How to secure appropriate property coverage

Catastrophe modelling and risk management
Wednesday, July 20, 2022
By Dru Douglas

From summer hail storms in Calgary to flooding in British Columbia to windstorms in the Eastern provinces, 2021 was full of catastrophic losses. Canada hit $2.1 billion in insured losses last year, the sixth highest in insured losses since 1983. Residential property risk also increased, including for condo buildings.

As a result, real estate owners with multi-family high-rises in their portfolio are beginning to layer policies just to secure their baseline coverage needs.

Planning in 2022 is more worrying than usual. With hard-to-secure coverage and limited policies available, many property owners and condo boards are stressed over the possibility of frequent and significant claims without adequate coverage in place for when the next catastrophe hits.

In 2022, insurance professionals will be relying on risk management tools like catastrophe (CAT) modelling to help owners understand their financial risks and secure appropriate coverage – a trend that will actually help mitigate risk over time and even lower the costs of coverage as well.

The impact of catastrophic exposures on the real estate market

Western Canada faced an extreme heat wave last summer that shattered all previous records, and wildfires led to issuing 181 evacuation orders and the burning of 8,700 square kilometres of land in B.C. alone.

While these stories may seem extreme, they are no longer rare. Climate-related catastrophes are growing around the world, both in frequency and severity, and the “new normal” must take the possibility of catastrophic losses into account during the planning stages. Whether your condo is near woodlands or water, it is at risk from wildfires, flooding and even extreme heat waves. And since the costs of CAT claims can be so high, it’s not realistic to self-fund.

The real problem is that the trend is continuing into 2022. The residential real estate market will be particularly affected, with reinsurers exiting the market, drying up capacity. As a result, there will be fewer coverage options and higher rates for condo buildings, particularly in areas where catastrophes are more frequent.

Risk management tools to the rescue

After several years of pandemic-related struggle in the real estate sector, the story is disheartening. And globally, first-half 2021 catastrophe losses reached $42 billion, of which $40 billion was related to natural disasters. With scientists expecting the climate-related disasters to continue into 2022, it would be easy for condo boards and operators to give up.

Instead, real estate owners and operators are digging in to the data, working intimately with tech tools such as catastrophe (CAT) modelling to provide information and make the right choices when it comes to risk management.

In short, CAT modelling is a computerized process that simulates possible catastrophic events in order to estimate the amount of loss that stems from those events. When done right, this kind of data analytics connects data sets to draw important conclusions, such as helping property owners understand their risk, estimate suitable policy limits and even secure appropriate coverage.

At the same time, however, traditional, low-tech risk solutions and controls, such as water mitigation and disaster recovery planning, will never go away completely. In many cases, you may be able to secure lower rates by creating risk mitigation plans that are unique to the building, training your staff to implement those plans and allowing regular on-site inspections.

Underwriters have begun to take notice of the trend. As a result, they are beginning to require CAT modelling and other predictive tech for large real estate portfolios as a means of mitigating risk and providing coverage. Owners may also discover that they need to paint a clear picture of their risk management processes and operational controls – whether high- or low-tech – in order to secure any coverage at all.

Best practices in the 2020s

Higher prices for less coverage seem to be the trend – and the challenge – of the 2020s. To counter that challenge, it’s imperative that condo operators and boards demonstrate best practices in risk management. Property owners who want to reduce their exposure and increase resiliency will need to engage both new tech and traditional controls across their portfolio — regardless of location, condition and catastrophe exposure.

Appropriate coverage will be difficult – but not impossible – to find, and successful real estate owners and operators will have to go the extra mile to secure it. Insurance brokers may be the key to that success. Those who consult with an expert broker will find themselves in a better position than those who don’t.

Dru Douglas is an account manager for the Ontario region for global insurance brokerage Hub International. He specializes in insurance and risk solutions for the office, retail, industrial and multifamily sectors of commercial real estate.

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