How Savvy Investors Do Property Insurance
“For investors with a portfolio of properties, greater opportunities exist to save on premiums, and thereby increase your investment income, by purchasing insurance on the portfolio, just like insurance carriers do on their portfolios as a whole,” according to Patrick Nugent, CCIM, JD with Commercial Insurance Solutions in Dallas.
For example, take an owner who has a $500 million portfolio that includes properties in California, Texas, and Florida. The highest valued property does not exceed $30 million, but $50 million of the portfolio properties are in a concentrated area of California.
“To help determine its level of risk, the carrier compares these locations against probable exposures, like earthquake and fires. Using this example, the probable maximum loss is only a fraction of the total value of the portfolio,” Patrick explains.
The aggregation of values across a broad geographic area is what makes a portfolio program work. Realizing that a single occurrence cannot affect a location in Houston, Los Angeles and Orlando simultaneously, it allows for a lower insurance limit.
In our scenario, it does not make sense to purchase $500 million in coverage (the portfolio value). The maximum loss per occurrence is $50 million (the value of the L.A. properties that are in close proximity). The insured may still want to cover up to a $100 million in a per occurrence limit to provide a buffer. But the lower loss limit means lower premiums. During a hard market, like in 2006, premium savings would have equaled $100,000 to $200,000.
Capitalize that over the life of the investment, and it translates to $1.4 million to $2.8 million in value.
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