Canadian Underwriter

Solution to sewer back-up losses not higher premiums and restricted cover, three-city MRAT pilot project launched

November 22, 2013   by Angela Stelmakowich, Editor

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The solution for ever-increasing insured losses from overwhelmed municipal infrastructure that leads to sewer back-up is not for insurers to hike premiums and slash cover, but rather to employ innovative tools that help cities better plan for and guard against severe weather, Don Forgeron, president and CEO of the Insurance Bureau of Canada (IBC), suggested in a speech Thursday.

“It has not been a pretty time, as the numbers suggest, for the property line in our business,” Forgeron said during a question and answer session following his luncheon address to business and government leaders at the Economic Club of Canada in downtown Toronto.

The industry could have eliminated sewer back-up coverage across the country or raised premiums to the point that a product is available, but not affordable, he told attendees. “But that doesn’t solve the problem. That just pushes it down the road a little bit further. That just forces, in our view, government to take measures that they probably wouldn’t otherwise even entertain,” Forgeron added.

It is necessary to view the issue holistically, he noted. That more encompassing view includes use of the municipal risk assessment tool (MRAT), a web-based aid to help calculate the probability of municipal sewer backflows now and that may also serve as an underwriting tool to calculate risk in future.

Forgeron told attendees that MRAT is being launched as a pilot project in partnership with the communities of Coquitlam, B.C., Fredericton, N.B. and Hamilton, Ont. “Insurers and municipalities have a key role to play in preparing their cities for a new era of severe weather and we are pleased to be partnering with these three forward-thinking cities,” he said.

Called the first climate adaptation technology of its kind, MRAT is designed to help municipalities identify vulnerabilities in their sewer and storm water infrastructure and to prioritize improvements to prevent sewer back-ups.

Changing weather, resulting in more torrential rain and flooding, is overwhelming vulnerable sewer and storm water infrastructure and causing sewer back-ups and basement flooding, Forgeron said. The genesis of MRAT “was the realization that infrastructure failure in Canada was responsible for the majority of ever-mounting insured losses that accompanied rainstorms across the country.”

The three municipalities were selected based on a number of factors, Forgeron said in response to a question from the audience. “There was a variety of criteria that we wanted to address in terms of testing of the tool itself,” he noted. The idea was also for the chosen municipalities to be as pan-Canadian as possible, to be of different sizes and to have infrastructure of different ages.

The initial three municipalities will be followed by six others. “The cities of Winnipeg, London, Bathurst, Moncton, Halifax and St. John’s have all collaborated with IBC in our developmental work on MRAT. In the months and years ahead, we will be partnering with them to integrate MRAT into their infrastructure analysis,” Forgeron reported.

And there are more municipalities waiting in the wings, he said, suggesting that the events of 2013 may have “provided even more motivation to municipalities.”

That motivation was likely enhanced by the severe flooding in Calgary and Toronto, events that significantly contributed to Canada’s almost $3 billion in insured losses from natural disasters so far in 2013. The hefty tab follows four years of nat cat-related insured losses close to or exceeding $1 billion, and which is considerably more than the average insurance payout for storm damage of less than $400 million annually from 1983 to 2008.

“You don’t need a calculator to see that in the past four years insurance payouts for storms have more than doubled the annual average of the 25 years that preceded it,” Forgeron said.

And it appears that, absent change, the trend will continue. “In Canada, we are now experiencing, on average, 20 more days of rain annually than we had in the 1950s. And extreme weather events that used to happen once in every 40 years now happen every six,” Forgeron said.

MRAT – created in partnership with several Canadian cities and through funding from Natural Resources Canada – is meant to fill the gap faced by municipalities that currently have few, if any, tools to quantify the susceptibility of infrastructure to severe weather events. Information about municipal infrastructure, current and future climate, and insurance claims is combined to provide a picture of where infrastructure is vulnerable now and will be vulnerable in 2020 and in 2050.

Based on information shared by municipalities and insurers, a unique risk formula is developed for each municipality. Climate information is added and a municipality’s risk formula input into a geographic information system visualization tool. This produces MRAT maps that show areas of current and future risk of failure of municipal sewer and storm water infrastructure that could result in insurable losses.

MRAT maps, in turn, can be used by city engineers to better plan and prioritize infrastructure repairs, adjust service levels and support requests for federal infrastructure dollars, notes an IBC backgrounder.

“The more cynical among us might conclude that MRAT is a science-based excuse for insurers to collect higher premiums,” Forgeron said. He emphasized, however, that the industry has pumped millions of dollars into MRAT’s development and has also handed it off to municipalities.

IBC reports that it will be a minimum three-year lag before insurers will have access to MRAT maps. “At some point in the future – at least three years out and at an agreed-upon time – insurers may also be provided with access to MRAT as an underwriting tool to help calculate risk. This will only happen with participating municipalities’ agreement,” the information adds.

However, it should not be assumed it is all bad news on the underwriting front. Some municipalities may find that high-risk areas are smaller than expected, so it could have positive effects for the availability of coverage, the IBC backgrounder notes. “As well, over time, municipalities can use MRAT to demonstrate infrastructure improvements to insurers, which will allow insurers to make more informed underwriting decisions.&r

At this point, it cannot be predicted how insurers will interpret MRAT maps several years from now, the information notes.

“Companies will do what companies have to do, but as an industry, we believe there are other solutions out there. This (MRAT) is not the only and the full solution, but it’s certainly a very, very strong positive step in the right direction,” Forgeron added.

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