By Stan Sauerwein
The worst forest fire season in 50 years, experienced in 2003, hit insurers incredibly hard. Not only did they face claims well in excess of $200-million, companies realized residential valuations were alarmingly anemic when Guaranteed Replacement Cost (GRC) bills started to arrive.
Rate hikes on homeowner renewals and new policies were immediate and brokers have had to face a ground swell of protest by customers with rate increases. Coupled with the dissolution of the old Boeckh paper system of valuation and the need to move to one of three computerized new products, brokers have been forced into an almost untenable situation of revaluating their entire book of business practically overnight.
While companies have shown sympathy to the new app submission burden, allowing a phased transition and in some cases accepting moderate inflationary increases on coverage for renewals, the issues of ITV and GRC have exposed carbuncles on the complexion of homeowner insurance industry-wide. They may take some time to heal.
At the heart of the GRC conundrum is the question of valuation reliability.
Is using the Kelowna wildfire total loss statistics accurate proof of a general shortfall in replacement cost to insured value across the province? The catastrophic loss is actually an anomaly, some brokers claim.
Valuations coming in today, using the new Marshall & Swift/Boeckh (MS/B) Residential Component Technology (RCT), PowerSoft's PowerHouse product, or the RS Means CostWorks system from Reed Construction Data (offered to members through the IBABC), are all showing major increases.
Not unexpectedly, some brokers have begun to question the valuation accuracy when they compare them to actual replacement cost experience that is showing differences of up to $70/ sq. ft. between valuation and reality.
Is Kelowna 'proof in the pudding' that the valuations are accurate?
One victim we interviewed for this article lost his 12 year-old home to the Kelowna fire. His dwelling was insured for $265,000 but improvements that were argued as unrecorded on the policy pumped his replacement cost to $470,000. His was not an isolated example.
The reconstruction process on 238 homes lost to the Okanagan Mountain Park wildfire in mid-August has gone surprisingly smoothly, despite the overheated residential construction market now being experienced there.
According to Jim Wright, Permit and Plan Checking Supervisor for the City of Kelowna, less than half of the homes destroyed by the fire are now in the process of reconstruction.
The City received 111 building permit applications since the disaster and has issued 93 permits as of mid-January. A good number of those homes are at or near completion. He is uncertain of the reconstruction progress on the remainder.
"Things have slowed down and completions are lagging," he says.
Kelowna moved to speed the processing of replacement by assigning a plan checker and building inspector dedicated to the fire-related reconstruction.
A telephone survey of ten builders indicates that construction costs in Kelowna range from $90-$125 per square foot for the average home. Similar homes being built in the same neighbourhoods even show a wide variance in cost.
Paul Fabre, a CMHC market analyst based in Kelowna, says the reconstruction lag on total losses could simply be based on the overheated construction market. Affected homeowners may be waiting for things to cool and prices to drop, he suggests.
"Some builders are probably taking more profit given the hot market," Fabre admits, but that is just one factor. In the past year, Kelowna has seen a 17% increase in the median retail price on resale anyway.
"I'm not saying that translates directly to the new construction market, as a lot of forces are affecting the new home price such as increases in material costs and labour. Lot prices have gone up significantly as well, due in part to rising development costs." Even before the fire, CMHC noted the median new home price in Kelowna had increased by one-third over the past five years.
Whether the Okanagan Mountain fire is adversely affecting pricing conditions in the region is therefore hard to determine because of all those factors, he says. Kelowna is, afterall , still one of the hottest construction markets in the province.
"We're seeing not just job seekers arriving, but a lot of retirees and 'move down' buyers. A lot of people who are not living here now are purchasing in anticipation of retirement.
"Prices are also a reflection of who is doing the buying. These people are purchasing expensive homes. They are not building basic boxes."
Don Ungaro, of Ungaro & Sons Insurance in Kelowna, says his experience has shown that residential valuations computed by the RCT have been reliable to the actual replacement costs recorded after the fire.
"When I compare it to some of the claims we've had in the fire, it's very, very close," he says.
"The panic of having all those homes hitting the trades people at once hasn't been as big an issue as it might have been. Certainly we are short of suppliers, but we were short of suppliers before the fire hit. It has put a crunch on rebuilding but overall, considering the circumstances, it's progressing not too badly."
But could the fact the replace cost valuations in Kelowna are close to the mark inspite of stress inflated prices, indicate they were too high in the first place? Not at all, says Phil Moore, Canadian business manager for MS/B.
