At first glance, James Arnold looks like an insurance company’s dream client. The Richmond, B.C., resident has owned his current home for almost two decades, been with the same insurance company for over 15 years, and in all those years he’s never made a claim. At least, not until last year, when a tree fell on his property, clipping his detached garage, and ripping the power lines right off his home. “It was a small claim,” he says, “at a cost of only $3,000 after the deductible.”
He expected his premiums to go up, but the 15% hike his insurance company sprung on him was more than he bargained for. Especially on top of the 7.5% rise he’d endured the year before and the 6.5% rise the year before that. All told, Arnold saw his payments jump up by almost one-third in just three years. “But when I shopped around, I found that rates had gone up everywhere,” he says.
If you’ve noticed that your home insurance costs have been rising too, you’re not alone. Customers with Intact Insurance saw their rates jump by 15% to 20% in early 2014, according to Canadian Underwriter magazine. The year before that the chief underwriter for TD Insurance announced rates would rise by 10% to 15%. The Insurance Bureau of Canada (IBC) does not provide national data on how quickly premiums have risen, but they agree that home insurance claims are going through the roof. Between 1995 and 1999, the IBC says the average total amount claimed per year in Canada was $2.87 billion, and that amount has risen steadily ever since, hitting $5.72 billion per year between 2010 and 2014 (all amounts in 2014 dollars).
The IBC says that much of the increase is due to extreme weather such as ice storms, severe cold snaps and heavy rainfall. Flooding, in particular, has caused home insurance claims to soar, with payouts due to severe weather doubling every five to 10 years since the 1980s—from less than $100 million a year to over $3 billion a year in just three decades. But while the cost of fixing damage caused by extreme weather is eye-popping, it’s not the only factor pushing rates higher. An Environment Canada study found that of the overall increase in water-related insurance losses, only 30% was due to weather. Other factors included increased building costs—think bigger and fancier homes—and aging infrastructure.
So what’s the result of all this? Expect to pay more for your insurance in years to come and don’t be surprised if premiums continue to rise even if you don’t make a claim. In some cases, you may have to settle for less coverage—or none at all—especially if you live in an area that’s prone to catastrophic weather such as flash floods.
Mother Nature’s Revenge
Ron and Julie Langford knew they were in for a long, stressful night when the river behind their Calgary home swelled up past its banks and started spilling across their 75-foot back lawn. It wasn’t long before there was a knock on the door from the fire department—telling them that the city-run pumping station was failing and a neighbourhood-wide evacuation was imminent. It was June 2005 and Calgary’s Bow River had burst its banks due to three torrential storms.
Desperate to save their homes, the Langfords (we’ve changed their names to protect their privacy) and their neighbours built a sandbag barrier about 35 feet from their back doors. Hours later river water surged into the neighbourhood pumping station preventing it from pushing sewage to the water treatment facility. A mere 48 hours after the Bow River burst its banks, the Langfords’ home was sitting in 6.5 feet of stagnant water. Their furnace was fried, their electrical system was destroyed and there were obvious signs of excrement on the basement walls. The clean-up would cost the Langfords just over $80,000 and it would take four years in court—and a ruling in their favour—for the insurance company to pay for the damages.
“Weather events that used to happen once every 40 years are now happening once every six years,” says Sharon Ludlow, president of Aviva Canada. These more frequent and more severe storms are pushing up claim costs, which results in higher premiums. The 2013 Alberta flood alone resulted in $4.8 billion in economic losses, explains Barbara Turley-McIntyre, senior director at the Co-operators. “The clean-up bill came to $1.9 billion—the single most costly disaster in Canadian history.”
Ice storms, frozen pipes and flooding resulting from extreme weather are worrisome enough, but aging infrastructure is making it worse. Our big cities have expanded rapidly—we’ve paved over land that helped to drain away water and overloaded storm drain systems that were built back in the 1950s and ‘60s. “Across Canada, outdated storm and waste water infrastructure has resulted in increased flood damage to homes,” explains Blair Feltmate, associate professor at the University of Waterloo’s Faculty of Environment. The damage to Ron and Julie Langford’s house from the overflowing river was bad, but the malfunctioning pumping station made the situation much worse.
And it’s not just about flooding, sewer backups and basements. Intense population growth in Toronto, for example, has caused a serious strain on electricity generating and distribution resources. This increase in demand—up 58% since 2009—combined with antiquated infrastructure has resulted in an increasing number of brownouts and blackouts, such as the one resulting from the 2013 ice storm that caused 27 deaths, loss of power to over a million residents and more than $200 million in damages.
More home to insure
There’s a flip side to this home insurance conundrum: not only are homes being damaged more often, but the cost of repairing them is going up. That’s because our homes are both bigger and better than they were 30 years ago.
The average size of a newly-built home in 1950 was 800 square feet, according to the Canadian Mortgage and Housing Corporation, but by 2005, this space has almost tripled, to 2,300 square feet. Older homes are growing too, with Victorians getting additions, bungalows getting second floors, and attics and basements getting a second life as renovated, usable space.
