Struggles persist in funding post-catastrophe reconstruction
In the world of insurance, the cost of rebuilding a home after a disaster can often be a contentious issue. A study by Marshall & Swift/Boeckh, a well-known firm that provides software for evaluating reconstruction costs, suggests that more than three-quarters of Canadian residents are underinsured. This finding is supported by other sources, indicating that the phenomenon of underinsurance has been a long-standing issue in the North American industry.
The high cost of labor and expertise required for rebuilding a neighborhood leveled by a disaster is a significant factor driving prices up. Thousands of North Americans who have lost their homes have been short by hundreds of thousands of dollars to rebuild. This was the unfortunate reality faced by Geneviève Laurendeau and Vincent Goineau, whose triplex collapsed, only to discover that the reconstruction cost in their policy was significantly insufficient.
Similarly, the Insurance Bureau of British Columbia revealed that the 240 homes destroyed by the 2003 forest fires in the province were, on average, $100,000 underinsured. Professor Kenneth S. Klein, from the California Western School of Law, analyzed 7,220 claims submitted to dozens of American insurers. He found that cost reconstruction estimates are incorrect in 77% of isolated loss cases and 90% when a natural disaster is involved.
The issue of underestimated reconstruction costs is likely similar in Canada as in the United States. Insurers use software to quickly determine the amount needed to rebuild a house, but these tools are based on flawed data. The software used by Canadian insurers, primarily Guidewire, is an analytics and insurance data platform used worldwide, including Canada. However, it differs from software commonly used in the United States mainly in integration and data models tailored to each market's regulatory and risk environment.
The Canadian Insurance Bureau (CIB) claims they haven't observed any underinsurance issues, but have no data to support this claim. During a meeting on the issue of underestimating reconstruction costs at the National Insurance Conference of Canada (NICC) held in 2008, all participants raised their hands when asked if they thought the ratio of insurance to replacement value was a problem.
Caroline Schweppe, Canadian representative of e2Value, a software publisher for home reconstruction cost evaluation, agrees with this assessment. Her software, she claims, has a margin of error of ±2.5%. However, Kenneth S. Klein suggests that insurers present as true something that is probably not when providing estimates of the reconstruction cost at the time of subscription.
Renovating your kitchen or bathroom without notifying your insurer might increase the risk of underinsurance. The constant changes to the Building Code, the multiplication of municipal requirements, and the explosion of labor and material costs during the pandemic years further complicate the issue. Currently, the real estate portfolio of Canadian insurers is underinsured by about 40%.
The investigation by the San Francisco Chronicle published in April concluded that the main factor for inaccurate reconstruction cost predictions is the dependence of insurance companies on a fundamentally flawed system. In theory, the entire industry would have to act at the same time to improve the accuracy of their algorithms and raise premiums to avoid underinsurance. Until then, it remains a real risk for homeowners across North America.
