BUSINESS CASE - Proposal for Insurance Policy Integration July 2013

BUSINESS CASE - Proposal for Insurance Policy Integration July 2013 Presented by Payk Pourzynal Backwater Boot Inc. 19 Branchwood Road Ottawa, Ontario

Table of Contents Introduction... Error! Bookmark not defined. Authority Signatures... 1 Executive Summary... 2 The Strategic Context... 7 Phase 1 Business Needs and Desired Outcomes... 7 1.1 Strategic Environment... 7 1.1.1 Organizational Overview... 7 1.1.2 Business Need... 8 1.1.3 Drivers for Change... 8 1.1.4 Business Outcomes... 8 1.2 Strategic Fit... 8 1.3 Detailed Description of the Business Need... 9 1.3.1 Problem/Opportunity Statement... 9 1.3.2 Prioritized Requirements (High Level)... 9 1.3.3 Assumptions... 10 1.3.4 Constraints... Error! Bookmark not defined. 1.3.5 Dependencies... 11 1.4 Scope... 11 1.4.1 Boundaries... 11 1.4.2 Stakeholder Analysis... 12 Phase 2 Viable Options... Error! Bookmark not defined. 3.1 Alignment... Error! Bookmark not defined. 3.1.1 Strategic Alignment... Error! Bookmark not defined. 3.1.2 Alignment with Desired Business OutcomesError! Bookmark not defined. Appendices... Error! Bookmark not defined. Presented by Payk Pourzynal Backwater Boot Inc. 19 Branchwood Road Ottawa, Ontario

Authority Signatures Payk Pourzynal Date Title, Backwater Boot Inc. Mark Girimonte Date Title, Clear View Construction Services Najman Ali Date Title, Backwater Boot Inc. BWB Insurance Program Integration 1

Executive Summary Installation of backwater valves in high-risk flood zones is a valuable tool in reducing the risk of sewage water backup in the Ottawa area. It is well known that poor infrastructure and changing climate patterns have contributed to a higher overall incidence of flooding. Recent extreme rainfall events have resulted in widespread sewer backup flooding in areas that were once considered to be low risk, including those with newer infrastructure and separated sewer systems. The net result of sewer backup for insurance providers is increased liability. Nationally, water damage claims associated with failure of household plumbing systems and sewer backup are a significant component of insurance claims paid to property owners. In 2012, the Insurance Bureau of Canada (IBC) estimated average yearly insurance payouts for water damage at $1.7 billion (IBC, 2012b). Water damage claims paid by Aviva Canada between 2000 and 2010 increased by approximately 160% across Canada, including an increase of over 180% in Alberta and Ontario over this time period (Carrick, 2012). Key Points Insurance claims stemming from basement flooding now total $140-million a year, according to a multiyear national average estimate from Canada Mortgage and Housing Corp. That total represents 30,000 to 40,000 incidents a year. It is now the number one concern for insurance companies, ahead of fire. Cost of water damage = $1.7B/year Damage claims have increased by ~160% across Canada. Claims from basement flooding total $140M/yr 30,000-40,000 incidents/yr #1 concern ahead of fire Figure 1: Meteorological and Hydrological Disaster Occurrences in Canada, 1900 2005 Source: Public Safety Canada, 2007. In July, 2012, a storm rolled through southern Ontario affecting several neighbourhoods in Hamilton and Ottawa, resulting in $90 million in insured damages (IBC, 2012a). In August, 2005, a severe rainfall event affected a large region of southern Ontario from Hamilton to Durham Region and resulted in over $500 million in insured damages, $247 million of which was associated with sewer backup. BWB Insurance Program Integration 2

