Underwriting conditions for the Canadian real estate market remain challenging, Aon says in its commercial lines underwriting report for mid-year 2021.
However, the picture differs from segment to segment. “Generally, residential (multi-family) and hospitality assets are experiencing the most difficult market conditions for property insurance, with retail, office and industrial less so. For liability insurance, all real estate asset classes are being adversely affected to a similar degree,” the Aon report states.
Earlier this year, Hub noted that a slight uptick in fire, water escape, wind, hail and flood claims in the apartment and condo market has led to a reduction in the number of insurance companies willing to insure this class of home. “For this reason, moving into 2021, multi-family residential can expect to see another 20 to 50 per cent increase, along with further increased deductibles in their general property coverage,” their brokers predicted at the time.
On the positive side, insurers' property insurance has stabilized, yet some insurers continue to reduce their capacity. “New capacity from London, Bermuda, and the domestic market is being added, but not to the point that overall capacity is rising in any significant way. Rates continue to rise, and some coverages have been cut back, namely in sub-limits,” the Aon report states.
However, insurers’ underwriting discipline is the strictest in decades, the Aon brokers add.
“Underwriters are closely watching replacement costs, given recent price increases for construction. Clients must demonstrate reporting accurate values and be prepared for margin clauses, which may limit recovery in situations of under-valuations,” Aon advises.
The report adds that the equipment breakdown market remains stable, with single-digit rate increases, except for portfolios with a poor claims history.
Primary general liability insurance is priced based on the loss history of the individual account. “Underwriters will price to achieve an expected approximately 40 per cent loss ratio. However, capacity continues to fall in the umbrella and excess liability markets, with more insurers required to fill the total limits. Pricing for the reduced capacity is rising significantly,” the report points out, adding that coverages in some areas are being pared back slightly.
The situation is also more complex on the financial lines side. “Like other industries, the real estate sector is seeing significant pressure on directors & officers, crime and cyber insurance rates and coverages. Exposure to retail, and a lesser extent, office, will attract more scrutiny from D&O underwriters,” Aon says.
“Nuclear verdicts” and “Social inflation”
Brokers at Hub underline two related phenomena to keep an eye on. The first is nuclear verdicts. This phenomenon, which recently emerged in the U.S., is where settlements for an injury or property loss surpass $10 million.
“They’re no longer uncommon there, which makes Canadian insurance companies nervous that a similar trend is likely to follow here. This phenomenon, which has led to rising insurance costs, has been dubbed ‘social inflation.’”
The judgments handed down in these nuclear decisions often far exceed the amounts previously awarded for the same offense or injury, Hub’s brokers note.
“As a result, umbrella insurance companies are now considering themselves as primary carriers. If there’s going to be a lawsuit, they expect to be involved sooner and more often. Even when bogus cases are thrown out, they still have to be defended, and often insurance companies will understandably settle for large sums just to safeguard the business’ reputation,” Hub explains.
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