Sticker Shock

If commercial property clients are hoping to bring their premiums down in this tightening market, experts suggest a host of measures that can help transform them into a good risk for underwriters. Sound risk mitigation measures include running a solid occupational health and safety program, hiring professionals to inspect mechanical equipment and water pipes on a regular basis, and raising deductibles.

“One of the biggest things you can do to reduce your premium — or at least keep it in check — is make sure you stand out as best-in-class,” says Tina Gardiner, a Canadian member of the board of directors of New York City-based Risk and Insurance Management Society (RIMS).

Across Canada, commercial brokers are experiencing a hardening market, with both rate increases and capacity challenges, says Kent Rowe, St. John’s, Nfld.-based president of the Insurance Brokers Association of Canada (IBAC).

“Pricing went down for years,” observes Dom Lopes, assistant vice president for first party and risk control services at RSA Canada. “Then in the last 18 months, in certain segments — particularly real estate, some manufacturers, some of the service areas — the prices went down to a point where it was more difficult for customers to get reductions on their insurance.”

Now that the price pendulum is swinging the other way, your clients need solid risk management programs in place and to sell their safety and business continuity programs to underwriters, suggests Gardiner, who served last year as RIMS Canada Council chair. She is currently the manager of insurance and risk management for the Regional Municipality of York, just north of Toronto.

Tell that underwriter your own story, Gardiner advises insurance buyers in the commercial property space. “Tell them what you are doing and all the programs you have in place. Tell them how you handle claims.”

Risk management

Commercial carriers are telling Canadian Underwriter that they take a close look at risk management when underwriting property. Some commercial property clients can mitigate risk by reinforcing the sprinkler system or having adequate management of hazardous materials, says Nancy Dorvil, head of property in Canada for Allianz Global Corporate and Specialty.

For its part, RSA Canada will sometimes look at a commercial client’s occupational health and safety program, Lopes says. For example, is the client holding safety meetings regularly and is there adequate documentation?

“We would rather get less [premium] money from somebody who really cares [about risk management] than more money from a company that doesn’t have strong risk protocols in place,” he says. “If you don’t have a good safety program, you tend to have more losses. A lot of documents show that companies that are not treating their employees with that kind of respect tend to have human errors in their operations.”

Closely related to occupational health and safety is the equipment maintenance program. “Do they have a preventative maintenance program? Or do they have an ad hoc program, where if something breaks down, [only then do] they look after it?” Lopes asks. “You can find out pretty quickly if you look at their documents. Are they looking at certain equipment every 30 days, 60 days, 90 days? Replacing certain elements of equipment on a regular basis? We like to see documented proof of that. It shows they are very proactive in having a strong comprehensive maintenance program.”

In addition, clients should keep inspection records for all mechanical, plumbing, heating and cooling systems, says Lina Ferraro, team leader for the commercial lines department at Acumen Insurance Group, a Hamilton, Ont.-based brokerage. The client should maintain a record of repairs and keep a contact list of professionals who can help repair systems on short notice.

Another way for a client to reduce premium is to have a well-written water prevention plan that can be shared with the insurer, Ferraro advises. This would include:

•  identifying areas of the building that are susceptible to having unusual amounts of snow and rainfall;
•  regular roof inspections to ensure they are clear of debris; and
•  arranging for professional roofing maintenance providers to do follow-up roof assessments.

A properly written water plan should stipulate that professionals inspect the sewage lines that take away the client’s wastewater.

Storm drains should also be inspected, said Robert Sparling, senior vice president and practice lead, materials failure at 30 Forensic Engineering.

“Storm drains can become clogged with debris over time and regular maintenance is required to ensure any blockages are identified and removed.  This is especially problematic in commercial properties with catch basins in the parking lots and laneways,” he says.

So if the client inspects and cleans storm drains periodically, this can reduce the risk of stormwater backing into the building. “Incorrect installation of both sanitary and storm drainage systems is a relatively common problem at commercial properties,” Sparling says. “Storm drains are often installed with insufficient support and bracing for the piping, which allows piping to separate during a storm event.” Moreover, he adds, some sanitary drains put the property at risk because debris can accumulate due to low points or an incorrect slope.

Pipe problems

Water losses caused by pipe problems generally fall into one of the following five categories, Sparling says:

•  incorrect installation;
•  lack of appropriate maintenance;
•  freezing failures;
•  design defects; and
•  manufacturing defects.

Some manufacturing defects have been found in the apparatus that supplies water to the toilet tank. “Flexible toilet connector hoses with white plastic nuts are particularly a problem,” Sparling warns. “Toilet connects should be reviewed for the presence of white plastic nuts on the toilet side of the supply water connection. Where identified, these hoses should be replaced.”

Some white plastic nuts deteriorate when they come into contact with chlorine, said Paul Okrutny, a materials engineer who used to work for 30 Forensic and has since founded a Toronto insurtech known as Mitigateway.

Property owners will often fail to notice the degradation of the nuts on the toilet supply line until it’s too late. But when that part fails, the supply line is no longer sealed. So instead of having a tight connection into the toilet tank, the supply line sprays water into the restroom like someone hooked a garden hose up to the sink and turned it on full-blast.

