Insurance What to Expect in 2022

What to Expect in 2022

Trends impacting Canadian apartment owners

by Andy Schwartze

As we move into 2022, there are two main developments in the world of insurance that are worthy of attention. The first relates to property insurance rates, and the second, to developments in the field of cyber insurance.

Nobody needs to be reminded that property insurance rates spiked significantly over the past three years. When one compares what was being charged in 2018 versus now, the difference is significant. In part, the increase was triggered by a long-delayed rate adjustment that should have started way back in 2013. The fact that most insurers were reluctant to do so, in fear of losing business to less aggressive rate hikes by their competitors, simply delayed and thus more seriously impacted the inevitable pain to come. The push ultimately came from the numerically smaller, but very influential reinsurance community, whose influence on the cost of our insurance is typically underestimated.

Most insurance professionals have a limited understanding of how reinsurance works, and how the four fundamental types of reinsurance support affect the ability of our insurers to accept and charge for their exposures. Properties that had once enjoyed seriously discounted rates were shocked to have their costs doubled. Typically, newer up to date buildings, constructed well and sprinklered, had been enjoying very thin property insurance rates. At the other end, older wood frame multi-residential buildings had also enjoyed pretty low rates, only to see them double or even triple. Both “extremes” found themselves under serious scrutiny. Some insurance professionals blamed COVID-19, but the pandemic has become a liability issue, not a property one.

The “smart money” now believes these rate adjustments are mostly behind us and that 2022 will be a much more moderate year

for increases. Insured values will, of course, be impacted by the new inflation levels that have burst upon the scene. Replacement cost insurance means covering the entire building on that basis, not just part of it. Expect underwriting managers to increasingly request insurance appraisals. This is already common in the U.S. and the cost of these is cheap. A big high-rise can have one done for $750 and it will be usable for quite a few years before requiring an update. This year we expect the combination of insured replacement costs and rate increases to result in single digit premium impacts. There will be exceptions, but by and large the market is settling down.

This brings us to the 2nd topic—one that is much more complicated. Cyber insurance is becoming an increasing concern for many corporate managers. For the insurers who rushed into it, the results have been painful with too little underwriting, too broad a list of insured events, and not much more than a good guess at what premium to charge. This is typical of the “early days” experienced by any new insurance initiative or product. Consider the fundamental difference between the insurance that you buy on your home, and how that compares to a policy protecting against a cyber incursion. Your home insurance is intended to pay in the event of a sudden and unexpected disaster (fire, wind, water, etc.). Now, imagine if there was an arsonist threatening to burn down your building all day, every day, and that was his sole intent. What would your home insurer say to that? Essentially, cyber crooks are a persistent threat that aren’t so “sudden and unexpected”.

Insurers in the cyber space are learning some harsh lessons. Currently, we are hearing that these underwriters are seeing $3 in claims go out for every $1 taken in premiums. As a result, we already have what is referred to as a “hard” market for this type of insurance. In a hard market, three things happen. First of all, premium rates go up sharply. Secondly, underwriting intensifies such that we are now seeing applications as long as nine pages of detailed questions on IT systems, protocols and preventative procedures. Finally, coverages become more restrictive and start to exclude more types of uncontrollable claims. We think that the insurer approach to ransomware coverage is going to change significantly in the coming years, although it is not yet entirely clear to what extent.

The most significant leader in cyber insurance in the U.S. in 2020 was Chubb. We’ve seen a major reinsurer enter the field via an underwriting facility. An American insurance underwriting firm named after Tom Ridge, the first Homeland Security Secretary, has recently entered the Canadian marketplace. The list is growing but the underwriting is becoming increasingly complex, and the warranties are expanding. The cyber insurance space is in its infancy and will struggle to scale itself to a size that enables company managers to understand how to coordinate underwriting, rating and claims in such a way as to create a balanced and profitable niche that will go the distance. Until that happens, insurance buyers will have to remember that they find themselves in an earlystage insurance space that still has much to learn.

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