Climate experts have predicted that climate change will increase the frequency and severity of storms. Storms such as these not only do damage directly, they also lead to the type of flooding seen in southern Ontario. The combined costs of infrastructure needs and repairs run into the tens of millions of dollars; hundreds of millions if one counts the full cost of things like the Ottawa River Action Plan. Though there are currently municipal protective plumbing programs in place, insurance companies cannot rely on municipalities alone to reduce the risk of flood. According to a discussion paper published by Swiss Re, in collaboration with The Institute for Catastrophic Loss reduction, November 2010, flood insurance has many advantages over government relief programs for flood damage coverage. For example, risk-based premiums and deductibles can provide incentives to encourage actions on behalf of homeowners to reduce flood risk. This reduction of risk can be accomplished through strategic alliances with area experts such as Backwater Boot. Furthermore, including preventative plumbing as part of an insurance program is a business opportunity, Providing flood insurance to individual homeowners can serve to increase confidence and satisfaction with insurance companies, and may provide opportunities for modest profits for the insurance industry. The expansion of current coverage to add flood protection is an opportunity for insurers to address a gap in current coverage and better serve their clients. Providing flood insurance coverage will help the many Canadian homeowners who experience flood damage each year, and will bring the peace of mind and security of insurance protection for flood to all Canadian homeowners. As well, provision of flood cover will reduce ambiguity regarding water damage claims, and can also provide an opportunity for growth in Canada s mature insurance market (Swiss Re, 2010). For a viable flood insurance program to be instituted in Canada, private homeowners should become aware of their own flood risks and implement appropriate flood damage mitigation measures on their own property. Homeowners should also consistently communicate with insurance providers when improvements are made to buildings or when flood mitigation measures are implemented to reduce the risk of underinsurance and to ensure fairly priced premiums and deductibles. Backwater Boot has been working with homeowners in the Ottawa area for over eight years. We are the ideal resource for educating homeowners on the role they can play in flood prevention, implementing prevention measures, and maintaining implementations. We also are well positioned to provide intelligence to insurance companies, since we currently install backwater valves and conduct inspections on behalf of the City of Ottawa. The Insurance Bureau of Canada can provide leadership and champion actions towards implementing a more vigorous preventative plumbing program as part of a cost savings initiative. BWB can provide expertise and help implement these solutions to reduce risk and cost to both homeowners and insurance companies. Our longstanding relationship with the City of Ottawa makes us an ideal candidate for partnership. It is well known that a partnership between government, the insurance industry and private homeowners will be necessary to adequately mitigate risk. We are hoping to assist in bridging this gap between all stakeholders. Appropriate risk assessments can be put in place, and Backwater Boot can help. Our Company assesses risk based on the following formula: Risk Threat of Flood x Vulnerability and Susceptibility of Home x Cost to Stakeholders BWB Insurance Program Integration 3

Though we are unable to mitigate the threat of flood on an environmental level, we can reduce the overall risk by adequately assessing threat and decreasing vulnerabilities and susceptibility within Ottawa area homes, especially those in high-risk zones. Assessing the threat, vulnerability, and susceptibility of a home requires the following: 1. Full inspection of home interior: a. Verification of cold air returns; b. Use of moisture meters; c. Furnace inspection d. Visual mold inspections; e. Presence of cracks in the floors/walls of basement 2. Full inspection of home exterior: a. Lot grading; b. Integrity of underground pipes; c. Foundation cracks d. Downspouts; e. Elbows and extensions; f. Eaves troughs and gutters; Backwater Boot is able to provide inspection services at a competitive rate and we consider our services a onestop solution to decreasing liability and risk to all stakeholders. Backwater Boot will provide a comprehensive inspection and recommendation report to insurance providers (see appendix A). This report can then be shared with homeowners, who will have the option to increase the resilience and resistance (thus reducing the risk) of their homes through the implementation of protective plumbing measures (see Figure 4). Figure 4: Risk Reduction Measures BWB Insurance Program Integration 4

Business Case BWB Insurance Program Integration The economic advantage of installing valves in new homes is augmented by the potential savings in insurance claims associated with sewer backup events. If climate experts are predicting an increase in the frequency and severity of storms, then one can assume a consistent cost of water damage of 1.7B per year is only the tip of the iceberg in terms of future expenditures to insurance providers. The average payout for sewer backup damages during a heavy rainfall event in the Greater Toronto Area in 2005 was approximately $19,000, and insurance claims totalling over $10,000 are common in other parts of Canada, in some cases reaching as high as $80,000 (Foster, 2012; Sandink, 2007). Using a Cluster of homes in the same general area that experienced basement flooding (Ward 4, Kanata North) we can show a simple analysis of insurance payout vs. cost of backwater valve implementation. We will propose this equation with a more conservative payout, for the sake of demonstration, where n=39: Figure 5: Summary of Findings by Cluster (Ward 4 Kanata North) Source: West-End Flooding Investigation Summary Report 2009. Figure 3: Cost of Valve Installation vs. Insurance Payout based on Kanata North Cluster (n=39) Cost savings of $156,000 OR 50% BWB Insurance Program Integration 5

