Do sophisticated water models select against smaller insurers?

The sophistication of technology for rating overland flood could conceivably lead to smaller insurers ending up with a disproportionate share of flood risks on their books in the event of a cat, which could spell trouble for consumers.

Insurance Brokers Association of Ontario (IBAO) chairwoman Traci Boland cited the looming issue in remarks made to Canadian Underwriter last week. She was contacted for her observations about trends she has observed in the Ontario insurance market.

As rating for water becomes more accurate, and with some of the larger companies using things like geo-rating systems, it can become difficult for brokers to place sewer back-up and overland flood coverage in certain areas, Boland observed.

This is based in part on the fact that larger insurers using sophisticated modeling techniques can make finer distinctions between good and poor water risks, giving them a competitive edge over companies that do not use the same models. “You have your smaller companies that might not have that [kind of] sophisticated water model… having to write a lot in those [higher-risk] areas,” Boland said.

But if smaller insurers with less capacity are writing the lion’s share of water coverage in a particular area, that could spell trouble in a cat situation. “The fear is when a cat happens,” Boland said. “How are those smaller insurance companies going to deal with a cat loss? Cats are no longer every 10 years. It’s not if, it’s when it’s going to happen.”

Boland urged brokers to work with municipalities and insurance companies to ensure that “water coverage is available at an affordable price for all people in Ontario.”

And if brokers are looking for the water insurance market to settle down anytime soon, guess again.

“Companies will continue to update their coverage as the need arises, and they will want to show their competitive advantage within their wordings [and] coverage,” Boland predicted. Given the various different policy coverages, exclusions and wordings, it is unlikely brokers will soon see the same overland flood coverage and policy wordings for everybody.

“That doesn’t work for realistic day-to-day Ontario weather and Ontario companies,” said Boland, who is also a partner at Ontario West Insurance Brokers in London, Ont. “The coverage cannot be easily described to our insureds without having an in-depth discussion with each customer about their own unique location and exposure.”

Brokers should constantly update their training on all water products to be in a better position to advise and sell the correct coverage for the risk, she advises.

Each company has their own unique coverages, exclusions and wordings for both sewer back-up and overland water, making the product a tricky sell. “There’s different wordings and different coverage for every single product out there,” Boland said. “The positive side of that is this is a time for brokers to shine and know their products, sell the right products for the right location.”