Skyrocketing Property Insurance Costs: How To Mitigate Your Risks
Premiums for the multifamily sector for both property and liability insurance have not only increased more than any other real estate market, but they have also risen at rates (10%-40% for the past two years) that haven’t been seen in more than a decade. In addition, insurance carriers are shifting the liability risk to apartment owners by asking them to carry more of the financial exposure by dramatically increasing deductibles and self-insurance limits. In the insurance industry, rates have been trending upward for a few years now, and most industry experts expect these trends to continue in 2021.
This shift in premiums is not only impacting the net operating income of existing property owners, but the rates are sometimes even impacting the ability to secure financing for new property acquisitions. The massive deductibles will require larger capital reserves in case of a lawsuit and could actually transfer so much risk to some property owners that they will be forced to sell the property to owners who have deeper pockets.
The Covid-19 Effect
All of these issues were in motion before Covid-19, but the pandemic has added a new layer of unpredictability to the multifamily insurance predicament. The pandemic has impacted the availability of coverage and pricing for certain specialty risks, like event cancelations. It also created pressure on other key parts of the industry, including underwriting trends and renewals.
Many insurance companies also will be reducing any pandemic-related exposures, taking the stance that losses related to viruses are not included in insurance policies. This is coupled with factors like “social inflation,” which continues to proliferate in courtrooms throughout the nation, often awarding huge payouts for routine cases, such as slip and fall incidents. All combined, these issues create concern for insurance carriers looking to underwrite profitability, which fell to 2.8% from 8.3% the previous year. This was mainly due to $6.8 billion in incurred losses from Covid-19 and drops in premium volume.
Deploying A Loss Prevention Strategy
For a while now, insurance alone was considered a sufficient form of risk transfer, and in my opinion, mitigating risk has therefore been, at best, an afterthought for apartment owners. Now, under the weight of larger deductibles and the risk of becoming uninsurable altogether after a serious loss, suddenly there is a great advantage to doing whatever possible to reduce risk.
Multifamily real estate owners need to deploy a robust loss prevention strategy to attract insurers, secure competitive rates and prevent avoidable claims. The first step is to work with the brokers to become educated and prepared for how underwriters will assess exposure and be equipped to provide data needed for critical negotiations to secure the best rates and make sure that data is complete and properly formatted. Blank answers or bad data will default carriers to just assume the worst.
This data can be developed through a systematic approach and by automating practices around risk mitigation, preventative maintenance and overall property operations. Property managers need to develop monthly, weekly and even daily guidance for onsite staff, guiding them through the necessary inspections, workflows and other tasks necessary for the true management of operational risk. Gathering pool pH readings or prompting lighting inspections are common, and be prepared to prove you have actually executed your mitigation plan.
Companies can use software tools to provide evidence of mitigation measures and credence to the statement that the guidelines not only exist within the management organizations but that they are also actually followed. (Full disclosure, my company offers this type of software, as do others.) Providing this kind of transparency can make owners more attractive to insurers, and in the inevitable event that there is a loss, these tools can come to the rescue in court to confound claims of gross negligence. I’ve observed that select carriers are starting to offer underwriting credits of up to 20% with such software in place — a trend I believe is sure to grow.
Turning The Ship
Keep in mind that these risk mitigation strategies may not offer an overnight cure. For properties and operators with a history of claims, it may take several years of using these strategies to reduce the frequency and size of losses before they will experience any significant reduction in premiums. Still, a digital record of ongoing maintenance and mitigation measures can help the narrative with the underwriters upon the next renewal cycle.
Showing the underwriters that a property is proactive at preventative measures is an investment that can pay dividends in the long run and may even be the difference between a profitable investment and one that is too risky to hold any longer.
Source: Forbes.com
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