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12-Storey Bonfires, Insurance Reputation, Uber Regulation, UBI Costs and Benefits

Posted By Thom Young, September 22, 2015
Updated: September 28, 2015

12-Storey Bonfires?

The issue of risk management for wooden buildings has arisen again with the Quebec government’s endorsement of safe practices for the construction of mass timber buildings up to 12 storeys.

Risk management and assessment is one of the most important parts of the broker’s role in the underwriting process. In order to price the exposure to loss properly, the necessary information must be collected to determine the chance of loss and to categorize the class of risk. On the commercial side, we often extrapolate this data from the design and architectural plans prepared for the project. These are frequently used in underwriting and rating Course of Construction coverage, and rating, as with all buildings, is determined by the type of construction and the materials used. Imagine being presented with plans for a 12-storey building of frame construction. Logically, your first thought might be that these people are nuts. You might be right.

For a very long time, the logic that you couldn’t safely build a building out of wood more than three storeys high went unquestioned. Engineering limitations of the materials and construction techniques were simply inadequate to build safely beyond this height, though many tried and often with disastrous results—disastrous in the construction phase and deadly in the completed stage. The history of many communities is peppered with stories about this or that great fire and its resulting loss of life. Building codes and regulations were developed and have limited the devastation caused by fire damage in frame structures, but they have in no way eliminated the losses. In particular, several large communal structures such as nursing homes and row-housing units have suffered total-loss situations from lightening and the ensuing fire, as well as from wind storm. The damage to these structures has also often caused loss of life. We can still go a long way to improve the safety of these types of structures, and I believe we should.

tall apartmentFrom our perspective as insurance advisers, we are concerned about the availability of coverage and the impact of large losses on the pricing our customers face. We should also, however, be concerned with providing them good advice about the exposures they might now face. Ultimately, the cost of any loss works its way through to rating for that type of risk, and we know what damage catastrophic losses can do to the marketplace. Today, six-storey frame structures—the regulated height allowed by building codes in most Canadian jurisdictions—are commonly built. Building codes have no national standards but, for the most part, the various provincial regulations are much the same. Engineering quirks in the building codes play with the definition of storeys in some jurisdictions, transferring the first floor into a part of the basement so what looks like seven storeys may be defined as six by that province’s building codes. Still, a whole lot of wood is going into these structures. As we’ve seen in B.C., Alberta, and Ontario, they can and do make for spectacular total losses during their course of construction. After completion, we’ve also seen how a small fire originating on a balcony can transfer to a multi-million-dollar loss in just a few minutes. While political pundits are quick to argue about the costs of insurance imposed upon their constituents, few seem to understand the function that insured losses play in the development of a fair price for an insurance policy covering varied risks. If a condo owner or tenant has a $100,000 unit loss in this type of dwelling, it takes a very long time to recover the costs of such claims through minor rate adjustments, especially if 20 or more people are impacted in the same loss for similar amounts. I’ll leave the math to you, but one fire in a condo complex could produce a 25% increase in the cost of insurance for all condo-unit owners in the territory and a like adjustment to the condo corporation’s costs for insurance too. These costs are simply passed on to the occupants through assessment or rent. This risk is something to consider when asked by your clients why their rates have increased once again.

The Quebec endorsement of twelve storeys also raises the issue of special interest groups, such as the forest-product producers and the construction associations, who come to the political pundits with requests for changes in building codes. While politicians regularly question the insurance industry about the high cost of insurance, the ramifications for their constituents of approving these code changes is often ignored. Great proposals that extol the benefits of increased jobs and lower housing costs are often on the song sheet of building associations when making the case for a building-code review. They are convincing tales in persuasive language but include little discussion of the potential down side and review of the actual experience. I think only four to five years ago (or so) the first six-storey frame condo complex in B.C. was approved for development. While still in the framing stage, a fire completely destroyed the building. Fire departments in Surrey and surrounding towns were overwhelmed by the intensity of the blaze and could do nothing to limit the loss except to keep it from spreading. The loss was insured but had an immediate impact on the course-of-construction coverage rate that is still felt today.

Oh, Those Damned Insurance Companies!

While holidaying in southern B.C., we were once again exposed to that seemingly more common natural disaster of forest fires. Fires to the south in the U.S.A. were producing copious amounts of smoke and ash, making breathing and seeing difficult for some. The usual sunny and warm late August afternoons and evenings were very unpleasant in many areas. The usual spectacular sunsets were replaced by the sinking sun looking more like a moon glowing through the haze, while the mountains in the distance would periodically flare up in bright red eruptions, sending plumes of smoke into the upper atmosphere. The results were apparent through much of Alberta, and relatives as far to the east as Winnipeg were complaining about the air quality.

