When it rains, it pours.
We are less often seeing a light sprinkling of rain and more often witnessing downpours that wreak havoc on old, crumbling and inadequate infrastructure. Inevitably, this causes increased insurance claims when sewers back up into basements of homes and buildings. “Water is kind of public enemy number one these days,” Larry Lythgoe, FCIP, vice president of corporate claims at Intact Financial Corporation, says.
Environment Canada has ranked the winter of 2008 as one of the top 10 wettest winters between 1948 and 2009. Additionally, the Great Lakes/St. Lawrence region experienced the third-wettest winter on record between December 2007 and February 2008, Lythgoe notes, adding that precipitation levels during this period were 31 per cent above normal.
“I would say in the last year we’ve probably had 10 situations where we’ve had major floods due to heavy rainfalls and rainfalls that we hadn’t typically seen before, where massive amounts of rain fall in short period of time,” Fred Plant, president of Plant Hope Adjusters Ltd., says. “I think today actually in Sydney, Cape Breton, they’ve experienced the highest amount of rainfall in 75 years. Last September, we had Rothesay Avenue in St. John under three feet of water. We’ve never seen that before.”
The climate’s impact on the insurance industry has slipped slightly in terms of a concern factor — in 2007, climate change ranked fourth in a list of risks facing insurers, according to an Insurance Banana Skins survey, and dropped to number 28 in the 2009 survey. But this is mainly due to the current economic recession, according to Christine Schuh, associate partner and climate change service leader at PricewaterhouseCoopers LLP. “The insurance industry still considers climate change as a long-term risk that needs to be managed and developed, but they’ve got some more urgent matters that they need to take care of . . . related to the economic recession,” Schuh notes. “So it’s not that climate change has fallen off the table. It hasn’t. It’s still recognized as a long-term risk that needs to be addressed.”
For an insurer, climate change has a direct impact on the increased frequency and severity of weather-related property insurance claims. “The insurance sector in particular is experiencing one of the most direct impacts of climate change,” according to PwC’s Insurance Digest. “It is estimated that around one-third of all overall insurance claims are from weather-related natural disasters. Increased losses, in turn, could raise the cost of capital and increase the volatility of insurance markets.”
How we got here
As people continue to drive cars and factories continue to run, among other factors, the pollution spewed into the air — carbon dioxide in particular — is causing the “blanket” around the world to keep more heat in. The warming process has been going on for roughly 150 years, accelerating since 1970, and all predictions suggest the world will only continue to get warmer, Paul Kovacs, the executive director of the Institute for Catastrophic Loss Reduction (ICLR) says.
Part of the warming trend means there will be a lot more hot, muggy days. More moisture will evaporate out of the soil, the lakes, the rivers, etc., and be held in the air. There will still be water, but instead of being in the ground and the lakes and rivers, it will be in the air. At some point, there is too much moisture in the air and it comes down as precipitation. Over the last few years, there has been less of the light sprinkle rain events and more of the pouring rain events, which occurs when the saturation point in the air is hit. “We’re getting a lot more of those events and we are getting more of those in Canada, we’re getting more of those around the world,” Kovacs says. “In a warmer world, the frequency of very intense rain goes up. Intense rain can be overwhelming and put water into our house where it’s not expected.”
The warmer air is also wreaking havoc on forests by drawing the moisture out of the trees leaving them more prone to ignition during lightning storms — which are also occurring more frequently.
The area around the Atlantic Ocean, where most hurricanes start, has gotten warmer and is predicted to get much warmer still. The conditions for starting a large hurricane are greater than they used to be, while the conditions for starting small hurricanes are probably actually weakened in this process, Kovacs says. “There’s a sense that we have had and we will continue to have more large hurricanes.”
Issues of concern
Statistics speak to the increasing severity of weather-related claims. In Toronto alone, there have been two 1- in-100-year events and six 1-in-50-year events in terms of rain intensity during the past 15 years, according to Robert Tremblay, director of research at the Insurance Bureau of Canada.
