Best terms, bad deal: Secretive condo insurance price model may be boosting rates

Dan Fumano, Lori Culbert - Vancouver Sun
Friday, August 14, 2020

This article was copied  from the Vancouver Sun, August 2, 2020

Best terms, bad deal: Secretive condo insurance price model may be boosting rates

'Best terms pricing' means all the insurers who cover portions of a strata policy get paid based on the highest rate offered. The practice may be a major reason why rates are crippling owners.

Author of the article:
Dan Fumano, Lori Culbert
Publishing date:
Aug 02, 2020  •

When the insurance bill for Ian Gilhooley’s Coal Harbour condo building leaped 225 per cent this year, the retired financial executive started sleuthing — and discovered that a little-known, behind-the-scenes practice called “best terms pricing” was one of the factors that drove up his rate.

And it made him angry.

In the common, but not widely understood, pricing practice, several insurers bid on covering portions of a condo’s policy. Yet the final premium is set not by an average of all bids, but by the highest price.

“It’s just not a good thing for the consumer,” Gilhooley said. “It’s obscene.”

While about half of Metro Vancouver residents live in strata properties, and while many of them have been shocked this year by big increases in their insurance costs, very few are aware of the intricacies of how those prices are set.

Even Gilhooley — a retired securities industry professional who is financially literate — was stonewalled by his building’s insurance broker when he tried to learn how wide the gap was between the lower initial bids and the final high price.


“There is no transparency on pricing,” he said.

Gilhooley isn’t the only one who believes there needs to be serious government scrutiny of “best terms pricing,” especially in a market that has fewer insurers willing to take on the perceived higher risk of multi-unit buildings in an expensive real estate market.

While this arcane pricing model is understood by very few regular strata residents, it has been highlighted as a serious concern by both homeowners’ advocates and the province’s financial regulator.

How “Best Terms Pricing” raises prices


B.C.’s Finance Ministry says it is waiting for the results of an investigation by the financial regulator and the practice could be legally banned if the evidence supports such a move. The industry association representing insurance brokers, though, denies that best terms pricing is widespread or a cause of rising costs for consumers.

Today we peel back the layers of this process to try to reveal who gets the “best” in best terms pricing — and what can be done to help owners with staggering strata fee increases.

“I’ve heard from literally hundreds of people that have faced these increasing strata insurance costs from all over the province … (and) best terms pricing is very often cited as a contributing factor,” said Todd Stone, the Liberal housing critic, who introduced a private member’s bill in February to try to ease other types of financial pressure on condo owners.

“This is where government, I think, has to step in: when the market can’t seem to act in a way that has the consumer first and foremost in mind, and the behaviour of the industry is just so out of line with what anyone would consider to be reasonable.”


95% of stratas affected

The new Crown agency that regulates insurance, the B.C. Financial Services Authority issued an interim report in June that concluded the strata insurance market was unhealthy and “not fulfilling the needs of British Columbians.” It also highlighted “best terms pricing,” a method that has been used across Canada for years but is now believed to be one of the reasons behind prices skyrocketing in this hard insurance market.

A preliminary analysis of new data collected by the Authority shows that of 500 stratas that renewed their insurance policies in April, best terms pricing was at play in 95 per cent of them. And this method can lead to “very substantive” increases in rates for some properties, although the exact price jumps and how many buildings were severely affected are still being calculated, Authority vice-president Frank Chong said.

How does best terms pricing work? Here’s a simple explainer of a complicated process:

• Large condo or townhouse buildings are worth many millions of dollars, which can be expensive to repair if there is a large damage claim.To spread out the financial risk, typically more than one company provides insurance for the building. A broker finds several insurance companies to share the policy.

• Each insurance company indicates the percentage of the policy it is willing to cover and the rate it will charge.

• Once the broker gathers enough companies to cover 100 per cent of the policy, the cost of the premium is not based on an average of all the bids, but rather is set by the highest proposed rate.

