March 21, 2016 by Canadian Underwriter
A new study of the property insurance costs for wood frame and concrete mid-rise residential buildings has found a substantial gap in the risks and insurance rates between the two building systems.
The data for the Study of Insurance Costs for Mid-Rise Wood Frame and Concrete for Residential Buildings, conducted by GLOBE Advisors and released on Monday by the Concrete Council of Canada (CCC), was drawn from relevant published literature and consultations with brokers, underwriters and property managers. [click image below to enlarge]
Interviews with three underwriters and data from the Canadian Wood Council (CWC) show that builders’ risk insurance rates per $100 monthly for comparable wood and concrete buildings are on average $0.008 for concrete and $0.053 for wood, the CCC said in a press release. When excluding the rate provided by CWC for wood frame insurance, which was significantly lower than the rates provided by the underwriters, the average rate for wood buildings rises to $0.06, a factor of 7.5 times greater than that for concrete buildings.
The study identified four main reasons for the higher rates: Greater fire peril; significantly higher moisture risk; climate change (payouts from extreme weather more than doubled every five to 10 years since the 1980s, according to the release); and difficulty in obtaining insurance for wood frame structures.
The CCC said in the release that the fire insurance portion of property insurance is seven to 11 times higher for wood than for concrete structures, reflecting the “far greater fire peril due to wood’s combustibility.” Fire damage to a wood frame structure can result in a total loss, whereas for concrete, the financial loss is only partial. Only 1% of concrete buildings are demolished due to fire, compared to 8% of wood frame buildings, the release reported.
As for moisture control, it is a “difficult and expensive” process for wood frame mid-rise buildings, as they are much more susceptible to mold and rot, which is much less of an issue for concrete structures. Water damage is already the leading cause of residential claims costs in Canada and it tends to spread more rapidly and remain undetected longer in wood frame structures compared to concrete structures, which can affect the safety of the structure or can even make it uninhabitable due to extensive rot and mold. “BC’s ‘leaky condo’ problems are well documented and known on an international scale,” the council added.
The CCC also noted that many insurance companies in Canada are “hesitant” to underwrite wood frame structures, or will “aggressively limit their risk exposure for such structures, during construction and over the life of the asset.” Home warranty concerns are also highly relevant for strata owners in wood frame structures; in 2014, in B.C., only 8% of claims filed under home warranties from multi-unit residential buildings were paid. “Condo owners in wood frame buildings therefore carry greater individual financial risk, and the data shows they may not be covered by their home warranty,” the council suggested.
“One of the key points about insurance rate setting emerging from this research was the importance of moisture control, both during construction and over the life of an insured asset,” said Frank Came, senior advisor with GLOBE Advisors, in the release. “Indeed, the importance of moisture management could emerge as one of the most important takeaway conclusions of this research.”
Chris Conway, chair of the CCC, said that the council commissioned the study “because we believe it is important for everyone to be aware of the implications of mid-rise wood frame construction in terms of public safety, municipal budgets, homeowner risk exposure and contractors liabilities.”
GLOBE Advisors, a subsidiary of the Vancouver-based not-for-profit GLOBE Foundation, was established to provide consulting services on a project basis. GLOBE Advisors has extended networks and extensive experience in the areas of international project management, partnership development, consulting, and market research.
The Concrete Council of Canada is an organization of national and provincial associations that brings together representatives from the full spectrum of cement and concrete manufacturers across Canada.