How Cat modelling can help your real estate clients – Canadian Underwriter

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With so many NatCats affecting the real estate property insurance sector, catastrophe [CAT] modelling is becoming a fixture for clients seeking coverage in a tightening market, a Hub International report states.

“Catastrophe (CAT) modeling is…becoming essential in real estate resiliency,” Hub’s report says of the U.S. real estate insurance sector. “One of HUB’s large real estate clients leveraged Cat modeling to show that the company was paying too much for the wrong risks. As a result, the organization reduced its loss limit by US$100 million, providing significant savings with an acceptable level of risk.


Buy/sell, rent/lease residential &
commercials real estate properties.

“In addition, the company identified significant exposures that affected the company’s long-term acquisition strategy.”

Hub’s Real Estate Outlook report specifically analyzes the U.S. real estate sector, although some parallels exist between the U.S. and Canadian real estate insurance markets.

In the U.S., Hub predicted commercial property pricing will likely increase within a range of 5% to 15% in 2024.

“Real estate owners should be prepared to demonstrate why their properties are fully prepared to handle risk to obtain coverage,” Hub’s report states. “Carriers are reducing total insurable values (TIVs) per location while applying increased deductibles and loss limits. Some carriers are not renewing policies with especially high risks.”

Commercial brokers are finding alternative risk transfer solutions for clients in the real estate sector who are finding it difficult to find affordable insurance policies.

Alternative ways to transfer risk include self-insurance, tenant default captives, spot captives, deductible aggregates (in which there is a limit on the deductible one needs to pay over a certain period), and contingent capital arrangements to generate capital short-term. (An example would be allowing banks to issue new securities on pre-negotiated terms to raise capital after a risk-based triggering event.)

On the residential or habitational properties side, premium hikes of between 10% and 35% are expected next year.

“While market indicators suggest that interest rates will remain stable, there’s no evidence that they will decline soon,” Hub’s report notes of the U.S. real estate market. “More than seven out of 10 real estate respondents to Hub’s Outlook Executive Survey say that economic challenges and unpredictability constitute a threat to profits in 2024, making it the most-commonly identified risk to the bottom line.

“That fear is already playing out. Vacancy rates for office space hit a record high of 13.1% in mid-2023, and growth in retail and multifamily housing has slowed.

“The industrial sector remains a bright spot in commercial real estate, with rent increasing 8.9% compared with 2022, thanks to growth in e-commerce and manufacturing.”

Real estate sector trends identified in Hub’s report are similarly playing out in Canada’s real estate market. This would suggest parallel approaches taken by P&C insurance providers north of the border.

In Canada, office vacancy rates sit now at 14% and could rise as high as 15% toward the latter part of 2024, in part due to hybrid office models, per a report by financial firm Colliers Canada.

And the slowing of the Canadian economy has led the Canadian Mortgage and Housing Corporation (CMHC) to reduce its estimate of the number of houses built by 2030.

“Last year, we projected that, by 2030, there would be 18.6 million housing units in Canada,” says a September 2023 report by CMHC. “Now, we project 18.2 million units (compared to our estimate of 16.5 million existing units in 2022).

“An important reason for this decline is the current shortfall in housing construction. Materials have gotten more expensive, labour is in short supply, and it’s hard to get financing for construction.”

Feature image courtesy of iStock.com/xavierarnau

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