Not only are insurance companies raising premiums and imposing stricter underwriting standards, but lenders are also becoming more stringent, all of which further drive up costs for borrowers.
The report attributes the rising costs of property and casualty insurance to factors such as an increased frequency of weather-related claims, expensive and scarce reinsurance, persistent inflation, and regulatory restrictions. For property owners, the effects of higher insurance premiums can include reduced net operating income, lost deals, and lower valuations.
“In response, investors are being forced to retain additional financial risk while seeking to assemble executives from multiple insurance companies to provide the required level of coverage,” the report said. states.
“They are devising new approaches to risk management by linking coverage from multiple insurers and adopting alternative risk financing solutions such as captive insurance and self-insurance.”
A multi-layered approach with an integrated master’s program is also an option. This allows dozens of insurance companies to participate in a single coverage plan. You can also create a buffer layer.
“This includes securing additional insurance to cover specific periods of loss above the primary insurance limit, such as obtaining additional protection against natural disasters if the primary insurance limit is exceeded. “However, the extent of liability for losses within certain thresholds is clear,” the report said. .
It is also possible to expand the deduction amount. Many property owners may try to maintain insurance costs by agreeing to pay a higher deductible. Some companies are considering “total deductibles,” which apply a single deductible to all claims during the policy period, rather than the traditional per-occurrence deductible.
However, such policies may conflict with lender requirements.
creative insurance solutions
Some owners are self-insured. This means that companies assume some of the risk, either individually or as part of a self-insured risk pool. This process requires evaluating estimated losses and insurance premium savings from not insuring the building. There may be legal and regulatory prohibitions, and some lenders are concerned about the impact on their balance sheets.
Many investment managers were also considering captive insurance, where business owners set up an insurance company to insure their own risks.
Some specialty insurance companies in the United States are increasing the use of excess and surplus insurance, designed for high-risk exposures that cannot be covered by traditional insurance companies, especially in states with a high risk of natural disasters. “This change has made E&S insurers an important coverage option, with their market share exceeding 9% of direct written premiums in 2023,” the report comments.
Another type of protection that is gradually being adopted is parametric insurance, which pays out if a specified “trigger event” occurs, rather than based on losses incurred. As an example, the report describes a parametric windshield policy that may be applied if “winds of category 3 or higher blow for a sustained period of one minute within a defined radius.”
Tighter policy conditions
Owners should also be prepared for insurance companies to request more detailed information, such as specific data on the building’s performance in storms and resilient design information. Failure to do so may result in your insurance premiums increasing.
“One important piece of data is the age of the roof, as this significantly impacts vulnerability to wind and water damage and impacts insurance coverage and premium calculations,” the report said. . It added that if the listed age of the roof is incorrect, owners could be denied commercial roof damage claims.
Construction type and conditions are also important to insurers, with some insurers reportedly reserving maximum capacity for best-in-class insurance policies. While insurance companies are also free to adjust rates each year, building owners with fixed-rent commercial leases have to deal with rising premiums, which has led some investors to believe that property owners We are looking for investment opportunities in net lease properties that can be partially transferred. The report says this poses a risk to tenants.
How to make everything work well
Interviewees recommended starting insurance renewal discussions early, stating that the process has become significantly more complex, and working closely with a knowledgeable insurance broker. “Effectively managing insurance costs requires building strong relationships with key industry stakeholders, including lenders, regulators, and investors,” the report said.
In addition to traditional insurance brokers, some owners seek assistance from third-party consultants, while others rely on in-house insurance experts. We recommend a structured process that ensures high quality data and open lines of communication.
Despite these complexities amid uncertainty about the future of commercial real estate insurance, the report found that investors continue to invest in high-risk areas. However, they are becoming more cautious about such investments and changing their portfolios accordingly.
“Leveraging portfolio size and diversification across geographic regions and asset types can make insurance contracts more attractive to insurers,” the report said.
On the other hand, investments in high-risk areas are not discouraged, but the focus is now on predicting and mitigating insurance-related risks. “Investors have not yet identified a reliable method for predicting insurance costs, but some investors are piloting methodologies that they hope will be profitable,” the report said.
