Insurance costs have risen dramatically for real estate developers and owners in recent years, but an industry expert who expects the trend to continue said measures can be taken to help reduce the impact.
Hullmark president Jeff Hull interviewed Jeffrey Charles, the managing director of Gallagher, during a recent Real Estate Forums webinar. The company acts on behalf of institutional pension capital, asset managers and public companies investing in and developing real assets in Canada, and insures assets around the globe.
Charles said insurance companies are incurring underwriting losses across Canada and around the world in all asset classes. In Canada, water damage losses have accumulated to become the biggest problem for insurers.
“The cost of those losses has started to outpace the actual premium that is received on the other side of the transaction,” said Charles. “We’ve been in an underwriting loss situation on an aggregated basis for a few years now.”
Damage and losses from forest fires, floods, lightning and other catastrophic weather events have been occurring more frequently, and that’s expected to continue due to climate change.
While it didn’t attract a lot of attention outside Alberta, Gallagher said the loss from early July hailstorms in the province was the fourth-largest catastrophic event in Canadian insurance history.
Most large insurance companies are national in scope, so an issue in one part of the country can affect premiums in other regions. Many insurers in Canada also have foreign parent companies underwriting around the world, so losses in other countries can even impact insurance prices in Canada.
Low interest rates don’t help insurers
“Exacerbating that problem is the current economic environment we find ourselves in,” said Charles, who noted that low interest rates don’t benefit insurance companies like they do developers. “Governments and regulatory bodies want to insure that the capital insurance companies receive from the premiums they collect actually gets invested in the economy in the jurisdiction that they’re operating in. It’s regulated what investment products they can buy.”
Charles said sovereign debt investments have traditionally been stable and risk-free, while providing decent returns. Lately though, those returns have been drying up.
“The low-interest-rate environment is forcing some insurance companies to really focus on their underwriting profit, and only their underwriting profit. That’s the only area where an insurance company can make money today. If it’s just producing losses, they have to change some things.”
Increasing knowledge can lead to lower rates
While insurance companies don’t know when fires or floods will happen, they have enough intelligence and historical perspective to know that they will.
Charles said building design, materials and locations should be taken into consideration when it comes to insurance coverage. He said waterfront properties might be less valuable in the future than they are today if they’re at constant risk of flooding or erosion damage.
Catastrophically exposed sites and buildings with older materials or technology will be subject to premium increases. However, improving building infrastructure to reduce risks and prevent potential losses would produce better availability of insurance at a lower price.
Charles said building owners should study underwriting reports closely and educate themselves better by researching data to find out more about potential risks. Then, they can create solutions to reduce those risks and gain leverage with insurers.
“There’s no better time than right now to understand the risks you face and learn about how you can implement technology, material use or information to make better decisions about the value of your assets,” said Charles.
Underwriting capacity and capital will come to the table once a building owner shows they understand risks and insurers’ concerns.
“Get your information together and get prepared is the best advice I have,” said Charles. “It’s going to be a tricky 18 to 24 months in the property insurance world, but it’s solvable.”
Look at history, talk about insurance early
Investors should look at the history of insurance losses in a building before deciding whether to buy, Charles added.
Hull said more brownfield land is going through the development process: “Environmental contamination can be a real issue and can be a hurdle that’s sometimes not possible to jump over to get a deal across the finish line.”
Charles said insurance conversations often don’t happen until the last minute in deal negotiations, but should begin earlier to achieve best results.
“A well-managed property that avoids risks, or has systems or even physical solutions that are likely to mitigate or prevent risk, is going to be worth more than the buildings that aren’t.”
Business interruption and pandemic insurance
Charles said most property policies for real estate companies should include business interruption insurance coverage. Recently however, companies making claims on those policies due to government-imposed measures to curb the spread of COVID-19 have often been denied, because no actual property damage has occurred.
A series of lawsuits, particularly in Europe and the United States, are under way and will better define “property damage” in these instances, Charles explained.
Business interruption insurance should continue to be important, but “pandemic coverage is something that was largely not adopted by the real estate community,” Charles said. “Some of the hospitality community will have considered it, and lots of events businesses that have cancellation circumstances will have considered this.”
Charles thinks the current situation will play out in similar fashion to the terrorism response after 9/11, when most property insurers wouldn’t underwrite terrorism exposure. Then some companies did, and it became a stand-alone policy.
He believes some insurers will view COVID-19 as a rare occurrence and will be willing to underwrite pandemic risk going forward, but it’s not happening yet. Instead, policies are now making it clearer that pandemic exposure isn’t covered by premiums.
Returning to the workplace
As more employees return to workplaces during the pandemic, businesses must also be prepared for the risk exposure they face. Charles said building operators and tenants should be having “common sense” conversations and communicating regularly about safety precautions in buildings. Owners/managers should look at the safety measures in their buildings as if they were a tenant or customer.
This communication and common sense approach should also be applied to dealing with COVID-19 safety precautions at construction sites, he said.