Since Opta Informational Intelligence was acquired by Verisk in 2022, the Canadian firm has access to a fleet of devices that allow it to use higher-quality aerial images than those provided by satellites. With the help of artificial intelligence (AI) tools, it can better interpret data and translate it into relevant insights.
For instance, the area covered by a building's roof provides more accuracy about the livable square footage. It's also possible to predict damages caused by vegetation by observing the presence of trees on the property's grounds.
Improvements such as the presence of a pool or a solar panel on the roof can also be identified. "Tenant improvements are very useful information at the time of renewal, enabling the underwriter to better assess the risk to cover," says Greg McCutcheon, CEO of Opta, during an interview with Insurance Portal.
This detailed imagery for each roof is particularly useful following an event like the derecho that occurred in May 2022. Images of the damaged buildings from that event were used to feed AI. The average claim for roof damage at the time was $15,000.
It was learned, for example, that for buildings with aging roofs, there was a higher likelihood of 55% that an extreme weather event like a derecho would result in a claim. The developed tool is now used to assess roof condition and make recommendations to clients to prevent further damage from heavy rain.
Greg McCutcheon cites the example of solar panels, which are now visible through aerial images. These panels aren't always properly installed on roofs. If that's the case, firefighters might hesitate to water a roof with a solar panel due to the attached electrical and electronic equipment.
Data Analysis
Following the Verisk transaction, Opta now has access to the largest database of construction permits in the country. Aerial images can be paired with permits to provide relevant information to brokers for accurate property assessment.
Five months before our interview, Greg McCutcheon recounts that his firm reassessed a building at the broker's request, which had been insured up to a limit of about $500,000.
"We provided an insurable value of $1.7 million. The house had been demolished and completely rebuilt and expanded. Neither the broker nor the insurer was aware. When we asked the client why he hadn't informed his insurer or broker, he simply replied, 'I didn't think it was necessary, as the reconstruction cost was covered.' Nothing happened in this case, but this is where we see that such a gap between the insurable value and the reconstruction cost can create a real problem for the client," he says.
In each province where Opta's president presents to brokers, he shows other examples of buildings with significant coverage gaps. "If there's a moment in the relationship between the broker and their commercial client to discuss the coverage limit, it's now. Entrepreneurs understand inflation, and its impact on reconstruction costs is easy to explain," emphasizes McCutcheon.
He confirms that if such a coverage gap harms the client, it could jeopardize the brokerage's solvency. According to him, a significant undervaluation of the property's value to be insured falls under professional liability, specifically the errors and omissions policy.
According to Opta, around 75% of commercial buildings are underinsured by at least 40% compared to their reconstruction cost after a total loss.
Reconstruction cost assessment needs to be rethought because even for a single input, it's sometimes challenging to determine the price impact of a material. Greg McCutcheon gives the example of lumber, the price of which fluctuated greatly from 2020 to 2023. "I don't know of any sawmill owner who wants to return to pre-COVID prices," he says.
Despite the Bank of Canada's efforts to tighten monetary policy and increase rates, he doesn't believe that material or wage costs will return to an average annual indexing of 2%, even once inflation rates have been controlled.
Competition
Greg McCutcheon began to take an interest in insurable values in the late 2000s. During a 2009 industry meeting, other firms involved in cost calculation admitted that they had access to a too-limited sample of total loss claims for the Canadian market.
To obtain such an example, it shouldn't be necessary to set a house on fire, he jokes. The development of the iClarify system, now operated by Verisk Canada, was designed to provide this reconstruction cost estimate.
"When we launched the product, we had thought of creating a tool for brokers, but we realized that underwriters are using it to estimate the insurable value of buildings," he says.
After years of trying to convince the industry to align reconstruction costs with insurable values, Greg McCutcheon notes that the problem resurfaces episodically every 7 or 10 years.
It's not just in property insurance where inflation effects are observed. In auto insurance, the average cost of claims is also consistently rising.
A few weeks before our interview, Opta's CEO met with the chief executive of the largest commercial risk underwriting firm. The latter explained that he wanted to estimate the reconstruction cost of a garage with a painting workshop. There was a 600% gap between the coverage limit and the actual cost in case of a total loss.