Roughly three years ago, the insurance industry began to see an increase in water claims. In 2005, the industry thought it had just been a bad year. But since that so-called “bad year,” things have become progressively worse, leading insurance companies to hold their breath during the first two quarters of 2009 — quarters that typically see a lot of snow and rainfall, Irene Bianchi, vice president of claims at RSA, notes. “I remember last year we were breaking records all over the place in terms of the amount of snow and rainfall we got,” she says. “It just wasn’t in one specific locality across the country. And when we do have this level of weather activity, it puts an enormous strain on the claims handlers themselves and then obviously the process.”
Lythgoe points out that fire and theft have traditionally made up the largest percentage of claims in the past. But now 40 per cent or more of claims have some kind of water component. The residual effect of hurricanes also features a water component. For example, when a large hurricane hits Florida or the Gulf Coast, it is very much a wind and water event. However, by the time the hurricane comes to Canada, it’s usually run out of steam and is mainly a water event, Kovacs says.
Climate change is not just about water. In addition to rain, the insurance industry is dealing with severe wind and wildfire claims.
Wind events that cause structural damage in Canada are often related to a tornado. While there are a number of reasons to believe there will be more and larger tornadoes in the future, the research is still unclear; more analysis is required to determine how much of an increase we will see in tornado frequency, Kovacs says. That said, wind is still a concern because it is very costly to make improvements to houses that have already been built in order to make them more resilient to wind damage.
The research also predicts a pronounced increase in wildfires. The number of acres burned per year in Canada has increased since the 1980s. Going forward, the amount of area burned every year could double by 2050, Kovacs warns. Currently when people think of fire, they think of British Columbia and Alberta, but there are fires in Northern Ontario and Quebec as well, he says. But the population is sparser in Eastern Canadian areas and therefore the impact on claims costs is reduced. Kovacs is quick to point out, however, that despite successful and aggressive fire suppression efforts, which stop fire from creeping into towns and burning buildings, the number of wildfires in the future is expected to increase; at some point, these fires are going to make their way into towns. “I’m quite worried about some risks in Ontario and Quebec, as well as thinking first about British Columbia and Alberta,” Kovacs says.
Kovacs notes that 10 to 15 years ago, the insurance industry in Australia and California was complacent about wildfires due to a lack of frequency. Similarly in Canada, many in the insurance industry are not focused on wildfire for the same
reason — a lack of frequency and potentially more pressing issues — but there is clear evidence surrounding increasing wildfires here at home.
Increased claims severity
Social change over the past 20 years has contributed to the increased severity of insurers’ claims costs. For example, previously if a sewer backed up into a homeowner’s basement, there was very little of value stored down there. Now, however, homeowners are using their basement as an extension of the home, storing high-end electronics and expensive furniture in fully finished basements. When there is water damage, the cost to fix it is much higher, Tremblay says. “From day-to-day expertise, when the average claim for a sewer backup goes from $5,000-$6,000 to $50,000-$60,000, well, it will have an impact on the cost of the claim,” he says.
In addition to more elaborate basements, there has been a shift in the requirements associated with cleaning up after a water claim. If damage occurs to a building built prior to 1986, then there must be a test completed for asbestos in the drywall, which can drive up the cost, Glen Oxford, national property claims manager at The Co- operators, says. Additionally, there is an increased vigilance around health and safety of those working on site: face masks and protective shields to protect again mould and dust are now standard equipment for cleaning up sites damaged by water.
Fancy basements and regulatory changes for clean-up aren’t the only culprits in the increasing severity of claims costs.
Extreme weather events have proven to be quite costly for the industry: the Saguenay floods in 1996 ($1.5 billion), the Ice Storm in 1998 ($1.6 billion), Peterborough floods in 2004 ($90 million) and the Toronto rains in 2005 ($500 million). The country experienced its first Force 5 tornado in Elie, Manitoba in 2007. As luck would have it, the area is sparsely populated and so only to a few barns and houses were damaged. But if this same tornado had ripped through Winnipeg (80 kilometers east of Elie), the damages would have been exponentially higher, Tremblay points out. Population density is a huge factor in terms of cost of insurance elements, he adds.