We propose Canadian insurers incentivize backwater valve installation through adjustments to water damage endorsement premiums, deductibles and caps and only offer sewer backup coverage in areas considered at high risk if backwater valves (or other plumbing measures) have been installed. Insurers that incentivize backwater valve installation should require evidence that the valve has been maintained for insured homeowners to retain these incentives. Backwater Boot can ensure maintenance is performed and provide reports for each household on a yearly basis. We also propose that insurers open dialogue with the City of Ottawa to share resources and offer a partial installation subsidy to homeowners. This can be presented in the form of policy changes and contingency will be determined based on assessed risk and homeowner preference. Our value proposition involves offering our insurance partners the following services: a) Comprehensive exterior inspection. b) Comprehensive interior inspection. c) Educating homeowner on how to reduce risk of flooding through installation of protective measures, The insurance industry should also directly communicate flood risk reduction information to policy holders to help increase flood risk awareness and mitigative behaviour at the private property level (Swiss Re, 2012). d) Resulting report to insurance partner. e) Installation of protective plumbing measures as indicated by report. f) Ongoing yearly maintenance of valves and diligent follow-up. In conclusion, it is in the best interest of IBC to support and promote the installation and maintenance of preventative plumbing. With a cost savings of up to 50% (based on conservative insurance payout estimates), it is well worth the investment of only $4,000 per home. For those homes who may not qualify based on certain criteria, we propose that insurance companies offer homeowners the option to have backwater valves privately installed by Backwater Boot Inc. We can provide value both inside and outside of policy infrastructure, from completion of inspections to full installations. Accurate assessment of flood risk is essential for a viable flood insurance model and Backwater Boot can assist in this assessment. BWB Insurance Program Integration 6

Phase 1: The Strategic Context 1 Business Needs and Desired Outcomes 1.1 Strategic Environment 1.1.1 Organizational Overview Founded in 20xx, Backwater Boot continues to provide preventative plumbing solutions to homeowners in the Ottawa area. Our company currently works under contract with the City of Ottawa. We provide private residential valve installation services to homeowners who do not qualify for the city program. Our services include, but are not limited to, inspection of properties to assess risk, interpretation of engineering reports, managing inspections, installation of Mainline backwater valves, installation of Mainline Adapt-A-Valves, installation of Ipex Adapt-A-Valves and installation of sump pumps. We also provide valve and sump pump maintenance services. The main goal of Backwater Boot is to decrease the incidence of sanitary sewer backups in Ottawa homes and educate homeowners on their risk. Our strategic vision involves extending the reach of our services through integration into insurance policies. This can be accomplished through three avenues: 1. Option System; insurers absorb the $4k cost of backwater valve installation to homeowners upon payment of an additional premium. 2. Co-operative Approach; homeowners who are deemed higher risk can absorb a certain percentage of installation cost. Insurers can cover the difference with cost being offset by premiums. Percentages of cost assumed by the homeowner can be negotiated based on levels of perceived risk (determined in partnership with Backwater Boot inspection). 3. If the home is deemed exceptionally high risk, insurers can refer clients to Backwater Boot for private installation. We will educate the client on how to decrease their risk of sewage backup and install valves privately at a preferred rate. 4. Integrative approach (preferred approach): Insurer can share cost with City s Protective Plumbing Program. In order for the homeowner to qualify for reduced premiums, they can apply to the City Program for a subsidy. We propose that the IBC open discussions with local government to discuss sharing of responsibility or installations. Backwater Boot can facilitate this relationship by leveraging our longstanding relationship with city officials and local government. Based on the historical cost of sanitary sewer backup in the Ottawa area, it makes sense to secure a relationship with local insurers. This benefits insurance companies through decreasing susceptibility of those insured (fewer/lower payouts), sends an important message to homeowners that their chosen insurer is making an effort to reduce their risk, and increases awareness confidence and satisfaction with insurance companies. Current organizational structure involved leveraging long-standing relationships with certified plumbers, an engineering firm, concrete specialists, hydro vac digging services, and local Municipalities for permits and inspection. Our foremen oversee work and quality assurance is paramount. BWB Insurance Program Integration 7

