How brokers can help mitigate risk when clients build in risky areas

Cost management needs to become a top priority if the property and casualty insurance industry wants to slow down the rise in premiums for the real estate sector.

And to do that, an expert explained, both industries — insurance and real estate — need to work together on strategies to examine losses, question development in high-risk areas and, should the development go ahead, what’s being done to mitigate risk.

“You have increasing issues with losses,” said Jeff Charles, managing director at Gallagher Canada. “Arguably, the Number 1 issue in the market right now and the reason we’re facing the dramatic price adjustments that we are is coming from losses.”

Charles recently spoke to Canadian Underwriter on the topic of building property in floodplains. Naturally, risks are heightened when real estate is being developed in areas that are at risk of a catastrophe.

“When we talk about cost management, if you’re going to build in something that is catastrophically exposed, we better have a good reason for our underwriting partners as to why we’re doing that,” he explained.

iStock.com/Marc Bruxelle

A “good reason,” for example, could be economic value because there’s a desire by people to live by the water. “That’s an attractive proposition for the ultimate owners and the developers of the real estate,” Charles noted.

But there’s more to it than that. “The other side of that proposition is, when the underwriters say, ‘OK, you’re going to build in an exposed area — what are you doing about it?’”

Some developers would benefit from advice that speaks to the reality of the site — how it’s exposed and, as they develop their plans, how they’ll be mindful of mitigating against exposure. “With flood, are we changing the materials? Are we doing extraordinary things to the design to limit and mitigate?” Charles listed as key questions.

Some of those answers could include technology, choice of materials and techniques used to build. When taking these factors into consideration, underwriters can be shown what the exposures are, the value of the exposures and the mitigation action plan, which includes the source materials to be used to limit the impacts, Charles said.

Of course, such an endeavour requires buy-in on both sides — for the broker to engage with their clients on the issues and for the client to understand the importance of examining exposure.

“It’s easier than we think,” Charles explained. “Those of us who take pride in our roles in the insurance brokerage function, it’s fun to have conversations on how to solve the Rubik’s Cube of risk for our clients. I think most operators understand that an asset that is designed to prevent loss or mitigate the impact of the loss is going to be more valuable over time than the assets that are not. Don’t you want to create assets that are more valuable?”

The challenging market is forcing clients to pay more attention to their insurance than they have in the past. But, “it doesn’t have to all be bad news — this is a pathway to solving a problem,” Charles said.

“If you’re chronically exposed to rising costs, maybe it’s time to have a discussion around why. Is that because the underwriters are not getting the right data? Is it because you’re not aware enough of the issues that your assets or your business is facing?”

Feature image by iStock.com/Don White