Recent trends have shown that construction costs throughout the United States and Canada have escalated at an accelerated rate, particularly in specific metropolitan regions. This is due to a combination of factors, including price increases for building materials and rising labour costs due to a rebound in construction activity since the recession of 2009. Areas such as Seattle, Los Angeles, Vancouver and Toronto are emblematic of the rise in construction cost, as market values have rebounded.
As a result of these cost increases, many commercial and residential properties are at risk of being under-insured. This is especially so for Condominiums that are situated in many of these city centres. It is therefore prudent to assess if the source and accuracy of your Condominium’s Insurable Value are reliable.
Common Pitfalls
It is not uncommon for Directors and Property Managers of Condominiums to be so heavily involved in other issues that they often forget the importance of having an accurate determination of the Replacement Cost of the standard unit and common elements of their Condominium. As a result, the Insurable Value they report may have come from a variety of less-than-reliable sources including:
1) Use of Developer’s Construction Costs
In many cases, the Insurable Value may have been based on the Developer’s construction cost. This amount may not include “soft costs” such as Architect Fees, Development Fees and General Contractor Fees. These are significant costs that should be included in the Insurable Value of the Condominium. In addition, a Developer who is building multiple condominiums can also achieve efficiencies in regards to material and labour costs. The reduction in these costs may result in a lower construction cost for the Condominium, which may not be achieved in the event of a loss and reconstruction of a single building. In most instances, the Developer’s construction cost can be approximately 20 to 40% less than the Replacement Cost of the Condominium.
2) Extended Indexing of Insurable Value
Once an Insurable Value exists, many Insurers/Insurance Brokers may use the annual Consumer Price Index (CPI) to update the Insurable Value of the condominium for an extended period of time. The annual CPI has been reported in the 1-2% range in recent years. In contrast, construction costs in some locales has been have been averaging double this amount. In addition, if the original construction cost that is being indexed is incorrect it can compound the error substantially over the years. Lastly, even with a correct original construction cost and accurate Inflation Index Factors, an Insurable Value should not be indexed up for more that three consecutive years.
3) Estimates from Unqualified Parties
In an attempt to save costs, some firms who lack architectural costing experience may develop a Replacement Cost estimate on a cost per square foot basis only. This methodology is not reliable since it may not consider location, construction quality and many of the important specialty features of the Condominium’s construction and services. Many of the construction details of a Condominium can only be verified by a physical inspection and comprehensive review of the architectural and site plans. In addition, the firm that completes the estimate should have specific architectural costing experience versus market value appraisal experience. Market value appraisals consider many other factors that are not relevant to the Insurable Value.
Insurance Appraisals By Qualified Professionals – The Most Accurate Source for Determining Insurable Values
An Insurance Appraisal is a formal estimate or opinion of value on a property as of a specified date. The premise of value developed should be the Replacement Cost New (RCN) of the standard unit and common elements of the Condominium. This value is based on a physical inspection, review of the building plans (architectural and site) and the development of current construction costs. Appraisal Firms use various construction costs from published sources including Marshall & Swift/Boeck, R.S. Means Construction Cost Data and Handscombe’s Yardstick for Costing. A reputable Appraisal Firm will also cross-reference this data with actual construction costs (including soft costs) reported by Contractors and Developers. Finally, construction costs of similar condominiums appraised should be used as a benchmark test to ensure the Insurable Value is correct. It is important that the Insurance Appraisal Firm you engage use as many of the above resources to develop an accurate Insurable Value.
Qualifications of Reputable Appraisal Firms
To select a reputable Appraisal Firm, it is recommended that they meet the following qualifications:
The Firm carries Errors and Omissions Insurance;
The Appraiser(s) have an educational background in Architectural Costing or Engineering;
The Appraiser(s) are experienced at completing Insurance Appraisals for Condominiums;
The Appraisal Service includes both Above Grade and Below Grade Assets;
The Appraisal Service is performed in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP); and
The Appraiser(s) reviews Architectural Plans, Site Plans and Standard Unit-By Law (if applicable).
In conclusion, it is prudent for the Directors and Property Managers to engage a Professional Appraisal Firm to complete an Insurance Appraisal of their Condominium. Furthermore, many of the Declarations and By-Laws of Condominiums specify the frequency that Insurance Appraisals should be completed (e.g. every three years). Lastly, the Condominium Acts of many of the jurisdictions have sections requiring the Condominium be insured for its Replacement Cost. Compliance with these guidelines can be best achieved by having a reputable firm complete an independent Insurance Appraisal.
We are attending the next RIMS Canada Conference, the preeminent convention and trade show for risk insurance managers and Insurance Brokers from Canada.The conference is being held in Edmonton, AB from September 8-11th, 2019.
