During the early hours of a Sunday in 1666, a massive fire erupted in the city of London, England. The inferno started in a bake shop and raged on for five days, engulfing 13,200 homes, 87 parish churches, The Royal Exchange, Guildhall, and St. Paul’s Cathedral. Damage was estimated at 10 million British pounds.
The Great Fire of London — as it’s known today — may have spurred the demand for home insurance. According to Intact, one of the early indicators that a person had home insurance was a metal plaque known as a “fire mark” that was placed on the home’s exterior, somewhere easily visible. The plaque told firefighters that the building was insured and in the case of a fire, saving it should be a priority.
Home insurance has come a long way since then. But one thing that hasn’t changed is that it’s still an optional product. Unlike auto insurance, which is mandatory and therefore regulated by the government via the Financial Services Commission of Ontario (FSCO), the home insurance space sees no government or regulatory intervention in consumers’ premiums.
To shed some light on this topic, we turned to the Insurance Bureau of Canada (IBC)’s Director of Consumer and Industry Relations for Ontario, Pete Karageorgos, to weigh in on why home insurance isn’t regulated.
Home insurance is optional
The first and most obvious reason home insurance premiums aren’t regulated is because the product itself isn’t mandatory.
“The government isn’t concerned about what you’re doing to protect your home or your belongings,” says Karageorgos. “That’s your own personal choice.”
Home insurance isn’t mandatory on paper, but in many ways, it is. Like when you consider that most people couldn’t afford to pay for something like a flooded basement out of pocket, which can cost $43,000 to repair, according to IBC. So, they pay a monthly premium to get home insurance in order to avoid bankruptcy in the event of such property damage.
Homes don’t run into people. Homes don’t cause injuries, typically
Not only that: most lenders will require wannabe homeowners to prove they have home insurance in order to qualify for a mortgage. All of that makes home insurance feel somewhat mandatory.
“Lenders want to protect their interests,” says Karageorgos. “It’s not that they want the homeowner to protect the community at large. They want to protect their investment in that property. It isn’t an issue of looking at the good of the larger community, which is what auto insurance is designed to do. Property insurance is different.”
Auto is social; home is personal
How, exactly? Well, says Karageorgos, “Auto insurance is a bit of a social policy as well as a property insurance policy. Social in the sense that someone can get hurt: passengers, drivers, innocent individuals, from someone's use of an automobile or any vehicle.”
In other words, because no other people are really at risk of injury from you owning a home in the same way they are when you drive a car, the government isn’t as concerned with regulating the product.
“Your exposures are different,” explains Karageorgos. “Homes don’t run into people. Homes don’t cause injuries, typically.”
Of course, it’s not impossible for someone to injure themselves in or around your home. Many home insurance policies come with liability insurance for this very reason, designed to protect the homeowner in case a third party tries to sue them for injuries sustained on their property. But that’s the key differentiator: this injury is happening on your personal property, not on a public roadway, so the government doesn’t view the risk in the same light.
By owning a home, says Karageorgos, “You’re not taking up road infrastructure or public infrastructure in the same way.” Sure, you pay taxes and benefit from garbage collection and the streets are ploughed when it snows. “But it’s a lot more passive type of scenario than a road user more actively using and taking up public space and services,” he says.
“So governments are cautious to enter into that space.”
Consequences of regulation
There are many benefits to regulating things. Regulation in the auto insurance industry means that auto insurers can’t increase a driver’s premiums on a whim, and by however much they please. In Ontario, they need to gain approval from FSCO before raising or lowering rates.
On the one hand, regulation could be especially useful in the home insurance sector, where premiums continue to skyrocket, and extreme weather patterns brought by climate change, means these increases aren’t expected to stop any time soon. As personal finance writer Rob Carrick put it in a recent Globe and Mail column, “somebody needs to pay more attention to this sector because it can't go on like this forever.”
The government isn’t concerned about what you’re doing to protect your home or your belongings. That’s your own personal choice
Regulation could also bring more uniformity to the types of coverage available (according to Carrick, “the IBC says some firms now limit their coverage of electronics in a home” and are “doing more in-home inspections to see up close exactly what it is that they're insuring.”)
But there’s also the argument that regulation could have negative consequences.
“If I’m a homeowner and I don’t have any claims because I take more pride, I take more care, and I maintain my property better than my neighbour who has a claim every other year, then I might think why should I be subsidizing that person?” says Karageorgos. “So there’s some discussion that needs to happen about that in terms of the whole concept of pooling and risk.”
This is already a point of contention within the auto insurance sector, where premiums are determined largely in part due to where you live. Often referred to as “postal code discrimination,” drivers who live in areas where there are a large number of claims will often see significantly higher premiums, even if they themselves haven’t made any claims. It’s even prompted some drivers to lie about where they live in order to obtain lower rates.
Not everyone can afford home insurance, either. “Sometimes you may have people who may be only barely able to afford rent and may not be able to afford insurance," says Karageorgos. "To mandate that everyone would require property insurance may make it difficult for some people to be able to afford daily living.”
Still, critics have said for a while now that something needs to be done about this sector. Karageorgos is hesitant to open that door to the government.
“The government has a tough enough time handling the issues that it currently deals with,” he says. “Regulation may require an increase in bureaucracy, and an increase in taxes. From a societal standpoint, there are other more important priorities that the government should be focussed on.”