OTTAWA, Feb. 25, 2014 /CNW/ - The increasing impact of water damage on
Canadian homes and businesses has prompted actuaries to look for better
ways of estimating the costs associated with this risk.
A new study, commissioned by the Canadian Institute of Actuaries and
conducted by KPMG, focuses on actuarial pricing of personal property
insurance for the risk of water damage (overland flooding was not
included as it is not covered by personal property policies in Canada).
Claim costs are the most significant driver of insurance premiums, which
makes analyzing water damage risk essential. According to the Insurance
Bureau of Canada:
In 2011 payouts for water damage claims hit the $500 million mark in
Québec alone; and
One out every two dollars paid to home insurers covers damage caused by
Furthermore, some insurance companies say the average cost of water
damage claims has more than doubled between 2002 and 2012.
Many actuaries are questioning whether the traditional process for
determining premium rates for property insurance needs to be
Currently actuaries start with historical claims and adjust them for
inflation in order to form the basis for the premiums to be charged.
They assume that over a large set of risks, the future will behave
similarly to the past—an assumption that actuaries are beginning to
question with regard to water damage.
One of the shortcomings of historical-based pricing approaches is that
they do not take into account, for example, the impact of climate
change on water damage risk. Insurers know that there has been an
impact, but it has been difficult to assess and price. CIA President
Jacques Lafrance said: "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. The Institute has sponsored
research on climate change for the last five years, and the profession
is very open to learning more.
"Another important factor in the increased payouts is the current state
of infrastructure in Canadian municipalities. Research suggests that a
good deal of Canadian infrastructure is beyond its design life and
capacity. And the challenges only increase during extreme weather
Other issues have exacerbated the problem. Compared to the past, more
people live in condominiums, which can suffer from leaks in their outer
shell, and more units have laundry appliances and dishwashers, which
can suffer pipe ruptures and inflict water seepage damage on other
More homeowners now finish their basements, which were formerly used for
storage in most homes. The trend has been to turn basements into living
or rental spaces, which has impacted water damage claims. Furthermore,
research shows that many are affected by budget shortfalls,
underestimate the risk, and focus on home safety. Also, some homeowners
procrastinate when it comes to preventive maintenance. Finally, people
are spending more time away from home, with a decreasing understanding
of the importance of preventing water damage to their property.
"This report will certainly have an impact on the profession as it makes
the effort to bring these factors into our professional practice," M.
Lafrance added. "And the clock is running. Our next steps will include
gathering comments and insights into the problem revealed by this
The Canadian Institute of Actuaries is the national organization and
voice of the actuarial profession. The Institute is dedicated to
serving the public through the provision, by the profession, of
actuarial services and advice of the highest quality. In fact, the
Institute holds the duty of the profession to the public above the
needs of the profession and its members.
SOURCE: Canadian Institute of Actuaries
For further information:
or to set up an interview with an actuary, contact Josée Gonthier, the CIA's French editor in our communications and public affairs department, at 613-236-8196 ext. 106, or e-mail her at email@example.com.
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