Dates: Sunday September 8th to Wednesday September 11th, 2019
Visit Us At Booth #200
We have a stand booked for booth #200, so come on down to visit us and speak to one of our knowledgeable representatives! Booth #200 is close to the entrances. Just turn left when you walk into the booths area, and you should see our team! See the map below to get a better idea of where you’ll find us.
We Have Prizes!
We are going to do a Plinko style game with prizes! Come have some fun with our reps.
Share On Social
We encourage attendees to share their experience across social media channels! If you do so, feel free to use hashtags like #Appraisers, #ValuationServices, #ExpertTestimony, #FinancialServices, #RiskControl, #LossControl, and #SafetyServices etc. to further your reach to relevant viewers.
Event Organizers Video
Below is a fun video made by the event organizers to give you a better idea of what the conference is all about and why one should attend!
We Hope To See You There!
We hope to see you at the event in September. Remember, come visit us at Booth #200 to speak to any one of our awesome reps. Make sure you participate in our Plinko style game for your chance to win some nice prizes too! We are always here to answer any questions you may have, so feel free to contact us if you need to speak to one of our reps prior to the event.
In our last blog post we talked about the importance of understanding your client’s exposure, values, risk management strategies and policy wording – especially when dealing with a hard market in the insurance industry like we are today.
Challenges Facing Brokers and Clients Is Significant
With Insurance Companies tightening their underwriting requirements, increasing premiums and deductibles, and reducing limits, the challenges facing brokers and their clients is significant. Placing a client’s business – regardless of whether they have had a claim or not – can be a daunting task, and where you might have had 2 or 3 insurance companies on a risk before, today we are seeing upwards of a dozen companies now involved.
Advantages of Comprehensive Risk Assessment Reports
Having a comprehensive Risk Assessment report on your client’s operation is a huge advantage for brokers to successfully market their client’s business to the industry. This third party, arm’s length report provides an objective overview of your client’s operation – the hazards associated in the operation and the controls in place to manage these hazards – so that the underwriter has an excellent picture of the risk, they are preparing to take on.
Understanding Different Types of Clients
While many insurance companies today will categorize clients based on, the type of business they operate, this “broad brush” approach can affect many clients with limited or no loss experience. The residential/condominium market is a good example of an industry that has been hit hard given the high number of losses in this type of occupancy. However, in saying this, not all clients will fall under this category. Understanding what separates these clients from the rest is the message that needs to get across.
Solid Risk Management More Critical Than Ever
The insurance market is still well capitalized, however, insurance companies are becoming more selective to write only good quality risks. Solid risk management strategies are now more than ever a critical component for managing your client’s business. A comprehensive Risk Assessment report will provide you and your client with an invaluable tool to assist in mitigating losses, while at the same time providing you the leverage to differentiate your client’s business from the masses during insurance renewals or placement.
Our Risk Management & Valuation Services
If you have any questions on the various Risk Management and Valuation services we can provide, please contact one of our offices, we would be happy to help.
In our February 2019 Industry Insight article, we looked at the insurance industry focusing on building resilience with those insured to be prepared for natural disasters. The underlying premise being that natural disasters will occur; it is no longer an “if”, it is about the when.
In that article, we pointed to the insurance markets hardening to face the pressure of mounting losses. We are now in the midst of a hard property market and the impact on renewals and premiums is certainly felt.
“Characteristics of Soft and Hard Markets.
A strong economic climate, a favorable legal environment and/or few catastrophic events can increase insurers’ capacity, creating a soft insurance market. When the market is soft many insurers are competing for business and premiums are generally low. Insurers relax their underwriting standards and coverage is widely available. Underwriters are generally flexible and willing to negotiate coverage terms. Broad coverage is available with some extensions available for free.
A series of catastrophic events, a litigious legal environment and/or a poor economy can reduce insurers’ capacity to write new policies. The result can be a hard insurance market. A hard insurance market is the opposite of a soft one. When the market hardens, insurers tighten their underwriting standards. Some coverages may be difficult to secure as fewer insurers are competing to write policies. Premiums are relatively high and insurers are disinclined to negotiate terms. Broad coverage may be costly or unavailable but some coverage extensions may be available for an additional premium.” (1)
As the chart below depicts, we do have catastrophic events and their costs rising, which are having a direct impact on the insurance market hardening (2).
We are seeing the insurance market acknowledge the hardening of the property market and what that means for insureds, brokers, and property managers in property markets.
“At the end of 2018, the property market had begun to see some firming, and that continued into Q1 of 2019. As we move into Q2, this trend has not just continued; it has accelerated.”
“The message for retailers is that things are changing in property more quickly than expected, and the changes are deeper than anticipated,” says Harry Tucker, Executive Vice President and National Property Practice Leader for AmWINS.
