Municipal infrastructure, condos with washing machines among major issues for insurers covering water damage

The resources dedicated by Canadian insurance carriers to auto rate filings, the tendency of condominium units to have dishwashers and washing machines, climate change and the current state of municipal infrastructure are all major issues for property insurers covering water damage, a new report suggests.

The Canadian Institute of Actuaries (CIA) announced Tuesday the release of a study it has commissioned, titled Water Damage Risk and Canadian Property Insurance Pricing, and conducted by KPMG.

The paper focused on actuarial pricing of personal property insurance for the risk of water damage.

“The increasing trends seen in the number of water damage claims (i.e., frequency of claims) as well as in the costs of claims (i.e., severity of claims) are alarming to many in the (property and casualty insurance) industry,” according to the paper.

CIA notes that trends include “aging and inadequate infrastructure,” lifestyle changes such as finished basements and the condominium boom.

“The ‘leaky condo’ problems in Canada are well-known across the country and around the world,” CIA added. “Water damage for condominiums is evident beyond simply the exterior shells of the buildings. “

For example, many owners have laundry facilities in their units.

“A rupture in the pipe in one unit can have repercussions for many neighboring units,” according to the paper. “Similarly, dishwashers are now a common feature in most condominium units, and a burst pipe, water seepage, or malfunction in the machinery that leads to water damage in one unit frequently damages other units as well. The quality of construction materials has also been a cited reason for water damage losses in condominiums.”

The scope of the paper was limited to water damage as defined by the Insurance Bureau of Canada (IBC). It does not include flood damage but does include, among other things: water main breaks; overflowing sanitary installations; sudden and accidental seepage of underground or surface water; and sudden and accidental discharge, backing up or overflow from sewer.

The study was based on a review of literature, questionnaires and interviews.

Many in the industry “believe that historical claims may no longer be predictive of future claims,” CIA noted.

“To the extent that certain claim types are either not present or have very limited frequency in the database, projections of future claims will not provide for such claims,” CIA added. “For example, there are very few claims for 50-year and 100-year storms in Canadian property data; similarly there are very few claims for losses resulting from failing infrastructure.”

Another factor affecting water damage insurance pricing is the amount of effort put into auto insurance pricing.

“Historically, Canadian P&C insurers have directed significant resources to the pricing and reserving of Canadian automobile insurance,” according to the report. “This attention is understandable given the volume of automobile insurance written in Canada, the numerous reforms that have been implemented across the country in the recent past (particularly in Ontario and Alberta), and the financial significance of automobile insurance to many Canadian insurers. Furthermore, the active rate regulation that exists in many provinces for auto insurance necessitates a greater degree of actuarial involvement to comply with requirements for rate filings and justification for rate changes than for property insurance for which similar rate regulations do not apply.”

CIA noted that respondents to its questionnaire “believe that actuaries have the skills necessary to price water damage but are lacking the credible data necessary to conduct such analyses.”

Respondents were also asked whether they believe that the government “has a role to play in addressing the factors giving rise to increased water damage.” Many respondents identified an issue with building codes.

“All future building needs further planning before providing building permits,” was how one respondent put it. “Builders and developers need to complete appropriate research into infrastructure requirements before subdivisions are built. Government needs to monitor and set standards. In areas of known concern, tax incentives be provided to homeowners to correct the situation and minimize a reoccurrence.”

Another respondent said there “needs to be higher standards for drains around the house as there is ‘nothing guaranteeing the builder’s work is done properly.'”

Quoting from a presentation in 2012 by Nodelcorp Consulting, CIA noted that municipal infrastructure “is believed to be a significant contributor to the increase in water damage claims for Canadian P&C insurers.”

CIA also referred to the Municipal Risk Assessment Tool (MRAT), which uses municipal data to “quantify the risk being underwritten with respect to water damage”

The data from MRAT “could potentially lead to … the ability of insurers to identify relevant variables for decision-making in both pricing and underwriting,” according to the paper. “Insurers’ claims data could be matched with municipal infrastructure data in sophisticated regression-based pricing models.”