1.1.2 Business Need Water damage claims associated with sewer backup are a significant component of insurance claims paid to property owners. Integrating backwater valve installation into insurance policies for the purpose of reducing the risk of a sewer backup event would address the problem of increasing payouts. Return on investment (ROI) could be as high as 50% based on the 4K cost of installation vs. current average payout (8K). ROI could possibly be higher if insurers work collaboratively with the City of Ottawa Protective Plumbing Program. 1.1.3 Drivers for Change a) Increasing incidence of sewage backup due to ageing storm water management infrastructure. b) Changes in environmental patters, which forecast increased precipitation - 1 in 100 three-day accumulated rainfall amounts in Ontario could increase by 30% by the year 2050 (Cheng et al., 2011). c) Increased health effects on population. Specifically, flooding associated with sewage can lead to faecaloral transmission of disease (Ahern et al., 2005), and contamination of building materials with floodwaters that contain sewage can facilitate the growth of human pathogens deposited during flooding (Taylor et al., 2011). d) Insufficient funding and maintenance of municipal sewer infrastructure - (Mirza, 2007) suggest that urban flood related damages and impacts will increase in Canada without the application of appropriate risk mitigation measures, i.e., backwater valve installation. (urban flooding, p.16). e) A lack of voluntary mitigation action due to a need for increased homeowner education. f) Out-of-date hazard mapping = inaccurate assessment of flood hazard. 1.1.4 Business Outcomes We aim to achieve the following: 1. Reduction of overall flood risk to all stakeholders due to sewer backup in high-risk Ottawa area clusters. 2. Decrease overall insurance payouts for insurers by a minimum of 10%. 3. Increase the number of homes with protective plumbing in the Ottawa area. 4. Increase accessibility and awareness of protective plumbing options for homeowners = shared responsibility. 5. Value: we aim to provide value through a one-stop package solution to a full property assessment resulting in a comprehensive, actionable report. 6. Increase discussions and communication around insurance policies for high-risk Ottawa neighbourhoods between government, insurance companies and homeowners. 1.2 Strategic Fit Flooding due to sewer backup is a large portion of insurance payouts in the Ottawa area. The goal of insurers is to provide homeowners with affordable protection policies. Policies can only remain affordable if insurance companies can accurately determine and offset risk. Installation of backwater valves, even with an initial investment of $4k is an economical way to reduce and offset risk and provide homeowners with increased protection, customer satisfaction and support. Insurance companies who adopt the backwater valve installation BWB Insurance Program Integration 8

policy will have a competitive edge over other providers. Educating consumers and increasing trust and overall value can have an immense impact on the bottom line. Strategically, best-case scenario involves co-operation and shared responsibility between all stakeholders (homeowners, government and insurers). As indicated in the Swiss Re report in 2012, A partnership between government, the insurance industry and private homeowners will be necessary to sustain a flood insurance system in Canada. Improving insurance services for Ottawa area residents can be considered part of professional development for area insurers, especially since urban flooding is a currently a matter of interest. We can assist in a dialogue with local government. Our long-standing relationship has allowed us to reduce flooding risk for many homes through the City of Ottawa Protective Plumbing Program. There is a potential possibility of integrating part of the government subsidy to offset the $4,000 cost of installation for those homes who qualify. This shared responsibility would allow for a more open dialogue and potentially lead to other opportunities for collaboration. 1.3 Detailed Description of Business Need 1.3.1 Problem/Opportunity Statement Insurance claims from basement flooding total $140M per year (30,000-40,000 incidents per year). In 2013, average payout was estimated to be approximately 1.7B (IBC, 2012). The average payout for each flooded basement is 14k. Cost of backwater valve installation is $4k. Therefore, it is economical to provide backwater valve installations in high-risk homes as a preventative measure. Cost of installation can either be absorbed by insurers and offset by increased premiums, entirely absorbed by the homeowner, resulting in decreased premiums, partially covered by insurers and homeowners, with homeowners paying a portion based on their risk profile or shared through a collaboration with the City of Ottawa Preventative Plumbing Program. Cost of installation: $4,000 (included inspection report and follow-up). Cost of average payout in event of flood: $8,000: COST SAVINGS OF $10K or 50%. BWB Insurance Program Integration 9