Adverse loss development has been a catalyst in this acceleration. Two consecutive years with combined ratios exceeding 100% across the market has heightened the focus of management teams and underwriters to drive rate and reduce aggregate exposure. Increasing rates are creating a deeper and broader change in the market. The obvious tough classes – including frame habitational, recyclers, and open lot – were the first to be affected, but now the trend has crept into broader classes and non-CAT exposed business.
“Along with rate increases, we are seeing more tightened risk selection, reductions in limits, increased deductibles, and close review of policy forms,” says Tucker.
However, the bright spot for clients is that the market is still well capitalized. “Carriers still want to write premium,” says Tucker. “The difference today is that they are applying a level of underwriting discipline we haven’t seen in quite some time.”(3)
The below graph graphically depicts the pricing trends in property renewals (4):
As property owners and/or tenants, brokers, and property managers, we would encourage you to look at your insurance program against the backdrop of the increase in natural disasters driven by climate change and the changes to occurring as underwriters are dealing with these variables as they develop insurance premiums. You need to understand your exposure, your values, your risk management strategies and your policy wordings. Being forewarned, will assist you exponentially in the event of a loss.
A Standard Unit Definition is a list of what parts of a typical condominium complex could be maintained and insured by the condominium board. The Standard Unit Definition for your development will detail exactly what the Condominium board is responsible for, and not responsible for.
For example, a typical Standard Unit Definition for a residential development could indicate that the condominium corporation is responsible to maintain and insure the structure: electrical, plumbing, and HVAC systems; wall and ceiling finish such as drywall and paint; floor finish such as carpet or tile; interior doors; interior electrical, plumbing, and HVAC fixtures; interior doors, casing, and baseboards; and built-in appliances, etc.
In this example, the condominium corporation is responsible to have adequate insurance in place for those items.
The preceding is not an exhaustive list, and in fact, a particular Standard Unit Definition could include more or less components. For example, the Standard Unit Definition may include the drywall for the walls and ceiling, but not the paint that is on the walls and ceilings.
This is especially the case with Standard Unit Definitions for non-residential units. Quite often, a non-residential Standard Unit Definition includes the shell only, with the unit owners being responsible for all other components.
Do we really need Standard Unit Definitions in the Bylaws?
Our recommendation is YES, for a number of reasons.
Mostly it is about insurance. The condominium corporation is responsible to acquire and maintain adequate insurance coverage for all common elements, including the items in the Standard Unit Definition. Insurance for all other components are the responsibility of the unit owner.
Without a Standard Unit Definition, both the condominium board and unit owners would be uncertain about what they need to insure. This could result in overlaps in coverage, resulting in insurance levies being too high. Worse, a gap in insurance coverage, which is a significant increase in risk.
Another reason to have Standard Unit Definitions is that they set minimum quality and décor standards for all units. This is important to ensure that the entire development maintains its overall level of quality and consistent esthetics. Otherwise, individual unit Market Values could suffer.
Finally, some condominium corporations have used Standard Unit Bylaws as a strategy to limit corporation claims, which can affect their premiums significantly. This strategy can put more onus on unit owners to pay particular attention to their personal coverage and how that fits into the corporation’s coverage.
What are Betterments and Improvements?
It is important to note that Standard Unit Definitions do not include Betterments and Improvements.
Betterments is a term to describe when an owner has upgraded a component that is part of the Standard Unit Definition. For example, consider a residential condominium development where the Standard Unit Definition includes carpet floor covering, and a particular owner has replaced the carpet with hardwood. In a case such as this, the hardwood is the “Betterment”. The condominium corporation would be responsible to carry sufficient insurance to replace the flooring with carpet only, and the unit owner would be responsible to carry insurance to pay for the upgrade to hardwood.
Improvements are those components that are installed in addition to the Standard Unit Definition. This is quite common with non-residential units. For example, a Standard Unit Definition in a commercial office condominium unit might include only “shell space”. The unit owner would be responsible for the costs to install the interior development, and to insure the improvements.
Speak to us about our Standard Unit Definition services today!
The Suncorp Valuations team will be attending RIMS 2019, the largest Risk Insurance Managers Conference in Boston, MA from April 28 to May 1, 2019. Meet us there at booth #482, and enter to win our draw prize too! More info below.
This is the preeminent convention and trade show for Risk Insurance Managers and Insurance Brokers from the US, Canada and internationally.
Find Us At Booth #482
We will be setup at booth #482, so come visit us! We are right in between booth 387 and 379. In the map, we are the top booth of the two between 387 and 379. See below for where we are in the exhibit map!
We are inviting attendees to our booth, and announcing that we will have a substantial draw prize (right now we are looking at a video game or drone with camera). Visit us, and enter to win our draw prize too!
Our Event #Hashtags
Hashtags we are using throughout social for this event;