• Thus, all the insurance companies get paid the highest rate, regardless of their own lower bid. And that drives up the cost of the policy.

The Condo Home Owners Association of B.C. issued its own report on escalating insurance rates in June, and it highlighted best terms pricing as well, saying the system resulted in a “substantial elevated cost.”

This week, the association’s executive director, Tony Gioventu, said a lack of transparency in the industry has buried details about how this process has made premiums rise. “The difficulty is trying to get real numbers.”

Gioventu, though, said the strata council of one condo building in the Tri-Cities was recently able to obtain the details of how best terms pricing inflated its bottom line.

The first 70 per cent of the strata’s insurance was covered by seven insurers, averaging a rate of 23 cents per $100 of coverage, Gioventu said. But rate for the final 30 per cent ended up coming in at 46 cents per $100, he said, which “basically doubled the cost of their policy.”

The premium for this year came to almost $500,000 — more than triple the previous year’s rate. In order to pay for the new insurance policy, strata fees shot up by 22 per cent, he said, which meant each unit owner was on the hook for hundreds of extra dollars a month.

“You rarely ever get to see that information,” Gioventu said. “The brokers don’t want to disclose their commissions and how the pricing works.”

He believes the brokers, whose job is to secure the policies for stratas, aren’t pushing back against the insurance companies because the higher the policy, the higher the commission they collect. “It’s totally a problem.”

‘This is certainly a concern’

Best terms pricing is the “predominantly used pricing method” in B.C.’s strata insurance, the Financial Services Authority’s Chong said after a preliminary review of the new data his agency has collected, but he doesn’t believe it has a large impact in every case. And even if the industry were to completely abandon this method, that wouldn’t, on its own, fix the problems facing this province’s unhealthy strata insurance market.

“But, this is certainly a concern we would like to better understand,” said Chong, who believes B.C.’s insurance regulator is the first in Canada to “dig deep” into pricing practices.

“Best terms pricing can have substantive increases on those higher risk properties, absolutely, there’s no doubt about it.”

As an example, Chong said, a broker might struggle to find an insurance company to cover the final five per cent of a policy. An insurer hesitant to take on more risk might agree to fill the final piece of the puzzle, but only at a steep price.

Any effort to clamp down on this practice, Chong cautioned, could have the effect of more companies being unwilling to insure stratas. His agency has instead begun to meet with brokers to discuss whether the industry would “consider looking at alternative ways in which we can move away from best terms pricing.”

To help the public better understand the practice, the Financial Services Authority collected data from brokers who renewed insurance policies in April for about 500 large stratas, with a total of 32,000 units. The agency found best terms pricing was a factor in 95 per cent. Insurance premium jumps ranged from minimal to more than doubling, especially for higher-risk properties. A complete analysis of the data will be revealed this fall in a new report, Chong said.


The head of the industry association representing B.C.’s insurance brokers, though, said the Authority must be using a different definition of best terms pricing than his group if they are reporting it’s that widespread. He argues it is not common, and that escalating premiums are primarily due to the unhealthy insurance market.

“Typically, it’s extremely rare and it’s probably been over-exaggerated as to the impact that it represents on pricing,” said Chuck Byrne, executive director of the Insurance Brokers Association of B.C. Best terms pricing “is a symptom of the tough market, but it isn’t a driving element.”

Byrne, who is in talks with the Authority on the issue, believes brokers should disclose to stratas the details of best terms pricing contracts, noting brokers are legally bound to ensure the best interest of the consumer.

Consumers don’t usually know, though, how much brokers are pocketing in commissions, which can often run as high as 20 per cent. That should change soon because the government said last month it will start to require brokers to disclose their commissions. That announcement was part of the NDP’s “first steps” to address the strata insurance crisis, which also included closing loopholes related to depreciation reports,but did not mention best terms pricing.

