Want to know what’s at fault for increased home insurance rates? Predictive Modeling!

The work-life of an insurance underwriter: working in cramped cubicles in dimly-lit office towers in Toronto, carefully sifting through risk data, local fire-fighting ratings, and dusty manuals to find ways of charging more money to insure your home.

Whimsical caricatures aside, the underwriter’s task – trying to insure homes that are unlikely to have claims – is accompanied by the obvious inability to predict precisely whether it will be your home or mine that will sustain fire damage, be in the path of a hurricane, or have the storm-sewer empty into the basement.

However, by using actuarial and statistical methodologies, underwriters can make educated guesses to project which buildings are more likely to sustain damage.  This is called predictive modeling.

And that’s why the premiums are increasing now.

For the last 75-plus years, predictive modeling in property insurance has relied heavily on factors that relate to damage by fire: proximity to a hydrant or fire hall, construction materials, heating fuel, age of electrical system. etc.

This information was useful for an era when the greatest threat to damage your home was fire and smoke.

However, an interesting “tipping point” was reached in 2009: for the first time, more claims dollars were paid out due to water damage than to fire.  In fact, some Canadian insurers paid out more for wind and water than for all other causes of loss combined.

This has led underwriters to rethink how they assess risk, and begin to consider other factors in their predictive modeling process – some of it controversial (think credit scoring).

And so the old paradigms are being challenged.  More insurers are adapting what is known as “rate-to-peril”.  Whereas a home located beside a fire hydrant in the city may generate a better score against the peril of fire, the fact that it’s connected to the municipal sewer system may be a greater threat for water damage.

As a result, when we receive our home insurance renewal notices, some of us smile, while others groan.

Blame it on those underwriters – you know the ones: slumped over desks in cramped quarters, dusty manuals piled high…

Tags: broker, claims, coverage, economy, fire, insurance, ontario, premium, rate-to-peril, rating, risk, safety, water