Advances in sensor technology and data networking can help mitigate water risk. Devices are now on the market that can detect a drop in flow through a supply pipe and notify someone in charge of property management.

“Smart tech provides many opportunities to improve our risk management programs, but it also adds an element of unpredictability if you don’t understand the smart tech that you have in your building,” Gardiner says. “It’s really important for risk managers to grab that opportunity and understand what they have.”

One simple way to reduce water damage risk is to ensure that whoever is in charge of facilities knows: 1) how to shut down the water; 2) where the valves are located; and 3) whom to contact in case of emergency, says Jeff Reitsma, vice president and practice lead for remediation at 30 Forensic Engineering. This also applies to those in charge of facilities after normal working hours.

Water damage claims are hitting the multi-unit condominium market particularly hard. The average cost of strata insurance in B.C. has increased by about 35%, the Insurance Bureau of Canada (IBC) has reported. And in Alberta, the situation is bad enough that IBC has recently announced that it is hiring its own risk manager, whose job will include advising condominium corporations on how to reduce their risk.

Risk factors for the condo market include accidental overflowing of toilets and bathtubs, as well as burst pipes and supply line failures, IBC says. “People are stacked up on top of each other so the problems literally cascade,” said Scott Treasure, CEO of Edmonton-based Treasures Insurance and Risk Management and past president of IBAC.

Cause and effect?

So, let’s say that a commercial property owner does all the right things to manage their risk. By what percent should their price drop on renewal?

Not so fast.

One large global commercial brokerage declined to comment for this article because the brokerage does not anticipate rate reductions for anyone — regardless of what it does to reduce risk. And Aviva Canada president and CEO Jason Storah said rate hikes in the “distressed” condo segment would likely continue in 2020 and then “taper off in 2021 and beyond.” In this kind of market, not all insurers will promise discounts for following best-in-class risk mitigation.

That said, “while every dollar spent on risk improvement many not translate into a dollar reduction on premium, there is certainly value in conducting risk mitigation,” Dorvil at AGCS Canada says. “It is important to remember that losses can have impacts that insurance cannot cover, such as loss of market share.”

Over the next six months, as insurers get adequate pricing, underwriters will start to differentiate between strong and not-so-strong risks, Lopes says. “I think as clients continue to maintain strong risk management programs, everyone is going to win out in six months’ time, when prices start to become more stable and in some cases go down.”

Zurich Canada was asked what commercial clients can do to get a drop in price, or at least a lower price increase. “We are taking it a few levels deeper than that,” said Yvonne Steiner, head of property for Zurich Canada.

For Zurich, a key question is: What motivates a client to reduce the propensity for disruption to a business? In Steiner’s eyes, there are three elements to this:

•  the size of the client, measured by revenue or market capitalization;
•  risk transfer tools; and
•  improving the delivery of the risk service side of the business.

Suppose a client has a market capitalization of $50 billion, their deductible is only $250,000, and they have a high attritional loss load. This may not be a very efficient way to transfer risk, says Steiner.

She would advise a client in this situation to look for alternative means,  such as a captive structure or larger self-insured retention or deductible. “Companies that are comfortable with increasing their deductibles will have a better opportunity to reduce some of their premium costs,” Lopes says.

Brokers should meet with their clients once a year to ensure that coverage reflects any changes the business has made over the past year, Ferraro advises. “This will not only help to ensure you are still accurately covered, but could save money in certain aspects depending on the changes.”

Clients should also look at the long-term impact of spending money now on their property to reduce risk.

For example, Zurich Canada might advise some clients that their particular sprinkler system is unlikely to control a fire, says Chris Snider, Zurich Canada’s interim head of risk services.

Let’s say the cost to improve the sprinkler’s firefighting performance to the level recommended by the underwriter is $85,000. When given that figure, the client may focus on the dollars they need to spend. “What they might not be looking at is, ‘Let me have a conversation with my broker and Zurich,’” Snider says. In this conversation, the client may ask: “If I invest this $85,000 and become less risky, what that could look like for me the next year and the year after?”

“Underwriters can have conversations with the customer and the broker about that,” Snider says. “And then the client can say, ‘Ah. It’s a possibility that, with that $85,000, I will get a return on that investment within five years by reducing my losses.’”

Additional measures

Commercial property clients also need to understand how business interruption affects their operations, AGCS Canada’s Dorvil points out.

This means having a business continuity plan that shows what the employees should do if they can no longer work from a site, Gardiner explains. “Often, companies will practise that [plan]. They will have an emergency response workshop in which they say, ‘Okay, today we will practise this: We have had a wind storm with loss of site and this is what everybody has to do.”

Property underwriters are also looking at how clients deal with their business partners, such as tenants and construction contractors. If a contractor is on site doing renovation work, they should inspect the property after they finish the work, Lopes says.

Also, the client’s contractors should have their own insurance policies in place that will cover the client in case of property damage.

“What are companies looking at when they have contractors come in and do renovation work?” Lopes says. “Maintenance work? Expansion work? Do they have very strong, documented contractor controls in place so we know exactly what they are doing and what their hazards are?”

Right now, this is “the best time ever to be a risk manager,” Gardiner says of advising clients in the current market. “It’s definitely a time when we can show our value.”