Condominiums carry a number of risks, some of which owners and condo boards may not be aware. In examining these risks and the necessity of sound reserve funds to cover future maintenance, the actuarial profession has several insights to offer in this area. In this episode we speak to Henry Chio, FCIA and John Nguyen, two of the authors of the CIA’s latest insight statement on the longevity of condo infrastructure.
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Fievoli: Welcome to Seeing Beyond Risk, a podcast series from the Canadian Institute of Actuaries. I’m Chris Fievoli, Actuary, Communications and Public Affairs at the CIA.
The most recent insight paper from the CIA deals with the risks associated with condominiums, what condo boards and owners need to be concerned with and how actuarial expertise can help out. So, joining us today are two of the authors of this insight statement, CIA members Henry Chio and John Nguyen.
Thank you both for joining us today.
Nguyen: Happy to be here.
Chio: Thank you. Thank you for having us.
Fievoli: So to start off, maybe just explain for us why would actuaries have any interest in the operation of condominiums?
Chio: Maybe as a start, I think it’s always good to give a bit of a background on what we do as an actuary. I guess, at least the people that I’ve talked to, not a lot of us know what exactly we do.
So basically, the way I would kind of describe it is that as actuaries we are trained to draw insight from the data analytics work that we do, and we formulate them into a chain of actions to drive a set of specific goals. And those goals could be setting the price to be more accurate for insurance contracts or setting reserve aside to allow the insurance company to pay out future claims for years to come. So I think these are valuable skill sets that actuaries possess, and it can help put things in perspective in uncertain situations.
And when I think of running a condominium operation, there are many different types of risks that can go wrong, and I think that’s one of the areas that might be of interest. As pointed out in a recent research paper, Longevity of Infrastructure, written by Jean-Sébastien Côté and Jon Juffs, there are several risks associated with setting and maintaining adequate condo reserve funds and quantifying and managing risks are part of what we do as actuaries. So, I think this topic would be of interest to our fellow actuaries.
Nguyen: Yeah, just to add on to Henry’s answer. It’s a topic that’s really close to home for a lot of us; it literally is home for a lot of us. And the condo boards that run and manage our buildings aren’t necessarily knowledgeable on all these topics. And there’s a lot we can do to help them out. But I think it’s not just condos that we should be interested in.
We live in a time with a lot of change, a lot of new trends in the world. So, it’s good for us to be looking at new opportunities to apply our traditional actuarial skills so we can help people with the new, changing environment.
Fievoli: Okay, you mentioned a research project, a CIA research project, that was done that led to the development of the statement. Can you share with us some of the things that project discovered?
Chio: It is an interesting read. So, for anyone who hasn’t read it, I highly recommend reading it. So, the research paper itself digs deep into kind of the mechanics of the operation of a condo reserve fund and how the individual condo owner contributes to those reserve funds and basically expanding on, you know, where does your money go, basically. And it identified some issues the condo industry is facing and even attempted to create a reserve fund model, which actuaries like to do, to evaluate the funding status and kind of estimate the likelihood that the reserve fund could go below a certain level.
So, I myself found that to be a fascinating topic and when I learned about the opportunity to develop an insight statement about this topic, I became quite interested in exploring this further mainly because of my background in actuarial pricing. I’ve priced a few realty businesses in the past and I myself was a condo owner before. I think that’s aligned with what I wanted to learn about more.
Fievoli: So we know that there are insurance products available for condominiums. Why can’t condo owners just rely on those to deal with any unexpected losses?
Chio: That’s a really good question. So, when it comes to insurance, I think it’s a pretty complex topic and I think there’s not a whole lot of people who fully understand the mechanics of insurance.
So, to quickly start off, the principle of insurance is to basically spread risk across a large group of insured such that when an insured event occurs to a small group of insured, there is a larger pool of money available to help the people who are in need. The problems start to arise when the accidental losses become less accidental, but more routine. And this could lead to the overall lost cause for that segment that the insurance company is trying to insure becomes higher and higher.
