By Sarah Thompson and Dave Barthel

The property and casualty insurance industry is subject to a cyclical market comprised of soft and hard market cycles. Soft markets are characterized by declining premiums, new entrants, abundance of capacity, and more favourable terms and conditions. As premiums decline and underwriting discipline is loosened, claims begin to rise and eventually lead to unprofitable underwriting results.  A hard market ensues, characterized by increasing premiums, insurers exiting the market, restricted coverage and terms, reduced capacity and stricter underwriting discipline.

There are often additional catalysts that progress a hard market, for example the terrorist attacks of 9/11, and the financial crisis of 2008. According to Canada’s Changing Climate Report, Canada’s climate is warming twice as fast as the global average.1 And with that warming comes an uptick in catastrophic weather events, like the wildfires that devastated Fort McMurray in 2016 or the recent devastating hailstorm in Calgary – with estimated losses around $1.2 billion. The aftermath of events like these is a surge in catastrophic claims on property insurance.

Over the past ten years there has been a significant upward trend in the frequency and severity of weather-related catastrophes.2 This trend is being laid on top of a business segment that was already producing unprofitable results, due to sustained soft market conditions and increased frequency and severity of water and fire losses. As a result, a hard insurance market has moved onto the scene, a cycle where insurers haven’t collected enough premium to cover the costs of losses due to low rates and deductibles. This means increased scrutiny in underwriting, significant premium increases and carriers less willing to write policies for properties with prior losses or posing any significant real or perceived risk.

In addition, some property owners have been using their insurance policies as maintenance policies, making small claims to replace building components rather than having a proactive building maintenance plan or simply paying the small losses themselves. This has driven up the cost of claims – and the costs incurred by insurers.

As rates are being corrected, insurers that are still offering capacity will be charging much more for that capacity. Although the average increase across Canada is approximately 40%, some policies will be increasing by over 100%.

And it’s not just the older buildings. There is certainly a greater risk in buildings built before the 1990s, where the roof may have already been replaced; however, the electrical and plumbing systems likely haven’t been updated. There’s also an increased risk in new construction, especially if the quality is not as high due to projects being rushed in high demand areas. Water damage has become increasingly common across the country, and earthquake coverage adds on an additional risk in BC.

Fortunately, there are a number of risk management and insurance considerations that can help your real estate portfolio look its best in the eyes of the underwriters.

Property Insurance Risk Management Considerations for a Hard Property Insurance Market

Consider these best practices when seeking to reduce your risk and attract the right coverage options:

  1. Complete a risk assessment. A thorough risk assessment of your property will highlight any areas of management you need to consider ahead of an underwriter’s assessment.
  2. Put a proactive maintenance plan in place. Carriers are wary of properties that use their coverage as a maintenance plan. Be proactive in scheduling regular maintenance, rather than waiting for something to break before giving it any attention.
  3. Have a water mitigation plan. Water damage is the number one loss leader for commercial and residential properties. Create a plan to avoid them. Include sprinklers in your proactive maintenance plan, hire best-in-class contractors, and inspect and test fire protection systems regularly.
  4. Update building systems. Know the life expectancy of your systems and plan accordingly. Keep accurate replacement and maintenance records and research retrofit options ahead of equipment failure. Properties with legacy systems like aluminum wiring or Poly-B plumbing will want to consider immediate remediation.
  5. Get an accurate appraisal. Market-accurate property appraisals can help right-size your facility’s coverage limits, and therefore, eliminate unnecessary costs.

Insurance Considerations for a Hard Property Insurance Market

Be armed and ready with an understanding of the current property insurance market and a 3-year loss history report ahead of your renewal period. Other insurance considerations include:  

  1. Get out to market early. It’s not enough for a residential property to be thinking about coverage a month before renewal. Work with your broker to create a renewal strategy 3-6 months ahead of your renewal date.
  2. Tell your story. By building a story around your facility’s renewal submission, including risk management documents, safety ratings and overall building operations, your broker can give the underwriter more confidence in assuming your risk.
  3. Know the facts. Understanding your losses, including tracking them and learning from them, will help position your facility as a good risk. Keep costs down by paying out of pocket for losses when possible to reduce the need to make a claim.
  4. Consider raising your deductible. Engaging higher deductibles is another way to reduce coverage costs.

Contact your HUB Real Estate expert for more information on the current property insurance market and best practices for property insurance risk management. Additionally, you can learn more about HUB’s insurance for property managers here!

1 https://changingclimate.ca/site/assets/uploads/sites/2/2020/06/CCCR_FULLREPORT-EN-FINAL.pdf
2 http://assets.ibc.ca/Documents/Facts%20Book/Facts_Book/2019/IBC-2019-Facts.pdf