Condo Coverage Crisis

Despite their growing popularity as the housing unit of choice for millions of Canadians, condominium corporations across the country face serious headwinds in their efforts to secure sufficient insurance at a reasonable cost.

“It’s a classic supply-versus-demand issue,” says Peter Kennedy, Toronto-based senior vice-president and national director of the real estate practice for Aon in Canada.

Demand for condo insurance is increasing. Canadians appreciate the relative affordability and lower maintenance requirements of a condominium compared to a detached home. Government officials like condos for their efficiency in helping to address the affordable housing crisis and limit urban sprawl. Condo corporations include duplexes and four-plexes, thus making the total size and value of the industry difficult to track. Still, sources contacted for this story observe that condo corporations in Vancouver, Montreal and Toronto are getting bigger and more valuable to replace, requiring more insurance.

But current market conditions facing insurance companies are forcing them to reduce the limits they can put up, Kennedy says. That’s limited the supply of capacity available for condo insurance.

The increase in demand and decrease in supply has resulted in serious difficulties for risk managers and brokers alike. In a softer market (characterized by lower premiums and more coverage), an insurance company might cover the entire limit of, say, a $100-million condo insurance account, according to Jeff Schaafsma, manager of risk management for the City of Surrey, B.C. But in a challenging market like this one, they might only cover for $40 million, so brokers may need to find additional layers of insurance for their clients.

“We’re seeing insurers pushing premium increases and deductible increases across the board due to poor insurance industry results,” Kennedy says. “Condominium corporations are just one element of that.” In some jurisdictions, Jason Rivait of Miller Thompson LLP wrote for Mondaq, “it has been reported that [condo insurance] premiums have risen 780%.” B.C. brokers report seeing some condo deductibles increase from $25,000 to $250,000 or even $500,000.

This is in sharp contrast to previous condominium market conditions, which provided rate reductions and deductible concessions in favour of clients. A period of competition in the market suppressed rates for an extended period of time, said Chuck Byrne, executive director and chief operating officer of the Insurance Brokers Association of British Columbia. But over the past 18 months, the pendulum has shifted the other way. “Improved circumstances for clients and worsening circumstances for insurers over time led to this point where the insurers were eventually unprofitable and not willing to take it anymore,” says Gareth McDonnell, the Vancouver-based national practice leader in BFL Canada’s real estate division.

Insurers select the risks they want to insure based in part on how much they anticipate paying out in claims costs. Due to an escalating number of condo claims, some insurers have withdrawn from the market. Others are willing to stay but only with radically different terms, McDonnell elaborates.

Impact of climate change

Multiple factors, including some beyond the control of condo corporations, have conspired to a hard market in commercial property real estate lines, experts say. Aside from a tough insurance market generally, climate change has led to water losses affecting condo buildings.

“Tough market conditions have led companies to re-evaluate their risk appetite for writing new business by having more discipline in commercial underwriting,” says Rob de Pruis, the Edmonton-based director of consumer and industry relations for Insurance Bureau of Canada’s (IBC) western region. “We don’t have a lot of control municipally, provincially or even federally over some of these impacts on commercial insurance.”

In addition, “global climate change concerns amongst institutional investors have likely resulted in some flight of capital to safety from the insurance world,” Byrne said. “This has impacted global insurance capital, resulting in more difficult reinsurance renewal terms for most of the primary markets in Canada, and forcing insurers to adjust.”

Between 1983 and 2008, insurers in Canada were paying out an average of about $500 million annually for severe weather losses. Between 2009 and 2018, that average more than doubled to over $1 billion annually. In 2018, it spiked upward to about $2 billion, de Pruis said.

Certain areas of Canada have a more pronounced risk exposure to natural catastrophes: Earthquake risk in British Columbia and parts of Ontario/Quebec, for example, or floods and severe hail conditions in parts of Alberta. Also, severe winter conditions across most of the country present seasonal risks that often result in freezing and burst pipes, for example. These risks are magnified in a multi-unit condo building.

McDonnell noted that insurers’ ability to cater to condos in catastrophe-exposed areas of Canada have become increasingly difficult. They are spending more on Cat reinsurance, which further squeezes the margins within the condo segment.

What’s more, specific conditions germane to condo corporations make them potentially riskier to insurers.

