Evolving protections

Insurance as a risk management strategy is hundreds, if not thousands, of years old, but developments in the economy, the environment and legal codes are changing the way insurance is handled in the property management industry.

Here, IREM members and insurance industry representatives around the world weigh in to gauge how experts are adapting so their practices and properties are well-positioned to deal with unexpected adversity.

Canada

The ramifications of legal changes in Canada’s insurance markets are becoming more evident. Headlines have drawn attention to federal legalization of cannabis for recreational users as of 2019, which has had implications for some commercial insurance, such as host liability for serving cannabis. But William McCarthy, president and Executive CPM at W.P.J. McCarthy and Company Ltd. in Barnaby, British Columbia, notes that managers of strata and residential units are being “proactive” to ensure smoking policies also restrict cannabis smoking. “Insurers are also questioning landlords and property managers on the intended use, looking for potential violations [by illegal growing operations],” McCarthy says.

“No coverage is adequate if it does not cover what you have budgeted for and what you have paid for.”

—William McCarthy, CPM

The emergence of broad water damage coverage in 2015 has perhaps affected property managers more directly. Flood insurance was only available to commercial properties in the past, but now residential properties can be insured for flood damage. “The residential flood coverage is complex and limited in scope,” notes Greg Mansfield, education department manager at the Insurance Brokers Association of British Columbia. “Insurance brokers must be careful to understand the differences between insurers for this coverage and advise their clients accordingly.”

McCarthy advises property managers and their insurance consultants to read flood policies explicitly, given that the wording is paramount: “No coverage is adequate if it does not cover what you have budgeted for and what you have paid for. You have to study your insurance coverage far more closely than before.”

The issue is not an abundance of new policies, per se, but fluctuations in the types of policies required, according to the risk management team at Oxford Properties in Toronto: “What we are seeing are policies like cyber[-liability] that were not as prevalent in the past are becoming more so. Others may be political risk and credit risk policies.” They also note that a competitive insurance market in Canada has driven rates much lower than other countries, but Canadian properties are seeing more pronounced rate increases due to shifting market dynamics, including consolidation in the industry. McCarthy adds, “It’s hard to find options, in terms of coverage, and get competing bids. There’s a lot more similarity, and prices are going up.”

Japan

In Japan, the property management industry is currently unlicensed, which means that management companies can operate freely and are not required to have liability insurance. President and CEO of Shonan Property Partners Co. Ltd. (Kanagawa), Yoshiaki Kase, CPM, notes that rental management liability insurance is available through member associations such as the Japan Property Management Association, but “the idea of this kind of insurance hasn’t caught on, and there is nothing compelling property managers to buy it,” he says. Smaller companies are wary of the cost of application fees and dues, and property owners who are not real estate operators are excluded from this type of insurance

“The idea of this kind of [rental management liability] insurance hasn’t caught on, and there is nothing compelling property managers to buy it.”

—Yoshiaki Kase, CPM

Japan is also seeing shifts in the insurance business in response to the country’s laws, demographic trends and environmental impacts. General manager at Tokyo-based Owner’s Agent Inc. and IREM Japan President Hidekazu “Eddie” Sakihara, CPM, highlights regulations currently being considered by Japan’s legislature, the National Diet, to regulate the rental management industry: “The development of these laws could strengthen the operations of rental management companies, and insurance policies designed for rental management companies could increase. These insurance policies could become a way for management companies to differentiate themselves in the market.”

Insurance premiums in Japan have increased due to a rise in non-life insurance claims from natural disasters such as typhoons. The advisory rates, which serve as reference calculations for insurance premiums, show two consecutive years of increases: in 2018 the average premium increased by 5.5%, and in 2019 increased by 4.9%.

“The development of these laws could strengthen the operations of rental management companies.”

—Hidekazu “Eddie” Sakihara, CPM

Japan’s aging population has led to new policies being marketed to property managers. Previously, a renter’s joint guarantor (known as a cosigner outside of Japan) was liable for damages that occurred after the resident died alone, a phenomenon known as a “lonely death.” “The adoption of revisions to Japan’s Civil Code has been a factor in the increase in lonely death insurance,” Sakihara says. These revisions will reduce the scope of responsibility of guarantors, and the country is expecting an uptick in non-life insurance claims and nonpayment guarantee services.

Brazil

Brazil’s real estate market experienced dramatic booms prompted by the 2014 World Cup and 2016 Summer Olympics, but they were followed by recession as growth and credit expansion slowed. Vice president of Rio de Janeiro-based CIPA Administradora, Maria Teresa Mendonça Dias, CPM, notes that these developments have influenced insurance there: “In both scenarios, we can think of several types of insurance that directly contributed to the balance of possible losses, such as the civil liability guarantee for works, residential and commercial insurance for landlords and tenants, mandatory condominium insurance and guarantees such as the guarantee of lease and capitalization.”

“There have been digital transformations, changing the way consumers interact with insurance.”

—Maria Teresa Mendonça Dias, CPM

Brazilians have a growing awareness of insurance and are increasingly concerned with protecting assets: Data from the National Federation of Private Pension and Life (FenaPrevi) shows that overall insurance contracts grew 14.8% from January to April 2019 compared with the same period in 2018.

Condominium insurance became mandatory in 2011, and other trends include the increased acquisition of optional insurance policies, including rental guarantee, civil responsibility and residential insurance that includes both construction and property.

Dias says there have also been digital transformations, changing the way consumers interact with insurance, and a “democratization in the products offered, such as more agile plans, a greater number of interest-free installments, nonstandard rates, and simpler and faster contracting.”

South Korea

Seok Jin Ko, CPM, director of PyungKang PMC in Kwangmyong, South Korea, says insurance strategies in South Korea are becoming more detailed and diversified as tenants’ needs grow.

“Insurance strategies in South Korea are becoming more detailed and diversified as tenants’ needs grow.”

—Seok Jin Ko, CPM

Most insurance for safety hazards is regulated by the national government and is legally required. “Basic fire, gas safety and personnel injuries are mandatory policies,” Ko says. Any properties with special features, such as elevators and parking spaces, require a separate accidental damage policy as well.

“New types of buildings and businesses will produce new types of risks that are yet to come, and insurance policies are also evolving with the ever-changing society we live in,” Ko says. He notes a few policies that have drawn attention recently in South Korea; for example, the market has seen “down payment insurance where tenants can insure their safety deposits against landlord’s events of default. Also, there are special policies that cover natural disasters, such as earthquakes and hurricanes.”