October 6, 2008 by Canadian Underwriter
About 80% of Canadian houses today are undervalued by 27%, which hasn’t changed since 1995, according to Peter Wells, president of Marshall & Swift/Boeck (M&S/B), a provider of building cost technologies.
In addition, 60% of commercial buildings are undervalued by 40%.
In total, that would amount to Cdn$11 billion in lost premium for (re)insurers, based on the discrepancies between the reconstruction values of buildings and the premium collected to rebuild them (otherwise known as the insurance-to-value or ITV issue).
It’s a hot topic among insurers, brokers and insurance calculator providers, each of which blames each other for the problem.
(Re)insurers, in the meantime, are warning primary insurers that they might be in for a big surprise if they are suddenly required to insure the reconstruction of a large number of homes or businesses based on a large-scale disaster in Canada on the order of the flood in New Orleans.
At the National Insurance Conference of Canada, Diane Brickner, the president and CEO of Peace Hills Insurance Company, blamed the insurance to value problem on three main factors:
the inadequacy of cost calculators;
brokers are not using cost calculators correctly; and
insurers are not capping guaranteed replacement cost (GRC) policies, thereby failing to limit the amount by which policyholders may be underinsured.
These and similar comments stoked the anger of many brokers attending the insurance-to-value seminar.
“Brokers are absolutely committed to fixing the ITV issue,” said Insurance Brokers Association of B.C. CEO Chuck Byrne. “We think we have the right leadership to do it.
“GRC is not the cause, it’s the symptom. What we have to change is ITV.
“We’ve got to make sure that brokers do not use ITV competitively; that they do train and use the tools properly.
“We’ve got to make sure that the tools are adequate. They’ve been woefully inadequate for a long time. And insurers must be a lot more consistent and disciplined in their approach to ITV.”
Wells noted insurance calculators in the United States have historically used square-footage models to determine the true value to rebuild homes. That has changed, and those changes have recently come to Canada, Wells noted.
M&S/B now uses a “total component underwriting” method for determining the cost of homes, which includes many more variables in its calculations.
But when brokers were using the cost calculator, some were turning off one or more of the variables, leading M&S/B to make changes that would make it impossible to turn any one of the variables off, Wells said.
Doing this significantly changed the calculators’ final results.