Water Management Questions Every Property Developer Must Answer
October 2, 2024
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When speaking with prospective clients, we often get asked if we can quantify the Return on Investment (ROI) of a Flood Mitigation System.
While there is no simple formula to calculate the ROI of a Flood Mitigation System, we will do our best to cover all the elements that can impact the ROI of such an investment while also sharing why we believe such systems should be implemented for good governance and risk management.
We have broken down our analysis into two segments to better understand the need for such an investment. The first segment focuses on insurance and risk, while the second focuses on operational advantages.
Regarding insurance and risk, the first part is to identify the likelihood of water loss within the built environment.
According to an article published in the Canadian Underwriter, condos have more than a 30% chance of making a claim yearly. While we encourage you to come to your own conclusions using your own data set, one could assume that similar ratios apply to multi-residential rentals and commercial high-rises. In addition, according to a study from the Canadian Institute of Actuaries, water damage represents 48% of the claims, making water the most common cause of loss within the built environment. By utilizing the above two statistics, one can expect condos, if not all high-rise buildings, to have a 14% chance of making a water claim yearly or once every seven years.
The second part evaluates the “size and/or magnitude” of this risk.
When evaluating the magnitude of this risk, one should consider the ever-increasing insurance costs, one’s insurability, the size of the loss and the deductible payout in the event of a loss.
A recent article in The Canadian Underwriter indicates that while insurance costs have been rising for 13 consecutive quarters, there is no end. For property owners and managers, this means that you need to spend energy making your risk more attractive to underwriters to ensure that insurance capacity can be carved out for your business book at competitive market rates. As indicated in the above section, since water is the most common cause of loss within the built environment, it is only good governance to implement some form of water risk mitigation to appeal to the Underwriter. In some market segments, the industry has seen insurance costs spike as high as 780%, making it impossible for the landlord or condo board to recoup such an expense.
Given this challenging insurance market and the capacity reduction resulting from the exit of many underwriters within the Commercial Property Insurance space over the last few years, property owners and managers have limited options, if any, regarding insurance. Some have even been denied coverage. Differentiating your risk profile can create capacity and give you a competitive advantage.
As it relates to water claims within the built environment, many articles have been written using different data points that identify that the average size of a claim ranges from $150,000 to $250,000. More importantly, it has been found that the cost incurred for such losses has increased by 400% over the past ten years. Leveraging technology such as Flood Mitigation Systems to reduce the size of a water loss is a great way to reduce your loss impact.
Another essential element to consider is the size of your deductible. Over the last few years, deductible payouts for some, if not most, have increased from $25,000 to $250,000 and even $500,000. In effect, what we have seen is that the underwriters have effectively passed on the risk of claims beneath the deductible threshold to the property owners and managers. These property owners and managers are now self-insured until they reach a claim that exceeds the deductible payout, which may never happen if you are one of these individuals with a $250,000 to $500,000 deductible.
Some of the apparent benefits/savings that come from installing a Flood Mitigation System include avoiding:
Some less obvious yet essential advantages include:
When a leak happens, it can go unnoticed for a long time, which can deteriorate the integrity of your building’s infrastructure over time. Installing a flood mitigation solution allows you to monitor the leaks inside your property and take immediate action when notified. Over time, if your asset/building has been well attended to, your property can fetch a higher valuation than a comparable asset nearby that may be distressed due to damages over the years.
Managing, maintaining and monitoring a multi-storey high-rise can be laborious and daunting. By leveraging technology such as a flood mitigation system to automate such arduous tasks, one can help reduce operational and payroll expenses.
By leveraging technology and installing a smart flow monitoring device as part of your Flood Mitigation System, you can effectively identify small leaks such as toilet and faucet repairs, issues with blow-down cycles and many other problems that can go undetected for long periods. It is estimated that 85% of properties lose 35% of their water due to leaks. As such, you can effectively reduce your contractor truck roll, generating operational savings while creating a preventive maintenance schedule that suits all stakeholders in managing and maintaining the property.
Installing a Flood Mitigation Solution as part of your building allows you to take advantage of the data aggregates from such a solution. For example, if multiple leaks have been identified on a riser over the last few years, this may be a great time to budget for a replacement in the next budget year.
We hope that our perspective on the benefits of such a solution can help you make a better-informed decision as to whether or not a Flood Mitigation System should be part of your investment roadmap. If you have any questions regarding the advantages of such a solution, please do not hesitate to message us; we would be happy to discuss it with you and your team.
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