Rethinking property insurance

Increasing impact of water damage on homes and businesses prompts actuaries to look for better ways of pricing risk

The increasing impact of water damage on Canadian homes and businesses has prompted actuaries to look for better ways of estimating the costs associated with this risk.

A new study, commissioned by the Canadian Institute of Actuaries and conducted by KPMG, focuses on actuarial pricing of personal property insurance for the risk of water damage (overland flooding was not included as it is not covered by personal property policies in Canada).

Read: Public must be educated on basement flooding

Claim costs are the most significant driver of insurance premiums, which makes analyzing water damage risk essential. According to the Insurance Bureau of Canada:

  • In 2011 payouts for water damage claims hit the $500 million mark in Quebec alone; and
  • One out every two dollars paid to home insurers covers damage caused by water.

Furthermore, some insurance companies say the average cost of water damage claims has more than doubled between 2002 and 2012.

Read: How Canadian cities will benefit from MRAT

As a result, many actuaries are questioning whether the traditional process for determining premium rates for property insurance needs to be re-thought.

Currently actuaries start with historical claims and adjust them for inflation in order to form the basis for the premiums to be charged. They assume that over a large set of risks, the future will behave similarly to the past—an assumption that actuaries are beginning to question with regard to water damage.

One of the shortcomings of historical-based pricing approaches is that they do not take into account, for example, the impact of climate change on water damage risk. Insurers know that there has been an impact, but it has been difficult to assess and price.

Read: Property insurance needs an overhaul says IBAA

“Climate change and other factors are clearly having an effect, and the study represents a good first step in sharing this knowledge within the profession. The Institute has sponsored research on climate change for the last five years, and the profession is very open to learning more,” said CIA president Jacques Lafrance in a press release.

“Another important factor in the increased payouts is the current state of infrastructure in Canadian municipalities. Research suggests that a good deal of Canadian infrastructure is beyond its design life and capacity. And the challenges only increase during extreme weather events.”

Other issues have exacerbated the problem. Compared to the past, more people live in condominiums, which can suffer from leaks in their outer shell, and more units have laundry appliances and dishwashers, which can suffer pipe ruptures and inflict water seepage damage on other units.

Read: Cities at flood prevention crossroads

More homeowners now finish their basements, which were formerly used for storage in most homes. The trend has been to turn basements into living or rental spaces, which has impacted water damage claims. Furthermore, research shows that many are affected by budget shortfalls, underestimate the risk, and focus on home safety. Also, some homeowners procrastinate when it comes to preventive maintenance. Finally, people are spending more time away from home, with a decreasing understanding of the importance of preventing water damage to their property.

“This report will certainly have an impact on the profession as it makes the effort to bring these factors into our professional practice,” Lafrance added. “And the clock is running. Our next steps will include gathering comments and insights into the problem revealed by this report.”

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