Your E&O Annual Report
E&O’s audited financial statements for the year ended March 31, 2019, are now available on our website. Here’s a summary of what they contain, with charts to support some of the information.
This year, E&O recorded comprehensive income of $388,943. However, the statements also show a net loss of $393,614 (before items such as unrealized gains on investments are factored in), which is largely due to an increase in provisions for unpaid claims and adjusting expenses.
The increase is a result of our actuary setting a claims reserve of $25.8 million for the policy year ended March 31, 2019 – a 22% increase over the previous year’s reserve of $21.2 million (see chart). The claims reserve is the actuary’s estimate of the cost that will be incurred, in addition to the amounts already paid, in order to eventually close the 599 claims that were open as of fiscal year-end at March 31, 2019.
The two most significant factors impacting claims costs are the frequency and severity of the claims.
Frequency: There were 387 claims reported in the policy year, an increase of 10% from the prior year (adjusted for the 13-month year ending March 31, 2018). There were also 599 open claim files at year-end, the highest number we’ve experienced since the 1990s (see below).
Severity: There are currently 23 open claims that are each expected to cost E&O more than $200,000, compared to 15 in the previous year.
The increase in claims reserves also reflects the impact of last year’s drop-off in real estate sales and the accompanying decline in prices. Falling prices can lead to buyer’s remorse and collapsed deals. For example, pre-sale buyers who were looking to make a quick profit may now be looking for ways to avoid completing. They may allege that the property was misrepresented to them, which usually means the real estate representatives are drawn into any resulting litigation.
As a result of the net loss, E&O’s accumulated surplus has declined from $22.6 million to $22.2 million and the Minimum Capital Test (MCT) ratio has declined from 283 last year to 258 this year. (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.)
The MCT ratio remains well above the minimum of 150 required by regulators and continues to be within the target range of 250 to 350 set by the Board of Directors based on the advice of our actuary.
Although premiums remain at $350 per year and have not increased since 2011, volatile economic times call for particularly close monitoring of claims development, so that adverse trends can be identified early. If adverse loss development becomes apparent, E&O will take appropriate steps to ensure that our equity is not further eroded.
E&O has closed more than 10,000 claims since 1988, spending more than $88 million in expense and indemnity payments. In the approximately 3,000 files that were opened since January 1, 2009 (and are now closed), 70% were closed with no indemnity or expense payment by E&O. Another 15% were closed with only legal expenses paid. In only 15% of these claims did E&O make indemnity payments.
The types of claims reported continue to be a mixed bag. Of the 387 claims reported in the last fiscal year, the top issues were drainage/water, subject clauses, valuations, parking/storage, strata documentation, encroachments and illegal suites.
Following the major changes in the Real Estate Rules that came into effect on June 15, 2018, we have not yet seen any claims relating to mistakes made in the preparation of the new required disclosure documentation. This is not surprising, however, as such mistakes would be more likely to lead to Real Estate Council complaints than to claims for monetary damages.
If you have claims or potential claims against you, report them to E&O without delay. If you’re unsure about whether to report a matter to E&O or have any questions, contact us at 604-669-0019 and ask to speak with a staff lawyer. We’re here to help you.