Property owners can improve their insurance position despite a tightening insurance market

Over the past few years, we have seen a tightening of the insurance market, with offshore, more challenging asset classes and loss-affected assets facing significant challenges. I’d like to highlight the driving factors of how we got here and ways to think about getting around the increased costs.

Property values: Demand is growing, interest rates are low, and supply is limited in desirable locations, causing property values ​​to increase. As a result, the costs of repair and reconstruction also increase.

Natural disasters: The frequency and severity of natural disasters such as hurricanes, wildfires and floods have increased, resulting in more property damage claims and the need for higher insurance valuations to cover repair and restoration costs.

Michael Shadid, Franklin Street Insurance Services

Construction costs: The cost of construction materials and labor continues to rise, resulting in higher repair and restoration costs, which in turn increases insurance assessments.

Inflation: The cost of living is rising, causing the cost of goods and services, including building materials and labor, to rise.

Reinsurance: In 2023, reinsurers are raising prices and tightening terms and conditions to improve underwriting margins. Property has seen some of the biggest increases, and a shortage of available capacity on both the traditional and alternative sides of the market is driving reinsurer discipline.

With the challenges of a tightening market, there are strategies to use when interacting with the market as well as when negotiating with the lender to improve your position.

While selling carrier assets, using the right data and narrative is vital. Insurers want to see detailed information about the risk they are insuring, as carriers will model the risk for different exposures to ensure they are adequately covering their potential loss costs. Gaps in data such as years of roof replacement, quality of construction, appraisals, etc. will result in less favorable pricing.

Providing detailed information on any major capital expenditures, risk management strategies and property management philosophies are also beneficial. If losses have affected your portfolio, discuss mitigation techniques and the strategies you plan to use to reduce these events. Also, using Marshall and Swift’s estimator can help negotiate increasing limits that directly increase premiums proportionately.

Another major factor in increasing rates is providing coverage that meets the lender’s requirements. Requirements are often built into loan agreements, but waivers and exceptions can be made in the event that coverage costs are detrimental to the asset’s cash flow or are not available at all. Some examples of this are: deductibles, flood or earthquake coverage, wind, flood or earthquake limits, and ratings of carriers offering coverage.

While we would never recommend taking on unnecessary risk, sometimes approaching your lending partners with requests to change coverage requirements is vital to maintaining cash flow. With proper documentation and discussion with your credit partners, there may be adjustments to the approved coverage.

Taking on higher deductibles, reducing total limits purchased through a “loss cap” program, and potentially retaining higher levels of risk through a captive are all options in this challenging market. Where the costs of certain layers of coverage do not make economic sense to purely transfer risk to a carrier versus retaining risk, there are alternative risk financing options that can make up a program. Also, for wind-exposed assets, CAT bonds can be another option.

Different asset types are affected proportionately, with multifamily frameworks leading the way with the challenges. However, all asset types have been affected by insurance and we don’t see any softening in the market any time soon, so most assets will have values ​​affected by insurance costs over the next few years. Creativity in structuring policies and thoroughly reviewing market options is paramount to success and avoiding these increases.

Because there are many challenges to disposing and acquiring assets in this market, don’t let insurance blow up your deals. Care should be taken behind the insurance number you use in your pro forma and loan applications and it should be discussed with your broker in advance.

In the last eight months, we have seen more deals fail due to insurance than ever before, especially offshore offshore assets. Carefully check your ability to secure affordable insurance coverage, as well as what drawbacks to lender-required coverages may arise, and discuss these with your lender in advance.

– By Michael Shadid, Managing Director of Franklin Street Insurance Services. This article was originally published in the May 2023 issue Southeast real estate business.

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