First, what is reinsurance?
Simply put, reinsurance is insurance for insurance companies. Insurance companies use reinsurance to manage their own risk in exchange for sharing part of the premiums they collect on policies sold.
Reinsurance often is used to protect against catastrophic losses such as earthquakes, floods or hurricanes. In the event of a catastrophic loss, insurance companies will use their reinsurance once an agreed-upon dollar threshold has been breached. For example, if a building worth $100 million is severely damaged by a natural disaster flood, the insurance company may pay the first $30 million in property damage, with their reinsurer paying the balance.
Why is the insurance market so volatile right now?
A lot of this has to do with the reinsurance market. Reinsurers have been unprofitable over the past six years due to the expense of frequent natural disasters and rising claims costs. Catastrophes will be important considerations for insurance companies, with global catastrophe losses in 2021 totaling $126 billion and estimated insured losses reaching $42 billion in the first half of 2022 alone. That number does not include Hurricane Fiona, which slammed into the Atlantic Coast in September 2022 and caused an estimated $800 million in insured damage from wind, storm surges, flooding and widespread power outages. Insurance is truly a global market and no matter where the losses occur, they all make their way into the shared reinsurance marketplace by insurance companies worldwide.
What are anticipated premium costs in 2023?
As of January 1, 2023, most reinsurance contracts were either renewed or extended, with the result being increased costs to insurance companies for catastrophe-based coverage. There are more contracts still to be renewed, and the market will continue to adapt as this happens. At this point, what we can say with confidence is that risks in catastrophe-exposed areas (earthquake zones in BC, flood zones in Alberta) will see more significant increases than those outside these areas.
Will any other factors impact premiums in 2023?
Yes. As inflation continues to put pressure on all areas of the economy, we expect residential building replacement costs to increase between 7%-12%.
Keep in mind that building replacement cost values are based on independent appraisals and have nothing to do with property insurance rates.
Will there be any changes to deductibles?
Given the reinsurance challenge, increases in earthquake and flood deductibles are likely, depending on where the property is located. When it comes to other water and sewer backup deductibles, we expect this to remain stable year-over-year. Over the past year, we’ve noticed an uptick in requests for lower water and sewer deductibles. Whether this is coming from strata councils, property managers or other insurance brokers, it is important to maintain appropriate deductible levels. Lower deductibles will increase costs to insurance companies, prolonging the return to a softer insurance market and the rate relief that should come with it.
Final thoughts.
The cost of catastrophes worldwide alongside high inflation has meant insurance companies and their reinsurers are paying out more for claims than ever before. Those in catastrophe-exposed areas will likely see further increases to their rates and should not expect lower deductibles in the near future. It may be some time before we can expect to see a soft market and an improvement in insurance rates for most real estate risks.