"Part of our obligation to the industry is to reduce the turbulence and volatility of numbers month to month. We actually do some factoring. Every month we call suppliers at the retail and wholesale level in 92 cities across the country (including 4 in BC). If we see significant differences, we try to account for them," he says.
"No question that the fires this summer had serious ripple effects for the construction industry, particularly when it comes to materials and labour costs. So, we recognized what happened with material costs and we equalized those over a quarter period. If the same volatility continues for another quarter then you'll probably find the numbers in RCT will increase again."
Last October, the firm released results of an independent review of 200 total loss property claim files from several leading property writers in Canada during the spring and summer months of that year. The losses consisted of buildings destroyed to the "plateline" of the foundation.
Across the industry, RCT valuations were within 4% of the claims payout, MS/B said. For one large insurer, the RCT valuations were within 1% of what the company actually paid on the losses.
Moore, says the RCT is built with total component technology and prices the cost to rebuild a structure from the ground up. "The broker or agent should feel good because he/she has competently met the protection needs of the client."
Ted Lewis, with Nanaimo Insurance Brokers, is not completely convinced. He has done some comparisons of his own.
Recently he looked at a total loss on a home of about 1,000 sq. ft. in Nanaimo with an unfinished basement. The RCT said the replacement cost of the home was $174,000. "I've been in touch with an adjuster here in town on some claims that we had. One house was roughly 1,000 sq. ft. with an unfinished basement and it had an actual replacement cost of $102,000."
"It just strikes me as strange. With another example, a fire loss on a brand new dwelling of 1,442 sq. ft. had a replacement cost of $130,000. That's less than $100 a sq. ft. and the RCT is way above that. We see a home built in the 1940s in the older part of town here and its $170 a sq. ft. according to RCT, based on the grade floor area and an unfinished basement."
"My personal feeling is that lots of times the RCT is inflated and I have two recent losses that show it is."
Lewis says the RCT uses Victoria costs as the base price for reconstruction across Vancouver Island, and he wonders if the costs in Victoria's the super-heated construction market apply fairly in Nanaimo.
Moore says the costs in the RCT are rationalized. RCT uses the first three digits of the postal code to identify different regions.
"Yes, we do gather information for our values from Victoria. But, when we apply the demographics of Victoria to the other postal codes, there is no significant variation. We would touch base with other cities on Vancouver Island and if there is no significant difference, we would use the Victoria numbers."
However, Moore adds the RCT is willing to address major variances brokers may find on a case-by-case basis and invites their inquiries.
RCT evaluator, at the broker level, is designed typically for homes in the $400,000 to $500,000 range. It runs out of steam above that number. The full RCT application is actually good for a much higher value home, he says.
Non-standard features may be inflating valuations in examples like those found by Lewis, he says.
"Where we have an underwriter or a broker, or in some cases an adjuster, saying he can't rationalize the numbers he is getting, we will gladly take a quick look. Usually we will find the RCT will produce a viable number for main street homes typically in the $120-$150 a sq. ft. range."
Moore adds that valuation for material costs between Victoria and Nanaimo may be the same, but labour may not be. "Labour is taken into account individually across the Island."
Lewis remains unconvinced on the issue of reliability though. One of his staff members recently did a test. A valuation was performed with RCT on a home in Nanaimo and a $166,000 figure was generated. The same home, applied to a comparable postal code area, personally familiar to the broker in Victoria, generated a $162,000 valuation. According to the RCT, the home would cost more to build in Nanaimo than the super-heated construction market in Victoria.
Reliability aside, Lewis says company requirements for the new valuations are putting heavy pressure on brokers and his office is experiencing it now.
Customers are arguing the valuations and, disgruntled with rate increases, doing more shopping. "We aren't building appraisers," Lewis laments, and the chore of explaining the valuations takes extra time. Worse, he suspects customers may not be supplying every broker they poll for a quote with the same information on their home.
Lewis says his staff does an evaluator on every renewal. "It's like pulling teeth sometimes, but we make the effort to be sure the replacement cost is covered."
In Kelowna, Ungaro looks at the new valuation a little more positively. "A silver lining is that people, at least in my area, have been tuned into insurance to value more than they ever have been in my career.
"They are actually listening to us finally. Before it was bottomline driven and the lowest cost ruled. Now they are seeing some of the horror stories, they are worried, and they are taking the time to do it right."
His staff uses RCT, the RS Means CostWorks product and checks the BC Assessment Authority figures for square footage records as well.
"When you put all the tools together, I'm hoping I have some reliable data."
"I'm really hoping the insurance companies will look for a bit of a transition period. It's quite a shock out there. We want to get everybody up to date, but it's just physically impossible to redo your whole book that quickly."
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