A series of disasters, along with more than two years of pandemic, have hit the insurance market hard – and that hardship, in turn, has been passed on to property owners in the form of higher premiums and deductibles, or difficulty getting insurance at all. In this current market, many building owners are wondering if there is anything they can do to manage the cost of their insurance.
While business owners can still expect price increases this year, things are starting to stabilize in some sectors of the insurance industry – and by managing your building well, you can improve your risk profile to negotiate the best available terms.
Key factors affect insurance costs
• Increased exposure to catastrophic events: Weather and climate events have dominated insurance industry loss results year-over-year. Recent catastrophic events like floods, wildfires, and windstorms have driven up insurer losses – the 2020 hailstorms in Alberta, for example, were estimated to cost more than $1 billion – and in B.C.’s Lower Mainland, insurers add in the ever-present threat of earthquakes.
• Fewer insurers in the market: Some insurers have withdrawn from certain segments of the market, and many have left the market entirely as high claims from aging buildings, (a flood in one unit can affect many) and extreme weather events, such as floods or wildfires, have made it less attractive.
• Low interest rates: While interest rates have risen recently, they have been relatively low for the past decade. Typically, insurers look to offset their losses with investment income, but when interest rates are low, they look to rate increases, as well, to make a profit.
• Increased repair and replacement costs: Increased costs for raw materials, material and labour shortages, global supply chain issues, and inflation have all contributed to rising construction costs.
• Increased insurance for insurers: The rates for insurers’ insurance increased significantly starting in 2020, as underwriters reacted to the key factors listed above.
Improve your insurance risk profile
The insurance industry has sought to manage its losses by reducing its capacity, increasing rates and deductibles, and/or declining to offer renewal terms. Many insurers have shifted to lower risk industry segments, preferring to focus on commercial portfolios over multi-residential properties.
But that doesn’t mean that commercial owners are immune from increases – insurance premiums and deductibles are forecast to increase for all owners this year, though residential owners will not see the huge jumps of 2020 and 2021.
In this market, when all buildings are being closely scrutinized by insurers at renewal time, it’s more important than ever to improve your building’s risk profile to negotiate the best available terms.
• Don’t submit frivolous claims: Insurance companies will examine the 5-year loss history for your property – keep your sheet as clean as possible by avoiding minor claims. A claims-free history doesn’t guarantee a lower rate in this market, but it should keep you at the low end of increases.
• Regularly inspect and maintain your systems: Even if your building is older, if you can show that you’re working to maintain it to the highest standard, it will carry some weight with your insurance company. Inspect your heating and cooling systems, roof, plumbing and electrical regularly, and keep a record of your maintenance work. Properties without up-to-date maintenance and inspection reports may struggle to obtain insurance, or face higher premiums and deductibles.
• Upgrade old infrastructure: Invest in the upgrades that will improve your risk profile, and prevent the system failures that can lead to large losses. It can take just one loss to lose access to a wide insurance market.
In addition, whenever a loss occurs, risk improvements that were previously optional may become mandatory. Improvements that you could have planned and budgeted for over time, suddenly become projects that must be completed within the insurance company’s timeframe.
Plumbing that uses Poly-B piping is a good example of this (it was banned under the National Plumbing Code in 2005 due to its high risk for failure). If your building’s plumbing system uses it (it was widely used in residential and commercial construction throughout the 1980’s), you may have difficulty obtaining insurance, or face higher premiums and deductibles. Losses from ruptured Poly-B plumbing can be significant and cost you more down the line in reparations and increased premiums, than the initial capital investment to replace it.
Consult with your insurance broker when leasing your property: Your prospective tenant’s business operations may affect the insurability of your building, or the cost of your premiums.
Get the right policy at the right price
As part of our property management services, we arrange insurance for our clients’ premises, and related properties such as parkades. In 2019, we chose CapriCMW as our blanket program provider after a thorough broker analysis. They work closely with our team to make sure our buildings have the insurance they need, at a competitive price.\
Sometimes, we’re asked why we can’t get another quote from another broker. The answer is that once an insurance company is approached by one broker on behalf of a client, they cannot work with any other brokers on that client proposal.
So, if we go out to the market with another broker, our pool of potential insurers is limited – in fact, if you have lots of brokers tendering your insurance, it sometimes means that none of your brokers can pull together a full quote.
Good management can help you manage your costs
In a hard market like the current one, you may not be able to reduce your insurance rates, or access multiple providers for competitive quotes, but consistent, well-documented housekeeping and strategic capital investments can help you create an attractive risk profile. Combine that strategy with a knowledgeable property management team and hardworking insurance broker, and you will be doing everything you can to manage your costs until the market improves.
– Rod Fram is president and certified property manager, Transpacific Realty Advisors, Burnaby, B.C. Phone 604-873-8591.