An expensive peril challenges the traditional process of rating property insurance

The impact of water damage on property insurance results has drawn the attention of the Canadian Institute of Actuaries. As noted by the Insurance Bureau of Canada, one out of every two dollars paid for homeowners insurance goes to cover the cost of water damage claims. In other words, the cost of water damage equals the costs of all other perils combined. If there is a “perfect storm” confronting insurers, it may be the combined effects of climate change, ageing infrastructure, and the increased value of insured property located below grade.

The traditional approach of developing rates (that is, taking historical data and adjusting for inflation) is proving inadequate when it comes to developing rates for property coverage. In time, a new approach for pricing property may be developed by actuaries, one that takes into account the per-risk exposure to water damage. A new approach could involve the use of mapping, analytics, and the geo-coding of risks. In the meantime, the industry is likely to rely on sub-limits for water damage and charges for increased limits.

The challenge of water damage represents an opportunity. If an insurer is able to develop a reliable method for assessing the location-specific risk of water damage and for charging a premium that reflects this risk, that insurer will gain a competitive advantage. The insurers who are left behind will face the prospect of adverse selection.