What will happen to B.C. Strata Insurance rates this year and are strata fees set to spike? For these burning questions, there is no one better to talk to than Tony Gioventu, Executive Director of the Condominium Home Owners Association of B.C. We cover the state of condos in the Lower Mainland, from insurance to deferred maintenance, with a focus on the risks to you, the homeowner and investor. Will the strata insurance market stabilize? What are some of the greatest risks coming to stratas? And ultimately, is ownership worth the risk? It’s time to cover your asset!
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Tell us about CHOA (Condominium Home Owners Association of BC).
Our organization provides support to the 32,000 strata corporations across the province. There’s a lot of demand for support for things like general operations, budgeting financing, repair issues and bylaws.
How did you end up in this role?
I made a connection in 1998 with the Association’s president and it seemed a natural fit for me to move over to CHOA. This was during the leaky condo crisis in Vancouver. It’s been quite a journey since then!
Do you see parallels between the leaky condo crisis (1980s-2000s) and what stratas are dealing with now?
Yes, I do. The leaky condo problem was many failures all at the same time – inappropriate building design, poor construction standards, new zoning rules, inappropriate materials, etc. People called it a perfect storm; I say it was a tragic storm. The public became innocent victims to massive costs. The government did create an interest-free loan program so people didn’t lose their homes, but a number of properties didn’t do the repairs they should have. So those properties are now looking at some very deep assessments. They were in denial that they had a problem and ignored advice. So, what should have been fixed in 2002-2004 with a special levy of $30,000-40,000 per unit is now today looking like a $250,000 levy per unit in some cases.
If you look at how that relates to insurance today, we’ve had about 50 years without issues. But to be suddenly caught off guard with higher prices and more risk means more cost to the consumer. We’ve seen insurance policies go up 300-500% in the last year.
What factors went into this large increase in 2020?
Again, it is a tragic storm. If you look back, you can see how the strata insurance industry wasn’t keeping pace with real costs. The issue in condos is when there’s a claim, it never just affects one unit. And the risk is even higher with multiple occupants in the same building. So, the insurer is exposed to more risks. But the strata corporation was paying less than what detached houses were paying. So, there was a huge imbalance between real risks and actual costs. The industry needed to correct this.
But worldwide economics around the insurance industry really drove this increase in the last 18 months. This created a hard insurance market – one where there is a lack of insurance available, high risk and high costs. The consumer then has to manage the increased policy costs and the increased risks. Not only has the policy price gone up but the deductible has too.
Insurance is bought and sold; it’s a commodity. It’s a profit-based free market product. If they’re not making money, the insurance industry will adjust their rates and risk exposure.
So, all of that compounded to where we are today.
So, the costs most people were paying were lower than they should’ve been for years. This wasn’t just an increase out of nowhere.
There is truth to that. The industry knew there was an imbalance between the risks, the costs and the deductibles. It took a crisis in the insurance market for insurers to realize they needed to fix this problem. The insurers have woken up and realized they need to more closely manage their risks.
It’s a combination of insurance history and losses in the community. We still have strata corporations that are having a hard time getting insurance because they have a poor claims history, or their building is in dire need of repairs. So, we can get you insurance, but it’s going to cost a lot more.
What is Best Terms Pricing? And how is it related to higher insurance premiums?
Best Terms Pricing is a practice where multiple insurance companies will assume a percentage of the liability for one strata corporation. The first few companies who are negotiating with the brokers will agree to a rate of, let’s say, $0.30 per $100 of insurance. But the problem is when the brokers go to the next companies on the list to get the final 10% of the building insured. The last company will demand more, like $0.60 per $100 of insurance. And Best Terms Pricing says that price, the $0.60/$100 insured, now applies to all of the insurers. You have to buy all of the insurance at the highest rate.
The insurance industry agreed that as of January 1, 2021 they would cease with Best Terms Pricing to allow for better competition. This just came into effect, so we’ll have to see what happens. Will they still keep doing it behind closed doors? Time will tell. It’s hard when you’re working with a for-profit industry. There’s no big incentive to do the right thing.
We’re starting to see a bit of easing in the market. But if you’re in a building with unmanaged risks or a history of claims, it’s going to be hard to get your policy costs down.
Will it be market forces or government intervention that get us out of this?
It could be the market itself that corrects and creates a more stable model. But the government needs to amend some legislation. They need to make building repairs more compelling and mandatory. So, it’s a balance.
For us at CHOA, we’re asking what can the leadership within the industry do to empower and educate the public? If the insurance industry doesn’t find a reasonable middle ground, we will need to find a new method for providing insurance. But we are going to be living with higher insurance costs for a very long time unless there’s a drastic change to what stratas have to ensure.
In some jurisdictions in North America and Australia, units are only ensured to a limited point of what the code requires. So, if a unit is flooded, the strata corporation only has to restore the drywall and life safety systems. The owner would be responsible for insuring, maintaining and repairing the rest. In BC, the strata corporation must restore to the original finishings. So, changing this obligation and spreading out the risks to a greater number of insurers could be very beneficial. If the government did make this amendment so the strata corporation only has to ensure up to the code safety of a unit, will the insurance industry provide some relief to stratas? There’s no way to be sure but it’s worth looking into.
There’s a rumour that the government will amend the strata property act so that there’s a maximum that can be charged back to the owner, in terms of a deductible. Thoughts?
