The Canadian Institute of Actuaries recently commissioned KPMG to conduct a study focusing on the actuarial cost of personal property insurance for the risk of water damage.

Findings of the Study

In a dramatic finding, the study reported that one out of every two dollars paid to home insurers went to covering water damage claims – in 2011, water damage claims paid out in Quebec alone amounted to $500 million. Some insurance companies examined in the study reported that water damage claims have doubled between 2002 and 2012.

This finding challenges the traditional means by which actuaries determine risk. Traditionally, actuaries compile historical claims, adjust them for inflation and base their predictions for total claims on this number when they calculate premiums. In doing so, they are accepting the axiom that the future will behave similarly to the past across a broad set of risks. However, if water damage related home insurance claims have increased by as much as some Canadian insurance companies are saying, this means that a new method will need to be found for determining this risk.

Factors Leading to More Claims

There are a number of factors that are contributing to the higher number of water damage claims, according to the study. The primary cause on everyone’s mind is climate change, which may indeed be contributing to the increase in home insurance claims. Unfortunately, the effects of climate change have been difficult to predict, measure and price.

“Climate change and other factors are clearly having an effect, and the study represents a good first step in sharing this knowledge within the profession,” said Jacques Lafrance, CIA president. “The Institute has sponsored research on climate change for the last five years, and the profession is very open to learning more.”

Further, there are a number of other factors that are contributing as much or more to the problem in terms of dollar value. “Another important factor in the increased payouts is the current state of infrastructure in Canadian municipalities,” said Lafrance. “Research suggests that a good deal of Canadian infrastructure is beyond its design life and capacity. And the challenges only increase during extreme weather events.”

Another trend that is driving up home insurance claims due to water damage is the increasing trend of finishing basements. Where, in the past, many Canadians left their basements unfinished, now more Canadians are using these spaces as extensions of their homes or as rental units. A finished basement represents a significantly higher investment of homeowner capital, so water damage results in home insurance claims that are much more costly.

More Canadians also now live in condominiums, according to the report, which can have leaks in their outer shells, leading to a greater number of claims. More units, both in condos and single-family homes, have washing machines and dishwashers, which can lead to water damage claims from leaking pipes.

What Can Homeowners Do?

While home insurance providers are the ones that have to pay out for water damage, a higher number of claims in a given year means that the overall risk is higher. This means that premiums, which distribute risk across all insurance purchasers, go up for everyone. In an effort to help homeowners avoid the added cost of higher home insurance premiums and the inconvenience of having to make a claim,the Insurance Bureau of Canada released a guideline on what Canadians should do to prepare for and avoid a claim during a flood.

• Create an emergency kit – Including bandages, flashlights and a radio. While a battery operated radio and flashlight will probably do, as long as you remember batteries, homeowners can ensure that they are prepared by purchasing a hand-crank device.
• Shovel snow – When snow has accumulated around your house – especially around basement windows – you should shovel it away to avoid the risk of flood when the snow melts. Snow can present an especially high risk of causing a flash flood if it rains before all the snow melts.
• Move valuables upstairs – While the basement is a tempting place to store items that you don’t use every day, valuables that are susceptible to water damage can pose a high risk of causing a home insurance claim.
• Clear eaves troughs – Only clear out your eaves trough if it is safe to do so, but a clear eaves trough will help to divert water away from your home.
• Check on your property – If you plan to be away for any significant period of time, get someone you trust to regularly check on your property. Give this person a key and make sure they know where the water shutoff valve is in your home.