4 Strategies for Navigating the Reinsurance Landscape

Hub's James "Chip" Stewart on how real estate owners and operators can be proactive.

In the ever-evolving world of real estate, the ebb and flow of market conditions constantly reshape the strategies and approaches of property owners and operators.

The intricate dance between insurers and reinsurers, though not directly visible to the average person, plays a crucial role in shaping the cost and availability of insurance coverage for commercial real estate.

The current state of the reinsurance market, characterized by escalating costs and constrained capacity, demands innovative thinking and proactive measures from real estate stakeholders.

Surge in catastrophic losses 

The reinsurance market, often dubbed as “insurance for insurers,” has an impact on the commercial real estate sector that is undeniable, and the recent landscape shifts have only heightened its significance.

Reports indicate that reinsurance costs have surged by more than 30 percent in a short span of time, while capacity has dwindled by a substantial 20 percent. These abrupt changes have cast a shadow over the search for affordable and comprehensive insurance coverage, prompting a reevaluation of how real estate owners and operators can safeguard their investments.

The surge in catastrophic losses arising from global natural disasters has been the driving force behind the reinsurance market’s tumultuous ride. Last year alone was as one of the costliest years on record, with a staggering $275 billion in losses attributed to CAT claims.

The reinsurance ripple effect

Insurance carriers, in their pursuit of financial protection against these mammoth losses, rely on reinsurance. However, as reinsurers adjust their strategies in response to increased claims the ripple effects reverberate through the industry. When reinsurers escalate costs or curtail capacity, insurance companies are coerced into shouldering more risk. The inevitable outcome is an upward surge in insurance premiums, stricter limitations on risk exposure through elevated deductibles, or a reduction in the ceiling of coverage they are willing to provide.

As the reinsurance market continues to throw its weight around, real estate owners and operators find themselves facing the stark reality of paying more for potentially less coverage. Property owners are compelled to search for proactive solutions to mitigate the repercussions.

How real estate owners can flourish

Amid the prevailing challenges, several strategic avenues exist through which real estate stakeholders can navigate the uncertain waters of the reinsurance market.

  1. Ensure accurate property valuation. Replacement cost values that fail to encompass the soaring expenses associated with rebuilding have emerged as a major pain point. To address this, carriers are progressively distancing themselves from policies tied to undervalued or inaccurately assessed properties. In response, property owners should provide third-party reconstruction replacement cost (excluding land) during insurance applications or renewals, offering insurers a comprehensive view of reconstruction costs and averting potential penalties.
  2. Consider parametric insurance. Traditional insurance models often rely on the actual occurrence of property damage. However, the emergence of parametric insurance brings a paradigm shift. This innovative approach covers the risk of property damage caused by specific perils such as storms, triggering payouts regardless of whether physical damage is evident. The expeditious payout mechanism empowers real estate stakeholders to swiftly manage losses, including the consequential disruptions to business operations.
  3. Strive for excellence in property management. Prioritizing robust risk management strategies, particularly in areas vulnerable to floods and fires, can significantly broaden the spectrum of insurance options while potentially unlocking better pricing. A key facet of this approach involves maintaining properties in optimal condition and bolstering security measures to thwart theft and damages. Also, be prepared to share your “Best in Class” risk management practices and loss control measures to underwriters. Differentiate your risk management from the pack.
  4. Harness expertise and resources. The complexity of the reinsurance landscape calls for expert guidance. Collaborating with trusted advisors can unearth creative solutions that curtail insurance costs. Strategies like CAT modeling, selective coverage placements across multiple carriers and a meticulous review of property leases for latent liabilities can uncover hidden opportunities for enhanced coverage at optimal prices. Review your leases and start pushing liability risks and insurance costs down to tenants.

In an era where resilience is paramount, real estate owners and operators are challenged to embrace proactive strategies that shield their investments from the tumultuous currents of the reinsurance market.

By adopting a multifaceted approach that combines meticulous property management, accurate valuations, innovative insurance models and expert guidance, stakeholders can not only weather the storm but also find opportunities for growth amidst adversity. As the reinsurance landscape continues to evolve, those who remain agile and proactive stand poised to thrive in the face of challenges.

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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