2013 flood losses mean insurance carriers need to point out exclusions to policyholders: EY

Canadian property & casualty insurance carriers need to work with government in order to determine how areas at risk of flooding can be insured, and they also need to “draw policyholders’ attention to exclusions,” suggests a new report from Ernst & Young LLP.

EY released its 2014 Canadian property & casualty insurance outlook Tuesday.

“Flood insurance received ample focus in 2013, and insurers need to continue to work with governments to define areas of higher risk and determine how these can be insured,” EY said in the report.

“Many insurers already use state-of-the-art technology to understand areas at risk of flooding and factor these into policy decisions. Insurers also need to draw policyholders’ attention to exclusions to make sure they understand their coverage.”

In addition to weather and catastrophes, the EY report focussed on product development and innovation, regulatory and accounting changes and digital technology and analytics.

“Vehicle telematics, which we discussed in our 2013 outlook, has seen a surge in interest, with many insurers beginning to pilot their telematics products,” EY noted. “Even the broker community is looking at telematics very closely, as it could change the way they approach their customers.”

The June, 2013 floods in southern Alberta “brought to light the difference between overland flooding and sewage backup,” EY stated. “Although this has been an issue in the past, it was magnified by the extent of the disaster and the number of affected customers. Claims were being denied because they were for damage caused by overland flooding, which is not a default coverage but can only be added at extra cost.”

EY added some carriers “ended up paying out these claims even though they were not covered just to avoid reputation damage.”

Meanwhile, with satellite mapping, EY added, “insurers could better use predictive modeling and maps to inform policyholders and to underwrite areas that have higher risks of flooding.”

However, insurance companies “continue to lag behind other sectors in their implementation of a digital strategy,” EY stated in a press release.

“We’ve said it before, but especially after a tough 2013, insurers need to invest in people, processes, methodologies and technology to meet the new requirements for risk analysis, distribution oversight and information transparency,” stated Doug McPhie, partner and EY Canadian insurance leader, in a release.

EY also addressed the issue of earthquake risk, noting there is a “low percentage of people and companies that are currently covered in the event of a significant earthquake.”

EY noted that last December, the federal Office of the Superintendent of Financial Institutions released its draft 2015 minimum capital test guideline. Public consultation closed March 15 and the guideline is expected to be released this September, EY noted.

“The draft guideline includes many new capital components, such as operational risk, diversification credit within insurance risk and risk of foreign exchange,” EY stated in the outlook. “Insurers should take a close look at the proposed changes early so they can optimally manage capital and make the appropriate decisions beforehand.”