Should insurers help customers build back better…or not at all?

Increased severity and frequency of NatCats has Canada’s P&C insurance ecosystem seeking ways to add resilience to the claims process.

This includes build back better initiatives to encourage adding things like hurricane straps or hail-resistant shingling to roof rebuilds to ensure they’ll stand up to future storms.

Insurers have developed coverages designed to let homeowners enhance their rebuilds, said Glenn McGillivray, managing director of the Institute for Catastrophic Loss Reduction. He added a working group of 16 insurance companies has “been plugging away [at potential solutions] for quite a while.”

Although covering upgrades is theoretically a concern for insurers, since it could lead to higher payouts to clients, it still makes sense, noted Graham Haigh, senior vice president and chief operating officer of Wawanesa Mutual Insurance. Avoiding future losses can be an efficient way to manage client concerns.

“The cost of that material will generally be a little bit higher but the amount of time to do the work shouldn’t be significantly different,” he told CU. “If you’re putting on a type of shingle that’s hail-resistant versus a 25-year asphalt shingle, you’re not going to see a significant impact in [the rebuild time].

“We factor it in when we’re charging people for their insurance policy. In most instances, it takes into account building code changes.”

At the individual client level, Haigh likened build back better to work done by governments to construct dykes or build firebreaks to deter NatCats at the community level. Being prepared for potential future losses, he notes, saves costs and time in the long run.

The right approach?

But what if more frequent, natural catastrophes are sending the P&C industry a different message? “We have to recognize that one key concept of building back better is sometimes not rebuilding at all,” McGillivray said.

“We talk about that mostly on the flood side, where we espouse this idea of buyouts, and the federal government is exploring a buyout program… They are looking at it, and buyouts are very common in the United States, where places like New Jersey are real leaders in the area. We’ve done a few in Canada, but they’ve been ad hoc. What we need is a solid program.”

Calgary after the 2013 floods was one such case. “In that event, you had government buying out some of the properties of those damaged homes that were in [certain] areas to let people move to other parts of the city,” said Haigh.

Jurisdictional questions

That could be a federal or provincial program, depending on how jurisdiction is interpreted, several sources noted.

Whether or not policies should give property owners the option to build back better — so long as it’s somewhere else — is complicated and extends beyond the P&C insurance industry, said Greg Smith, president of Canadian operations at Crawford & Company.

“But it’s an important conversation to have and one that needs to involve the municipality, higher orders of government and the insurance industry,” he told CU. “It’s particularly relevant in those areas that are prone to repeated natural disasters.”

The insurer’s place in the equation is, in part, to leverage its pricing structure to help clients understand the risk they may be taking by choosing to live in a NatCat-prone area.

“We want to make sure that when people are picking where they’re going to live, they have all the information. Insurance pricing is one of those indicators. If [one homeowner’s] coverage is a lot more expensive and has limitations on it, versus a neighbor who happens to be further up on a hill a little further away, that’s an indicator they should contemplate,” said Haigh.

“We need to work with government to make sure future development takes into account exposure to catastrophic loss, and that those currently living in areas that might be at high risk are aware of it and can make decisions that make sense for them.”

“Affordability and availability of insurance coverage is one of those characteristics that actually can show people how big the risk is.”

This story is excerpted from one that appeared in the November print edition of Canadian Underwriter. Feature image by iStock.com/Bogdanhoda