to the right ITV number for the consumer is a good thing. Personally, I think these technology developments are great news. There are some entrepreneurial approaches to help us deal with a very complex issue.”

He cautions, however, that there are no singular solutions to the ITV problem. Fitzgerald notes the working group, formed in February 2009, is “at the end of the beginning” phase in terms of sending material for approval to the IBC board of directors. It plans to mount a public ITV awareness campaign, publish best practices procedures for insurance companies and brokers and provide guidelines for what industry groups want to see from ITV calculator providers. “We are expecting to move ahead on this in the early second quarter of 2010,” he says.

McCutcheon says he supports the IBC working group. “We think this work is very important and we want to dovetail with that process,” he says. “This has to be a collaborative solution.”

Industry-wide Loss Data

One issue conspicuous by its absence in the discussions of the IBC ITV working group is any specific plan to either build the aforementioned industry-wide loss database or conduct closed claims file studies to verify existing building calculation values according to actual reconstruction costs.

Fitzgerald says there are currently no specific plans to conduct closed claims files studies or collect industry loss data, “but that doesn’t mean there won’t be in the future.”

“We have never collected it as insurance companies,” says Coulson. “It is the vendors who have collected the data; some have data warehouses but the data is proprietary to them.”

This lack of verifiable industry loss data has been a bone of contention for some industry groups. “We have seen national insurers, those that insure properties coast to coast, base their ITV estimates on a mere 100 total loss files,” Orr says. “That has been the justification for arguing that their valuations are way under. By contrast, if you can’t gather and validate credible data based on (SCM Risk Management Services’ loss database), then there is a problem. We are talking about the difference between 100 and tens of thousands.”

There just does not seem to be an appetite for such a loss database, says Lang. “To us, it would be logical for IBC to do it. But, like anything, it takes time and money to collect, update and manage the data. We would like to have something more consistent to run through our evaluation tool.”

The fact that private companies are now moving into the market may raise some concerns about “proprietary” access to data and fee arrangements. But, McCutcheon asks, what is the alternative? “We would support any industry type of initiative to collect and share data, but I don’t think that is going to happen anytime soon,” he says. “Many larger companies simply do not want to share this data for their own reasons, and I am not sure if IBC is positioned to do so.”

Some argue the issue of consumer education must be front-and-centre in any industry ITV project. “I think the most prominent variable in the data collection issue is pretty simple,” says Coulson. “Most homeowners don’t know all the details about their house we need to come up with an accurate ITV. There are some startling statistics [suggesti
ng that] 50% don’t know the square footage of their house. We need to encourage more awareness amongst consumers about basic elements of data we need, regardless of the calculator.”

By making sure the information coming from consumers is as accurate as possible, that eliminates one of the variables, adds Rose. “That is why one of the things the IBC is focusing on is consumer education,” she says. “When you ask clients about square footage, do they know the right number or is it just something they heard from a real estate agent 10 years ago? And if they don’t know square footage, they sure are not going to know about building structure, components and so on.”

Others are less confident that this is the real solution to the industry’s ITV woes. “The IBC working group is going to consumers with an awareness campaign and that is all well and good,” says Orr. “But we recognize that consumers are not a terrific source of data. No matter how many millions you spend on a consumer education campaign, my Mom will still not know the square footage of her house.”

In fact, Orr contends that brokers are looking for real solutions available in the marketplace today and may draw a line in the sand when it comes to getting ITV issues on the right track. “We looked at it [the IBC ITV working group] quite honestly as [having] too many stakeholders,” he says. “We didn’t think there would be enough cooperation to truly come up with an industry-wide solution. Right now, we are encouraging insurance companies to participate in the iClarify tool. At the end of the day, it might have to come to us forcing this solution on insurers. If all the brokers got together, it could happen.”

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Insurers and brokers agree the underinsurance problem can easily range from 30% to 40%, which is a big number when it comes to accuracy. (imagine if your employer “underestimated” your salary by 30% or if you were selling your home and a realtor undervalued its list price by 40%.)

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We support anything that will create a more streamlined process for brokers to validate information on some key data points. If brokers can easily and quickly verify things like square footage, and also get street mapping and photos, that is a great development.

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That is why the IBC is focusing on consumer education. When you ask clients about square footage, do they know the right number or is it just something they heard from a real estate agent 10 years ago? And if they don’t know square footage, they sure are not going to know about building structure, components and so on.

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If insurers were willing to share loss data, which would obviously be anonymous, it would be a very useful exercise to everyone’s benefit. There are all kinds of reasons why some companies have not shared data. The fact is we have not gotten there yet as an industry.