Why insurers want more regulation on building back better

The private sector doesn’t often advocate for more regulation, because it can restrict flexibility, increase compliance costs and affect competition.  

But the insurance industry is advocating for more regulation around building back better after catastrophes. 

That’s because regulation requiring insurers to rebuild or repair properties so they’re more resilient to perils following a catastrophe would level the playing field among insurers. And it would quell any fears around customer retention leakage, experts said during a Jul. 22 Accenture panel discussion.  

During the ‘Business case for investing in resilience’ session at the Accenture Toronto office, insurers acknowledged the complexities of rebuilding homes after a loss. If insurers invest in rebuilding a home to higher resilience standards, questions can arise around the long-term value of those upgrades — particularly in a competitive market where policyholders have the option to move their business elsewhere. 

“That is where there’s that leap of faith that we have to take to get over that piece — to recognize if we all did it, we’d have the solution. But sometimes it’s ‘who goes first?’ and then ‘Who’s going to follow?’” said Lisa Guglietti, EVP & COO of Co-operators. 

But, if regulation existed that required rebuilding after a Cat to a better standard of resiliency, that would “level the playing field,” panellists said. 

Plus, standardizing resilient rebuilding materials across the industry would make it easier for insurance professionals to predict, distribute and manage the cost of those materials over time, said Paul Gilbody, president of ClaimsPro.  

“It would help…scatter the cost of the materials…if everyone’s using similar sorts of things,” he said. “That would help from a lifecycle perspective…if everybody’s using the same rather than it being almost a niche product.” 

Precedent for the regulation of building back better does exist elsewhere, said Jolee Crosby, CEO of reinsurance at Swiss Re Canada. “The national flood program in the U.S. does have that requirement; the build-back has to be back to a certain level to avoid basically the [same] problem.” 

Better building codes

Building for resilience is also something that should apply to construction of new units, said Guglietti.

“Builders are thinking about the unit costs. They’re also being pressured to put out as much affordable housing as possible,” she said. “It is a bit of a slippery slope if we don’t solve for it, because we could put out housing that is a little bit more affordable, but then it gets knocked out by the first windstorm and hailstorm that comes through town.” 

That’s where updates to building code regulations come into play, Keith Porter, chief engineer at the Institute for Catastrophic Loss Reduction, explained. 

Since 2019, Canada has experienced a 115% increase in the number of claims for personal property damage and a 485% increase in the costs for repairing and replacing personal property, according to the Insurance Bureau of Canada.

“This exponential increase in our catastrophe losses is partly because of our building code, because we build to ‘least first cost’ rather than to ‘least life-cycle ownership cost,’ and we do that partly because of regulatory capture,” Porter said.

Regulatory capture occurs when a regulator acts in the interests of the industry it is meant to oversee, rather than in the public interest. Least first cost ensures the construction cost is the lowest possible, whereas least life-cycle ownership cost evaluates a property’s value over time, including the cost of construction, operation, maintenance — such as repairs and rebuilds — and disposal.

In the insurance industry’s case, concerns have been raised about the amount of influence builders have over the building code.

“I would like to see a much more muscular effort by the insurance and the reinsurance industry to try to overcome that regulatory capture,” he added.

“With every year of new construction that is vulnerable, we’re baking more and more catastrophes into our future, and until that code changes, that curve is not going to flatten out. And the only way to get that done is with a code change that requires new construction to be minimum life-cycle cost rather than minimum first cost — basically, better buildings.”