Have ever asked yourself “Why are my insurance rates going up even if I haven’t made a claim?”
We’ve teamed up with the Broady Windsor Group to help explain.
What is insurance?
Insurance is simply a pooling if funds, made available to the contributors of that fund, should they ever need. In a nutshell, we throw our premium into a pot. Now, there are, of course, rules to claiming. If you claim you are a homeowner, yet you have a hydraulic lift in your garage and do mechanics on the side, you are going to have a problem. True story.
Insurance, by definition, is really the business of risk. The industry is very comfortable with volatility, obviously, but the game really is pricing for risk.
Think about the price your son pays for his auto policy vs the price your daughter would pay if all of the variables are the same. Same car, same age, same driving history. Your son is going to pay more. The probability of him having a claim vs she is greater. Thus the pricing for risk.
So, this concept of risk is broken down into pools. For instance:
- Commercial business is a pool of risk
- Fire is a pool of risk
- Climate is a pool of risk
- Cyber is a pool of risk
- Inflation and liability are huge pools of risk
The trick is to price each pool accordingly. In some instances, despite all effort, the pool cannot be priced. Capital cannot be deployed where the probability of loss is excessively high, such as an annual flood.
Your insurance company goes out and purchases reinsurance from a re-insurer. In this way, there is a pooling of the risk on the insurer side thus no single insurer, just like no single homeowner, gets stuck holding the bag in the event of a catastrophic loss. (As an aside, in Canada we have very rigorous regulation and the property and causality market is very strong).
The insurance industry’s number one challenge, globally, is the changing pattern of climate or weather.
The flux that we are seeing in the global market reminds me very much of the flux which followed the tragedy of 9/11. Underwriters and actuaries across the plant were faced with the question, how do we underwrite, price the risk, of something we could never imagine? Australia? The melting ice cap?
A similar situation is upon us. How do we underwrite a once in a hundred-year occurrence, which happened twice in three years? Considerable resources are being deployed into trying to figure out how to manage the risk of water. We hear much of wild fires, wind, snow and drought. All of this has rocked the foundations and the bottom line, which, of course trickles down to all we purchasers.
What we know, is the frequency and severity of weather-related catastrophes have increased by a factor of 4 or 5 over the last 30 years. Think about that for a second. 20 years ago there was one water related coverage to purchase should you be inclined, it was called sewer back up coverage. $25 bought you $25,000 of coverage in the event that a sewer backed up.
Today, we often see the price of water related coverages greater than the price to insure your home should it burn down. Back to pricing and risk.
Let’s take a quick look at some of the catastrophic events, insured damage from flood, rain, snow and wind as per the insurance bureau of Canada.
In 2019 the cat losses totaled 1.3 billion dollars. As with 2018, which saw cat losses at 1.9 billion, there was no single event in 2019, yet a host of smaller, severe events coat to coast.
- $250 million on Halloween 2019 hitting Quebec and Ontario ( who remembers the ‘let’s cancel Halloween idea?’). Montreal and Niagara’s were hardest hit in terms of wind and water.
- $208 million in flooding damage in Quebec and New Brunswick During April and May as high water levels on the Ottawa and St. John rivers breeched. As an aside, 6000 homes were effected in Quebec.
- $181 million during 2 hail storms in western Canada during July and August.
- $114 million during 2 winter storms in the GTA and eastern Canada.
- $105 million resulting from hurricane Dorian in Atlantic Canada which saw 155km/ hour winds in Halifax.
And these are just the losses which cracked the $100 million line. There were a host of events. We won’t even go to the Fort McMurry fire of 2016, the costliest disaster in Canadian history at $10 billion.
And these are only the Canadian events, globally the insured losses from catastrophes reached $86US BILLION IN 2018 and $53US BILLION LAST YEAR…so yeah, pooling makes sense and allows local markets to provide the ‘availability ‘at a reasonable cost.
Who do you think is paying for this? Back to the pooling of funds designed to pay claims.
As the pool required to pay for these events continues to increase, thereby does your insurance rates.