Uncertainty leads to rising costs

4 tips for beating the tough reinsurance real estate market
Wednesday, December 20, 2023
by Drew Fenton

Despite inflation rates holding steady as the year winds to a close, the real estate industry faces continued uncertainty as we head into 2024. Challenges include everything from financial insecurity to environmental changes to ongoing civil unrest. But the biggest challenge for many real estate owners will be finding affordable insurance coverage to protect their properties.

Reinsurance, otherwise known as insurance for insurers, is a critical factor in determining the cost and availability of coverage for commercial real estate. Throughout the past year, reinsurance costs have risen 25 to 30 per cent and capacity has fallen by roughly 20 per cent.

The changes in the reinsurance market have come about, in large part, because of losses related to global natural disasters. Last year was one of the costliest years on record, with $275 billion in damages—and $3 billion in Canada alone. Between the springtime derecho in Ontario and Quebec, summer storms in Western Canada, and the effects of Hurricane Fiona, weather events are causing more damage than ever before. In 2023, losses related to wildfires are expected to run between $700 million and $1.5 billion.

Insurance carriers buy reinsurance to protect themselves financially from major losses (like those from the wildfires). But when reinsurers raise their costs or limit capacity, the insurance carriers must take on more risk. As a result, they will raise their own rates, limit their exposure to risk through higher deductibles or lower the amount they’re willing to insure.

The bottom line: Real estate owners will be paying more for less coverage—and the situation isn’t likely to change anytime soon. Finding affordable insurance coverage for real estate owners will remain challenging for the foreseeable future.

4 tips to protect your real estate investment

Although the out-of-control reinsurance market isn’t likely to improve, that doesn’t mean property owners should sit back and do nothing. Taking certain proactive steps will increase a property’s resilience and help building owners secure appropriate insurance coverage to protect them in the event of a catastrophe.

1.Keep your property in good repair.

With extreme weather events increasing in frequency, real estate owners and operators will need to take aggressive steps to manage their risk. Properties should be well maintained and secured with access control, surveillance, and intrusion detection. Those equipped with sump pumps and other protective devices to diminish damage from flood and fires will attract better pricing and a larger number of coverage options.

2.Check out the costs of reconstruction.

Insurance coverage simply can’t keep up with the ever-growing costs of rebuilding. Older or outdated policies no longer offer enough coverage to replace or reconstruct a building once it’s damaged, making carriers nervous. To avoid valuations that are too low or inaccurate, real estate owners should have their buildings appraised – and then include that appraisal along with an insurance application or renewal to avoid extra costs and penalties. Without this extra information, carriers may independently increase premiums when they deem it necessary.

3. Look into alternative coverages.

When a storm hits, many real estate owners and operators are concerned about their businesses as well as their buildings. A catastrophic weather event may not damage your building, but it could halt your business for a period of time. Consider securing a parametric policy, which pays out based on the size of the event, rather than the amount of loss suffered. This means you’ll receive a payout even if your building isn’t damaged, offering much-needed cash to cover business interruption costs.

4. Secure the right tools and supports.

In a risky environment, having trusted advisors to help you secure appropriate protection can be invaluable. Experts in the field have access to tools that can save on insurance costs, such as CAT modelling. They also know what has worked for other real estate owners and operators, such as splitting off less-desirable locations, placing coverage with multiple carriers or looking for hidden liabilities in property leases. The right advisor can suggest an appropriate course of action to secure suitable coverage for the best price.

Mistakes are expensive. With an ever-changing, dynamic insurance market—and difficulties expected to last at least through next year—it’s important to have an experienced, knowledgeable insurance professional to guide you through. A good broker can offer advice around your specific circumstance as well as guidance to secure affordable coverage – even in the toughest times.

Drew Fenton is the real estate practice leader for global insurance brokerage Hub International in Toronto.

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