The industry view on soaring home insurance premiums: People, you're actually getting a break.
Here's the math, supplied by Wayne Ross, vice-president of property claims for Aviva Canada, the country's second-largest property insurer. Over the past 10 years, the value of homes has close to doubled on average. Meanwhile, premiums have gone up about 1.8 times.
"The cost per $1,000 of coverage has actually gone down," Mr. Ross said.
So insurers have actually been going easy on us?
"That's the way you should be looking at it," Mr. Ross said with a chuckle.
We're at a weird point in the economy where inflation is supposedly not a problem and some experts still worry about deflation. And yet, you can't live your life these days without being whacked upside the head repeatedly with price increases. It happens when you gas up your car, buy groceries and renew your home insurance. At our house, premiums have gone up at least 40 per cent over the past couple of years.
In a column earlier this month, I suggested you hit the road if your insurer keeps jacking up rates year after year. An industry that relies on routine double-digit price hikes every year is one that risks creating nomadic clients with zero loyalty. If any financial sector needs to rethink the way it builds and prices its products, it's home insurance.
Until that happens, we're stuck between those enormous premium hikes and the business realities in the home insurance business as described by Mr. Ross. Let's hear more about them.
Why We Pay What We Pay
Mr. Ross says rising home values are a big factor in home insurance premium increases. We're not talking here about the price your home would fetch if you put it on the market. Insurers look at home values from the perspective of how much it would cost to rebuild and replace the contents.
Premiums are also influenced by the claims experience of insurers. Here, water damage is the villain of the moment.
Water damage - that's sewer backups, burst pipes, and leaky foundations and roofs - accounted for 20 per cent of losses a decade ago, Mr. Ross said. The comparable number today at Aviva is 40 per cent, enough to push the old king of claims, fire, down to second spot, at 37 per cent. Theft and wind both account for a bit under 10 per cent, followed by miscellaneous other mishaps.
The average cost of a water damage claim for Aviva has risen to more than $14,000 as of last year, up from $5,423 in 2000, and the total paid out last year in water damage claims was more than $124-million.
A trend toward fancier finished basements is part of the reason for the increase in dollar value of water damage claims. Mr. Ross said people are adding bathrooms and kitchens, and stocking their basements with expensive electronics.
Another factor in higher water claims is a big increase in the number of severe rainstorms, Mr. Ross said. "Every year we seem to see more catastrophes, by which I mean an event where there's a lot of water that creates a glut of claims."
Urban sprawl coupled with old sewer infrastructure is another factor. Mr. Ross said runoff from big rainstorms has nowhere to go in the typical subdivisions being built today, so it ends up overwhelming sewers that weren't built to handle today's loads.
According to Mr. Ross, most water damage claims are preventable through such steps as:
- Keeping your roof in good shape and having a vapour barrier installed when you replace the shingles (it acts as a second layer of protection under the shingles).
- Installing a backwater valve in your basement - it closes automatically if your sewer backs up.
- Making sure your property slopes away from your house and not the opposite.
- Keeping snow away from your foundation, door and basement windows.
You may ask why you should worry about preventing these claims when insurers are already pricing them into their premiums. The answer is to save both the myriad hassles of a flooded basement and the cost of paying your home insurance deductible.
Mr. Ross said insurers are noting areas of the country where water claims are rising the most, and they're increasing premiums in these locales accordingly. In some cases, insurers are not covering sewer backups at all, or they're scaling back coverage.
Conceivably, you'll find yourself in a position where the company insuring your home has raised premiums significantly while paring back water damage coverage. That happened to us and our response has been to find a new insurer.
Growth in Water Damage Insurance Claims -- 2000-10
% increase in the average claim cost
Newfoundland and Labrador
* data unavailable for Saskatchewan, Manitoba and P.E.I. Source: Aviva Canada