Canadian Underwriter
Feature

Water, Water Everywhere


February 1, 2008   by David Gambrill


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There is a line in the poem, The Rime of the Ancient Mariner — “Water, water every where, nor any drop to drink”– that speaks to the increasing water damage claims Canadian insurers have been experiencing lately, leaving insurance companies parched for more premium dollars to pay the claims.

Statistics for 2007 are not yet available to support the anecdotal evidence (and won’t be until around March 2008), but there appears to be a growing consensus within the Canadian insurance industry that water damage claims are now more frequent than the previous Number 1 bane of the country’s insurers — fire damage claims. “From Chubb’s standpoint, I can tell you that water damage has become the most frequent peril that we’re paying claims on when it comes to a homeowner situation, whereas historically fire and theft would have made up a greater percentage of our claims,” observes Chubb Insurance Company of Canada’s vice president of personal insurance, Paul Morrissette.

The Co-operators president and CEO Kathy Bardswick predicts the same will hold true when the 2007 financial results are tabulated. “I think that 2007 will prove to be a very troubling year as well for water-related losses for the industry,” she says. “I will be absolutel surprised– shocked, in fact– if it doesn’t prove to be one of our most troubling years in the past 10 related to water losses.”

The situation may well blow the lid off a simmering, behind-the-scenes dialogue, in which some insurers are calling on the industry as a whole to re-think its occasionally confusing approach to covering water damage. On the one hand, for example, insurers cover homeowners’ water damage if the damage arises as a result of sewer backup. But no Canadian carrier offers protection in a homeowners’ policy for overland flooding.

FLOOD OF CLAIMS

Where is all of this water damage coming from?

Global climate change is an obvious culprit. Paul Kovacs, the executive director of the Institute for Catastrophic Loss Reduction (ICLR), is a member of the Intergovernmental Panel on Climate Change (IPCC), which recently shared a Nobel Prize for its scientific work in the area of climate change research. “There’s climate change, increasing rainfall events,” he says. “There’s lots of evidence, not only in the models, to say it will increase in the future, but there’s lots of empirical evidence to show it’s already increasing now.” He cites a study, conducted eight years ago, showing that there has been a 20% increase in the number of rainfall events measuring more than 50 mm (over two inches), which is considered a heavy rainfall event, between 1900 and 1990.

A quick scan of Environment Canada’s ‘Top 10 Weather Stories’ for 2007 bears out his observation. The stories include major flooding events in British Columbia, Manitoba, Saskatchewan and Alberta. As recently as January 2008, a major windstorm and rain event in Ontario caused a great deal of flooding in the “cottage country” around Huntsville, Ontario. Water damage claims from that storm accounted for a “majority” of the insurance claims, Insurance Bureau of Canada (IBC) noted in a public statement, with the overall insured losses totaling Cdn$50 million.

ICLR researcher Dan Sandink further points to the 2004 floods in Peterborough, which caused Cdn$87 million of insured flood damage based on more than 5,000 claims. A state of emergency was declared when the city was hit with more than 220 mm of rain over just a twoday period. “You cannot say the Peterborough rain event was climate change,” Kovacs says. “But you can say that climate change means we are going to have more rain events like Peterborough.”

Urban development is also a factor in flooding. What happens to the water when it falls? It searches for permeable areas, Sandink observes. He notes that non-permeable, concrete areas — a consequence of urban development — have replaced permeable surfaces such as wetlands, meadows, river valleys, grass, trees, etc. As a result, when the rains fall, the water flows over non-permeable surfaces, often arriving in policyholders’ basements, causing flood damage.

In some situations, higher water-damage costs might be attributable to the more valuable and expensive items that are increasingly finding their way into people’s basements. “Some of the renovation trends in our major cities, where homes are gutted with high frequency and then rebuilt or renovated on a large scale, [mean] basements are no longer the ugly, cement areas where people store old, outdated goods,” said Morrissette. “In many cases, you have elaborate home theatres in there. You have people decorating them with the same level of detail as they do other levels of their home. And the basement is a frequent area for damage to occur.”

