3 Considerations When Exploring Alternative Insurance

These risk mitigation strategies are worth a look, but they are not for everyone, says Hub International's James "Chip" Stuart.

James Stuart
James “Chip” Stewart

Today’s weather-related news has likely caught your attention. Disasters are becoming more frequent and intense, leading to increased claims expenses and property valuations that often leave real estate owners and managers with insufficient insurance coverage.

These storms are relentless and can show up in unexpected places. Consider the global insured losses due to natural disasters. Over the past five years, actual insured losses in the United States have averaged $101 billion, marking a substantial increase compared to previous periods that averaged $70 billion.

Insurance rates rose by 4.56 percent in 2023. This increase follows several years of rate hikes in the real estate sector. Commercial property owners are experiencing higher deductibles and lower coverage limits, and many insurance providers are withdrawing from catastrophe-prone markets entirely.

While states such as Florida are taking steps to stabilize within the market, significant rate reductions are not expected in the near future. In 2024 alone commercial property insurance premiums are expected to rise anywhere from 5 to 25 percent.

The recent surge in named storms emphasizes the need to prepare for potential risks and disruptions. Exploring risk mitigation alternatives such as captive insurance or self-insurance is key. These options offer greater control and stability over your coverage, along with potential long-term savings on premiums.

But alternative insurance programs are not for every organization. Here are three factors to consider when deciding if an alternative insurance program is suitable for you:

Take your time

Creating an alternative insurance program such as a captive isn’t a quick process, so avoid attempting to establish one just before your next insurance renewal. Assess your financial strength and ability to fund potential losses without traditional insurance coverage as well as your risk “tolerance.” Evaluate insurance alternatives and engage all stakeholders several months before your coverage expires. It typically takes 90 days or more to establish an alternative insurance plan.

A common misunderstanding among real estate owners and operators is that a captive might initially be more costly than a traditional program. This option is not a quick fix for higher rates; however, a well-managed captive usually becomes profitable within a few years while reducing market uncertainties.

Explore your options

Captive and self-insurance programs come in various structures tailored to different types of risks. For instance, you can utilize self-insurance for specific policies like wind, fire or flood, as well as for coverage beyond property, such as general liability. Additionally, you can self-insure for excess policy layers to cover risks not included in your main policy, allowing the savings to be redirected towards a primary property policy.

Captive insurance is an insurance company owned by an insured. With captive insurance, a real estate entity assumes some or all of their own risks, sometimes alongside similar risk-related entities. This can be an excellent long-term insurance solution as it facilitates capital building or future premium savings, which can be reinvested back into the property or business.

Having strong risk management is vital for any alternative insurance program, and a program simply cannot be set up without it.

Collaborate with an expert

Given the complexity of alternative insurance options, with numerous choices, opportunities and potential pitfalls, it’s crucial to partner with a knowledgeable insurance advisor to gain insights and guidance tailored to your property and location’s specific situation, as well as any regulatory considerations. A specialist in captive or self-insurance can provide valuable insights into restructuring your building’s insurance policy and help meet your long-term needs effectively.

By taking your time, carefully considering your options and collaborating with experts, property owners and operators can make an informed decision about whether an alternative insurance program aligns with their risk management goals and financial objectives.

James “Chip” Stuart is the corporate chief sales officer and practice leader for global insurance brokerage Hub International’s real estate specialty in North America.

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