Canadian Underwriter

Walking on Water

March 1, 2012   by Canadian Underwriter

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Remember those heady days in the mid-2000s, when personal and commercial property claims ratios were more in the range of the high 50s and mid 60s, instead of the low-70s that we see now?

Sadly, we are all too used to seeing high claims ratios in auto insurance. But insurers are starting to make noises about worrisome trends in property lines as well. Water damage is a huge factor in the increase.

Recently, the Insurance Bureau of Canada, an association of home, car and business insurers, toured Atlantic Canada and sketched out the numbers in more detail. Specifically, water losses quadrupled in New Brunswick between 2005 and 2009, and doubled in Halifax over the same period.

It should be noted these water damage losses are based strictly on wastewater and sewer back-up issues inside the home. Losses due to overland flooding in Canada are not covered in any home insurance policies.

A movement is afoot within part of the Canadian property and casualty insurance industry to at least discuss the possibility of covering water damage due to overland flooding in Canada.

The debate is likely to gain more traction in Canada as governments start cutting an increasing number of emergency cheques to cover flood damage to homes. The projected bill to pay for damage costs related to Manitoba flooding in Spring 2011, for example, is more than $800 million. High property damage costs such as these are a likely result of more intense storm events predicted for the future. It is difficult to believe the federal, provincial governments wouldn’t mind some kind of public-private sector arrangement to help offset some of the costs associated with overland flooding damage in the future.

The thing is, whether governments or insurers step up to front the costs for water damage, the public will ultimately be left paying the final invoice. This could come in the form of higher taxes (if the government foots the bill) or higher premiums (if the private insurers cover the costs).

This is going to be a public issue in the future, especially if storm water damage escalates as predicted. Certainly insurers’ claims patterns over the past three years indicate something is going on out there. As one insurance company CEO put it: “We’re all weather forecasters now.”

As people in the industry often say, insurers can underwrite anything — for the right price. Naturally, if you live in a flood zone, the price of flood insurance would be higher than if you lived in an arid, landlocked area of the country. The problem thus far has been marshaling the data to assess where the water risks are.

To this end, insurers will be gradually rolling out a new instrument called the Municipal Risk Assessment Tool (MRAT) in 2013. This is not for overland flood insurance, which, as stated above, doesn’t exist. Rather, MRAT is to help insurers gather granular data to determine very specific sewer back-up and wastewater risks in particular areas.

Needless to say, this will expose some neighbourhoods as ‘high-risk’ for sewer backup. For those areas, it is not difficult to imagine premium increases.

Similarly, flood maps, required to analyze and potentially underwrite flood risk, would also expose areas at high risk of overland flooding. In order for overland flood coverage to work, the government would have to enact laws to prevent people from building in these high-risk areas, so premiums won’t go through the roof.

Herein lies the challenge: even if consumers might appreciate the clarity that comes with overland flood damage being covered under their homeowner policies, how will insurers and politicians convince them to pay the additional money that will no doubt be required to cover the risk?

The tune of covering overland flood is indeed nice to hear, but someone will have to pay the piper when all is said and done. Consumers interested in taking up such an option will want to have some idea of how much they might be expected to contribute.