But basement contents and demographics make up only part of the flooding story. Although urban development has proceeded at a remarkable pace, Canada’s municipal infrastructures in Canada have not kept up. From 1800 to as late as 1970, cities traditionally used the same pipe structures to handle both sewer and storm water flow, Sandink notes. After the 1970s, cities started to build storm sewers separate from the sewer pipes. They also started to look into other ways to manage the water flow, including:

• incorporating overland flow routes in the design of their storm water infrastructure;

• building streets with higher curbs;

• introducing storm water retention ponds in areas that were depressed; and

• ceased or decreased development in naturally permeable areas, so water could flow into these areas and be absorbed into the ground before it hit the sewer system. After 1990, Sandink says, municipalities got even more aggressive, incorporating best water management practices areas into their development plans. Ontario’s ‘technology triangle,’ for example, Kitchener-Waterloo-Guelph, has its Grand River Conservation Authority that deals strictly with water issues related to the Grand River.

Despite all of the above initiatives, storm water rains still manage to overwhelm aging, cracked storm water pipes, overwhelming the system. The cost to upkeep the 30-year old water infrastructure is costly, Kovacs notes. He says ICLR’s discussions with representatives of the City of Toronto have suggested it might cost Cdn$1 billion alone just to refurbish Toronto’s aging system — to say nothing of how much it will cost other cities to do the same. A recent Federation of Canadian Municipalities report, estimating how much it would cost nationally to repair decaying infrastructure such as roads, storm water systems, etc., comes up with a figure of Cdn$123 billion.

As expensive as that sounds, repairs to the infrastructure are top-of-mind for Canadian insurers. IBC in January called on Canadian governments at all levels to make infrastructure repair a top priority. “Since the 1970s, we have witnessed a 20-fold increase in the cost of claims from extreme weather and geological losses,” IBC president and CEO Mark Yakabuski said as part of a panel at the Climate Adaptation Expert Meeting hosted by the City of Toronto. “The unfortunate reality is that infrastructure failure played a major role in every major natural disaster in Canada in recent memory, including the Ice Storm (January 1998), the Saguenay Flood (1996) and the Greater Toronto Area rainstorm (August 2005).”

OVERLAND FLOOD COVERAGE

Insurance industry partnership with governments is at the heart of a discussion surrounding one of the insurance industry’s Achilles Heels — the ambiguity surrounding water damage cover.

“We have a fairly confused approach to water in the policy, as it stands,” Bardswick says. “We have the separate sewer backup endorsements. We speak specifically to sewer backup in the event called ‘sewer backup,’ but we have, and I’ve seen it, a number of situations in which it’s a grey area. Is it a sewer backup? Is it a flood? Do we cover it or don’t we?”

Adjusters have a number of means to determ
ine whether flooding is a result of sewer backup, which is covered, or overland flooding, which is not. Morrissette notes adjusters look for things like impurities or discoloration in the water, water stains appearing from outside the house, and whether other houses in the area have experienced the same type of water damage.

Coverage for water damage arising from sewer backup is often a standard feature in a homeowners’ policy. Historically written as a separate rider attached to a homeowner’s policy, coverage for sewer backup is now increasingly being subsumed under the general homeowners’ policy, Glenn McGillivray, the managing director of ICLR notes.

Alas, many policyholders believe water damage due to overland flooding is also covered, even though no such coverage exists in Canada. Kovacs and Sandink both refer to an ICLR study in which 70% out of 2,100 survey respondents indicated they believed they were covered for overland flood damage when in fact they weren’t. “Certainly you see the impact on consumer perceptions of the insurance industry in that regard,” Sandink says. “Because when consumers are affected by a flood, they assume they’re covered. But when they go to their insurance company when they’ve had overland flood damages, [the insurers] say: ‘No, you are not covered.’ And [the consumer] will say, ‘Well, I didn’t know that before. What am I paying my premiums for?’

“In the study I did in Peterborough, the open-ended responses talked to that point. People were just angry about it.”

Canadian policyholders can’t totally be blamed for believing this, since insurance companies in Europe, United States and other countries, unlike their Canadian counterparts, do cover overland flooding. In fact, Guy Carpenter & Company LLC noted extensive flooding in June 2007 caused severe damage in north-eastern, central, and southwestern England. “Over 130,000 insurance claims were submitted, with insured losses estimated at over 3 billion ([US]$6.2 billion),” the report noted.

