This article was produced in partnership with CNA Canada.
Desmond Devoy, of Insurance Business Canada, sat down with Markham Sandulak, senior risk control consultant, at CNA Canada, to discuss how insurance is getting stretched in the face of increasingly intense catastrophic natural events, and how brokers can work with their clients to help mitigate the risk.
Catastrophe insurance rates are at a 20-year peak.
It is not that there is an increase in the number of storms to contend with – just bigger, more destructive ones. Indeed, unlike similar rate increases in the past, this one comes at a different time, under different circumstances.
Thanks to infill and densification, “there is a concentration of assets as communities are fit into smaller spaces,” said Markham Sandulak (pictured), senior risk control consultant with CNA Canada. “There’s a compounding effect in which you have more and more values associated with a smaller footprint.”
A flood or a hurricane can impact more people in a dense, urban area. He saw this for himself during a recent family visit to Florida. The community was rebuilding after a recent storm.
“We spent our vacation watching three houses in the area get demolished,” he recalled. While his family’s house withstood the storm, all around them, “people were basically watching their lives go in the back of a dumpster.” Seeing roofs peeled off, windows blown out, the word ‘Demo’ spray-painted on the sides of homes (indicating they would be demolished for rebuild) stayed with him. Eight months later, people remain displaced.
“That uncertainty is not a good thing,” he said. “Most people are not prepared for that mental exercise. We all want to have a clear path.”
While upsetting, he also points out that there has not been an increase in the frequency of hurricanes in comparison to prior years. “The number of natural disaster events is relatively the same,” he said. “Even last year, which was a record-breaking year for losses, the number of storms was actually below average.”
The ferocity of storms is increasing and climate change is one of many factors why, according to Sandulak. “Part of the problem is that, as the storm intensity escalates, building codes have not changed for 20 years,” he said. A building built in 2003 which might have been durable previously, is an older building now and “more susceptible to the damage of a bigger storm than a building built today,” he said.
There used to be a regularity with when, say, hurricanes would occur, or floods would see water levels rise. But climate change is creating instability in Mother Nature’s calendar.
“We now have events occurring outside of the normal event horizon,” he said. “Flood season is starting earlier and sometimes lasts longer. Hurricanes are certainly occurring at different times of the year than previously.”
This in conjunction is leading to higher losses, sometimes beyond expert forecasts. A large event of high ferocity – think Hurricane Ian from last year – is going to have a big impact, including on the insurance industry.
“What that does is it upsets the balance between capacity, insurance limits and coverages in general,” he said. A large event sees all insurers taking a direct hit from claims, and “that draws down the capacity of the industry. To rebuild that capacity typically means insurance rates go up.”
This spring, Alberta was bedeviled by fires. BC has been beset by floods. And re-building continues in Atlantic Canada after Hurricane Fiona.
“We cannot control weather events,” said Sandulak. “All we can do is prepare ourselves and our properties to minimize damage potential.”
There are other storms to be weathered as well, including inflation, supply chain disruptions and the skilled labour shortage, which adds to the cost of rebuilding after a catastrophic event – and the ability to rebuild at all. “The tradespeople that would normally support rebuilding projects just aren’t there.” And with all of these added costs, it raises the value of existing property; as we have seen with surging housing prices and material costs.
“The value you placed on a building 11 months ago can be 8% under-valued just due to inflation,” he said. “So when rebuilding, there will be a shortfall. Clients do not want to be responsible for additional capital to replace a facility that they thought was fully insured.”
In the past few months, CNA’s Risk Control team has been active in assisting brokers in having conversations to look over their clients’ portfolios and ask if replacement values requested for quotes are accurately representative of what the true ask or need is.
“It’s a very difficult conversation to have with clients,” he said.
A similar problem with outdated information can be found in items like flood plain maps, some of which are woefully out of date - based on 30-year-old information, before the era of computers and satellite imagery. They now do not tell the true picture.
“All models are wrong, some are useful,” Sandulak said. “Resources are utilized to improve them, but they’re never 100% correct.”
A common misconception among those outside of the insurance industry is that a 100-year flood means that if a flood happened 30 years ago, then you’ve got another 70 years until the next flood of its kind. “What that actually means is there is a 1% chance that you could experience a flood in any given year,” he said.
Having local brokers who know the area well can be key in adjusting coverage that speaks to local conditions.
“Brokers are accessing the same information as everybody else,” he said. At the same time, “if you’re a local broker, you are familiar with your clients’ environment and have a mutual shared experience of what the exposures are in the area.”
Brokers should understand the client’s pain points and be open and transparent about potential claims that can arise; which can help them ask key coverage questions.
He encouraged brokers to have regular conversations with their clients and remain informed on changing environments and proactively manage potential future losses.
“If there are steps we can take proactively, then results will present themselves on the back end - with either no claims or a controlled response to an emergency situation,” he said. “Have a conversation with your clients and remind them that there are steps they can take to mitigate the damages. If the client is receptive to that message and they’ve taken action to mitigate potential losses, then that’s a really good narrative when dealing with your insurance provider. Regardless, losses will occur and clients will still need to go through that claim process, but it can be more strenuous and time consuming if the client is poorly informed on coverages.”