What’s on Dec? | Episode 3 | Insurance to value

Intro: You’re listening to What’s on Dec? the Canadian Underwriter podcast, focusing on the hottest topics in the P&C community, featuring insights, analysis, and interviews with subject-matter experts throughout the year.

Pete Tessier:       

Hey, everyone. Welcome to What’s on Dec? We’re back with another great episode, and this podcast is brought to you by Taycon Risk, the MGA that specializes in niche markets, hard-to-place or unusually complex commercial risks. They turn hard risks into smart coverage the old fashioned way – they underwrite it. So Curt, we have Greg McCutcheon from Opta Intelligence here today, and we’re going to dive deep into an issue that was huge in 2022, and now it’s rearing its head again as 2023 steps forward, and that’s dealing with insurance to value.

Curt Wyatt:

Hey, let’s face it, we’ve talked inflation. Now, we’re dealing with inflation. Greg knows it. I don’t think there’s anyone in industry that doesn’t know Opta. This is a company that was born in Canada by Greg and his team. It has done amazing things to change the landscape of the P&C industry in the Canadian market. It’s exciting to have Greg here kind of giving us some of the secret sauce of what they’re up to and what brokers should be expecting.

Pete Tessier:        

Yeah, he understands the data side and how it impacts the P&C side when it comes to talking to clients. And we’re going to ask him a little bit about what that means for brokers as you have conversations with clients this year and what kinds of things you should be discussing with your clients around issues as it relates insurance to value and how they need to address it with their own lines of business, whether it’s commercial, agricultural, business, or personal lines.

Curt Wyatt:       

And not just the data, Pete. We’re talking rates. Opta today has a huge database of what the rates are. It’s incredible to know that there’s so much science going into this, and I think, as Canadians, we’re better off. I mean, we want a stable insurance environment. A stable insurance environment brings more options, it brings more carriers, and we talk about all of that.

Pete Tessier:

Yeah, Greg is going to help us understand what you’re going to be looking at this year, what are the things you have to consider. And I don’t think there’s much more we can talk about, and we should just get Greg in here right now and listen to what he has to say about inflation, data, insurance to value, and all the things that are linked between them.

And we’ve got Greg McCutcheon, president of Opta on the line here to join us to talk about insurance to value and some of the things that come with rating and the challenges that we’re seeing in this marketplace. So, hey Greg, thanks for jumping on What’s on Dec? with us and Happy New Year to you.

Greg McCutcheon:   

Happy New Year. It’s a pleasure to be with you guys.

Pete Tessier:          

So, insurance to value is a big issue right now. There’s all these angles that are hitting it in terms of, it’s almost like a perfect storm. So, what are you seeing from the side of the rating and the data that are affecting the values of properties and how the insurance industry is dealing with it?

Greg McCutcheon:

Well, we’ve all seen inflation at record levels in Canada right now, which has had a direct increase to material costs, labour costs, and all other components that drive insurance to value in all things property — personal lines, and commercial lines. So, simply put, keeping up with the inflationary increases on materials and labour costs. We’re focused on it every quarter, and it’s been a very moving target for the last couple years for certain.

Curt Wyatt:  

Greg, data is the game, let’s face it. And you guys own it. You’re the kingpins of data, as far as I’m concerned, when it comes to Canada. And how are you finding that across the country? What challenges are out there when it comes to the collection of good data as we see inflation, as we see all the things that are happening? And so, what’s not obvious to us when it comes to you guys having to collect this stuff?

Greg McCutcheon:

Well, we’re using various tools to collect it. Most recently, we were able to obtain low level aerial imagery that helps us drive artificial intelligence models which verify square foot information and provides change detection opportunities for us where we can literally see from the air that there’s been a pool put in or there’s been an addition put on the house. We validate things like that. So, those are just one of the tools we’re using. I think if I put my shoes on the foot of a broker right now, relying on the consumer to give them updates and accurate updates on either improvements they’ve made to their houses is a challenge, right? And particularly, there’s one thing about guaranteed replacement costs policies, but an ACV [actual cash value] policy is totally different. So, relying on the customer to give accurate information can be a challenge, and that’s why it’s important to use services like ours that has the largest repository of property detail information.

