Even before COVID-19, there were many factors already putting upward pressure on real estate insurance premiums. Mostly, this was due to upticks in climate and catastrophic losses caused by forest fires, hurricanes, hail, etc. Then came the pandemic which left commercial and retail buildings empty and landlords struggling to pay bills.
These losses far exceeded insurers’ expectations leading to a “hard market” in an attempt to recoup losses through increased premiums.
In a regular hard market, buildings with good maintenance and a clean loss history, rate increases of 10-20% are common. For substandard buildings that are old or carry a loss history, rate increases of 30-40% are not uncommon in this part of the market cycle. Now in these unprecedented times, rates are set to increase even further.
To combat these trends, real estate owners and operators need to partner with the right insurance advisor/broker and advisors/brokers need to play a risk management role in helping strategize leading up to renewal and partnering with owners to implement alternative ways of managing risk.
Worry About Things You Can Control
Broad market premium increases are likely outside of your control but there ARE things that you can affect – such as building maintenance.
Real estate owners and operators with a good in-house risk management program are more likely to control see lower rates. This means being proactive about preventative maintenance such as:
- Promptly replacing equipment like boilers, pumps, water systems, electrical panels, etc. that has reached or approaching end of life
- Keep up with building maintenance by repairing broken handrails and cleaning HVAC and lint filters in dryer ducts regularly as these can cause fires
- Upkeep common areas like parking lots and other high traffic areas to prevent slip and fall losses
- Testing safety equipment like fire pumps and alarms regularly to ensure they’re in good working order
- Document where the water shut-off valve is and how to isolate leaks to prevent further damage
All these things demonstrate good risk management to underwriters and prevents losses from occurring in the first place.
Safety & Security
Aside from water damage, crime losses like theft or vandalism are another major source of claims. Make sure you conduct regular security audits and act on the recommendations. Things like hiring third party security, installing cameras, and upgrading access controls can also help.
Before you hire any contractor for a job, make sure you receive a certificate of insurance before you hire them and ask them to list you as an additional insured on their policy. That way if you are caught up in a lawsuit for something they did, their policy would cover you so you wouldn’t need to use your own. As an additional measure, ask your broker partner to review their insurance policy.
Similarly, have lawyers vet any agreements that you enter into to ensure you are protected and indemnified properly. You don’t want to pay for someone else’s mistakes.
If you have a solid risk management plan, you are not likely to be hit with smaller losses. This leaves you free to increase your deductible and enjoy the cost savings.
Working with another client on their property insurance, we were able to save them ~7% on a nearly 6-figure policy by simply adjusting their deductibles after implementing a risk management plan.
Split Your Policy
For larger buildings with mixed uses, it might make sense to use a different carrier for each occupancy. In a “hard market”, insurers often offer smaller limits and some carrier may have better pricing or a preference for certain occupancies over others.
For example, if you have a mixed used building with residential and commercial occupancies, you might want to insure the residential occupancies with one that specializes in residential while insuring the commercial portion with a commercial insurer.
Maintain a Good Relationship with Your Advisor
I’ve harped on this many times but try to only work with 1 advisor. While it’s standard practice in most industries to get quotes from multiple sources, this is not the case with insurance. Most advisors can all access the same insurers and insurers can only release quote to one advisor so you’re not going to get any better pricing through a different advisor unless they have a better understanding of how to present a risk in the best light possible.
Meet with your advisor regularly throughout the policy term and start your renewal at least 90-120 days in advance. If they know your business and understand any losses or changes that have occurred mid-term, they will be in a better position to negotiate your renewal.
Maintain a Good Relationship with Your Insurance Company
The role of the advisor is to be the intermediary between the client and the insurance company. The more comfortable the underwriter is with your business, the better they will take negative news and the more they will be willing to help you.
For this reason, I also advise against switching insurance companies too often to try to win short-term pricing decreases. Your advisor can help you assess when and how often you should be taking your risk to market.
Tell Your Story
Think about the brand story you tell your clients. What about the story you tell prospective employees about what it’s like to work for you? Are there any cool things you are doing for the community, for charity, or to give back? Highlighting these things can cast your business in a better light with insurance companies leading to preferential treatment on eligibility and rates.
I had a client recently who struggled to secure D&O insurance until we came across an underwriter who had heard of the brand and the mission of the company. Better yet, they used the products personally. As a result, they were willing to offer terms even when nobody else wanted to and at pretty good rates as well!
If your company is doing something cool, don’t be afraid to share it with your advisor and the underwriter.