Finance Minister Carole James did not have time this week to answer our questions, a representative said, but her office issued some written answers that said government supported the Financial Services Authority’s investigation into best terms pricing, a national practice that “is compounded in a market like British Columbia when capacity is scarce, and insurers are highly selective on risk.”

The ministry also cautioned that banning this pricing scheme could scare insurers away, and therefore lead to higher costs for owners. But it added that if it is proven best terms pricing is having a “material impact” on some insurance fees, then the Authority has some regulatory options it could pursue or “could launch a formal investigation into the practice, which could lead to legal orders to cease this practice.”


It was a shocker

Best terms pricing was at play when the insurance bill tripled for the well-maintained, 56-townhouse, Oliver’s Landing complex in Furry Creek. Monthly strata fees for the owners — many of them seniors on fixed incomes — have leaped up by 42 per cent.

“It was a shocker,” strata council president Gordon Wallace said. “It was very emotional.”

On Feb. 27, the building’s broker estimated the insurance would be double the previous year’s rate of $100,000, but cautioned at least one more company needed to be found to complete the policy. Just four days later, though, the strata council was told the final price would be $300,000.

Wallace doesn’t know all the details, but after speaking with his broker and property manager, has confirmed best terms pricing was used in the transaction. The retired businessman understands why this is an attractive system to the insurance companies and the broker.

“From a business perspective, I think I understand it, but I don’t like it. I don’t know what the solution is. Could you find an average price? I don’t know,” said Wallace, whose strata council has met with an insurance risk adjuster to ask what the council can do to prove the development is low-risk.


He has advice for other strata council presidents.

“If I knew what I know now, I would be asking the question of the broker: Is that best terms pricing applicable to our coverage? I would be trying to get more detail about the companies’ underwriting percentage. And I’d look for some schedule, if I could, to see what one or two or three companies are driving the price up,” Wallace said.

And, he added, he would tell a broker to keep looking for insurance companies, even after the policy is filled, because there’s a chance a cheaper rate could be found.

‘They are outrageous’

Stone, the Liberal critic, argues government action is required to protect consumers because so many insurers have left this hard market. There are options available to the NDP, such as changing the regulation on how these policies are priced, said Stone, who was the transportation minister in the previous Liberal government.

“Government can absolutely intervene,” he said. “I think that is the expectation of the public when an industry that is, without question, taking advantage of tens of thousands of British Columbians with insurance increases that are so far beyond reasonable, they are outrageous.”

While the Insurance Bureau of Canada, the lobbying association for insurance providers, confirmed that best terms pricing exists, it said it doesn’t know its scope or impact because it is a tool that brokers single-handedly decide whether to use. Aaron Sutherland, the bureau’s Pacific vice-president, said “many insurers” will not participate in the pricing scheme.


The bigger influence on insurance rates, Sutherland argued, is the claims for water and other damage at local stratas, which he said has been increasing in recent years. That is “the key challenge in need of addressing.”

Other industry insiders have previously said that poorly constructed new buildings and a lack of maintenance in older ones have driven up the frequency and severity of claims in B.C., especially for water damage.


Gerald Hinkley, though, said his small Port Moody townhome development had only one minor claim in more than a decade, is well-maintained, and keeps its depreciation reports up to date. And yet, the complex’s insurance went up by 120 per cent in March.

“There were no issues, so you would think we would be a prime candidate for an insurance company to get on board, because we are the lowest risk you can possibly ask for,” said Hinkley, who is the strata council president.

He does not know what caused his insurance to go up. But he’s frustrated that after asking for quotes for four months, the strata council was notified of the rate increase hours before the policy was set to expire.

That hit owners hard. “It was a lot of money, but it had to be done. Not just a couple of months later, it had to be done in six hours. How are you going to get owners to cough up $3,000 each in a few hours?”

Both Hinkley and Gilhooley worry about how much more insurance will increase again next year, if solutions are not found soon.

“The government says we have to have 100 per cent insurance,” Gilhooley said, “but there’s no competition in the marketplace, so you’re a hostage.”