How the hard market is hitting the residential realty insurance market - report

Many brokers are scrambling to find adequate insurance limits

How the hard market is hitting the residential realty insurance market - report

Insurance News

By Mark Rosanes

The hardening of Canada’s property and casualty (P&C) segment has forced many brokers to scramble to find adequate insurance limits for their clients as available capacity also decreases. And according to Roxane Modeste, senior underwriter at Stewart Specialty Risk Underwriting’s (SSRU) property division, the situation has hit the residential realty insurance market “particularly hard.”

But why is this happening? Modeste examined the factors impacting an insurer’s approach to providing coverage and the role of managing general agents (MGAs) in helping brokers and insurers navigate volatility in the realty segment.

What factors are contributing to the hard market?

“The increasing frequency and severity of water and fire damage losses has made many markets unwilling or unable to continue providing capacity in the segment,” Modeste wrote in her analysis of the residential realty insurance landscape. “It has also led to a demand by the remaining carriers for condominium and rental property owners to increase their risk retention though higher deductibles or SIRs.”


“Saturation of capacity for catastrophe perils in Western Canada and Quebec has had a knock-on effect, causing a scarcity of capacity for general perils in those regions,” she added.

Modeste also noted how climate change has contributed to the hardening of the insurance market.

“Climate change has led to hotter and drier summers, which has resulted in an increase in wildfires throughout Western and Central Canada,” she wrote. “An increase in the number of winter storms has resulted in more instances of roofs collapsing due to snow load, as well as flooding during winter thaw.”

Modeste cited data from the Insurance Bureau of Canada (IBC), which revealed that the country’s P&C insurers paid out a total of $41.5 billion in claims in 2019. This is among the major factors that have caused premiums to escalate.

She added that the current shortage and rise in the cost of building materials has been a boon to the sector as builders often pass the costs on to the insurance industry.

Condominiums, however, present a different challenge to residential property insurance brokers and providers, according to Modeste.

“Condo boards are often comprised of unit owners who may not have an understanding of the adequate reserves required to fund deductibles in the event of a loss,” she wrote. “They may also struggle with ensuring adequate funding will be available for maintenance costs related to upkeep of aging buildings.”

“At the same time, property managers and owners of rental properties have the difficult task of enforcing loss prevention practices surrounding water escape, smoking, cooking and hoarding – especially with tenants who may be indifferent to the losses generated by these exposures.”

Modeste highlighted that increasing demand for condo and rental units brought about by surging real estate prices and the recent changes in the Office of the Superintendent of Financial Institutions’ (OSFI) mortgage stress test has affected insurance companies’ approach to providing coverage.

“It is hard to find a major city centre in Canada without construction cranes dotting the skyline as they build more condominium and purpose-built rental buildings,” she wrote.

What is the role of an MGA in the current residential realty insurance market?

Modeste noted how these conditions have made the MGA’s role in risk selection and management, and pricing critical in helping brokers and insurers “navigate the volatility of the realty segment.”

“MGAs focusing on residential realty have the market knowledge and expertise to provide solutions for capacity while ensuring sound underwriting,” she wrote. “The subscription model favoured by most MGAs can also help ensure capacity limits are met, while limiting counter-party exposure by spreading risk among many carriers.”

Read more: What is an MGA?

She added that MGAs could take some of the burden off insurance companies by increasing rates and deductibles, removing or decreasing coverages, and setting stricter underwriting requirements.

“MGAs manage capacity needs and provide appropriate risk management principles such as rates and deductibles commensurate with the risk and exposure,” she wrote. “Insurance brokers add to this by providing advice on the importance of adequate reserving for the funding of deductibles and building maintenance, as well as promoting risk management awareness to their customers.”

“As the challenges to the residential realty segment continue to evolve, the expertise MGAs provide to brokers and insurers in developing the right solutions for customers in this segment will be of increasing importance.”

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