Premium Pricing: It’s a Buyer’s Market. How Long Will It Last?

By Jeffrey Steele

Increasingly ferocious storms. Deadly high-rise fires in London and Hawaii. Residents’ inclination to leave ranges and running bathtubs unattended. It’s enough to ruin the sleep of multifamily owners and managers. But insurance experts say they shouldn’t fret, at least not until something unforeseen comes along.

Don’t look for multifamily property insurance rate hikes anytime soon, advises Brian Ruane, executive vice president & director of the national real estate and hotel practice at Willis Towers Watson.

“We see prices stabilizing, but more likely continuing to decline, primarily because the insurance industry has quite a bit of capital surplus that fuels competitive pricing,” he said, noting that the industry’s surplus is two-and-a-half times what it was on Sept. 11, 2001.

“The sky is blue, but that could change,” Ruane added. “What could change it is a major surplus-depleting event, something that would total a $50 billion-plus aggregate loss from a natural or man-made catastrophe.” (Note: The insurance specialists interviewed for this article offered their perspectives before Harvey struck the Gulf Coast in late August.)

Also predicting flat premium pricing is Marc Reisner, Boston-based Multifamily Center of Excellence leader for Marsh. In his view, the surplus is likely to keep prices fairly stable for the rest of 2017, absent a major weather event. However, he added that with attritional and weather-related losses, underwriters will likely remain cautious.

Down time

In the meantime, renewal rates are taking a continuing downward trajectory. During the second quarter, the U.S. composite insurance rate fell 2.6 percent, according to the Marsh Global Insurance Market Index. Casualty insurance renewal rates have declined in 10 of the last 11 quarters, including 2.3 percent in the second quarter, and property renewal rates have ticked down for 14 quarters in a row.

Owners of tall, unsprinklered buildings may not share in this trend, especially in light of two recent tragedies: The Grenfell Tower fire in west London, which killed scores of residents on June 14, and the blaze one month later at the Marco Polo condominium community in Honolulu, in which three people died. Neither property was equipped with sprinklers. “This is the kind of news that could—and I emphasize, could—lead to increased premiums for owners of apartment buildings without sprinklers,” Ruane observed. “People know unsprinklered high-rises are dangerous, but they forget until news happens.”

Meanwhile, carriers are eyeing owners’ and managers’ loss records ever more closely and scrutinizing risk management programs, Reisner noted.

Terry McCann, president & managing director of R.T. Specialty, a Chicago-based wholesale insurance broker, has likewise detected a shift toward more rigorous analysis. “I see my underwriters really digging into the schedule and determining what’s in the portfolio location by location, like it’s never been done before,” he said. “They’ll look at the crime rate of the area to determine their appetite for risk and how competitive their rates can be.”

Back to basics

Owners and managers looking to minimize risk and reduce premiums have a variety of tools at their disposal—some brand-new, others tried and true. Property and casualty insurer Millers Mutual Group has debuted a new program designed to help owners avoid making claims on their master policies, noted Ben Guttman of Heller Kowitz Insurance Advisors in Lutherville, Md.

OwnersPROTECT provides as much as $100,000 in coverage to shield owners from financial responsibility when residents negligently cause damage and losses. This keeps owners “from having to tap the master policy, resulting in higher premiums and having to pay deductibles,” he said.

Improving basic maintenance is often an afterthought, Reisner contends, reminding operators that attention to the basics—repairing roofs, fixing driveway cracks, enhancing lighting, trimming trees that could damage buildings and vehicles—helps prevent losses and eventually lowers premiums.

For his part, Ruane talks to clients about installing cooking-fire prevention systems that employ fuel cutoff switches and fire-retardant canisters. Carriers provide estimates of rates both with and without these measures.

“The effect is to make (owners) realize (the safety features) pay for themselves in as little as two to three years,” he explained. Also in this category are leak-detection devices and fire stops that prevent flames from spreading to other units.

Another crucial step is ensuring that vendor contracts allocate responsibility appropriately and are supported by proper coverage. That ensures the contractor will be responsible for negligence-related losses. Owners should also leverage free carrier property inspections and recommendations, suggested Daniel Phelps, vice president of asset management and insurance at Waterton.

“Train employees to inspect properties daily for trip hazards, clean up spills immediately, salt sidewalks hourly during snowstorms, perform monthly fire pump tests and have detailed written plans in the event of a catastrophe or incident,” he said. “Also carefully document each incident and actively participate in the resolution of claims.” Don’t expect these measures to lower premiums overnight, Phelps cautioned, but consistent application should pay off in three to five years. 

On the horizon

Though premiums are expected to remain stable for now, experts are watching several issues that may push rates up. During the past 12 months, fires have destroyed wood-frame apartment buildings under construction on both coasts, Reisner said, events that underscore the risks of arson or contractor error before sprinklers are installed.

“Premiums for wood-frame buildings under construction may show signs of increasing,” Reisner predicted. “And underwriters may place greater scrutiny around active security requirements, be it a security guard or active as opposed to passive video monitoring.”

Also worth watching is underwriting for what Ruane calls “unnamed storms.” Though they may not pack the power of hurricanes or tropical storms, the intensity and frequency of hailstorms are increasing, particularly in the tornado belt of Texas, Oklahoma and Kansas. Bumps in prices and deductibles are likely on the way, Ruane reported.

And although multifamily insurance may be a buyer’s market for a while, the ride can’t go on forever. What comes down must eventually go up, McCann maintains: “Historically, these are the lowest property and liability rates we’ve seen for this class of business.”

Originally appearing in the September 2017 issue of MHN.