Opening the Innovation Floodgates

Increasing water damage might just be the precursor to innovation in the insurance industry.

One of the many challenges facing our industry involves insured losses from water damage. In the article ‘From Fire to Flood’ (Canadian Underwriter, June 2009) Glenn McGillivray, managing director of the Institute for Catastrophic Loss Reduction, makes the following statement: “Indeed, basement flooding is a major concern for many (if not most) urban municipalities — and, thus, insurers — in Canada. Increases in the frequency and intensity of heavy rainfall events exacerbated by rising urbanization, deteriorating infrastructure and climate change will increase basement flood risk in the future. Effective management of flood risks requires improving sewer infrastructure, and also the cooperation of more informed homeowners.”

The topic has seeped into the upcoming agenda at the National Insurance Conference of Canada, which is to be held in Montreal on Sept. 19-21, 2010.The NICC features a panel discussion exploring the topic ‘Water and Brimstone – The New Reality in Property.’ The following de- scription of the panel discussion sets the stage: “Damage from water and other climate related perils have emerged in recent years to replace fire and theft as the largest claims cost for Canada’s property insurers. Lifestyle changes, aging infrastructure and change in the climate are some of the factors that have contributed to the rapid and sustained increase in insurance claims.”

It seems to me that in order to properly address the water infiltration challenge, we need to understand the causes of water entry into basements. This can occur as a result of torrential rain storms, winter/spring melts and deteriorating municipal infrastructure.

Poor home design can exacerbate the issue. This includes an absence of evestroughs/downspouts, improperly positioned downspouts, poor grading around the foundation, deteriorating weeping beds, lack of sump holes and a lack of functional sump pumps.

IDENTIFY AND EXAMINE POINT OF LOSS

In sewer back-up claims, damage most commonly occurs in basements with a poured foundation (usually concrete).This usually involves at least some part of the basement area being finished. Although basements of old often were completely unfinished, today’s basements often include bedrooms as well as a family’s prime liv- ing space, increasing the risk of more substantial losses if water enters the basement.

Here are a few characteristics of a typical basement that might augment the cost of the claim:

• Flooring often features carpet, laminate or wood flooring with sub-floor, increasing demolition and restoration costs.

• Furniture is often made using a soft material, close to floor level, and not ideal for a basement.

• Contents are often plentiful and stored in cardboard boxes on the floor.

• Electronics are often placed on floor level.

With respect to personal property, many would agree that in most sewer back-up and grey water claims, an inordinate amount of contents end up in landfill sites at great cost to insurers and the environment. However, some innovations with respect to treatment of many of the contents have demonstrated some success. These include the use of ultrasonic cleaning equipment, which has been able to save some items that otherwise might have been written off.

Contents to be discarded should be itemized before they are removed from the loss site. Typically a contractor initially scribbles down a list of contents to be disposed of, the insured completes the inventory and the adjuster performs the loss calculations. The process involves a lot of hand-written work. The process is long, frustrating, often flawed by errors and visually unappealing.

BUILDING RESTORATION

With respect to building restoration, two response phases include emergency restoration and the ultimate repair.

During the emergency response phase, the contractor will focus on extraction of water, drying with fans, dehumidifying and a ‘tear-out’ of building components deemed unresponsive to treatment. Construction materials removed during the emergency clean-up response include drywall, flooring and sub-flooring, etc. They usually end up in landfill sites.

The generally accepted approach to the final restoration involves returning the risk to its previous glory (even if it isn’t water resistant).

In view of what’s been said above, there are a number of opportunities to launch innovative projects.

Partnering with others

Failing infrastructures, including municipal sewer lines, pose challenges that can best be addressed when all the stakeholders begin to communicate and collaborate. The stakeholders include local, provincial and national levels of government, as well as the community associations and the insurance industry.

The insurance industry is already sponsoring research for potential solutions to the water damage challenge. For example, it is currently behind the development of a new municipal risk assessment tool, which is designed to aid insurers and municipalities assess municipal their water damage risks. However, there may be further opportunities to partner with the construction industry and various levels of government. Dealing with the issue of waste going to landfill sites provides a perfect example of such a partnership opportunity that might be explored between the insurance industry, municipalities and the construction industry.

Educate the general public

Acknowledging that the Insurance Bureau of Canada (IBC) has launched a public awareness campaign on this issue, the public needs to hear more from the industry about how to deal with claims arising from water in the basement. What if every adjuster is provided with a check list when they attend a loss site? The checklist could form the basis upon which to review with the insured what might be done to make the policy holder’s basement more water resistant. At renewal, brokers or insurers could send a flyer reviewing best practices and offer discounts to insured’s that follow the practices. Perhaps insurers could provide an audit service to randomly selected policy holders and then show anonymized results of a video audit on the company Web site.

Differentiate your policy or service

Look at your own processes to see if they can be made more efficient, such as how you deal with your contents inventories. Offer your policyholders more information on how to avoid losses and reward policyholders’ pro-active actions. Offer more technology-based options for services. Look at different options instead of merely restoring the water damaged basement to its original state. Create an innovate-or-die culture in your organization, and ensure it works from the ground up and is rewarded from the top down.

Organizations deciding to create a culture of innovation pervading the entire organization will not only survive, they will thrive!

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Dealing with the issue of sending water-damaged contents to landfill sites provides a perfect example of a partnership opportunity that might be explored between insurers, municipalities and the construction industry.