E&O annual report

Financials

E&O remains in a strong financial position for the year ending March 31, 2020; its audited financial statements are now available on the website. This was the first year that the audit was conducted by E&O’s new auditors, KPMG LLP.

KPMG LLP has provided their opinion that these financial statements present fairly, in all material respects, the financial position of E&O as at March 31, 2020, including the results of operations and cash flow, in accordance with International Financial Reporting Standards.

This year, E&O recorded comprehensive net income of $2.6 million and increased the accumulated surplus by approximately 18% from $22.2 million to $26.2 million. The surplus acts as a premium stabilization fund and thus as a buffer in the event our claims expenses change for the worse.

E&O’s Minimum Capital Test (MCT) ratio (a solvency test used by insurance regulators) remained steady, changing from 258% last year to 259% this year. This continues to be within the target range of 250-350 set by E&O’s Board of Directors. Licensee premiums also remain stable at $350 per year ($700 for the two-year licensing period), an amount that has not changed since 2011.

Claims

There were 267 claims reported to E&O this year, representing a 30% decline from the prior year. The most likely explanation for this decrease is the 25% decline in residential real estate sales in BC from 2017 to 2018. Since there were substantially fewer transactions in 2018 and again in 2019, we would expect fewer claims arising out of those years (there are usually about 3.5 errors per 1,000 transactions). However, since there is often a delay between the date of the error and the date it is reported to E&O, the impact on claims numbers may take a year or two to show up.

Claims liabilities declined this year from $25.8 million to $25.3 million. This is the actuary’s estimate of the cost that will be incurred, in addition to the amount already paid out, in order to eventually close the 471 claims that remained open as of March 31, 2020.

E&O has closed more than 3,500 claims that have been reported since January 1, 2008 and spent more than $41.7 million in defence and indemnity payments on these claims. Of these claims, 68% were closed without any expense other than staff costs to resolve them. A further 16% resulted in legal expenses only, while only 16% involved indemnity payments by E&O.

Historically, for every $1 spent on indemnity payments, we spend almost $1.50 on defence costs. The strong defences provided to insureds resulted in 84% of these claims being closed with E&O making no indemnity payments.

As shown in the chart below, only a small portion (11%) of these claims resulted in payments of defence and indemnity expenses exceeding $20,000.

The sudden change in the market due to the COVID pandemic may eventually lead to claims, although it is still too early to predict the impact. In a falling market, we would normally expect claims against licensees for negligence in valuation of properties or for negligent drafting of contracts. As always, we will be monitoring claims to identify any trends and provide focused loss prevention information.