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A New Tide In [Water] Policy Management

Water-related damages are the number one property loss issue--but many policies are designed to deal with theft and fire. How is the industry shifting to meet the new need?

The trend towards increasing water issues is causing insurers to seriously amend their policy development and payout processes.

“I think the problems are bigger than just getting insurance to cover our losses,” says Martin Beaulieu, senior vice president of personal lines at Intact Financial Corp. “Consumers won’t want to pay for that increased level of loss. We have to find ways to mitigate the level of losses. Prevention and education are aspects Intact is really counting on.”

Like many insurance companies, Intact saw water-related claims take over as the primary loss issue. “It’s now the number one loss in our home insurance… averaging north of 40% of our losses now. Go back 10 years and it would have been half of that.”

What happened? It didn’t just rain. It poured. In Ottawa and Hamilton last summer, heavy rains led to $196 million (CDN) in payouts, the IBC says. Atlantic Canada saw 42% more precipitation than normal in 2009, notes Environment Canada. The government department also points out that near Morris, Man., the Red River reached a width of 16 kilometres across; flood claims exceeded $40 million.

How is the insurance industry responding? The answer seems to be a mix of policy changes, education, and new processes.

While neither of the carriers we interviewed (Intact and Aviva Canada Inc.) would say that they’re raising rates, Statistics Canada reported late last year that home insurance prices had increased in 2009 by 13% in Ontario, alone. While this was twice the average national increase, the fact is homeowners across the nation experienced some sort of insurance increase in 2009.

Tapping the Revenue Flow
“I’d say that across the board, the Canadian property and casualty insurance industry has done a good job responding to this,” says Fred Plant, president of Plant Hope Adjusters Ltd. in Moncton, N.B. He adds that over the past few years, insurers have been beefing up their policies and providing additional coverage for competitive reasons.

But “there’s been a rate problem in this country for years. The insurers have not kept up with the premium revenue that they need because of the competitive nature. When you add more coverage, but you don’t get a whole lot more premium for it, you’ve taken a step backwards. I think insurers now are being more sensitive to the location of the risks and doing more specific underwriting on homeowners’ policies.”

Plant’s observations came just as insurers operating in New Brunswick predicted another rate increase for property policyholders, and just as 1,600 homeowners in Cape Breton, N.S. (and parts of New Brunswick) received non-renewal notices from The Co-operators.

The issue: Balancing the need for more revenue to cover the losses on one hand, with the competitive stakes on the other–customers are ever so willing to walk over to a competitor if the price is right.

Education is Key
Intact is focusing on education as one of the solutions. Beaulieu points out that consumers need to become more familiar with the humble backflow valve to prevent sewage from backing up into their fine basements. Intact also aims to teach consumers about the dangers of old water pipes, which are more prone to breaking than newer pipes. Homeowners need to see the importance of ongoing replacement of aged plumbing, he says. Another preventive tool is the installation of alarm systems that shut off the main water flow when a leak is detected.

“I think we have a long way to go in educating consumers on that,” Beaulieu says, adding that this used to be the case with smoke detectors, but working with firefighting organizations, the insurance sector helped convince people to install the life-saving devices. “By educating consumers and getting involved as an industry, we made [fire alarms] a standard,” he says. The same can be done with water leak alarms.

Better Risk-Assessment Tools
Another tool Intact is investing in is a new system to assess risks. “…The prevention tool… [will] provide brokers with a diagnostic of risks for a [particular] consumer, and what [clients and brokers] can do to best protect themselves.”

The technology–primarily available via Intact’s Web portal and in the future through broker management systems–will consider things like the age of a home’s water heater, the age of the roof, and whether there are large trees on the property, or cracks in the basement.

This more comprehensive examination of potential property risks is what Aviva is concentrating on, says Wayne Ross, vice-president of property claims. The carrier also faced significant losses thanks to water over the last few years. Ross blames the rising costs on weather as well as the trend towards urbanization–with so many people living in cities these days, we’ve created “asphalt jungles” that divert water into sewer systems that are starting to show their age.

“I’m certainly hoping that within a year and a half from now, we will have [this tool],” Tremblay says, adding that part of the tool-validation project will require testing it among a number of municipalities.

“We’ve tried to develop an infrastructure that can support this type of activity, because we know the volume’s going to be there,” Ross says.

The first step for Aviva, says Ross, is to find water-specialist partners. “We’ve partnered with a number of contractors across the country who are well versed in water remediation,” Ross says. “If you get the right player on these losses early on, you can mitigate a lot of damages.”

Step two involves enhanced assessments, says Bob Fitzgerald, Aviva’s former executive vice-president and chief underwriting and marketing officer.

“Aviva has developed a very sophisticated rating methodology that looks to customize its property rates,” he says, adding the assessment considers impact perils such as wind and sewer backup issues in specific locations. “We also look to reward, via lower rates, customers who have been proactive in helping mitigate potential effects through their own actions.”

Industry & Infrastructure
Robert Tremblay is the IBC’s director of research. He’s about to embark on a project that should help insurers draw a dotted line between poor sewer systems and water-related property claims.

The project is a risk assessment tool for municipal waste-water and surface-water infrastructure that would give municipalities a better picture of the risk their infrastructure presents.

The IBC has convened an industry working group to analyze the proposals and make a recommendation to the IBC adoption and climate change committee. The group is scheduled to begin building a tool on March 1.

“I can tell you, I’m looking forward to it,” says Tremblay.

He projects that in 18 months this risk assessment tool will be ready to use, after tests within various municipalities.

With water claims, the rubber really hits the road for brokers in their approach to clients, as well as their product knowledge. Brokers will need to have a strong handle on just what the individual carriers offer by way of coverage–and what their clients are up to, especially when it comes to basement renovations.

It all points to a new standard in customer engagement. “The public needs to be better educated about what insurance is,” explains Plant. “When you need it, and when you don’t.”