“Water damage is one of the biggest sources of property insurance losses for condominium corporations,” Kennedy said. “Toilets overflow. Sinks back up. The washer or dishwasher connection comes loose. Pipes burst in the building. Whatever the case may be. And when you have an overflow on the 10th floor, the water can run all the way down to the bottom floor. So you have a larger loss for the condominium corporation.”

These buildings have a notoriously high frequency of claims. “In general terms, we see condos having more than a 30% chance of a claim each year,” McDonnell said. Newer buildings are being completed to higher standards, he added. That, along with the increased cost of labour and materials, is contributing to a higher average claim cost today.

Geographic location, replacement cost, repair and maintenance procedures, and past record of claims all influence condo rates. Quotes generally take into account a five-year loss history, “so if a condominium corporation had a very poor five-year loss history, they’re going to have more challenges,” says Kennedy. “Each property is assessed on its individual merits, and then the insurers decide if that’s something within their risk appetite to insure or not,” de Pruis said.

Condominium corporations tend to be price-sensitive; they frequently shop their coverage around to find a lower-cost alternative. Although containing costs is important, Kennedy says, this strategy prevents condo corporations from developing a long-term relationship with one insurance company. A good relationship is important: If a condo corporation builds up credit during the good years in which no claims were made, this might help keep their rates in check during the challenging years.

Addressing insurer’s risk concerns

From the insurer’s point of view, a central issue is that while condominiums have high values, their deductibles are very low compared to commercial and industrial properties of similar values.

For example, Schaafsma says, “a condo complex might have a $2,500 deductible, whereas a similar commercial or industrial valued complex would probably have a $25,000 or $50,000 deductible.” Small deductible values for condos don’t adequately reflect the high frequency of claims, particularly in the water damage area, he adds. “I think a lot of underwriters want to get this frequency of smaller losses off their books.”

Given the current hard market cycle, Kennedy believes condo corporations will need to assume greater risk in the form of higher deductibles. The very low property insurance deductibles experienced in past years will not continue in the future, he predicts.

In addition to mitigating the risk of major losses like fire, condo corporations will also need to prevent the higher-frequency claims for lesser amounts, such as for sewer backups and pipe ruptures, Schaafsma said.

Experts also stress the importance of undertaking good risk management practices.

“If you rely on insurance as the primary method of reducing the impact of losses without attempting to reduce the frequency or impact through a risk management program, you will forever be paying higher premiums,” Schaafsma warns.

Aon has developed risk management policies and procedures for its condominium corporation and property manager clients. This includes highlighting potential exposures and assisting clients in managing their buildings’ risks more effectively, Kennedy says. “The key thing that I think brokers and the insurance industry can bring to bear to the condominium corporations is helping them best manage their risk to reduce the likelihood of a loss and/or the severity when there is a loss.”

Condo corporations and owners can help minimize claims through strong maintenance programs and by ensuring the building infrastructure remains in good repair, including maintaining age-appropriate plumbing, windows and roof systems, says McDonnell.

Technology is blossoming to help combat water damage claims, he adds. For example, water detection and shut-off systems will automatically turn off the water in units if unusually high levels of water are detected.

Wake-up call

The insurance industry risks significant harm to its reputation with consumers and regulators because of the high condo premium rates across the country, which could contribute to a lack of affordable housing, Byrne says.

“This is extremely volatile and represents a wake-up call to the industry to start thinking very clearly about what they have to do to keep government from intervening in an aggressive way,” he says. Over-regulation can impose real costs in a free market, he adds, including the potential risk that some insurers may opt to exit the market altogether.

“We need behavioural change, likely using a carrot-and-stick approach,” says Byrne. “I think consumers and condo corporations have to get their heads around very significant discipline around mitigation of loss. [And] insurers have to be very serious about offering significant discounts to condo buildings and unit owners that take steps to mitigate against water damage loss.”

The growing number of condos being built in Canada is creating an increasing demand for condo insurance just as the supply [of condo insurance capacity] is shrinking, McDonnell says.

Consequently, “it’s now up to the brokers to go and find out new capacity to bring that supply of insurance back up,” he adds, noting that brokers are sourcing new and innovative ways to find capacity, including looking to unconventional channels such as insurers and reinsurers based in the United States and/or Europe.

A healthy global economy relies on the ability of insurers to meet their financial obligations in the event of large global losses, Schaafsma says.

“While the pricing pendulum has swung too far in the opposite direction, one would hope that it settles to a range that is both reasonable and sustainable from a global funding perspective.”