Real Estate: Unprecedented Challenges for the Real Estate Market

Risk Capital Remains Constrained 

Property insurance is usually the largest insurance spend of real estate firms, which have experienced significant rate increases over the last five years. Over the last two years, insurers have focused their capacity on accounts with favorable risk quality, realistic insurance to value, and good property conditions. Insurers have learned that risk selection continues to be paramount, and we expect to see narrowed risk selection in 2024. To minimize rate increases, real estate firms should focus on property condition, insurance to value, occupancy, and CapEx. Additionally, property concentrations in catastrophic zones will impact how much capacity the insurer takes on and the pricing at which they may do so. 

With general liability, insurers have been sounding alarm bells about social inflation, financed litigation, and nuclear verdicts. Many underwriters believe there is no end in sight. Insureds should review their limits annually to consider the increased cost of litigation. What helps is for firms to focus on contractual risk transfer on leases, construction, renovation, and maintenance  agreements for work on premises. 
 

For 2024, property rates will continue to increase, and terms and conditions will be restricted across all asset classes due to limited market capacity and increased claims and reinsurance costs. However, there will be variability depending on the class, venue, loss experience, and other characteristics. Casualty rates will increase as well, with insurers focused on excess liability capacity and pricing again.

To minimize rate increases, real estate firms should focus on property condition, insurance to value, occupancy, and CapEx.

2024 Trends and How to Ensure Continuing Coverage

Multifamily: With round-the-clock occupancy, little control over resident activities, and limited access to unit interiors, owners may struggle to control their exposure to loss. Property condition is paramount. Updates to pavement, electrical, roofs, plumbing, and HVAC systems are critical.

Retail: Tenant occupancies, CapEx estimates for older buildings, and vacancy rates will be key underwriting considerations for carriers. Owners should provide the details their brokers need to show they are above-average risks.

Industrial: Current tax credits incentivize the use of solar panels; however, insurers are not comfortable with solar panels on roofs because there is an increased fire risk. Owners should work closely with insurers on the specifications and installation of solar panels to get underwriters on board early in the process.

Three Actions to Take Today

First, it is vitally important that you document specific risk improvements year over year. Look to your insurance broker for advice about where to invest scarce CapEx dollars. We recently advised a large property owner to replace a certain kind of door in their property. The door replacement reduced the liability claim frequency by 40%, and the client benefited from a 25% rate reduction at the next renewal.

Second, you need an expert broker who will engage with your lenders during the financing or refinancing process. Satisfying requirements has become more difficult. Your broker should clearly explain all your options and should be able to negotiate insurance requirements in your favor.

Third, review your broker’s carrier relationships along with your risk and insurance program. Having a broker that understands your risks and has strong insurer relationships to negotiate deals is critical.

With increased scrutiny on risk quality or mix, sometimes carve-outs are required to preserve the master program or to access less expensive programs. Brokering in a challenging market environment requires subject matter expertise and experience. The record of accomplishment and experience of your broker team will help secure competitive options.

As the economy rebounds and investment activity accelerates, you want to be well-positioned in the insurance market with an exceptional risk profile. You should be able to rely on your broker’s good judgment and expertise in the face of uncertainty, limited data, and competing demands for capital to develop or maintain your risk and insurance program. The broker’s role is to protect your assets and reduce the variability of profits and losses to enable you to grow and/or increase returns.