Materials and finishes are more expensive these days, further increasing the cost of claims. Where we once installed laminate countertops, now the standard is granite. Basements used to be wood-panelled rec rooms with an old sofa and TV, now they house big-ticket items such as media centres and customized family rooms.
Renovated basements are particularly vulnerable. Not only do they now routinely contain high-end TVs, sound systems and fine furniture (the average cost of a basement remodel is just over $61,000, according to HGTV), but they are also most prone to flooding. That combination can end in disaster, as one family in a high-end North York neighbourhood discovered in the spring of 2014. They had a catastrophic sewer back-up after the builder failed to install a backflow valve. As a result, the home’s basement—along with two nanny suites and a state-of-the-art media centre—were destroyed. The total cost of repairs? A staggering $140,000.
What you can do
In the wake of record catastrophic weather events, bigger, more expensive homes, and aging infrastructure, insurance companies are changing their approach to home insurance. Coverage terms are constricting, sub-limits are being introduced, and deductibles are increasing even as overall rates rise incrementally year after year. But that doesn’t mean homeowners are completely at their mercy. In fact, there are a number of steps you can take to keep your rates at reasonable levels.
First, and probably most important, is to force yourself to shop around once a year when your policy comes up for renewal. Many policies automatically renew and your insurance company will tend to make little increases each year without a lot of fanfare. Like James Arnold, who saw his rates rise by almost one-third in three years, you could find that those little rate increases add up fast. The solution is to watch for your insurance renewal documents, take the time to read them carefully, and if you do notice an increase, go online to see if you can find a better deal.
Another option is to just call your insurance company to see if there’s anything they can do to lower your rates. If you tell them that you’re going to leave unless they help you keep your rates in check, you’ll likely find that they’re willing to work with you to find ways to lower your premium. Perhaps they overvalued the cost of replacing your crown moulding or thought you had granite counters when you had laminate. Anything you can do to lower their calculated cost of replacement helps.
Next, consider increasing your deductible. The deductible is the amount you agree to pay on a claim, with the balance of the cost paid by your insurance company. It amounts to $500 on most homeowner’s insurance policies. But you may be able to reduce your premium by increasing the deductible to $1,000, $2,000 or even $2,500.
For even better rates, more access to coverage, and higher limits, ask your insurance company what other discounts they provide. For instance, installing carbon monoxide detectors, not just smoke detectors, can mean a discount on your premiums, as can an updated roof or new eavestroughs. “The key is to make sure your insurance policy is a reflection of your current home,” says Adam Mitchell, president of Mitchell and Whale Insurance brokers.
And don’t forget about maintenance. By making sure your eavestroughs and downspouts are clear from debris (this includes pruning back large trees or bushes) and your landscape is graded and slopes away from the house, says Dan Sandink, manager of resilient communities and research at the Institute of Catastrophic Loss Reduction, “you allow water to drain away from foundation walls,” which goes a long way to preventing a claim. Disconnect downspouts from city drains as well, “as this will help minimize the likelihood of a sewage back-up.”
Finally, once a year check to make sure your credit history is accurate. It’s as simple as completing a form and mailing or faxing it to TransUnion and Equifax, and it’s increasingly important given that more and more insurance companies are using credit scores to set home insurance premium rates (see “Gimme Credit” below for more on this).
“These simple steps often require little labour, time or money,” says Feltmate, but can go a long way to reducing the possibility of a claim or the risk of a rate increase.
It’s a well known fact that actuaries really love numbers. They crunch statistics on weather, claim location, age, occupation, home size and a raft of other factors to help determine our home insurance premiums. But the one number many of them love the most is your credit score. As one industry insider explained: “If I could use only one metric to assess risk and set pricing, I would choose credit scoring. Nothing else.”
On the surface, the use of credit scoring appears to benefit homeowners who work, pay their bills on time and are responsible members of society. But studies out of the U.S. show that while credit scoring favours responsible credit-users, it can penalize other insurance clients unfairly.
According to the studies, anyone who is in a lower income tax bracket, pays cash for most transactions or is retired, or single, can be penalized when credit scores are used. “If you pay bills in cash or rely on a line of credit or loan, like a small business owner often does, then you’ll have a terrible credit score even if you always pay your bills on time,” explains Michael Brattman, vice-president of personal insurance at Erb Insurance Brokers.
Still, despite knowing its limitations, Brattman and other insurance brokers will often advise clients to provide their credit scores when applying for insurance. Unless you personally happen to fall into a penalized group, it’s likely your premium will be lower if you authorize use of your credit score than if you don’t.
But Adam Mitchell, president of Mitchell and Whale Insurance Brokers, sees a larger issue with using credit scores when rating an insurance policy. Credit scores emphasize each individual’s probability of risk, says Mitchell, and that was never the intent of insurance. “The theory behind home insurance is the same as the theory behind universal health care,” says Mitchell. “The premiums of the many pay for the claims of a few.”
He worries that those who don’t fit the mould as “responsible citizens” could end up shouldered with crushing premiums they can’t afford. “It’s an erosion of what insurance is supposed to be: a cost-effective answer to catastrophic loss.”