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Are insurance costs flat or rising?
September, 2011
By Andy Schwartze
One of the fascinating aspects of being a “middle” person, whose professional responsibilities are wedged somewhere between the cost crazed customer and the greedy underwriter, is that you see a vast amount of information from a very different perspective. The cost of transferring the risks associated with sudden and unexpected physical building damage, and the related rental income loss, is pretty cheap for the apartment building owner. Add to that the covering off of any liability claims, not to mention related defence costs, and the result is that the building owner has off loaded a huge burden of surprising and unpredictable financial losses. Take the cost of doing this, as a percentage of gross building revenue taken in, and one cannot help but think of the old term “chump change.” Try operating a trucking fleet and learn what insurance costing can really look like…not a pretty picture.
While I would not want the apartment building owning reader to assume that this is some sort of guarantee, the annual insurance costs on a typical highrise, when purchased with low deductibles, are often comfortably below one per cent of annual revenues. Take a look at the last 20 years of apartment building premiums and you will be hard pressed to have seen much of a change in this relationship. Other costs, such as utilities, can certainly not be able to make the same claim in terms of their impact on building operations and bottom lines. Insurance costs do tend to creep up, in linear fashion, as insured values rise to remain realistic. But as a percentage of operating costs, little has changed in the past 30 years.
Yet there is a developing concern that catastrophes will ultimately become a more significant driver of insurance costing. Reinsurers are the big players in this and, being two steps removed from the retail insurance buyer, are very much operated like cautious banks. There are signs that these giant insurance companies are realizing the significance of building a war chest for an increasing number of Mother Nature’s surprise attacks.
In an interesting wake-up call, in April, I was standing at a look out area on the way up to Cypress Mountain, overlooking Vancouver from the northwest. It was a breathtaking view of Vancouver Island, English Bay filled with anchored overseas freighters, and downtown in a sun drenched morning haze. The mood was shattered when a young bearded tour guide leader pointed to the west and informed his attentive tourists that “if we have an earthquake, the epicentre will be approximately 50 kms over in that direction”. Then he topped it off by asking how many of them had an “earthquake kit” at home. Beneath the beauty lurks the monster.
In the past short term, reinsurers have been hammered with losses. Most of us, in Canada, can easily remember the earthquakes in Japan and New Zealand. At home the Slave Lake wildfires in May are expected to cost about $700 million. Forest fires (southeast Australia and southwest U.S.) , tornados, hurricanes and flooding are just part of what may well be an estimated $48 to $67 billion hit on world insurance markets (ref: Canadian Underwriter, June 2011). The 2011 hurricane season hasn’t even started yet and already the drain on reinsurer capital has been the highest ever so far this year. Isn’t there an ice island, the size of Bermuda, on its way to our East Coast...? Natural forces are working harder than they once did.
Now, if this all sounds just a bit scary, let’s put some local perspective on it. Foreign reinsurance companies, doing business in Canada, have to capitalize their Canadian entities. These capital requirements are significant. Unlike in the U.S., a foreign insurer’s head office cannot call Toronto and demand money because of something that has happened in another part of the world. Ottawa must approve the removal of capital first. That being said, a Canadian reinsurer’s subsidiary can wind up its business and deploy its capital elsewhere. It can also participate in out of country insurance deals as there are many ways in which insurance capital is utilized worldwide. Reinsurers in Canada are in relatively safe territory but most certainly not bullet proof.
Once a year, commencing in the fall and finally concluding by a deadline date of December 31, the jostling for position between our insurance companies and their reinsurer backers take place. Part of every premium that we pay is a reinsurance component. There was a time when an apartment building owner might buy a number of similar policies on the same building. Each having been issued by a different insurer, the wordings would be similar and the premiums different. The amounts of insurance would be combined to arrive at the total coverage needed. I once had a client with 10 separate property insurance policies. Today, your insurer issues one policy and the “capacity” of the international reinsurance community allows for high coverage limits to be purchased on the one contract. But there’s a price to be paid for that backing and it trickles down in to the premium we pay.
This annual negotiating process has resulted in the ability of seasoned insurance vets to be able to
predict in which direction rates are going. In the fall the rumours start; by late February the impact of
the current year’s reinsurance pricing begins to make itself felt. It’s an annual dance that takes place
every year......but with natural catastrophes clearly on the rise, it’s expected that the cost of twirling
your partner across this floor may soon go up. By how much is always tough to predict in an industry
with unpredictable future expenses to look forward to.
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