“When we look industry-wide, we see that virtually every company in Canada had a huge adverse effect on their results simply because of weather- related personal property claims in the first half of this year,” Bianchi points out. “So [it was a] huge financial impact for us all.”
Oxford says there hasn’t necessarily been an increase in the large number of events. Rather, in Western Canada at least, smaller storms have occurred with greater frequency — in some instances, once a week. These aren’t just sewer back-up type events, but hail and wind contribute to the water damage caused by the heavy rains. “Last year, when we look back on our storms, we really didn’t have anything that stood out where we had a thousand or two to three thousand claims like we’ve had in some other major events,” Oxford says. “But it was just sort of non-stop small events that were occurring literally every week that kept us busy. By the time you finished the season, you have had an awful lot of storm activity.”
What needs to be done
As the impact of climate change on the insurance industry continues to be felt, insurers are likely to encounter new types of claims and will seek to develop new products to handle these, according to Insurance Digest.
“I’d like to think that I can control the weather,” Bianchi jokes. “I have absolutely no influence whatsoever on the frequency of these claims. They are going to happen, and they are going to happen often if we keep continuing to get more severe weather.”
With this in mind, companies are working to reduce or mitigate the severity of the cost, ensuring that customers are aware of steps they can take to protect property from water damage.
In addition, insurance companies are being forced to look at processes, productivity and staffing models, Bianchi notes, adding that RSA has looked at how to streamline processes in order to get to customer faster and resolve claims quicker. This includes developing and solidifying relationships with vendors, such as contractors, to ensure they are available in the event of a disaster.
Since more people are living in densely-concentrated areas, the potential for a cluster of claims is much greater now than ever before. For an insurer, this means having an organized cat or storm team and plan in place is key.
Even in the absence of full catastrophes, companies have had to adjust to a significant influx of weather-related claims, Albert Poon, vice president of strategic business development at Cunningham Lindsey Canada, says. Most companies cannot deal with a spike of 100 to 200 claims in one day, and so they look to workflow changes to handle these types of ‘mini-cat’ situations. Insurance companies are reaching out to independent adjusters to help out, Poon adds. The company is able to pull adjusters in from elsewhere, if required, to help handle the influx of claims in a slightly different fashion than during a fully-fledged catastrophe. During a cat situation, adjusters are brought in and housed over the entire length of the event, But with smaller, pocketed storms, an adjuster would come in for a week, handle as many claims as possible and then finalize the files back in their office.
Mike Koch, property and catastrophe manager at Crawford & Company (Canada) Inc., notes that when branch managers within the adjusting firm have reached their capacity levels during a weather event, they will hit trigger points and call up the cat team to access necessary resources to respond to the event at hand. When a weather event hits, the first step is to determine how much an insurance company will handle on their own and how much the adjusting firm will be taking on. From there, step two is determining the number of claims involved and what sort of additional resources will be required to respond appropriately.
Lythgoe points out that previously catastrophes were sporadic events. Now, however, over the past five years, storms have been hitting nearly every region of the country, forcing companies to step up cat-handling protocols.
In addition to partnering up with an independent adjusting firm to ensure they are ready to go at a moment’s notice, Intact has also developed small cat teams that are used in addition to normal staffing; they are in place and ready to go in the event of a weather incident.
At The Co-Operators, a 10-person team devoted exclusively to handling storm claims was created last year to move from one location to another, Oxford says. The team has been relatively quiet this year, although last year they responded to storm losses in Western Canada on a consistent basis between May and September.
Climate events are costly and extreme, and insurance products are generally offered for a period of 12 months so that exposure can be limited by reviewing cover and price upon renewal, according to Insurance Digest.
Clearly, infrastructure needs to be improved — both the electrical distribution network and wastewater and surface water infrastructure, Tremblay says. The life expectancy of a sewer is anywhere between 50 and 100 years. Therefore, when updating the infrastructure, it is essential to examine what the climate is anticipated to be during that period. This way it will help to ensure infrastructure can withstand any changes in weather patterns. Unfortunately, what frequently occurs is this: When installing new infrastructure, municipalities use intensity direction and flow (IDF) curves that are already outdated, despite the existence of information that predicts how the climate will be over the next 50 to 100 years, Tremblay adds.