Pete Tessier:

Greg, one of the things that I think brokers are talking a lot about right now when it comes to insurance is the impact of interest rates. We’re seeing inflationary increases, but interest rates are playing a role, too. And how is that driving some of the pressures on insurance to value? Because some companies offer interest rate protection, they offer different ways of accommodating the change in interest rates, which have now changed, but for many years we’re really stable. What do you see on that side of it?

Greg McCutcheon:

Well, where it just really compounds the insurance to value issue is for those people now that were used to paying a 2% mortgage level and are now approaching maybe six on renewal. So, their monthly budgets to be able to work on home improvements could be diminished dramatically, and they may be struggling to hang onto their homes. That’s a problem because if a roof needs to be repaired and it can’t be, or plumbing issues are occurring in the house and it can’t be repaired, or there’s a wiring problem, because of a lack of income, that’s where interest rates really start to cause a problem. And the other thing that we’ve seen historically with interest rates increases have put pressure on consumers to manage their monthly payments. Sometimes, unfortunately, we see some fires happening and some claims that are out of desperation, unfortunately. You can historically go back and see that trend. So, it’s something that the industry has to really pay attention to right now is the maintenance of a home based on these interest rates increases.

Pete Tessier:

Then when brokers are talking to clients, whether you’re a commercial client, whether you are a homeowner client, and everything in between, and obviously even with farm clients, too, what are the kinds of things they can say to them about how companies are arriving at these valuations and stuff? How can they soothe the customer?

Greg McCutcheon:

Well, for personal lines customers, starting there, I think that a lot of people put upgrades into their homes during the COVID period of time, and for that conversation to see that their home premiums may be going up because of these upgrades, I think that most people can get their head around it. For those that are struggling on the other side of the fence that may not have been able to make those upgrades but are seeing increases and may be already struggling, as I mentioned, it’s a different story to have. But being properly insured, the best way to explain it is claims can go sideways if there is a big dislocation. Even if you have guaranteed replacement costs, they can drag on, take longer, and be more problematic.

Commercially, I think everybody realizes that appraised values on commercial buildings need to be reset, and what we’re seeing there is brokers having a dialogue with customers who are actually coming to us directly to come out and provide an on-the-ground appraisal on the building, which the customer’s willing to pay for to make sure that they’re properly insured. So, I think it’s two conversations. But it’s a good time to have the conversation because I think everybody understands that this inflationary factor’s real. Just go to the gas pump, go to the grocery store.

Curt Wyatt:

Hey Greg, last question for you today is in addition to inflation and in addition to prices going up, we’ve been talking rates. So, hard market. We thought, “Hey, we’re through it. It’s two, three years now. We’re on the other side.” And then, boom. This hits. And you work a lot with insurers. You guys have a super strong understanding of everything to do with rating by peril, setting rates broken down right down to the basic and whether it be personal lines or commercial. Is there any chance that as we get through this inflationary bubble that we actually may see rates come down because of this? Or is there way more at play than just inflation when it comes to the rising rates in the market?

Greg McCutcheon:

I think that there’s more at play than just inflation. Our industry seems to always find, through the various cycles that I’ve been through, ways to come back into the market with more capacity. So, we can have some capacity crunches, but we’re seeing a reemergence of foreign insurers wanting to come back into the Canadian market and provide more commercial capacity. We’re seeing other domestics that are changing their appetite for certain commercial risks and will need to be competitive if they want to grow in those areas outside of the inflationary factors. Getting the pricing right on values is always key to these decisions, for certain. And also, right now, a big thing that’s facing us is climate change. So, as people are factoring in their pricing and their willingness to provide capacity, I think values are critical, but also assessing areas that are, climate change areas, that could be more prone to wildfire and areas that could be more prone to flooding will be part of this decision-making.

