What type of losses are driving the poor results? Two main areas:

1. Water damage. Several years ago, the Insurance Bureau of Canada reported that water damage losses surpassed fire losses as the leading cause of insurance claims in Canada. One major insurer states its average commercial water damage claim is now $120,000. Commercial property owners of all asset classes, not just residential, have experienced water damage losses. The sources are many, including: leaky pipes, improper design/construction, poor maintenance, human error and sprinkler systems failure. While not catastrophic from an insurer’s perspective, the frequency and severity of such water damage events has been steadily increasing.
    
2. Fire. Despite many years of active measures to reduce and mitigate fire risks, such as investments in fire detection, suppression and superior construction materials, fires still happen. Commercial real estate owners continue to experience fire losses and resulting smoke damage. While in many cases these are caused by tenant activity, fire loses from other causes continue. Other than wildfire, these losses are generally not deemed catastrophic from an insurance perspective in that they tend to be limited to a single site, but fire losses incurred on a regular basis can still significantly accumulate.

The most common types and size of water damage and fire claims being experienced in the real estate sector are usually referred to as “attritional losses” losses; meaning noncatastrophic peril losses that occur more frequently but with only moderate severity. While not catastrophic to an insurer (such as a hurricane that covers a broad geographic area), attritional losses can still amount to be many times the annual premiums paid, either by a few relatively large losses or a string of moderate losses.

The following are a few trends that are shaping insurance risks in the real estate sector:

Aging infrastructure

In many cases, water damage losses have arisen due to the failure of water and sprinkler systems, in addition to human error, as mentioned above. These water systems can be internal to the building, or external via water and sewer mains maintained by the local municipality. Real estate building stock, especially residential, will continue to age. According to CMHC over 51% of all the high-rise apartment stock in Canada is over 40 years old, and 23% was built 1960 or before. That supporting infrastructure, both owner and municipal infrastructure, will continue to come under fi scal constraints for repair and replacement.

Earthquake risks

Canadian financial regulators (OSFI) continue to closely monitor reinsurance taken out by insurers to protect themselves. In 2018 OSFI placed this sector under a formal review to ensure insurers are properly assessing and setting aside adequate capital reserves to protect themselves from the risk of a major earthquake in Canada. Also, reinsurance placed with foreign reinsurers by insurers in Canada is being examined to ensure the reinsurance capital is available for insurers to respond adequately in the event of a major earthquake. We are beginning to see and expect further restriction of earthquake capacity off ered by insurers, and an accompanying rising cost of this component of the property and business interruption insurance premium.

Insurance capacity

Beyond earthquake risks, in some cases the overall capacity being off ered by insurers is being reduced. This may be the result of the insurers’ modelling being performed on portfolios against various natural catastrophe risks, such as flood, windstorm, etc. In addition, there are also cut backs in limits being made by some insurers in managing their overall financial exposures, against all types of losses.

Climate change/weather patterns

More severe storms are predicted, and insurers continue to monitor this trend and its accompanying eff ects on claims. More intense rainfall in shorter bursts will drive higher the costs of flooding claims, both overland and riverine flooding. Dryer conditions will also increase the intensity and scale of wildfires. More severe convection storms may increase hail and tornadic events. Any resulting increase in claims costs will put additional pressure on insurance premiums and policy coverage. Fortunately to date within Canada large scale natural catastrophe losses, such as hurricanes, have not been experienced. While there have been a couple larger scale flooding events in recent years (Calgary, Toronto) and wildfire events (Slave Lake, Fort McMurray), these have not been catastrophic in terms of total payouts, especially when compared to other parts of the world.

Inflation/deductibles

It is important to note that labour, repair and new material costs continue to rise each year, while in many cases property insurance deductible levels have remained constant. According to the Marshall Valuation Service by Marshall and Swift, construction costs have risen on average 30.3% in Canada over the last 10 years (July 2008-2018). This would mean a $5,000 deductible in 2008 would be the equivalent to $6,500 today, just due to construction inflation costs alone. During the favourable property insurance market of the past few years, deductibles generally have not increased, insurers are playing catch-up in some ways just to adjust for inflation. Higher deductibles are being imposed on several types of perils, including water damage, flood and in some cases all perils, dependent upon the specific claims history of a portfolio.

Residential real estate

The most aff ected asset class to date has been residential, specifically multi-family high-rise apartments and wood frame buildings. The inherent risks of owning and insuring buildings occupied 24/7/365 by individuals can be high and owners have limited control over the actions of tenants within their units. The eff ects of tenant accidents can go well beyond damaging just the unit itself, and can impact other units and the building itself, especially water damage and fire losses. These are in addition to the traditional exposures where the cause is outside the control of the owner, such as windstorm, hail, etc. Condominium and strata corporations are also aff ected and the reduced spread of risk that an individual condominium or strata has, compared to the owner of many multi-family buildings, makes them more vulnerable to the property insurance market in the event of individual losses.

Office, retail and industrial

Office and industrial risks continue to be the most favoured asset class with insurers. While generally less aff ected by certain types of claims compared to residential assets, many of the overlying trends noted above are also applicable. Insurers are looking closely at retail vacancy and/or asset repurposing exposures. Aging infrastructure is also applicable to these asset classes. While there is more control over tenants in this sector, insurers are now examining more closely the tenant occupancies of industrial buildings.