Protecting Assets amid Rising Insurance Costs

Following several years of declining property insurance rates, the recent global catastrophes in Japan, Chile, New Zealand and Australia, combined with the flooding and tornadoes in the United States, have caused significant losses for most insurers, resulting in a nearly market-wide effort to push rates upward.

Additionally, the recently released RMS Windstorm Version 11—the catastrophe modeling system used by well over half of insurance carriers—is projecting increased average annual losses for the same risks over the prior version of as much as 100 percent or more in certain coastal regions, particularly those slightly inland such as Harris County, Texas and areas in central Florida such as Orlando. The losses and revised modeling have caused reinsurance rates (insurance for insurers in the event of major losses) to increase, on average, by 10 percent.

Rates for May and June renewals generally rose from 5 percent to 10 percent, with flat renewals for risks with excellent loss history. However, most carriers have already exhausted their loss budgets for the year. Another insured natural catastrophe, such as a windstorm hitting land in the United States or an earthquake in California, will likely lead to a much more significant market hardening. As incumbent markets are seeking increases, the insureds are marketing their risks to new carriers, flooding underwriters with submissions. So what can be done to differentiate your portfolio from others to ensure the best results?

1. Engineering Reports: In addition to providing basic information including sprinkler protection, construction class, square footage, etc., these reports can confirm the condition of the asset and that it was built properly. Unexpectedly high losses associated with Hurricane Ike are being partially attributed to poor build quality. In addition to reports issued by insurers and insurance broker engineers, there are many quality third-party firms that focus on the insurance aspect of the report. Also, Property Condition Assessments completed as part of acquisition due diligence often contain the same information.

2. Secondary Factors: Earthquake and wind models include inputs for “secondary factors” for physical characteristics such as roof anchoring and foundation engineering, as well as human element components like roof maintenance and emergency preparedness programs. When positive inputs are provided, the modeling results can improve by 15 percent or more. Many property engineering firms offer to compile this information as part of their reports.

3. Valuation Confirmation: With respect to buildings, the best way to be certain values are correct is through an on-site appraisal. Most property engineering firms offer this service. Additionally, desktop appraisals can be obtained through companies such as Marshall & Swift. Your lender may be able to provide an appraisal as well. At a minimum, building values should be adjusted based on construction cost trend factors on an annual basis. With respect to business interruption values, a worksheet should be completed on an annual basis for each asset.

4. Emergency Preparedness: Having a formal set of procedures in place for events such as hurricanes, earthquakes and floods, as well as formal training for staff, not only reduces the potential for injury or death but also helps minimize physical damage and business interruption losses.

5. Underwriting Meetings: As underwriters are forced to contemplate more and more data in order to justify their capacity and pricing, taking the time to develop personal relationships with them and demonstrating your commitment to the renewal process and risk management is critical. While brokers can supply key information on your behalf, the positive aspects of your business and portfolio will always carry more weight with the markets when conveyed face-to-face by you.

I was recently in London with a client to meet with their Lloyds panel of insurers, and one underwriter commented that even their internal peer reviews have become antagonistic as each of the underwriters fights for his or her share of the syndicate’s capacity. He went on to state that being able to tell his management that an insured had taken the time to meet with him in person made his job easier when pushing for a pricing exception or additional capacity.

While the above can require a significant commitment of time and resources, insureds who provide this information and spend the time to develop relationships with their carriers will be in a position to secure the best terms and pricing the market has to offer, giving multifamily owners and managers a competitive advantage in today’s challenging real estate market.

Andrew Rasberry is the lead property broker for Lockton Cos.’ Washington D.C. real estate practice. Lockton provides insurance, benefits, surety and risk management services to more than 15,000 clients around the world.

To comment, email Diana Mosher at [email protected].