Keeping Covered: Tips on Managing Insurance Costs

Advice from experts on how to mitigate insurance premium hikes that many owners are facing.
Photo by Chris Gallagher on Unsplash

Insurers have been hit hard in the last two years, with property losses in excess of about $200 billion. Along with years of underpricing, the trend has led to rising premiums across all insurance categories since early 2019. Emerging and smaller operators face a variety of challenges, but there are strategies to to best mitigate risk while limiting the rise in premiums.

Multifamily will see the biggest increase in premiums, experts predict. Unlike most other property categories, multifamily communities face 24/7 exposure. Smaller multifamily companies are particularly prone to cost hikes, as many operators are dealing with older product with a higher incidence of issues like older roofs, code violations and water leaks. These problems can make it challenging to find an insurer, especially when a wood-frame building is involved.

Alexandra Glickman Photo courtesy of Gallagher

Even well-managed multifamily properties—no losses, accurate valuations and strong maintenance records—are susceptible to double-digit increases. Organizations with losses could see premium hikes of 100 to 200 percent increases, depending on the geographic location of the assets, said Alexandra Glickman, senior managing director & global practice leader for real estate at Arthur J. Gallagher & Co.

CAT vs. Non-CAT

Estimates of premium price increases vary widely. For properties with non-catastrophic losses (non-CAT, in risk-management parlance), Willis Towers Watson’s Insurance Marketplace Realities projects 5 percent to 15 percent rate increases. Assets with catastrophic losses could be subject to hikes of 15 to 30 percent. The risk-management adviser and insurance broker expects hospitality, multifamily and senior living to be among the areas with the largest increases, along with woodworking and waste management.

Chip Stuart Photo courtesy of HUB International

Commercial properties tend to be considerably less risk-prone than multifamily assets, in part because office buildings tend to be fire resistant. Class A, fire-resistant properties with no losses will be the least affected by premium increases in 2020, noted Chip Stuart, executive vice president & chief sales officer with HUB International’s Real Estate and Property Specialty Group.  Owners with a variety of property types, including mixed-use assets, will have the most options among insurers, he added.

 Glickman offered key ways to mitigate risk and  insurance cost increases:

  1. Ensure replacement cost values, or the rental income values, are accurate and up to date. Underwriters are scouring the values that are presented.
  2. Scrutinize how your insurance works if you are participating in a large group program. Find out how much of your premium you get back if you leave the group.
  3. Make sure the property is up to code. Inspect elements that could post a hazard, such as the roof, steps, balconies, and railings. She suggests that owners go into their units twice a year and look for  leaks or mold. (Important tip: Do not allow barbecue grills on balconies.)
  4. Put strong indemnifications in place with all vendors (i.e., ice and snow removal, landscaping, maintenance). Also, don’t hire a vendor that does not have insurance.
  5. Require renters to have their own renter’s insurance policies. Not only will this protect tenants’ belongings, but there is typically $100,000 worth of general liability coverage to pay a third party.

Coverage Choices

Umbrella Coverage

Photo by Guy Stevens on Unsplash

In the past, umbrella insurance policies have been used primarily as a last resort. But this type of coverage is being tapped more frequently. Stuart noted that until a few years ago, umbrella coverage generally provided favorable returns for insurers, but as these policies are more routinely used, watch for rates to rise.

A principal reason behind the increased use of umbrella coverage is social inflation, which refers to societal trends and views toward increased litigation, broader contract interpretations, plaintiff-friendly legal decisions and larger jury awards. Glickman described it as a “someone has to pay” mentality. The root of trend can be traced back to anti-corporate sentiment that emerged in the wake of the financial crisis.

Cybersecurity Insurance & Employment Practices Liability Insurance (EPLI)

If your company, or even your third-party manager, runs credit reports, you are holding on to personally identifiable information. Each state has unique rules for handling an information breach, so understanding those regulations is highly advisable. In any event, if you are using a third-party it should be a requirement that they carry coverage that extends to the owner. On that same note, discrimination insurance should be carried by the owner and any third-party managers, as well.

Overall, owners should take as much risk as they can possibly handle,  but should be proactive in mitigating risk, as this can help secure competitively priced coverage.