So why don’t Canadian insurers cover flood?

Insurance companies typically do not offer overland flooding coverage because of what is called “anti-selection,” McGillivray notes. Simply stated, while every Canadian home is at risk of fire, theft or wind damage, not every Canadian home is at risk of overland flood damage. Those most at risk of such damage are those who own or build property in a flood plain. As a result, not everyone will buy flood insurance, which means the risk can only be priced over a smaller base of policyholders. That makes the premiums more expensive; overland flood coverage therefore becomes unaffordable for the policyholder and unprofitable for the insurer.

There are questions as to why the anti-selection argument has carried the day in Canada, when overland flood coverage is available elsewhere. At a brokers’ conference in Ontario a few years ago, one broker, who was not talking about flood coverage, said “I can insure a dynamite factory that I know is going to blow up on Saturday and make money.” The key, he added, is to price the product properly according to the risk of damage. And therein lies the dilemma for Canadian insurers: what can be done to reduce the risk of water damage, so that overland flood coverage might be affordable and profitable for private insurers?

SOLUTIONS

Obviously, in order to mitigate water damage, policyholders can do some things themselves, Sandink notes. They can install backwater valves, which prevent sewer backup from flowing back through the pipes into the house. They can install waterproof basement windows, window wells can be added to prevent water from flowing into windows. Landscaping should be graded so that water is directed away from the house’s foundation. Sump pumps can be added to work in concert with the backwater valves, and downspouts can be detached so water doesn’t flow down to the foundation of the house.

Making these things happen will depend on insurers making the effort to educate their policyholders. Bardswick and Morrissette advocate using a combination of education approaches. Chubb, for example, Morrissette says, goes “to great extent to educate every one of our homeowners, customers, first and foremost, on how to shut off the water in their home, so that if a problem does start, they can at least mitigate further damage in the event of a pipe burst or some sort of freeze that might occur somewhere in the house.” He adds Chubb has an appraisal service that visits with customers onsite and demonstrates where the water shutoff valve is, labels it, and explains other ways available to monitor moisture — including available devices that can shut off water automatically when a certain amount of moisture is detected.

Bardswick notes this kind of face-to-face time can add up, when spread across millions of Canadian policyholders.

Another way to educate is through premium rates. Some companies, for example, offer rate decreases for policyholders that agree to install backwater valves. Such valves, when they are installed, “float” inside the water pipes; when the water reaches a certain level, the valve closes, preventing the water from flowing back up the pipe. Kovacs says the cost to install the valves themselves is relatively inexpensive — about $60 for the valve, and about two hours of labour costs to pay the plumber to install it.

Of course, the broadest and most lasting initiative would be the upgrading of municipal infrastructures. This, as IBC notes, requires a long-term partnership with all levels of Canadian government. Some hope such a partnership would create the opportunity to discuss mitigation efforts that might lead to overland flood coverage. In a recent Swiss Re report, the reinsurer notes “there is no reason why comprehensive insurance cover against floods should not be marketable — provided that the partnership between policyholders, insurance companies and the government works.”

European insurance brokers themselves have recently called on their governments to increase mitigation efforts, including:

• an independent government agency dedicated exclusively to mitigating flood risk;

• government commitment to improve flood defences and fix drainage systems;

• improve flood map development; and

• consulting with the insurance industry before approving development in flood plain areas.

Such items would also likely be preconditions for any Canadian private insurer to consider underwriting flood risk in Canada. And some of them seem to be a long way on the horizon. “We do not have adequate flood-mapping in Canada,” McGillivray observes, by way of example. “The flood map program died a couple of decades ago after government cuts, and so there’s very, very few places in Canada that have adequate flood maps — like in Quebec, for example.”

Regardless, says Bardswick, the discussion about covering overland flood risk needs to begin now. “I think that that discussion needs to happen,” she says, citing the need for the industry to partner with governments.

“I think we need to be more proactive as an industry in trying to identify what are the possible solutions, what are the best practices that are out there worldwide. What are other jurisdictions doing, and is it applicable to us? How do we go about implementing it as an industry?”


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