The Challenges, Costs, Opportunities & Solutions in Today’s Challenging World of Multifamily Properties Risk Coverage
By: Nick Aronson, AAI, CLCS | Principal
Insurance Market Overview
As most of us are aware, numerous, critical events over the past several years have led to the current uncertainties and complexities in today’s property marketplace for the multifamily sector. From 2012 through 2017, the market had seen 5 consecutive years of rate reductions, while at the same time experiencing an increase in frequency and severity of attritional losses (i.e. tenant related fires, water damage, etc.). By 2017, property rates had reached a very favorably depressed level. That, coupled with a record-breaking year of losses in 2017 at $140 Billion followed by $80 Billion in 2018, has forced underwriting managers to closely evaluate their portfolios and make drastic adjustments to their books.
While the 2018 insured natural catastrophe losses were not as drastic as 2017, they were and still are, substantially above the 30-year average of $41 Billion. This has created a micro hard market in the habitational space as fewer carriers are currently willing to participate in the placement of coverage at any price. Those that are still willing to insure apartments are looking for significantly higher rates and tighter terms. As a number of the Risk Purchasing Groups / Programs are either collapsing or pushing large increases (which are, in some cases, still below open market rates) the market is being flooded with a greater number of submissions. This has given underwriters the opportunity to carefully select which risks they’re willing to participate in and which accounts they can summarily decline for the smallest of details.
As a result, we are currently experiencing a disruption as well as uncertainty in the property marketplace. Markets are either requiring rate increases as they quote 2019 accounts, and/or reducing coverage and/or reducing the amount of capacity provided. Underwriters are on the front end of receiving 2019 direction from their management teams who are, themselves, on the front end of digesting their final results from 2018.
Property
Because every portfolio is different regarding loss history, geographic spread, type of properties, etc, it is very difficult to put an expected range for a rate increase that an operator should expect. Depending on the makeup of a portfolio, it could be anywhere from 5% – 40%. If an account or property has significant loss challenges, it could be even worse. So, what makes one account increase by 5% and another by 40%? The following are some critical factors that will negatively influence property rates:
- Older wood frame buildings without sprinklers
- Presence of aluminum wiring (even if remediated)
- Presence of Federal Pacific, Stab-Lok or Zinsco circuit breakers
- Inability to verify major updates on older properties most importantly on plumbing, HVAC, and electrical systems
- Properties in states highly susceptible to wind/hail claims (TX, CO, OK, MO, AR) • Poor loss history – Or inability to verify 5 years loss history • Roofs over 15-20 years in age
- Vinyl siding due to both an increase in fire hazard and susceptibility to wind damage
- Exterior Insulation and Finish Systems
- Crime Scores of the area
- 15-20% or more of subsidized/section 8 tenants
- Higher percentage of student tenants
- Historically lower replacement cost valuation per square foot
On the last point, carriers have been providing full replacement cost, with blanket coverage across many buildings, at plus or minus $70/square foot for frame apartments. To replace or rebuild after a loss, costs could range from $100 – $150/square foot. Even if the rates are at the level needed to remain profitable, the carriers have not been collecting adequate premiums on the risks they’re insuring and are, therefore, losing money within this class of business. Carriers are requiring higher replacement costs to account for this shortfall which, of course, also drives premiums upward.
General Liability
As with the property market, the general liability market is experiencing its own challenges. Carriers are receiving more and more nuisance claims. At the very least, they are having to incur significant costs to defend the cases and often times having to offer a settlement as well. As a result, there has been a greater increase of carriers exiting the habitational space due to sustained losses and unprofitability. Even locations with favorable loss history are receiving non-renewal notices simply because the carrier no longer wants to insure apartment risks. Many portfolios with sustained track records and clean loss history are renewing favorably, however, on portfolios where there may have been an adverse loss such as a shooting or assault, or where claims frequency has been high, carriers are asking for substantial premiums and limiting the coverage offered. This is not only limited to a specific location, but even high crime incidences or shootings within the surrounding area of a property can have the same adverse effects. As such, it can be extremely difficult to find a carrier that offers full assault & battery limits on a location that has had an assault claim. Many times, there won’t be an option available, even for a sublimit or at any premium amount. This is most severe when a location has had a shooting within the last few years. If a carrier does offer any limit for assault & battery, it usually will come with a much higher deductible on the policy than has been seen in the past.
Other property characteristics have also garnered additional scrutiny from carriers. Locations with poor maintenance/management or frequently poor online reviews are looked at as having a high potential for claims due to slip/falls, collapsing ceilings, potential mold exposures, and a generally higher potential for tenant bodily injury.
Flood
NFIP continues to operate in the red and remain a financial burden to the Federal government every year. While the premiums through NFIP rise yearly, this is still often the most cost-effective option. Legislation that has passed recently has made it easier for the private marketplace to compete with NFIP, which has helped in certain circumstances, but flood coverage continues to be a challenge for many properties.
It is especially important when reviewing locations for a potential acquisition, where a flood risk exists, to fully understand what the line item amount the seller is paying for flood insurance means. In many circumstances flood could look less expensive than it really is because a seller is vastly underinsuring the flood risk where most lenders will require full replacement cost of building values and coverage for loss of rents. NFIP can only offer up to $500K in building coverage per building and does not cover loss of rents/business income, so a supplemental policy could be necessary.
Moving Forward
It often seems as though the forces determining your insurance rates are beyond your control. But, as an insurance buyer, it’s important to know how your premiums are calculated, what trends influence the market, and what you can do to get the best coverage along with the best price. Your claims history, which you can influence to an extent, has an enormous impact on your rates. That’s where implementing a solid risk management plan will help steer your pricing in a more favorable direction, both now and in future renewal periods. It’s also important to note that buying a location with unfavorable loss history can have an adverse impact on how your portfolio is viewed by the marketplace for years in the future. The following are seven critical components of a successful risk management strategy:
- Pinpoint your exposures and cost drivers
- Identify the best loss control solutions to address your unique areas of risk
- Explore opportunities to combine coverages of larger property portfolios on a national basis
- Create a solid business continuity plan to account for disasters and other unpredictable risks
- Continue to build a company-wide culture focused on safety
- Manage claims more efficiently to keep costs down
- Contract with reputable, reviewed, and experienced property managers
During this time of market turmoil, it is critical to have a partner who focuses exclusively in your industry. At MRA, we pride ourselves on providing you with the expertise and ability to understand the market and secure you best coverage options. The valuable relationships we have formed with our carriers, wholesale brokers, and program administrators enable us to continue to offer comprehensive coverage at competitive rates. As your partner, we will continue to closely monitor carrier pricing, keeping you informed to avoid any unexpected outcomes. We are, of course, always available to discuss any concerns you may have.