Spreading the Word About ITV

Insurance Bureau of Canada is spearheading a major public awareness campaign aimed at educating consumers about the importance of insurance to value (ITV) and its impact on their property values. A summary paper by the IBC’s working group on ITV, to be released this fall, is calling for a significant push to increase homeowner knowledge about how the industry calculates the value of their properties. The working group is composed of insurer, broker and agent representatives and has been meeting since February 2009.

“We found out early on that many homeowners don’t know that much about their most important asset,” says Bob Fitzgerald, chair of the ITV working group and an executive vice president with Aviva Canada. “It is somewhat surprising how little people know about basic things, such as how old their homes are, how large their homes are or the square footage.”

Fitzgerald says the public awareness campaign is perhaps the most prominent part of a three- pronged strategy designed to tackle the ITV issue, which has plagued brokers and insurers across the country. ITV has to do with property values being undervalued, meaning that insurers aren’t collecting enough premium to pay for claims. The dilemma becomes particularly acute when insurers’ policies guarantee to pay for the full replacement cost of a home that has not been insured to its full value.

Two other aspects of the IBC’s campaign involve an industry-wide series of established best practices for usage of and training on ITV calculator tools, and a broker-specific code of best practices that could be adopted by provincial associations.

Consumer education is critical, Fitzgerald says, because without it the industry will not get the right kind of information no matter how much progress is made on ITV calculation models. “We want to show consumers why it matters and inform them of how valuations work and what they should know,” he notes. “If they shop for homeowners insurance, here is what they need to know and how to get their paperwork up to date.”

The campaign will involve links to Web sites, brochures and “support material” for sales staff. It is expected to kick off early in 2010.

Establishing industry-wide best practices is another important component of the IBC working group strategy, Fitzgerald notes. “This really comes down to a few areas, such as use of ITV calculation tools and training. We have to find ways to make the valuations easier and clearer for brokers, insurers and consumers.”

Fitzgerald says the working group is intent on developing “10 or 15 data points that, if done correctly, will guarantee at least a 95% accuracy. We are interested in seeing how we can work with ITV vendors to develop that. Also, we need to look at the frequency of re-evaluations. Should they be done annually, or every three or five years?”

ITV vendors say they generally support the framework of the working group. But they caution any specific recommendations about products should involve their direct input.

“I think we need to have input from all the ITV vendors, but the question is: are those 10 or 15 data points the right parameters or requirements?” says Todd Rissel, chairman and CEO of e2value. “I would not go into a broker’s office and tell them how to bind coverage or what exposures need to be covered off, so there has to be some understanding that they may not understand the [valuation] products as well as we do.”

Chris Lang, president of PowerSoft, says ITV calculation tools have to be straightforward and focused on the primary users. “In terms of best practices, I think the most obvious step is to ensure that the ITV tool is designed specifically for brokers in Canada,” he observes. “Any model should not ask questions or use terminology that brokers either don’t understand or don’t have access to in terms of information.”

He cites several examples of ITV software models being too complex or detailed, such as the requirement that brokers use correct wage rates for construction trades in their area or overly specific breakdowns for the type of exterior walls. “It is important to know if the exterior of a building is brick, concrete, wood or siding, but it is not necessary to go into detail about whether the wood is board and batten or clapboard, and if it is vertical or horizontal. That doesn’t make a big difference in the valuation.”

Lang says PowerSoft introduced a “short-form” version of its EvalWorks product in September. “It contains 20 questions that will cover about 80-85% of homes in Canada,” he says. “It won’t cover them all, because there are some exceptions, but we are talking about the majority. We got tired of waiting for the industry to come up with something so we developed it. There is no need for a broker to spend 45 minutes doing an evaluation; it should only take 10-15 minutes tops.”

Fitzgerald says ITV vendors have been consulted regularly since the IBC working group began. Rissel and Lang have each confirmed this. [MSB was contacted for this article, but declined to comment. Xactware is another ITV vendor active in Canada].

The competitive pressures of the ITV vendor industry are well known, says Brenda Rose, vice president at brokerage Firstbrook Cassie and Anderson.