1.3.2 Prioritized Requirements (High Level) Core Insurers must be willing to invest up to 4K for preventative plumbing installations. Inspections and resulting reports will be handled by Backwater Boot Inc. Insurance companies assign Backwater Boot preferred vendor status for all installations and subsequent valve maintenance. Insurers incentivize installation of protective plumbing through premium reductions/adjustments. Desirable Optional Offer protective plumbing policy to all homeowners, aside from those occupying high-risk areas. Willingness to share responsibility and costs through a collaborative relationship with the City of Ottawa Protective Plumbing Program. 1.3.3 Assumptions/Constraints 1 It is Assumed that: Effects on Investment: Reliability Level: High/Medium/Low There is availability of capital for initial investment (4k) If capital is not available then investment is not possible 2 New policies will be initiated New insurance policies can integrate the cost of preventative plumbing installation into policy premiums, therefore assisting to absorb the cost. 3 Co-operative approach will be considered 4 Adoption and acceptance of new policy profiles by homeowners 5 Insurers will consider Backwater Boot the preferred vendor for inspections, and risk assessment where installation of protective plumbing is Investment will be decreased if stakeholders are willing to work together in an integrated manner. Policy structure will depend on assessment of risk for certain homeowners. If policy is structured to make preventative plumbing installation attractive, insurers may be able to offset partial cost of installation to the homeowner, this decreasing the need for the entire $4k investment. Backwater Boot will provide wholesale pricing to insurers so that initial investment remains consistent. High Insurers should be able to either offset the cost of the program through increased premiums or expense-sharing with Ottawa. Medium homeowners are demanding a higher quality of insurance service and increasingly coverage for basement flooding. We make the assumption that new policies will serve to increase competition among insurance companies and have high retention. Medium strategic alliance with the City of Ottawa can be facilitated by Backwater Boot, but cannot be guaranteed without a full understanding on insurer strategy moving forward. High As indicated above, homeowners are seeking more comprehensive protection against basement flooding. Policies including preventative plumbing measures and education will serve to fill a gap in homeowner satisfaction. High best practice will be implemented so that pricing remains consistent and predictable. We will also account for incidentals. BWB Insurance Program Integration 10

warranted. 6 There will be continued basement flood events in the Ottawa area warranting valve installation. 7 Backwater Boot will conduct business inline with the mission and quality of service mandated by the IBAC. ROI will not be substantive if flood events decrease or cease to occur. Quality assurance and adherence to best practice will be necessary in order to provide valve installation in a timely manner with quality installation. This will allow for costing to be accurate and ROI will remain consistent. High Historical data in combination with forward estimates for climate change and precipitation provide adequate evidence against this proposition. High Backwater Boot is committed to expedient quality installations at a bulk price point. 1.3.5 Dependencies Internal core dependencies are based on the willingness of insurance companies to: A: Provide initial investment, which is dependent on availability of capital. B: Initiate new policy programs, which is dependent on internal resource availability and capital. C: Integration of new program into current strategic environment, which is dependent on resource availability and capital. E: Willingness to spearhead a co-operative effort to work with the City of Ottawa where shared responsibility is of benefit. External core dependencies involve: A: Acceptance of change on behalf of current insurance providers. B: Continued backwater flood events in the Ottawa area. C: Uptake of new policy on behalf of homeowners. D: Consistency in economic environment economy must support additional expenditures in order to support viability. 1.4 Scope 1.4.1 Boundaries For the initial investment of 4k, Backwater Boot will provide the following: 1. Full inspection of home interior with resulting report: a. Verification of cold air returns; b. Use of moisture meters; c. Furnace inspection d. Visual mold inspections; e. Presence of cracks in the floors/walls of basement 2. Full inspection of home exterior with resulting report: a. Lot grading; b. Integrity of underground pipes; BWB Insurance Program Integration 11

c. Foundation cracks d. Downspouts; e. Elbows and extensions; f. Eaves troughs and gutters; 3. Engineers inspection with resulting report RV Anderson and Associates sets up a camera inspection to compile an engineers report. Scope of work is identified in report (which is also provided to insurer) and installation date is set. 4. Clear View Construction breaks ground 5. Certified plumber installs preventative plumbing measure 6. City inspector confirms work meets quality control standards prior to sealing of hole 7. Hole is sealed by Clear View Construction 8. Inspector returns to conduct a flush test 1.4.2 Stakeholder Analysis Stakeholder Role Insurance Brokers Association of Canada Homeowner Independent insurers Local government Clear View Construction Services Back Water Boot Inc. Boone Plumbing Inc. Badger Daylighting Inc. Cavanagh Construction Inc. K McDonald Plumbing RV Anderson & Associates Proposition and support policy change and preventative plumbing integration to independent insurance brokers. Recipient of installations and consumer of new policies and/or policy changes. Beneficiary. Adoption of new policies Provide subsidy to area residents in co-operation with insurers when warranted. Provide City inspections prior to initiation work and upon completion of work. Provide professional concrete pouring services Provide preventative plumbing installations, risk assessment reports, valve maintenance, education to homeowners. Act as a liaison for initiation of co-operative relationship between government and the IBAC. Supplies and materials Hydro vac digging services Stone slinging Master plumber Engineers BWB Insurance Program Integration 12

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