This article was produced in partnership with MyInsurance Broker
Karen Surca, of Insurance Business Canada, sat down with Tousif Ansari (pictured), commercial lines manager with MyInsurance Broker, to discuss the different classes of commercial construction and the corresponding necessity for comprehensive coverage as contractors deal with rising construction costs and new building methods.
The goalposts are changing in the commercial insurance field.
In an ongoing process of readaptation, many insurance providers are seeking creative solutions to meet the risk coverage necessary for planned larger-scale commercial projects this year.
As 2022 demand for commercial construction projects rises, so too must underwriters rise to the ever-increasing challenge of providing the necessary and appropriate level of insurance coverage for current and planned commercial construction projects in the pipeline.
Not only is the demand for commercial construction rising, so too are the premiums for many projects, developers, and companies, as both the scale and types of construction are changing.
According to Tousif Ansari, commercial lines manager with MyInsurance Broker, there are six distinct classes of commercial construction that must be considered by a commercial underwriter in the process of recommending adequate insurance coverage.
These categories are important, Ansari explained, to a commercial construction underwriter, and for an insurance provider, because they determine what type of construction is being implemented in any given project.
Each category has a different level of assigned risk used as a benchmark for commercial construction underwriters when assessing various risk factors.
“The premium rate is based on the type of construction of any property and any building,” Ansari stated.
“We have the one that is the most inferior (frame construction) and then we have joisted masonry and then non-combustible, masonry non-combustible, modified fire-resistive, and the last category, which is the most advanced construction version, is fire-resistive,” he added.
By extension, the construction that is least protective against fire damage will be deemed to have the highest risk factors and therefore premiums will be affected for the building company when buying adequate insurance coverage.
“Frame construction will have the highest premium rate versus the fire-resistant construction that will have the lowest premium rates,” Ansari said.
To help illustrate his point, Ansari used the example of the type of construction that a builder chooses when creating a restaurant.
“If your occupancy is a restaurant, most insurance companies will prefer to see at least a masonry non-combustible building so that it can have fire-resistant walls. If a fire were to happen, the fire will not spread into the neighbouring location,” Ansari said.
He pointed out that if the restaurant is designed to be a frame building, standard insurance providers, including MyInsurance Broker, will decline the opportunity to provide coverage for this type of construction.
Although mitigating risk is the name of the game for all players in the insurance sector, the trends in commercial construction are providing tough competition.
One such trend is the increased frequency with which city permits are given out to allow for frame construction projects.
This leaves many insurance providers with a more difficult job when trying to provide necessary risk coverage for planned commercial residential projects.
“Normally we have not seen a frame construction on a higher risk condominium, but we have seen buildings where now it’s a five-storey condominium or a five-storey apartment building and those are frame construction,” Ansari pointed out.
“Builders are taking the risk because of the lower cost of frame construction, but the premium rates are going to be really high in those categories because they are not fire-resistant. If there were to be a fire, it would be a total loss without the traditional steel-on-steel condominium construction,” Ansari illustrated.
Ansari insists that a conversation must be had with the city to help drive home the risk involved in using non-traditional frame construction.
“This is something that we can recommend to the city and have done in the past, but we can only recommend,” Ansari stated.
Ansari pointed out that what ends up happening is that MyInsurance Broker and other insurers are “not comfortable to write this class of business” and some of the proposed and current projects end up being sent to specialized insurance markets where they will ultimately pay higher premiums.
“They will likely have a limitation of coverage, or they may have a higher deductible as well,” Ansari added.
When faced with trying to cover some of these high-exposure construction projects MyInsurance Broker directs its efforts to recommending and ensuring that proper protective measures are implemented to offset the inherent construction risk.
“So even if it is a frame construction, we will see what the client has inside, such as a sprinkler system or a monitored alarm system, which helps to form our rating solution,” Ansari stated.
MyInsurance Broker, as Ansari highlighted, will be looking for evidence of implemented protective measures to offset the corresponding risk of fire or water damage. Both these risks could lead to catastrophic damage.
Ansari recommends that taking the necessary steps forms a crucial link to reducing the overall level of risk with the lower-cost methods of construction.
MyInsurance Broker and Ansari are more than cognizant that rates are on the rise.
Market factors are fueling these rate increases, including construction companies that are trying to keep costs down by utilizing ‘riskier’ construction types.
However, Asani argued that other businesses have been affected by rate increases as well.
“Businesses are coming out of the pandemic and then they are seeing a 5% or 10% increase on their policy. They don’t have much revenue to support that increase and face few available options. Other standard insurers are telling them the same thing,” Ansari said.
Despite challenging market conditions, Ansari is confident that MyInsurance Broker is more than prepared to walk the insurance tightrope, balancing between a happy client and a reduction in construction risk.
Tousif Ansari (RIBO, CAIB, DIP.CII, MBA) is an experienced AVP-commercial lines with a demonstrated history of working with traditional insurance markets in the field of underwriting and product development. His specialties include transportation, product and general liability.
