Why are my premiums going up so fast on my real estate insurance? The usual VCREP gang was off this week but instead we have commercial real estate experts Rod MacKay and Seamus Bailey stepping into the studio to welcome Nigel Clark of BFL Canada.
Working for one of the largest risk management, insurance brokerage and benefits consulting firms in Canada, Nigel knows the commercial real estate insurance industry inside and out. He talks about how inflation, interest rates and rising construction costs all impact the insurance market and we dive into the difference between a soft-market and hard-market; as well as diagnosing the type of market we are currently in.
You might also be surprised to hear what direction the insurance market is going in and how this directly affects consumers. He unpacks the previously volatile strata insurance market, how a recession can influence insurance policies and much more.
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Who is Nigel Clark?
I am the Senior VP of Construction and Commercial Real Estate at BFL Canada. I’ve been with BFL Canada for over 12 years and our immediate team is about 50 people strong. I live in East Vancouver with my wife and two young daughters.
We were primarily a construction team when we first came together in 2004. But many of our construction clients retain their assets, so we’re able to manage both the construction and their operating assets.
How is inflation and increasing construction costs affecting insurance?
Insurance is no different than any other business in terms of exposure to inflation and rising costs. We’re not insulated from that; it’s prevalent in my day to day when I’m talking about insured values.
I just went through a large commercial real estate insurance renewal and the first thing we were asked to do is look at values. Clients need to ensure their values are up to date to reflect increased costs and inflation. But there’s no specific formula. We have to take a multi-prong approach to ensure both our clients and insurers are happy.
Just running an insurance company is expensive, so our insurers are looking to recoup their costs. That, in addition to inflation and rising construction costs, affects the cost of premiums.
How does the global market affect insurance costs?
Many insurers are multinational entities who insure assets around the world. So if there’s a wildfire in California or hurricane in Florida, that has ripple effects. Reinsurance costs bleed down into the costs that customers pay. Global disasters certainly have a broad effect.
For example, the flooding in the Fraser Valley last year and wildfires in the Okanagan and California have been a major factor for Vancouver real estate insurance. A lot of these properties are held by the same insurers who have to pay out the claims.
How has covid affected insurance policies?
Covid had a huge impact on the insurance industry. In the height of covid, insurers weren’t writing any new business or taking on any risks that weren’t profitable, like residential real estate. So covid compounded what was already a very difficult insurance industry. Covid exasperated issues that were already there.
Now, it has levelled off. There’s more appetite and capacity in the market; we have more flexibility for risk.
During covid, insurers met their obligations in their contracts but were very strict with what new business they would take on. Covid was new to us and it made the day to day of our business more difficult.
Communicable disease, like covid, is an exclusion on most policies. So it’s not like insurers were paying out a boatload of claims. It was just a general time of uncertainty when insurers decided to turn off the taps and wait to see what happens.
What is a soft market for insurance and what is a hard market? What type of insurance market are we in now in 2022 and where are we heading?
A soft insurance market has a lot of capacity – a lot of insurers are fighting for the same business. That reduces pricing and increases things like favourable deductibles, extensions and additional coverage.
Soft markets are nice for us as brokers because we can present more options to our clients at lower pricing. There’s more supply, so clients can be more flexible. It’s good news.
We were in a soft market for well over a decade prior to 2019. But the tide started to turn before covid.
A hard market for insurance is the opposite: there is finite capacity for the same level of demand which leads to increased rates, higher deductibles and reduced coverage. That is the market we are in now. It’s hard to have tough conversations with clients in a hard market and deliver that bad news.
In the last six months, we have seen more capacity creep in and that is starting to soften the market. It’s still a hard market, but it is softening.
Are there different insurance processes and policies based on asset class?
It doesn’t matter what asset class, insurance covers the same things. On the property side, you have protection against things such as theft, flood, earthquake, etc. And on the liability side, you have coverage against third party claims.
In terms of desirability, insurers prefer commercial and office risk over residential risk. There’s a higher propensity for claims with residential real estate. So the process is a bit easier under commercial, specifically office and retail, insurance policies.
There was a lot of news in the last couple of years about strata insurance policies skyrocketing. What happened and is it still happening?
There was a confluence of events that led to many strata insurance policies skyrocketing in 2019/2020.
The majority of strata insurance policies in BC are placed via 3-4 programs, with each program having 20-30 insurers under it. Each insurer has a share and takes a piece of the program.
In 2019/2020, a few insurers who had big shares in the program pulled out of the market. This was driven by losses. Our data showed that for every $1 strata insurers were collecting in premiums, they were paying out $4 in claims. And most of those claims were due to water damage. That can only go on so long before the insurers will demand changes.
Some insurers were paying out more than they were getting, so decided to pull out of these programs in North America all together. The insurers who were left said they needed higher rates and deductibles to make the numbers work. Covid then threw gas onto the problem. That’s how this all blew up and ended up in the news.
The strata insurance problem has plateaued and profitability in the space has come back a bit. Insurers are willing to play ball again. Deductibles are still high, especially for water damage, but that adjustment has allowed for more flexibility in this space.
With rising construction costs, do insurers find it more risky to insure developers for construction?
If you take a property policy out in the construction industry, that covers your project for physical damage from start to finish. Insurers are digging down more on the pro formas because these policies are based on estimated project values. If those values seem off, insurers may have questions.
But those value numbers are adjusted at the end of the term and clients will pay the difference if the numbers are off. So it’s not a huge risk for insurers because these construction policies are fluid.
We work with a lot of developers and package them up into the marketplace. If a developer or contractor has had a run of claims, it does come up. The insurers will want to have a conversation about that. But we can usually fix the issue by increasing deductibles or minimizing that person’s involvement.
Insurers look for frequency and severity of claims. If a builder has both of those things, that’s a red flag. But it usually results in tweaks to a policy, not in the insurer not writing at all.
How would a recession affect the insurance market?
If there’s a slowdown in the economy, that makes insurers hungry to continue growth. So that may actually improve our market. That’s my optimistic view. These companies all want to grow and will have to get more aggressive to do that during a recession.
If insurers are fighting for business, that’s good for us and good for our clients. But we will have to wait and see how things turn out.
Find out more: https://www.bflcanada.ca/