“We are very wary of competitive issues within the ITV vendor community, but this is a public issue that directly affects our industry,” says Rose, who sits on the IBC working group along with two other brokers. “Any of the vendors we are talking to appear to be quite open and willing to participate. This is their product line after all. They know how their tools work better than we do; we need their input “

The broker-specific best practices developed by the IBC ITV working group will likely build off the discussion paper released by the Insurance Brokers Association of Canada (IBAC) this past spring. ¹ “We have to make sure the industry is aligned with the best practices of the sales force,” Fitzgerald says. “We want to be able to take best practices established at a national level, and then have provincial broker associations adopt them into their code of practice.”

Rose says some of the recommendations emerging out of industry discussions will require a long-term perspective. “Some of this may evolve over time and take a bit longer,” she notes. “For example, the neutral forum for evaluating the accuracy of ITV calculators will take some work. We are seeking some mechanism to be used for evaluating ITV products and results. What form this will take is still subject to discussion.”

ITV vendors are not against the idea, but want to see the details, according to Rissel. “I think this could be a great idea, but it has to have definite purpose, definite steps and definite criteria,” he says. “It is really more about how this could work on a practical level. If it keeps changing, then you have a moving target, and it is hard to hit a moving target. Insurers ask us and our competitors on a regular basis if our products provide the right numbers, and we have to be accountable for that.”

Fitzgerald says the working group is clear that there is no need for an industry-sponsored ITV entity, since plenty of competition already exists at the ITV vendor level. “Brokers want to have the ability to validate the ITV tools, and it is the brokers or agents who are doing this at the point of sale,” he says. “There is no interest on the part of the working group in having any kind of industry-owned ITV solution. This will have to be done by aligning the sales force practices with what insurers are doing on an individual basis.”

However, there may be an opportunity for a “clearinghouse” of actual loss data from insurance companies, which could be run against ITV calculator models. Lang says PowerSoft has supported this idea for some time. He notes that some vendors collect this loss data from individual companies, but not all insurers are willing to share this information.

“We have asked groups like the IBC if they could set up a clearinghou se of actual loss data,” Lang says. “For example, let’s say the IBC collects 25 losses over the last quarter and submits that to all vendors. They could run it against their models and see how these perform and compare. Adjustments could also be made if the calculators are off.”

The working group is also discussing the notion of insurance companies “sanctioning” the use of specific ITV calculators. The purpose of this recommendation is to validate the performance of ITV products, not reduce competition, Rose says.

“Why would an ITV vendor not want an insurance company to sanction their product?” she asks. “I cannot see why an ITV vendor would not want to cooperate with that process. We are not saying that any one insurer will tell brokers they have to use this one tool, but we do expect that the ITV vendors will stand behind their products and participate in this process.”

Rissel says there are three main ITV vendors to choose from in Canada, and there is a real benefit to this competition. “It is beneficial for the end-clients, brokers and insurers,” he says. “If you don’t have that competition, there can be complacency, and I think we saw that in the Canadian market in the past.”

Both brokers and insurers say they want to keep competition amongst ITV vendors alive and well in the valuation of property. However, Fitzgerald and Rose stress that companies and intermediaries should not use various ITV tools as competitive levers to gain market share.

“One principle became clear early on in our working group meetings: we should not be competing on the replacement cost calculation of a house, period,” Fitzgerald says. “As insurers, we compete on price and product, not on who can get the lowest replacement cost from an ITV tool. So the question is how do we get a proper rebuilding cost as a class?”

Rose said a fundamental premise is that brokers and insurers should have a choice in which ITV tool they use. “We also believe that ITV should not be used as a competitive lever,” she says. “The right number is the right number. How we come up with that right number is the real issue.”

Coming up with that right number will be the focus of the IBC working group over the next few months, according to Fitzgerald. He expects to see specific results of the working group’s three-pronged strategy implemented in early 2010.

“There are no silver bullets here,” he says. “This is a difficult issue that did not just arise in one part of the industry or from one group. It will have to be solved with several different players in the industry working together. The good news is that there is a lot of traction, good dialogue and agreement on guiding principles.”

1 See “Establishing ITV Best Practices,” Brenda Rose, Canadian Underwriter, April 2009: Page 14

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One principle became clear. We should not be competing on the replacement cost calculation of a house, period.