COVID-19 compounds ongoing real estate insurance challenges

The global pandemic isn’t necessarily causing a large number of problems around insurance issues in the real estate sector, but it’s clogging up the pathway to making things better.

“The way we’re thinking about real estate and insurance is that, I would argue, COVID-19 is not one of the three driving issues right now in real estate,” explained Jeff Charles, managing director at Gallagher. “The fallout from COVID-19 is an exacerbating agitator for insurance companies right now.”

The three biggest issues in real estate and insurance right now, according to Charles, are insurer performance, capacity availability and problem-solving skills to tackle those issues.

What’s causing these issues? Costs stemming from cat losses, the accumulation of attritional losses and near-zero per cent interest rates, outlined Charles, who will be speaking on these issues on Sept. 15 as part of the Gallagher Talks virtual conference.

Still, COVID-19’s shadow can’t be ignored. On the real estate end of things, the pandemic has created a whole set of concerns around the return to work and the workplace. A lot of effort and consideration has been put into how to get people to return to the office in a safe manner.

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“Our view as it relates to real estate is how you adopt [those considerations] and communicate with tenants, ensure that the tenant experience is maintained,” Charles said.

Another area where brokers working in the real estate area can excel at is in specialty products, Charles pointed out. “There are specialty products where certain expertise is important and can set a real estate team apart if they’re working well together with their insurance team.”

For example, mergers and acquisitions have been happening with regularity in recent times. Even with so many transactions in Canada, “the utilization of representations and warranties insurance as part of the real estate transaction has been relatively non-existent,” Charles explained. “There is room to explore this further.”

The topic of the environment is another important specialty area that should be explored at a more in-depth level, he added. “Tiering liability from environmental issues related to real estate is an area of the market that most real estate companies could benefit from greatly if they understood it better,” Charles said. “There is, in fact, capacity; there are insurers out there willing to help acquirers deal with environmental issues in a way that is beneficial to the transaction and the new owner.”

One specialty product in particular that Charles said requires attention is terrorism. Terrorism insurance really became an independent product in response to the Sept. 11, 2001, terrorist attack. Since then, additional solutions have emerged.

“The nature of the impacts has changed and the nature of insurance that will respond to these impacts has evolved. Insurance buying of the product has not caught up to the solutions that are available,” Charles said.

For example, a traditional terrorism policy was designed to address a bomb blast. So it would be based on the blast radius and the destruction of a building.

“That’s not how we’re seeing terrorism today,” he said. “Yeah, you buy a terrorism policy but is that going to protect you from the liability created when the public is impacted by an active shooter?”

It raises even more questions that brokers need to help their clients answer. Terrorism insurance will protect a client from property damage and business interruption when there’s a material loss to the building. “But what about the liability? How does the terrorism liability interact with a malicious attack or act of an assailant?”

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