In that instance, the insurance company will need to demand a higher premium in order to surface this claim cost. And this can down spiral. In the event that the claims keep on climbing and the premiums become higher and higher, that could lead to kind of an insurance availability issue. In the most extreme cases this segment can be seen as disjoining capital and the insurer would just back off from this segment entirely.
So, to answer your question, why can’t condo owners just rely on that insurance to handle unexpected losses? I think to some extent, yes, that’s what insurance is here for. But at the same time, condo owners have a role to play, and I guess the condo boards have a role to play to make sure the landscape is sustainable and making sure that the claims that are occurring are purely accidental but not on a routine basis, so to speak.
Nguyen: And just to add on that, from my perspective, the preventative measures that we’re recommending generally cost a lot less than paying the full claim for the damage later on.
So, I used to work in health and dental consulting, and we recommended the same thing. We recommended that our clients put more of their money into preventative dental care, for example, as it will save them a lot more in the long run, so they don’t have to pay for all the major dental surgeries that may have to be done if preventative measures weren’t provided before.
Fievoli: Let’s talk about some of the risks that condo owners face that they may not be aware of. You referenced a few of them in this paper. May be just share some of those with us.
Chio: Yeah, absolutely. So, I think there are a few that are top of mind and the first one is, definitely in my opinion, the proper oversight of the condo board in terms of the approach that they are taking to maintain the upkeep of the condo is a big one.
Because depending on the approach that is taken, the result might not be surfacing for everyone to see in a short period of time, but it could have a detrimental impact for years to come. I’ve heard accounts of using insurance to cover regular wear and tear repairs, but that’s not a sustainable outcome. So I think by having proper oversight in terms of the actions that are being taken, that’s a big one to keep in mind.
The other one that people might not be that aware of is climate change, in my opinion. It’s hard to tell exactly how much of that impact will add to the risk of condos, but we all know that extreme climate events are predicted to be more frequent and that will put pressure on making sure the maintenance of the condos are up to standards because if the regular upkeeps are not there and you have heavy extreme weather events that would put a lot more strain on the structure and make existing problems even worse. And we do expand on this topic more in depth in our insight statement.
Fievoli: Alright, and let’s wrap up by asking what opportunities do you see for actuaries to be more influential in this space and possibly collaborate with other professions?
Chio: Yeah, as mentioned at the beginning, I myself think actuaries bring a set of unique skills. It’s a very broad skill set that we have. And I think by just having a seat at the table to start asking questions and validating whether the actions being taken or the actions that are not being taken, are they aligned with the long-term goals of keeping the condo building in a good state to maintain its lifespan, could be a start.
We’ll see. We’re not experts on everything, so it makes sense to collaborate with other professions like engineers and accountants to make sure there is a well-rounded opinion when it comes to making sure the operations are run efficiently.
Nguyen: Some of the more obvious opportunities are helping setting the reserve fund, just like we do with insurance companies, projecting cash flows that we would expect in the future, and just managing the risk in general.
So, Henry mentioned a couple of the risks earlier that we wrote about there. There are all the risks such as changing interest rates and inflation that we need to deal with. So yeah, I think anywhere where we can find opportunities to quantify risk where we can add value, would just be a good area for us to do a little bit more research and figure out how we can contribute to it.
Fievoli: And we encourage everybody to check out the insight statement that’s on the CIA website. I’d like to thank Henry and John for coming on the podcast today.
Chio: Yeah, no worries. Thank you.
Fievoli: If you enjoyed today’s conversation, we invite you to subscribe to our podcast series and catch up on prior episodes. And if you have any ideas for future episode or if you’d like to contribute to our Seeing Beyond Risk blog, we would love to hear from you. Contact information can be found in the show description.
Until next time, I’m Chris Fievoli and thank you for tuning in to Seeing Beyond Risk.
This transcript has been edited for clarity.