Having a good, solid relationship with your insurance agent or broker and your insurance carrier is always a healthy business practice – even amid a buyer-friendly insurance marketplace and the best of economic times.
These, of course, are not the best of times. Already confronted with a hard market for Property and Casualty Insurance, owners, developers and property managers in the real estate industry are finding that strong relationships with their broker and insurers are more important than ever.
As Alera Group expert Steve Felker observed in the previous installment of our market outlook series – Disaster Aftermath: Unfavorable Property Insurance Market – recent natural disasters, COVID-19 and property damage resulting from civil unrest have further hardened a P&C market already affected by previous severe weather events and other factors.
As a result, Commercial Property Insurance is both more expensive and harder to come by, with buyers paying higher rates and higher deductibles, sometimes receiving reduced coverage and often requiring placement in the Surplus Lines market. Considerations such as environmental hazards, local crime rates and inadequate updates to the asset can add to the difficulty of insuring property.
All factors considered, attempting to purchase Commercial Property Insurance without the assistance of a knowledgeable agent/broker and the receptiveness of an informed underwriter has become exceptionally difficult.
Securing coverage with the best possible rates, limits and conditions requires:
- Adherence to rigorous construction updates, maintenance and safety codes
- Additional risk management practices and documentation
- The ability to communicate your marketability to your broker for negotiations with prospective underwriters.
This is why, as insurance strategist Mark Breeding recently wrote in PropertyCasualty360:
“There will always be a need for expert advice on risk management. And there will always be a need for intermediaries who deeply understand customer needs and can create that right combination of coverages linked to the right underwriters.”
Outlook Heading into 2021
Here’s the Property and Casualty Insurance landscape for the real estate industry as outlined in Alera Group’s Property & Casualty 2021 Market Outlook whitepaper, released in December 2020:
► Rising prices: Commercial property rates have risen for the last 14 quarters. This trend is expected to continue through 2021.
► Insurance companies’ appetite for real estate business is shrinking. For some insurers and reinsurers, the risks associated with real estate are too high to underwrite the business profitably. With fewer insurers competing for accounts, those that remain can be extremely selective about the clients they choose to work with, and the pricing, terms and conditions they’re willing to offer.
► Shifting the burden to the client: Those insurers who are continuing to partner with real estate clients are looking to clients to assume more risk through higher deductibles. Rather than traditional flat deductibles, some insurers are using a percentage of the clients’ property values. The percentage typically falls somewhere between 1% to 5%.
► Some sectors within real estate are more affected. The habitational sector is especially hard hit. Juries and courts are placing a higher standard of care and responsibility on landlords and management companies for security and safety on the premises. Contract language is being interpreted more broadly, and nuclear verdicts (verdicts in excess of $10 million) are becoming more common.
These factors are increasing claims and underwriters’ reluctance to write this business. Student housing, senior living and Section 8 housing are viewed as extremely tough risks. Most standard insurers won’t consider this business anymore. It is increasingly being written in the Surplus Lines market, which typically uses proprietary forms with more limited coverages and additional exclusions.
► Frame Construction: Underwriters have increased apprehensions about writing these risks.
► Habitability claims represent a growing risk for insurers. California courts are handing down million-dollar awards in lawsuits alleging apartment complex owners have failed to maintain “habitable” properties. Insurers, concerned the litigation trend could spread, are adding exclusions to limit their risk.
► With vacancies on the rise, it’s critical to pay attention to policy vacancy clauses. Complying with vacancy requirements can mean the difference between an accepted claims payment and a decreased or denied claims payment. Typically, policy language says a building is vacant unless at least 31% of its total square footage is used by the owner or lessee to conduct its customary operations.
The Outlook forecasted unfavorable buyer conditions for rates, availability, carrier capacity and underwriting scrutiny and selectivity in multiple lines of coverage, notably General Liability, Property and Umbrella/Excess. One exception to the hard market: Workers’ Compensation Insurance, which, while not favorable to the buyer, at least appeared to remain stable.
Some Room to Maneuver
Under such demanding circumstances, securing coverage requires resourcefulness, a certain degree of compromise and some hard decisions. For example, agreeing to a higher deductible could be necessary for obtaining an affordable premium. Also, be prepared to read the fine print for special limits, terms and exclusions to determine whether those conditions are acceptable. Some are negotiable – with the possibility of restoring them to the policy at an additional cost – while others are not. These need to be addressed and discussed thoroughly with the underwriter.
What You Can Do
To secure the best available coverage and rates, start early and, if necessary, participate in the application and underwriting process to assist your broker.
- Again, start early. Because the increasingly selective market demands extensive documentation, as the underwriting process can be arduous and lengthy. Equip yourself with documentation of your property’s specifications, loss history and risk management program, and be able to present your material as an organized narrative. The sooner you start, the better the opportunity to equip your broker for negotiating with the underwriter in considering the merits of your application.
- Use the resources available to you, including your agent/broker. An experienced, knowledgeable broker can:
- provide you with the tools to implement a strong risk management program;
- help you leverage your strengths and communicate them during the underwriting process.
Providing this type of information will go far in securing a comprehensive program with the most competitive rates in this hard marketplace. This will enable those organizations within the real estate industry to keep their competitive edge in today’s market.
- Gain a better understanding of your Commercial Property’s insurance rating. Alera Group’s brief guide provides insights on contributing factors such as construction, occupancy, protection and exposure.
About the Author
Sharon J. Compton, CPCU
Risk Management Consultant
Armstrong/Robitaille/Riegle Business and Insurance Solutions, an Alera Group Company
A Property and Casualty Insurance broker since 1982 and Chartered Property Casualty Underwriter since 1989, Sharon Compton is unsurpassed in the knowledge and experience she brings to commercial insurance clients throughout Southern California. Prior to joining the Irvine, CA, firm of Armstrong/Robitaille/Riegle, an Alera Group Company, she spent 14 years as a Corporate Risk Manager for CBRE, the largest global real estate services company in the world. Her background also includes serving as an instructor in a monthly training program for national property and project managers.
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