Pete Tessier:

Right on. Thanks for dropping in, Greg. Always appreciate having your insight and sharing what you see from one of the best organizations for data and getting that global picture of the Canadian marketplace. So, thanks again, and we’ll be sure to be in touch for future things.

Greg McCutcheon:

All right, sounds good, guys. Thank you very much.

Pete Tessier:

Curt, that was some pretty interesting stuff from Greg because he hit on a lot of the key issues that I think everyone wants to understand and know a little bit better. One, how do policies react when you’re not insured to proper value? And I keep coming back to the ACV part. That’s really important to know because you never want to get your client in a situation where unexpectedly, “Oh, we’re going to settle on ACV because you weren’t insured to value.” That’s a huge risk vector the brokers have to consider when they’re talking to clients and dealing with insurers.

Curt Wyatt:

I think the shift away from assuming that the conversation you’re having with your policyholder is more accurate than the policy data that companies like Opta and Greg have developed, it’s something else to now see the industry go away from thinking that, “Hey, I had this conversation with my policyholder. This is gospel.” The fact is often it’s not, and Greg politely points this out that the shift is changing, that the data itself is more valuable at times than the conversation can be. And that is a very interesting twist to somebody who’s been in the business a long time, Pete. And I think that it actually is a good thing because it means that it’s eliminating that risk that you pointed out, the ACV insurer not wanting to pay a full payment on a replacement cost policy.

Pete Tessier:

The other part with that, Curt, is you’ve got property owners. And whether you’re a personal lines, commercial lines, or other type of property owner, farm, agriculture, business, that you now have to think about your risk factor with how you deploy capital, and are you doing the right things to maintain eligibility for the coverage you want? Are you ensuring that when you do these renovations, improvements, additions, expansions of your businesses, homes, whatever, that you’re accounting for them on the insurance policy, as well. The data there is going to say that sometimes you’re not entirely accurate. Or you think, “I know how much it costs to build,” when you really don’t. And right now, the cost of building things, well, put a blindfold on and throw a dart at a dart board. It varies everywhere, and at least someone like Opta is consolidating some of that information and making it accessible and consistent so you have an idea depending on your region.

Curt Wyatt:

I think that, hey, you hit the nail on the head. Greg goes on to tell us about capacity. Their organization is working in addition to collecting data on rating, they’re working heavily on who’s providing those coverages. And we hear it firsthand with his insight on insurers coming in from other jurisdictions interested in the Canadian market. And I think that was interesting at a time when I think we are just coming through the new year and hearing the stories of pullback in the Lloyd’s market on property in Canada. So, to hear Greg say that there’s some light at the end of the tunnel, that there is a potential win here for clients and brokers to find ways to get coverage at those limits, like you talked about, Pete, that’s great news. And I think we’re going to look forward to 2023 if Greg’s predictions are right.

Pete Tessier:

Yeah. For the brokers out there, I think what you want to think about, what Greg said and the issues at hand, are, one, much deeper conversation with your clients. Get some access to data. Use other sources to come in prepared to have meaningful conversations and be the value around this topic. Don’t separate capacity from insurance to value from inflation. They all intertwine together and are linked. You’ve got to be super careful about how those fit together and sell the right products with the right protections and have clear understanding.

Also, the one tip I give everyone. Sign off on a value statement with your clients. Give them the option to agree or disagree with what you’re submitting to the insurer because that’s where the rubber’s going to hit the road. And certainly, at all costs, make sure you and your clients understand what the co-insurance requirements are on your policies. That’s going to be a big one because they’re changing all the time depending on company, and there’s going to be a lot of pressure to manage premium and get offside with co-insurance with the company requirements on that product or that class. Big ones to think about. But hey, again, take a look at other data sources, use data as your friend to help your clients, and we’re going to get through the tail end of this hard market. And it’s great to have guys like Greg who sit where they sit, share some of their perspective so that we can be better at the front end as insurance brokers.

Outro: Thanks for listening to What’s on Dec?, the Canadian Underwriter podcast.