The History : The Hard Market, Insurer appetite, and taking their toys and going home.
The first thing we have to look at is the insurance cycle of what are known as “hard” and “soft” markets. When I first entered the business in 1992, I had no idea what anyone was talking about. I was a very junior independent adjuster working in a suburban branch of a massive adjusting firm. When the discussion came up – and make no mistake, it only comes up as you approach, are in, or are exiting a hard market, and often in sotto voce whispers – they explained it to me.
Aside from all the potential financial factors like inflationary pressure, or interest rates, or whatever, insurance companies rate things on a cycle. I was told, at the time that it’s essentially a seven year cycle: 7 years of a hard market, where premiums are high and the capacity or willingness of insurers to underwrite new business was restricted; and 7 years of a soft market, where premiums are very competitive, and insurers were looking to expand the amount of business written, the lines of business written, and the coverages offered, all while maintaining competitive pricing.
That 7 year cycle has been knocking around in my brain now for 28 years. It’s probably wrong, somehow – it’s probably not 7 and 7 – but it was considered regular, whatever it was. The thing is, I don’t think I ever lived through that. The model has always seemed to be a long and prolonged soft market, followed by a sharp turn to a steep hardening of the market. During the soft market, insurers would keep increasing their capacity and appetite, and start writing business that they had no business writing – I always joked that you knew the end of the soft market was coming when normally conservative insurers turned an eye to underwriting very risky businesses, namely hot roofers and cross-border truckers. Insurance nerd humour.
That is exactly what happened here. Except that this wasn’t the typical “hockey stick” that you see on so many finance graphs on TV. This was a hardening and price increase of staggering proportions, and if you graphed it, it would look like the sharp slope of a mountain. This seemed to come out of nowhere. Our commercial liability clients started to feel it first, then our commercial property and construction clients. I heard stories of 100% premium increases, and deductibles going up at the same time.
Insurers were reducing capacity and increasing rating. They were starting to think that Canada, which swings from insurer darling to the albatross around their neck, wasn’t a good place to underwriter; BC, with their earthquake exposure, doubly so. They started to pull out, fearing… something. But what was it?
Then in the early part of 2020 the stories started to surface about the impact this was having on strata insurance. The articles about the problem, and articles warning about the problem, are easy enough to find by a Google Bing search, but here are a few examples:
- 12/04/2019, CBC News – B.C. stratas, such as condos, told to minimize risks as insurance spikes 50 to 300%
- 12/11/2019, CBC News – How rising strata insurance rates across B.C. could affect you
- 1/7/2020, Global News – ‘Government needs to get involved’: B.C. strata’s plea after insurance bill with 780% hike
- 2/6/2020, Real Estate Board of Greater Vancouver – What you need to know about strata insurance rate increases
- 2/10/2020, Global News – BC. insurance brokers call for legislative reforms to tackle skyrocketing strata rates
- 2/11/2020, Vancouver Sun – B.C. stratas on edge after reports of soaring insurance premiums
- 2/12/2020, Canadian Underwriter – Brokers on what would help bring down skyrocketing condo insurance premiums
- 2/14/2020, Vancouver Sun – ‘Strata market in crisis’: Some B.C. condo buildings unable to buy insurance
- 2/25/2020, CBC News – B.C. Liberals pressure province to help condo owners hit by skyrocketing strata insurance
- 3/1/2020, Canadian Underwriter – Condo Coverage Crisis
- 3/2/2020, Canadian Underwriter – What IBC and brokers think would improve condo insurance affordability in B.C.
- 3/11/2020, Business in Vancouver – What IBC and brokers think would improve condo insurance affordability in B.C.
There are more, go find them. I tried to include a balance – general media and specialist media both – to give perspectives from all sides. Some of the articles mention deductibles on the building going up to $250,000 or $500,000, which would eliminate almost all claims a strata would make. Some mention rate increases of nearly 800%, meaning that the strata’s budget has been blown for the year, and they likely need to have a special assessment to cover the insurance premium (for one year). Some even go so far as to mention the affects that weather-related or catastrophe claims might be playing in these cases. I don’t buy the weather related issues, by the way. There are always two or three catastrophes (at least) in Canada each year. It’s been going on for decades, an the insurers underwrite for them – they just don’t know where they’ll happen. So, I take a bit of a different approach when looking at the factors involved. I have dealt with these claims for years, but am by no means an expert. Still, we have to look at what the insurers are truly afraid of.
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