Homeowner Property Losses: Underwater

Water-related losses on homeowner property covers seem to be seeping increasingly into the red-ink. While insurers have been battling the onslaught of losses arising from auto business, water poses a new threat to personal property covers, one which insurers can ill afford to ignore.

If you have been following the homeowner insurance news in the U.S., you have undoubtedly heard about the issue of rising water damage claims. Water is the fastest growing cause of loss in the U.S., having spiraled to a peak in the past three years. Freezing, sewer backup, leaky roofs, water ingress and mold are some of the categories that have taken off.

A recent poll of Californian insurance companies found that water damage claims have doubled in the state in the last four years and threaten to constrict the market. Texas insurers estimate a 60% increase in water claims in the past year. Several companies have stopped writing new business in the state, which now has the highest homeowner premiums in the country, and there is a concern that the limited availability of insurance will cause a downturn in the real estate market.

CANADIAN PERSPECTIVE

Although water damage statistics for Canadian homeowners insurance are not as readily available, we cannot assume that we have been immune to the water damage trends seen in the U.S. Claims growth in all categories has outpaced premium growth in Canada for five straight years. For the first time in many years, 2001 saw negative development on prior years’ claims.

The property class of business is considered to be significantly under-priced, and water damage has to be one of the factors behind this lack of profitability. In the past five years, we have seen unprecedented catastrophe activity in Canada: the ice storm in eastern Canada in 1998, the snowstorms of 1999, the record breaking rainstorm in Toronto in 2000, and the windstorms in Alberta and Ontario in 2002. All of these events produced catastrophe level payouts on property, and most of the claims were water-related.

State Farm recently excluded sewer backup from their homeowners policies citing a 400% increase in cat claims since 1997. My actuarial department now uses a significant weather related “cat load” in each Canadian province when calculating indications. Previously, Canada was considered “cat free” except for earthquake.

INSIDE OUT

Weather is not the only factor driving water damage. Water ingress is a significant cause of water damage claims on both sides of the border. Vancouver is now experiencing its second wave of leaky condos as high rise buildings start to show water damage. An increasing number of B.C. homes are also showing signs of water ingress damage.

The explosion of mold claims are also driving the water damage phenomenon in the U.S. In Texas alone, the top five insurance carriers saw their mold claims quintuple last year, and they have paid out more than US$1billion on settlements in the last two years. According to the Insurance Information Institute (III), Texas and California account for a majority of the U.S. mold claims, although many states are seeing increases and typical homeowners’ mold claims costs are between US$15,000 to $30,000. We have not yet seen the same proportion of mold claims in Canada, but the public awareness of the issue is growing.

REPAIR COSTS

The issue with water damage claims is that they are much more expensive on a cost per square foot basis to repair than fire damage. Water damage repairs usually involve ripping out and replacing sections of the home, instead of rebuilding from the ground up. Thus, water damage represents an “insurance-to-value” issue.

Chubb personal lines, through the use of our home appraisers, probably achieves the best insurance-to- value in the property insurance industry, and yet we still cannot determine the price to take apart a home piece by piece and put it back together. It is like that old poster of a car that shows how much more the sum of its components cost than the total car.

We have paid $500,000 on a water damage claim in one room of a $700,000 house. We recently had a claim to a hardwood floor in a kitchen. We had appraised, accurately, the replacement cost of the floor to be about $12 a square foot or $4000 in total. However, we had to pay an additional $20,000 to lift the marble island to put the new floor underneath it.

MOLD FACTOR

Just the threat of mold is pushing up the cost of settling water damage claims. Testing for mold costs about $2500, even if the results come back negative. Additionally, we take extra care in the settling and overseeing of water claims to ensure that today’s water damage claim does not turn into tomorrow’s mold claim.This “one-two punch” of higher frequency and higher severity from water damage, if not addressed, will drive up homeowner loss ratios beyond the reach of price increases. If the industry hopes to achieve an acceptable return on equity (ROE) from their homeowners’ insurance business, changes will have to made. So, what can we expect to see in the homeowners’ market in the next few years?

I believe that rates will continue to rise through 2003. The rate increases of the last year were a good start, but rates are still inadequate. Insurers will undoubtedly continue to refine their contract offerings. We have already seen changes to the way that cover for backup of sewers and drains is offered. We may also see separate backup deductibles or new contract wording for mold exposures. There is no question that stringent underwriting will continue, with additional scrutiny being placed on clients with prior water damage claims.

Overall, I expect to see increased industry attention being paid to insurance-to-value. We may also see increased annual inflation factors on policies to account for the red hot construction market and the shortage of skilled labor in the construction trades. Even with our excellent insurance-to-value, we will be trying to improve this ratio on contents and vacation properties.

GOOD NEWS

The good news is that Canada does not seem to be heading down the path of California or Texas. In addition to having different weather patterns and construction types, the current standard water damage coverage in Canada is already more restrictive than in the U.S. Canadian consumers do not yet seem to regard their insurance contract as a “maintenance agreement”. The industry is in the enviable position of having the opportunity to address the issue of water damage before it becomes a crisis, which should be less painful for the consumer and brokers in the long run.