Looking at the information, municipalities might recognize there will not necessarily be more water entering the hydraulic system; it is the intensity of the downpour
s that will change. “If you were to look at how fast that water comes down, it will be in droves,” Tremblay says. “When you have those types of things . . . the storm sewers are being overwhelmed very, very quickly and that leads to sewer backups, localized flooding and so forth. If you are putting that kind of money into improving the infrastructure, well, at least build it in such a way that it will be able to take care of what we will have in the future. In other words make your pipes a little bigger.”
Looking to the future, it seems the frequency of these claims will only continue to increase. These very large and frequent events are taxing on adjusters. “From a professional perspective, the adjusters are going to be very much-sought-after specialty,” Tremblay says. “They will need to be more flexible and some work needs to be done in terms of ensuring that an adjuster who normally operates in Alberta would be able to go down in the Atlantic if there is a crisis there to adjust claims. Those are some of the issues that need to be considered as we move on down that path.”
Tips for Industry Representatives
Insurance Digest offers up some action points for the insurance industry related to climate change:
• Conduct further research to under stand the effects of climate change.
• Enhance models to factor in necessary risks, with better climate-related data.
• Review portfolios with an ‘updated’ view of potential exposures.
• Review contractual terms to re-examine whether coverage and limits remain appropriate.
• Ensure customers are treated correctly and fairly. Some customers could be left with uninsurable risks.
• Perform a role in public policy formation.
Vale Training Solutions
For adjusters interested in ramping up their green adjusting skills, or those within the industry looking to expand their knowledge of green technology and its impact on the environment, Vale Training Solutions offers Green Risk 1 and Green Risk 2. Successful completion of the program will earn the participant a Green Risk Professional credential.
THE FIRST COURSE TAKES A LOOK AT THE FUNDAMENTALS:
• History of green building and how did we get here?
• Green building endorsements, programs and rating systems such as Leadership in Energy and Environmental Design (LEED).
• Green roofing — i. e. Vegetative roofs and Energy Star shingles
• Deconstruction — diverting debris and garbage away from the landfill.
• Building commissioning issues.
• Fundamental principles of green construction.
• Green products.
• Insurance coverages.
• Customer service — understanding the mindset of the owner.
THE SECOND COURSE PICKS UP WHERE THE FIRST ONE LEAVES OFF:
• Certification costs.
• Flushing out a building, including the implications on business insurance.
• Green endorsements.
The courses take a look at how green buildings fit into traditional policies, Trent Massey, green course developer at Vale Training Solutions, says. There are already coverage issues surrounding green products and technologies covered under traditional policies. The adjuster must be aware of these.
Ways To Migrate Water/Sewer Backup
RSA has released ways that homeowners can help to mitigate water damage within their home.
• Check your eavestroughs and downspouts to ensure they are not blocked.
• Downspouts should discharge at least 3 feet from the side of the home
• Disconnect any downspouts that are connected to the sewer system.
• Install window wells on basement windows at or near ground level.
• Install a backwater valve.
• Install a sump pump.
• Have a licensed professional check your weeping tiles in case they are damaged or blocked.
• Older clay piping can get blocked with tree roots and water can get into your home. Consider having them replaced with metal, PVC or ABS pipes.
• Keep your drains and toilets free of grease and other foreign objects that can cause blockage.
Ways To Mitigate Fire
The provincial, territorial and federal governments rallied together to create a program called Firesmart, intended to help mitigate the risk of fire damage from a wildfire. The program shows how homeowners can implement certain changes to their home in order to reduce the risk:
• Ensuring the roof is made out of material that cannot burn, which can help reduce the risk of flying embers catching fire.
• Cleaning up debris on the roof.
• Do not plant trees within 10 meters of the home.
• Keep the lawn healthy and green.
• Within the subsequent 10 meters, ensure trees are trimmed and healthy.