The myth of this started in Alberta where their laws around charging deductibles have changed recently. BC legislation has always allowed a strata corporation to charge back an insurance deductible if an owner or their occupants were responsible for a claim. If something within their control caused damage to the building, the strata corporation could seek those charges from the owner. There’s been talk of limiting this but we don’t see the merit. If I cause a claim, I should have to pay the deductible. Why should everyone else in the building have to pay for my claim?
However, the definition of responsibility might change. Just because my dishwasher pump failed doesn’t mean I caused the claim. But if I’ve done unauthorized repairs or had a cooking fire in my unit, why should everyone else pay for a portion of the deductible if they had no hand in the act? So, we might see a change in the definition but not in the limit.
The issue now is we’re dealing with very high deductibles. For example, we saw a claim in December with a $250,000 deductible. But even if the owner didn’t pay it, they could be sued by the other occupants in the building.
With policies like the empty homes tax, we’ve seen the province and the city doing a lot to disincentivize leaving units vacant. How does the insurance issue affect rentals?
There have been a lot of statements saying that rentals or too many rentals are contributing to the insurance problem but there’s no truth to that. There are not more claims in buildings with more rentals. Virtually every building has some number of rentals. Investors are usually quite aware of risks and will approve things like repairs to an elevator, because they know it helps with rental ability. There’s incentive for landlords to look towards long term risk management for the building.
We did a building audit in 2016 when this vacancy issue first came up. We looked at 16 buildings where 8 were from post-2010 and 8 were from before that. Buildings after 2010 don’t have rental bylaws because they wouldn’t apply anyway.
In the pre-2010 buildings, we looked at those with and without rental bylaws. The ones with rental bylaws had the lowest vacancy rate. They were occupied by tenants or resident-owners. It was actually the post-2010 buildings without rental bylaws that had much higher vacancy rates, 27-34% compared to just 2% with the pre-2010 buildings.
So, buildings with rental bylaws had higher occupancy as they weren’t being used for short term rentals or as holding spots for investors. So, removing rental bylaws won’t increase occupancy; it will just make these units options for investors.
So rental restrictions are actually a benefit to having higher occupancy?
Yes, it was interesting to see that impact. These restrictions either meant you occupied your unit (yourself or tenants) or left it empty. And that’s not an option for investors who want to do Airbnb. It was good to do this study, building by building, to see those numbers. The reality is that buildings with rental bylaws actually have the highest occupancy rate. And rental bylaws won’t deal with the supply issue anyhow.
Are we moving into a climate of major maintenance fee hikes?
We are in that climate. In order to meet annual operations, upgrade buildings and maintain reserves for future repairs, the fees will go up. I expect we’ll see changes to policy about whether a building can be exempt from a report and minimum levels of funding.
The easiest way to manage risk is with higher monthly contributions. If you have a good annual operating budget, 22% of your budget should go into your reserve fund. That ensures buildings can move forward with major repairs without special levies. An extra $25-50/month makes a huge difference. In my building, 23% goes into the reserve and we do pay extra each month, but we don’t fear special levies.
Most people vote against special levies because they can’t afford them, not because they don’t want the work done. Which makes the work cost more in the end with court orders, emergency repairs, etc. The economics tell us making smaller, more frequent payments is better than a special levy. The issue is when these practices aren’t regulated and you have a booming real estate market, it’s hard to rationalize with people to do this because it’s in their best interest. We will probably have to look at a legislative model that has minimum requirements for strata corporations.
We usually see $0.40-0.50 per square foot for strata fees. Where do you think those are going 2-5 years from now?
Well, I don’t think they will be less. Realistically, in a building that is fully funded, you should be around $0.60-0.70/square foot.
We see a lot of buildings that don’t have annual operations plans. A lot of the claims we see are related to neglected service areas that could have been maintained and budgeted for with an operations plan. The cost of maintenance is nominal compared to the cost of an emergency repair for a neglected area, which includes paying a deductible and insurance costs going up. Maintenance also extends the life of your building, making this a holistic approach to reducing long term costs. So, I advise a building operations plan for every building. That also converts into a very real annual budget.
Our market doesn’t treat condo buildings the way an industrial or commercial building would be treated. A corporate commercial building will have an operations plan, building maintenance, janitorial and security services, etc. Whereas a high-rise two blocks over will have nothing.
Everyone is still looking for the lowest strata fee, but we know a high strata fee isn’t a bad thing. Is that part of the education you’re trying to get out to the public?
Keeping strata fees low means you’re not maintaining and repairing your building, which means you’re accelerating liability for your building. Insurance companies are now saying if you don’t treat your building properly, it’s going to cost you.
There are no cost savings when you cut corners – it always costs you in the long run. This education is absolutely essential. And if we can get government appetite around minimum requirements to make it a level playing field, that would be helpful.
Will insurance premiums go down or are the new costs here to stay? Are you optimistic about the insurance climate going forward?
The cost for buildings who are taking their risks seriously and managing their property well, who are responding to their insurers, and barring any worldwide crises, should come down. In fact, we’re already seeing the costs coming down in the last few months. We’ve seen the benefit of strata corporations who are making the needed changes.
But it’s also time for the government to look at a new model for insurance. Let’s look at how we share risk or what has to be insured. It doesn’t have to be government provided insurance, but we’re due for modernization about how we approach insurance for multi-family buildings.
Find out more at https://www.choa.bc.ca/ and follow Tony’s writing at https://www.timescolonist.com/authors?author=Tony%20Gioventu