Authors: Tessa Rowland, Negina Khalil
More than 670,000 strata properties exist in British Columbia, ranging up to more than $200 million in insured value for these buildings and the common property within them.
Strata insurance is more than an expense incurred by strata corporations out of caution, these corporations are obligated by the Strata Property Act to secure property and liability insurance based on the full replacement value of the property in question.
In recent years the cost of strata insurance premiums have drastically increased averaging 40 per cent higher each year province-wide. Deductibles have similarly increased annually, often with triple digit increases. The strata insurance industry can significantly impact housing affordability for homeowners and renters, as well as the cost of individual homeowner strata insurance. The provincial government has now responded with regulatory changes, effective November 1, 2020, targeting a lack of transparency affecting the strata insurance industry, a private sector industry populated by only a handful of insurance providers. While enhanced disclosure requirements will be welcomed by customers, the changes do little to effectively regulate the systemic issues contributing to rising costs.
Strata Insurance Increases
The B.C. Financial Services Authority (“BCFSA”) is the regulatory agency responsible for overseeing private sector insurance companies within B.C. Despite the BCFSA’s oversight, insurance rates are determined by the insurers based on their own estimate of market factors and are not regulated. At the request of the provincial government in February 2020, the BCFSA initiated an investigation under section 213 of the Financial Institutions Act to report on the rising cost of strata insurance. The BCFSA’s initial findings of the factors underpinning the unsustainable strata insurance market were published in its June 16, 2020 interim report (the “Interim Report”) and a final report is expected later this fall.
The Interim Report revealed that the cost of strata insurance in B.C. has increased by approximately 40 per cent over the past year and specifically by 50 per cent in Metro Vancouver. Deductibles have similarly continued to increase, in some cases reaching triple-digit increases during this period. These increases can be broken down further in the following ways:
- 54 per cent of strata properties experienced a premium increase of less than 30 per cent compared to premiums of the previous year;
- 31 per cent of strata properties saw increases in the 30-50 per cent range;
- 9 per cent of properties faced year-over-year increases of 50-100 per cent; and
- 6 per cent of properties saw strata insurance premium increases in excess of 100 per cent compared to the previous year.
The above findings described in the Interim Report lead the BCFSA to conclude that the market is “unhealthy”. It goes on to state that, “a healthy market is one that meets the goals of sustainability, affordability and availability” and that the current unhealthy state of the B.C. strata insurance market is not fulfilling the needs of British Columbians, nor is it profitable for the insurance industry. The findings of the Interim Report suggest that both local and global factors are responsible for driving up the cost of strata insurance in B.C., from rising property values to increased earthquake risk brought upon by unmitigated climate change.
Increased Strata Insurance Losses
The BCFSA’s data demonstrates that insurers struggle with sustaining profitability in the strata insurance market due to losses from mostly minor claims. For example, water damage from plumbing leaks and failures was a key driver in losses, accounting for approximately 46 per cent of the total claim amount since 2017 (56 per cent in 2018 alone). This data suggests that strata insurance is used to fill the gaps where appropriate ongoing maintenance practices have not been observed. New buildings are also deemed to be higher risk, with the claims cost for buildings less than five-years old averaging $18,000 compared to $10,000 for buildings of all ages. The Interim Report explains that this may be a consequence of strata insurers absorbing the costs that would ordinarily be covered under the new home warranty programs, but are instead directed to strata insurance due to uncertainty over whether the new home warranty will cover the loss.
Limited Strata Insurance Industry Capacity
An additional fundamental issue is the lack of capacity or the supply of insurance to serve the market adequately. In other words, the insurers capital support is not sufficient for the amount of risk insurers are exposed to in B.C. For instance, the excess capital of the insurers sampled by the BCFSA was approximately $2.5 billion compared to the over $100 billion of strata property value they insure. Insurers typically purchase reinsurance to manage this risk, where other companies purchase portions of an insurer’s risk portfolio. However, reinsurance costs have been increasing globally and are likely to continue increasing due to the global increase in the frequency and amount of losses from catastrophic events and from new earthquake risk research.
Best Term Pricing
A method known as “best terms pricing” is used by insurers in the industry. When each insurer quotes a strata property, it sets out the amount of risk as a percentage and the rate charge it is prepared to accept, priced per insured dollar. The quotes from all the insurers involved forms the basis of the insurance premium paid by strata corporations and reflected in the monthly strata fees of owners. However, instead of setting the premium based on the quote of each insurer, or by an average of all quotes, under best terms pricing the highest rate quoted by any of the insurers on the policy determines the final price. This approach can lead to an increase in the spread between average bids and the highest bids, resulting in higher prices.
Following the Interim Report’s release, the provincial government announced upcoming changes to the Financial Institutions Act (British Columbia). These changes are intended to bring further transparency to the industry and help address the rising cost of strata insurance in B.C. Notably absent from the changes, however, are measures to address the lack of industry capacity and any tangible regulation of pricing.
The following changes will come into effect on November 1, 2020:
- Insurers will be required to provide 30-day advanced notice directly to strata corporations of their intention to not renew an insurance policy or of any material changes to the policy. This will provide strata corporations with advanced warning of cost increases, which will allow them time to seek other insurance options if needed.
- Insurance agents will be required to disclose their commission amount (or a reasonable estimate) to strata corporations. Failing to meet these disclosure requirements can lead to penalties of up to $25,000 for an individual or $50,000 for a corporation.
- Referral fees to strata property managers from strata insurance transactions will be prohibited.
The BCFSA will be engaging further with stakeholders to explore and further validate its interim findings, including the various causes along with possible regulatory and industry solutions prior to publishing its final report. As part of its upcoming engagement with stakeholders the BCFSA will also explore best terms pricing to better understand the impact on pricing and capacity in B.C. It is unknown whether further regulatory changes can be expected following the final report.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.