First National hosted a special Commercial Property Insurance Briefing on Thursday, March 11, 2021 designed to help apartment owners understand why it has suddenly become difficult and much more costly to obtain property insurance in Canada and what can be done about it. Hosted by Jeremy Wedgbury, Senior Vice President Commercial Mortgages and featuring three experts from Hub International, one of the world’s largest insurance brokers with a dedicated Real Estate Insurance Practice with over 70 employees from coast to coast focusing exclusively in this industry, the webinar featured these key takeaways.
The Reason for this Briefing
As a Canadian lender with a $35 billion commercial mortgage book, First National is dedicated to helping clients mitigate financing and interest-rate risks through programs such as bridge loans and Early Rate Lock but has noticed the emergence of a new risk: insurance coverage.
First National first spotted the start of a new insurance cycle about a year ago and in recent weeks, has noted that more clients are facing significant challenges getting coverage and doing so at a reasonable price. This prompted First National to partner with Hub International to organize this executive briefing.
Defining the Problem
Insurance markets are cyclical, and the cycles are typically described as hard or soft. Soft markets are defined as times when insurance premium costs are low, insurance industry capacity is rising – capacity being the amount, value or limit of coverage that is available from insurers – and policy wording and coverage extensions are generous.
Hard markets feature lower insurance industry capacity as insurers reduce their risk exposure and introduce more restrictive policies, higher deductibles, and much higher insurance prices.
The last hard market in Canada occurred right after September 11, 2001 and for the past two decades, we have lived through a soft market.
In today’s hard market, premium prices are rising across all Property and Casualty categories because insurance costs have been low for over a decade but primarily because many insurers have not been profitable for many years.
Insurer profitability has suffered because their investment returns are low – due to low interest rates and bond yields – and as a result they cannot count on their investments to cover underwriting losses. The hard market emerged before the pandemic but COVID-19 has definitely made the market even more challenging.
Insurers are underwriting for profitability and are being much more inquisitive about property maintenance and capital expenditures. Insurers also have much better access to data and more advanced catastrophe modelling and they are using this information and insight to inform their pricing and underwriting decisions
The frequency of catastrophes such as wildfires and flooding affect insurers’ reinsurance costs, which is in turn passed along to consumers.
The exit of several insurers from the residential property market and industry consolidation has exacerbated the problem for those purchasing or renewing insurance.
Claims frequency tends to relate to human error or human intervention and severity of claims tends to be driven by large-scale natural events involving floods, fires, wind and hail.
Water damage is by far the biggest source of claims over the past four years and insurance underwriters are hyper-focused on looking at each building’s risk in this area. This is understandable because each apartment unit has multiple water outlets for sinks, showers, tubs and dishwashers while the building overall may be subject to risks involving sewer backups and sprinkler head releases.
When will the Hard Market End?
It is not possible to predict when the situation will improve but historically hard markets last two to three years. It would be logical to assume that costs will remain high in 2021 and perhaps into 2022.
Cost increases of 15% to 30% even on properties with clean claims histories can be expected along with the requirement for higher deductible for water damages.
Working with a Broker
In soft markets, coverage typically renews without the need for a broker to shop the market, whereas in hard markets, brokers must market just about every policy.
Because brokers have to shop the market for additional capacity, insurers are inundated with submissions and this extra demand, combined with COVID-19 workplace inefficiencies, means it is taking far longer for policies to be written or renewed.
Apartment owners should rely on their insurance brokers during the claims process but also during the development of submissions for coverage. Insurance brokers are experts at ensuring a client’s submission gets noticed.
Work with just one broker not many. Insurers will only provide terms to one broker. If they are approached multiple times to review the same property, it could jeopardize getting the best coverage at the best price.
Advice for Property Owners
The way to combat this hard market is to provide better information to your broker and prove that your building is best in class.
A hot button issue for insurance underwriters is the presence and quality of a property’s risk management plan. If the plan is missing or out of date, it will create a red flag and lead the insurance underwriter to wonder about compliance more generally. It is imperative to have a plan and keep it current.
Document everything most especially your property inspections and the property improvements made.
Underwriters inspect properties more frequently and if they recommend an improvement, make sure the improvement is done. In a hard market, insurers have low tolerance for improvement deferrals.
Regularly inspect your own property to make sure sprinkler valves are open, portable fire extinguishers work, downspouts are clear after major storms and tenants haven’t covered up minor damage that could lead to a bigger problem in the future. Contact your First National advisor for a detailed checklist of what you can do to minimize risks when inspecting your property.
Manage high risk activities such as hot process asphalt roofing to ensure your contractor has the proper permits.
Be prepared to talk about the highest risk properties in your portfolio and the measures taken to mitigate or manage those risks because underwriters will focus on these areas.
Interested in learning more about this important topic, please contact your First National advisor and watch for future insights on our website.
You can access the recording of the briefing here.