E&O’s Annual Report
New fiscal year-end
E&O’s annual audited financial statements for the year ended March 31, 2018 are now available on the website. A significant change that occurred this year was that E&O’s fiscal year-end changed from February 28 to March 31. As a result, this year, the financial statements reflect a 13-month period as opposed to a 12-month period.
The change to the fiscal year-end was a consequence of legislative amendments made on September 30, 2016 to the Real Estate Services Act (RESA) and the Real Estate Services Regulation. These changes empowered the Lieutenant Governor in Council to appoint all 16 individuals who act as members of the Real Estate Council (REC) and resulted in the government concluding that because of this and significant operational oversight by the Superintendent of Real Estate, the REC is now a government organization and is thus included in the public accounts. As a government-reporting entity, the REC must report its finances to the government.
Although the amendments to RESA did not directly apply to E&O, there were unexpected consequences. In particular, as the majority of the seven directors of E&O are appointed by the REC (four are appointed by REC and three are appointed by the BC Real Estate Association), the government concluded that E&O was controlled by the REC and as such, the REC must include E&O’s financials in their reporting to government.
When the REC decided to align its fiscal year-end with that of government, E&O was asked to make the same change. E&O agreed to this change as it would simplify and streamline the reporting process. As was noted in the March Risk Report, the policy year in the Indemnity Plan was also changed to match the new fiscal year.
Despite the financial reporting requirements to REC, E&O continues to operate independently as it has since 1988.
E&O’s auditors, Grant Thornton, have concluded that, “The financial statements present fairly, in all material respects, the financial position of Real Estate Errors and Omissions Insurance Corporation as at March 31, 2018 and February 28, 2017 and its financial performance and its cash flows for the periods then ended, in accordance with International Financial Reporting Standards.”
This year, E&O recorded comprehensive net income of $1,446,781 and increased the accumulated surplus by approximately 11% from $20.2 million to $22.6 million. This surplus acts as a premium stabilization fund that will be a buffer in the event our claims experience changes for the worse.
E&O’s Minimum Capital Test (MCT) ratio has declined from 294 last year to 283 this year, but remains well above the minimum of 150 required by the regulators and within the target range of 250 to 350 set by the Board of Directors based on the advice of E&O’s actuary (see chart).
The MCT ratio is a solvency test used by insurance regulators to monitor the ability of an insurance company to meet its financial obligations and provides a cushion or margin of error in the event of market volatility or unexpected loss results.
There were 381 claims reported during this fiscal year; keeping in mind that this was a 13-month period, once this number is adjusted for the extra month (12/13 x 381), it would be 352 claims. This adjusted claims number is only up by about 5% compared to the prior year’s number of 335 claims.
Although the increase in the number of claims is moderate, the severity of claims continues to grow. This is evident in the attached graph that shows E&O’s claims liabilities at year-end to be $21.2 million, up from $19.5 million in the prior year. This number has been steadily increasing for 12 years and is likely due, in part, to the increasing cost of real estate as claims involving higher value real estate are more likely to result in higher damage claims.
E&O has closed approximately 3,500 claim files in the last 10 years; 66% of these claims were closed with no indemnity or expense payment by E&O and another 18% were closed with only legal expenses paid (see chart). In only 16% of these claims were indemnity payments made by E&O.
E&O remains committed to fulfilling its mission statement, to provide adequate cost-effective professional liability insurance for the protection of real estate licensees and thereby the public. Premiums remain at $350 per year and have not increased since 2011.
New rules, new risks
The new Real Estate Rules came into effect on June 15, 2018. With changes, licensees must learn and adapt to these new Rules and as they do so, there will likely be some mistakes that may result in claims for damages reported to E&O. We will be closely monitoring these claims and will be addressing any problem areas that arise in future loss prevention articles.
In the meantime, all licensees are encouraged to read the information published by the REC and take the time needed to ensure that you fully understand your professional obligations, so as to minimize the risk of mistakes.