The practice was identified in a report this summer as one of several factors inflating strata property insurance premiums in B.C.
Stratas and property owners stand to see major savings on insurance premiums when the practice of “best terms pricing” is eliminated at the end of this year.
However, those in the industry say the change is just one more step toward rehabilitating the strata insurance market in B.C., which was described as “unhealthy” in a recent B.C. Financial Services Authority interim report.
“This is great news — if it works — and really time will unfold to see what the effects are,” said Tony Gioventu, executive director of the Condominium Home Owners Association of B.C. “I think it’s an additional tool that will help to make the insurance industry more competitive and will help to ease the pressure on costs for consumers.”
The Financial Services Authority, which is responsible for regulating the private insurance sector in the province, has identified best terms pricing as one of many factors inflating premiums.
According to data the authority collected from properties that buy strata insurance, 94 per cent were negatively impacted by best terms pricing, and overall premiums were 27 per cent higher than they would be if a different pricing method was used.
The increases trickle down to owners in the form of higher strata fees. About half of Metro Vancouverites live in strata properties, and all B.C. stratas must have insurance.
To insure strata properties, brokers gather quotes from multiple insurers who share the risk of insuring properties that can be worth millions of dollars and expensive to repair. This is referred to as a subscription policy.
Each insurer submits a bid, but under best terms pricing instead of the cost of the premium being based on an average of the bids, it is based on the highest bid, even if most quotes were lower.
The authority has received assurances that the practice will be phased out by Jan. 1. This will give insurers time to adjust their computer systems so they can accommodate different prices for each insurer. Stratas will still be on the hook for paying their current insurance premiums, but will likely notice a difference when they renew their policies.
Chuck Byrne, executive director of the Insurance Brokers Association of B.C., said the devil will be in the details, which are few at this point.
“The insurance companies that are active in the strata market are the ones that are setting the pricing terms and other related policy terms, and if they’re willing to go to this split-rate approach then obviously that’s battle one, that’s the whole story, and it’s a matter of seeing how that will work in practice,” Byrne said.
However, there is concern among brokers that the change could deter some insurance companies because it is an added complexity.
“Again, it’s fear of the unknown. It’s not knowing how this will all work and how it will be accomplished. Hopefully, those details can be worked out really quickly and easily,” Byrne said.
B.C. Financial Services Authority vice-president of regulation Frank Chong said he sees this as a positive step by the insurance industry and believes it will be positive for British Columbians.
However, he added, “I would caution generally that while removing best terms pricing will alleviate some of the pricing pressures, it’s not the core reason for the increase.”
Among the other factors named in the authority’s report is claims costs, with insurers losing money because of minor claims due to poor building maintenance and bad construction.
“Our industry recognizes the challenges consumers have faced in the strata space over the past year. As it relates to best terms pricing, many insurers never entertained that practice and those that did, in light of the consumer concerns, have certainly moved away from it in conjunction with the regulator,” said Aaron Sutherland, a vice-president with the Insurance Bureau of Canada.
“We believe at its heart these concerns are a symptom of the challenges and we really need to attack the disease, which is claims costs as it relates to strata corporations in this province.”
Byrne said he would like to see a standard unit definition included in B.C.’s strata regulation, which would clarify situations when the building’s or the unit owner’s insurance applies, and a cap on loss or deductible assessments. He believes those changes would go a long way to stabilizing the strata insurance industry.
The B.C. Financial Services Authority is expected to release a final report on the province’s strata insurance market, which will include next steps, by the end of this year.
The government has already made two changes to the Financial Institutions Act around renewal notice for strata corporations, insurance agent commission and referral fees for strata property managers.
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