J2K Properties is a family owned and operated business that has served Halifax for the past two decades. Its hands-on approach to all aspects of development and design, construction and day-to-day leasing and operating makes it a market leader and a sought-after landlord for tenants across 1,200 apartment units in 10 buildings.
“Based on its business track record, one could say it is a Triple A operator,” said Jody Comeau, Assistant Vice President, Commercial Financing at First National, which has served J2K Properties and its owners John and Jim Kanellakos for over five years. “They are meticulous managers who maintain their properties perfectly, which is why the insurance quotes they’ve received seemed completely unwarranted and unfair.”
Like every commercial property owner across Canada, J2K Properties is facing a hard insurance market characterized by rising premium costs and limited supply of coverage (as explored in First National’s Insurance Briefing on March 11, 2021). But as entrepreneurs, the owners decided to do something about it.
The Kanellakos families take great pride in their properties – are typically under 10 years old – and see their role as providing homes for tenants, many of whom are retirees and empty nesters. “With that in mind, we provide spacious, functional designs that lead to easy living and a sense of community,” says Jim Kanellakos. “Our goal is to provide great value and that includes never cutting corners on building maintenance.”
Despite disciplined management – and zero insurance claims – Mr. Kanellakos began to see insurance premiums rise about three years ago, on average about 10% per annum for J2K Properties. But what was “more worrisome to us is that some property owners with claims’ histories, told us they were having difficulty just finding insurance at any price.”
An algorithm to the rescue
In hearing those stories and experiencing increases, Mr. Kanellakos felt J2K Properties was being penalized, which prompted him to ask a simple question: “what can we do to manage this situation?”
He posed the question to Steve Earle, President of Bauld Insurance, a broker in Halifax with a specialization in commercial property insurance. Mr. Earle explained that insurance companies have faced outsized losses in multi-family due to water damage and other risks. “However, insurers pool landlords of all different stripes in the same bucket during underwriting. Best-practice owners like Jim who are building assets to leave to their grandchildren get lumped in with condominium corporations and those who are not engaged in loss control. So the answer to Jim’s question was we needed to find a way to separate the wheat from the chaff to reward great property managers.”
Those discussions prompted Mr. Earle to create what he calls a “scoring algorithm” that grades landlords from A to D based not only on the physical attributes of their properties – which is historically how insurance is underwritten – but specific management practices including business record-keeping.
Scores are given for the presence of items such as current lease agreements, certificates of insurance from third-party contractors and water damage-loss control mitigation management. Some 200 attributes are measured. Mr. Earle talked to carriers while developing the idea to make sure the data captured for the algorithm were relevant to their underwriting processes and seek agreement on what constitutes best practice property management in the minds of insurers.
After collaborating with J2K Properties – the first in the industry to submit information – Mr. Earle shared the scoring system with an insurer and negotiated discounts for best-in-class landlords who receive an A or B rating. “The insurer liked the idea, because they love data, and responded favourably to J2K’s submission.”
Mr. Kanellakos credits the algorithm with “flattening the curve” for J2K Properties’ insurance premium costs. “It’s an onerous procedure to go through because we complete the questionnaire for every property we own but the deep dive produces something of value to the insurer that they can use to better assess their specific risks.”
Not all landlords will receive an A or B grade on the algorithm, but that’s ok says Mr. Earle because the rating system encourages owners to fix deficiencies. “Understanding that the premiums of the many cover the losses of the few makes it a property industry imperative to improve the practices of the few.”
This is not the only way Bauld Insurance is working to solve the challenges of a hard market. It has partnered to provide tenant insurance with the premiums integrated into monthly rent and has found an economical solution for replacement cost valuations which are critically important to lenders.
The moral of this story is it pays to have great management practices but also a hard-working, innovative insurance broker. “If I had one piece of advice to provide property owners across Canada other than stay on top of your maintenance, it’s to pick one brokerage that you know you can work well with, that you know will advocate for you, and stick with it. It looks very bad to insurance companies to receive your submission from more than one broker. It can do you a huge disservice,” says Mr. Kanellakos.
Wayne Fast, CEO and Senior Risk Analyst at ProinCon, reviews the adequacy of property insurance policies for First National during the process used to underwrite loans. He is a 17-year industry veteran.
During the past decade, Mr. Fast has seen claim costs increase some 70%, the Lloyds market cut some 10 underperforming insurers, which had a significant impact on insurance capacity worldwide, and insurance company’s return on equity fall to levels not seen since 2002. “2020 was the worst year for price increases and capacity decreases and we saw that for condo corps, apartments, retail and office properties,” said Mr. Fast. “Like a lot of things this past year, normal left the room and what used to be a 3% to 4% annual cost increase for insurance is now more in the neighbourhood of 10% to 30% or more.”
As insurers rate risk right down to the postal codes of where a property is located, owners in areas that are near bodies of water, in earthquake zones, high-crime neighbourhoods and with inadequate access to fire hydrants will pay higher rates. Beyond those risk factors, construction costs are also rising, which is why full reconstruction cost coverage on insurance policies is important. Since water damage is the
number one type of claim in Canada, Mr. Fast recommends owners install water metres that detect leaks and shut off flow.
Said Mr. Fast: “Most of us do not have the financial capacity to absorb losses, so proper insurance is key for property owners and lenders alike as it provides financial stability and protection against unknown potential loss. In my experience, insurance is often an after-thought, but because the marketplace has changed so much, insurance must become a forethought.”
Mr. Fast recommends property owners maintain a strong risk management plan and a formal maintenance schedule because these will help to secure better rates in both hard and soft insurance markets.
He also echoes the advice provided by others: “Make sure to communicate with your broker because if a broker does not have a convincing package of information to present to insurers, you will end up settling for whatever price you get.”
This story was provided as a service to our clients. We thank J2K, Bauld Insurance and ProinCon for sharing their experiences and advice. For advice on property financing, please speak to your First National advisor.