Driving on the southern route took us through the community of Rock Creek, which used to be like so many other rural B.C. Interior communities, a hodgepodge of modular homes, very old mobile homes, and newer mansion-like retirement homes built along the riverside where the land is cheap and the ambiance is superb. The town of Rock Creek on the southwest side of the river is now, for the most part, leveled. The fire showed no preference for either the old shacks and mobile homes or the new million-dollar mansions, reducing them to piles of white ash. The heat was so intense that even the concrete foundations were reduced to soft sand. Total losses are both the easiest and hardest claims adjustments to make. The comment that “at least there was no loss of life” does little to diminish the tragedy for those who have lost everything.

Discussing the event, a local businessman in a nearby community indicated that a number of his clients had suffered losses. Without knowing my involvement in insurance, he began to rag on about the insurers who he’d been told were already “short changing” their insureds. He reported one of his clients had already been told by his insurer that he’d have to downsize after the fire. I began asking for more details as I was confused by this position. “Was it a new home?” “Yes.” “Was it his primary residence?” “Yes.” “So why wouldn’t the guaranteed replacement cost clause put it back the way it was?” “What’s a replacement cost clause?” he asked. The fellow soon realized I was in the insurance business and changed his tone about the bad insurance company taking advantage of their mutual customer. Some friendly discussion revealed that this fellow had rented some scaffolding to the customer, and the home, along with an addition he was building, was a total loss. I began to wonder if the customer had advised his insurers about the addition. Conclusions are difficult without all the facts, but it struck me as odd. Insurance companies are collectively responding with extraordinary measures to meet the needs of their clients in the face of an insurable and, for most part, insured catastrophe. Nonetheless, the public perception remains twisted and maintains the notion that insurers try to take advantage of their customers by not living up to the terms of the contract with them. This lack of faith has become a common theme in my writing. I seem to run into it too often. We have much work to do to improve the public’s perception of the industry.

Uber Again

Well, it seems I’m not the only one calling for amendments to the regulations regarding Uber. Edmonton City Council is considering new legislation governing vehicles for hire. While most changes in this kind of legislation tend to annoy most everyone equally, we can hope that any adjustments will provide oversight to the unregulated activities of Uber. On the product side, Intact has taken a lead with its new offering, determining that the risk is in need of coverage and that the risk is insurable. It has announced an initiative in consultation with provincial regulators and Uber to develop a product to meet the needs of both parties. This initiative will likely put competitive pressure on other insurers to get involved as well. Personal-lines auto underwriters seem quite agitated when discussing exposures in the Uber business model. Perhaps they will get an endorsement to offer our clients. Time will tell.

UBI Again

This topic never seems to go away. Those who follow the industry press may have seen me quoted in a recent article. I was approached for my thoughts on Allstate’s new patented approach and to provide some commentary as to how I see UBI “turning the industry on end.” Well, I don’t see any real significant changes to what we do coming about through the introduction of UBI in the Canadian market. Our neighbours to the south have been using UBI for about five years now and have not seen any real disruption in their marketplace. Where it’s been introduced, we’ve seen the competitive offering of a group of major insurers match any gains in market share through it by offering their own versions. Loyalty to brokers and companies hasn’t been negatively impacted. Further, the inference that the data gathered affronts clients’ privacy has not been supported. No privacy complaints regarding UBI have been brought against any insurer. I suspect our Canadian experience will not be dissimilar.

About the savings provided through UBI, I say the product just allows for selective underwriting and disrupts the classes of risk by introducing new classes. The amount of money that is needed in the pool of auto insurance in any province is not reduced by UBI, so, where its take up is substantial, the cost of the claims in these new classes will be shifted to the old. This transfer introduces a political reality that will attract the regulators’ attention. A 25% reduction for one group will net a 25% increase for another group. That won’t get good press anywhere. While some will say that the “new” group should fairly pay its actual costs based on the losses, remember that the premiums paid by the many should cover the losses of the few. Disrupting this principle with a business model based on new technology will not be considered fair by those paying the extra premium required to maintain the financial reserve needed to pay claims. Wow, heavy philosophical insurance stuff here!

Costs aside, any technological changes that reduce losses have a positive impact on the insurance marketplace. UBI fails to deliver on this principle as well, with one exception—young drivers. Where young driver’s behaviour is monitored and corrected through the use of UBI, claims decrease by as much as 40%. The real savings to these drivers class don’t have to be absorbed by other classes. While these savings are a big plus, the most important part of the story is that UBI monitoring of these drivers results in a 70% reduction in bodily injury and death. If we can get our kids through their learning-to-drive years without serious accidents, then we’re really onto something good. In a perfect world, we’d make this mandatory, wouldn’t we?

In Closing

Fall is in the air. Thankfully, early snow in the foothills didn’t last very long. The forecasts for some very warm weather in the coming weeks seem overly optimistic, but those excellent weather prognosticators are calling for a warm winter on account of El Nino. We’ll see.

The opinions expressed in this blog are not necessarily those of IBAA.
Comment on this post below or email Thom Young privately. Thom also encourages suggestions for topics.

Tags:  building codes  construction associations  forest producers  insurance industry reputation  Intact  Quebec regulations  special interest groups  timber-frame buildings  Uber  UBI 

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