By Stan Sauerwein
Based on 2004 financial results, it comes as no surprise that brokers are already seeing signs the market for commercial property insurance is softening. Capacity, which is renewing underwriters' appetites to write new business and improve volumes, has meant brokers are generally enjoying renewal chats with their clients. In most cases they can report renewals without premium increases.
But, at least one firm in a B.C. construction hot spot is encouraging brokers to be proactive about valuations. The memory of undervalued replacement cost for residential construction is still fresh in the memory of most Kelowna area brokers two years after a disastrous wildfire swept the mountainsides near the city.
Dave Pelletier, a Kelowna contractor who is also a director of the Southern Interior Construction Association, thinks reminding commercial clients would not be such a bad idea.
"The last 12-14 months have seen serious material and commodities price increases, particularly driven by offshore markets in China on steel," he says. "It's a national issue. There are other products that will and are being affected as well, like concrete and drywall." StatsCan reports that between the third quarters of 2003 and 2004, the cost of Portland cement has climbed by 3.5%, roofing materials by 18.9%, wall board by 6.8%, and structural steel by 41.4%.
Add to that a severe labour shortage caused by the boom in construction province-wide and you have the formula for some potentially severe shocks on replacement cost, he advises.
However, the concern about adequate valuations is not completely shared by brokers specializing in commercial construction.
Steve Pavelich has focused on the construction market since he set up the Kelowna branch of Wilson M. Beck Insurance Services in 1991. Pavelich also serves on the board of the B.C. Construction Association. He says concerns about under-valuation should be tempered if a client is in the construction business.
Generally, he says, brokers are not around construction enough to identify under-insured commercial property, so they have to rely on client knowledge.
"When you're dealing with developers and contractors and people who know what they are doing, the onus is on them, as knowledgeable purchasers of insurance, to know what their product is really worth."
"If we do the course of construction, we have a basic idea what replacement cost might be," he says. Nonetheless, if Pavelich encounters a client with a building value that seems out of whack, he asks the client to get an evaluation done professionally.
For clients who own commercial buildings, that might be good advice regardless.
According to the Statistics Canada Capital Expenditures Price Statistics for the third quarter 2004, the non-residential building construction price in Canada jumped 2.6% since the second quarter and was 7.7% higher when compared to prices one year earlier. Vancouver recorded the highest quarterly change, up 2.9% and recorded a 10.4% increase since the same quarter in 2003.
Vancouver experienced major price hikes in most building classes. StatsCan's year-to-year comparison of the third quarter shows office buildings underwent a 10.1% increase in construction cost in the coastal city. Other types of buildings with hikes included warehouses at 12%, shopping centres at 11.5%, and industrial buildings at 13.7%.
Pavelich says he has not yet seen a major softening in the commercial property market. But, though liability rates are holding steady, ironically he has been seeing a certain amount of flex with liability premiums for the roofing industry. "There is still not a whole lot of capacity but the pricing has come down," he claims. "There is some light at the end of the tunnel for them (roofing contractors) and for once it isn't a train."
Jane Voll, chief economist with the IBC, suggests pricing for commercial liability will likely remain firm in the near term in order for companies to protect their underwriting position.
In an economic outlook report for the IBC last December, she noted "in the last 25 years, liability claims have grown faster than premiums in 11 times. At the same time, premiums have increased by 15% or more only three times since 1990 and have declined three times during the same period."
"In 2003, total premiums in the commercial liability market rose by approximately 30%, but this increase was nearly matched by the growth in total liability claims costs over that year."
She says the Canadian experience with court settlement is following the litigious U.S. environment, which has seen nearly one in seven jury awards amounting to $1 million or more.
"In Canada, court awards and legal expenses cost approximately $7.3 billion in 1998. By 2003, tort costs rose to an estimated $10 billion, roughly the same amount announced in the 2003 Federal Budget for federal health care transfers to the provinces and territories over the next five years."
Workshops/Readings