Weather: The Mother Of Invention

For the better part of a year, insurance companies have been hinting that some form of product innovation is required to offset the heavy losses insurers have been taking in the personal property lines — in particular, water damage losses.

Innovation is required, insurers say, because most homeowners’ policies have been underwritten on the assumption that fire losses would be much more likely than water damage losses.

Enter our brave new world, in which water damage has been the predominant means of damaging a house in Canada.

Even though auto losses have hogged headlines over this past year — what, with all of the court cases, the glacial pace of government reform in Ontario and the absence of any working brakes on accident benefits (AB) claims payouts — homeowners’ property losses have been a major source of concern.

In 2009 Q2, federally regulated insurers in Canada wrote Cdn $2.558 billion in net premium last year in the personal property (homeowners’) line. They also paid out Cdn$1.98 billion in net claims incurred, which would put the loss ratio in the neighbourhood of 77.4%. Last year, the loss ratio was 74.8%

Granted, that’s not as horrible as in the personal accident auto line, where loss ratios are breaking 100% (indicating business losses). Still, this is not a good time to have the home and commercial property lines showing signs of distress as well.

Up until now, the industry has dropped a number of hints that “something must be done” about the losses in homeowner and commercial property lines. Until recently, it wasn’t really clear what that meant. All people really knew is that a “new way” of underwriting insurance was required to deal with water damage losses.

Alas, “innovation” is a buzzword that means absolutely nothing unless something concrete is attached to it. And as is often the case in the insurance industry, nothing concrete is spelled out in great detail, for fear of giving away trade secrets.

But some things are indeed starting to percolate up to the level of the public record.

For example, the Insurance Bureau of Canada has introduced a municipal risk assessment tool that can help underwriters determine where municipal infrastructure and flooding is worst, and will thus aid in underwriting those risks.

Also, individual insurers are talking about writing more risk-specific home insurance policies. This kind of underwriting would better take into account water risks and reward for mitigation measures taken by the policyholder. Presumably the underwriting criteria would focus more on things like the location of the contents in the house (i. e are they in the basement?), how much the contents are worth, whether the municipal sewers in the area are up to snuff, etc.

Another option, which came to light at the National Insurance Conference (NICC) in Ottawa, is the possibility of risk-transfer mechanisms based on the public markets.

In a speech to the NICC, Canada’s solvency superintendent, Julie Dickson, said insurers have approached the solvency regulator to see if there would be any objection to transferring weather-related property risks to the capital markets. Dickson gave a qualified thumbs up, saying “innovation” must still meet the regulator’s tests for capital adequacy, but, in essence, OSFI was “open for business” to innovation.

So it seems the inclement weather has ushered in a fresh new breeze of innovation.

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It seems as though the inclement weather has ushered in a fresh new breeze of innovation.