How Property Valuations and Inflation Impact Premiums

While insurance rates and premiums are based on multiple factors, an important aspect to those rates is the cost to replace the insured building, which is called the reconstruction cost.

In the past, the rate of inflation for building construction costs was relatively steady, allowing building owners to utilize an estimated percentage increase to accommodate for inflation. That process is no longer acceptable to underwriters. To maintain replacement cost coverage, building owners are now required to have up-to-date reconstruction cost valuations. The reason is because of an increased volatility in the construction cost market. 

Supply Chain and Labour Cost Challenges in the Construction Industry

Even prior to the pandemic and significant inflation hikes, insurance rates were already increasing. Rising claims costs, claims frequency and weather-related event losses have led to significant jumps in insurance premiums for some building owners. This is even more challenging in British Columbia due to heightened sensitivity to increasing interest rates driven by high debt-to-income ratios. These increases were further exacerbated by impacts of the pandemic, including supply chain issues and labour market challenges.

Since 2019, the industry has been negatively impacted by staffing problems, production issues and unreliable supply chains. Specifically, labour issues have been a significant factor in negatively impacting project timelines, as well as project costs and pricing. The result of an increase in volatility in commodity and labour prices has resulted in significant construction cost increases.

Statistics Canada has regularly reported year-over-year growth of construction costs, which surpass previous highs. The report shows residential building construction in the Vancouver area is up 23.7% over the past two years (Q2 2021 to Q2 2023)1. Since the start of the pandemic, residential construction costs in Canada have increased up to 51%2. Also contributing to these costs are material cost increases, a severe labour shortage, interest rate hikes, Canadian dollar weakness and a global energy crisis that affects oil and natural gas prices.

However, overall construction costs are projected to decrease somewhat throughout 2023, although they will still experience above-average increases ranging from 5% to 12%, according to Normac’s Canadian Construction Cost Trends3.

What This Means for Your Real Estate Insurance

It’s imperative to regularly review your insurance coverage and the reconstruction values of your property. The evolving market dynamics, especially in British Columbia, necessitate a proactive approach to ensure your assets and investments are adequately protected.

Failing to adequately insure your property may mean a financial gap between your insurance coverage, and the cost to rebuild if a loss were to occur. To ensure that you or your organization is best protected, there are proactive measures to take that will ensure your risk is minimized in a volatile market. These recommendations include:

  • Submit Accurate Reconstruction Values. Ensure your property’s reconstruction valuation reflect current market conditions. Relying on prior years data may leave you underinsured and exposed to risk.
  • Evaluate Additional Coverages. Review your insurance coverage considering changing dynamics to adequately protect your investments.
  • Re-Appraise Properties. Consider obtaining third-party appraisals for all properties, either through full appraisals or desktop reviews. This ensures that valuations are accurate and up to date.

At HUB, we are here to assist you in making well-informed decisions about your real estate insurance needs. Please feel free to reach out to our team for personalized guidance and insurance assessments to align with your evolving requirements. We remain committed to securing your peace of mind in these dynamic times.

1 Statistics Canada “Building Construction Price Indexes Data Visualization Tool” https://www150.statcan.gc.ca/n1/pub/71-607-x/71-607-x2022013-eng.htm

2 RBC Proof Point https://thoughtleadership.rbc.com/proof-point-soaring-construction-costs-will-hamper-canadas-homebuilding-ambitions/

3 Normac Insurance Appraisals https://normac.ca/wp-content/uploads/2023/01/Normac-2023-Canadian-Construction-Cost-Trends.pdf

PLEASE READ: All risk consulting services performed by HUB International are advisory in nature. All resultant reports are based on conditions and practices observed by HUB and information provided by the client. Any such reports may not identify or contemplate all unsafe conditions and practices; others may exist. HUB International does not imply, guarantee or warrant the safety of any of the client’s properties or operations or that the client or any such properties or operations are in compliance with all federal, provincial or municipal laws, codes, statutes, ordinances, standards or recommendations. All decisions in connection with the implementation, if any, of HUB’s advice or recommendations shall be the sole responsibility of, and made by, the client.