Long before COVID-19, change was afoot for multifamily property holders.
A hard market made the typical approach to lowering insurance costs obsolete, and owners saw margins decrease as one of the most expensive line items in the budget doubled—or even tripled.
Today, the unknown implications of COVID-19 threaten another shift in the multifamily landscape.
While we don’t believe in crystal balls, we do believe that being ready to adapt is paramount. Staying stagnant is only a recipe for disaster. We recognize that improving margins by lowering premiums takes ingenuity, hard work, and genuine expertise.
When it comes to multifamily assets, we’ve learned to adapt our approach to help clients reduce coverage costs.
Here are three tactics we’ve implemented and would suggest you consider as well:
1. Examine Your Valuations
In today’s market, blanket coverage is quickly becoming a thing of the past. Specified-limits policies—which place a coverage cap on each and every building—are turning into the new reality.
From a rate standpoint alone, specified-limits carriers have been fairly competitive. However, without the benefit of a blanket endorsement, owners are now forced to carefully evaluate construction costs and policy limits to avoid being underfunded after a claim. Often that requires increased limits, which, in turn, drive up insurance costs.
To address this challenge, we recommend re-examining your valuations.
For our clients, we have been doing property surveys, measuring the square footage of each asset as best we are able to—building by building. This helps to more accurately capture the property value for companies that only quote business this way.
2. Address Portfolio Diversity
In previous cycles, owners could benefit by combining several properties into a single policy as insurers considered the diversity as a “spread of risk,” a key tenet in any sound risk-management strategy. With enough scale, property owners could really impact carriers’ rates because “economies of scale drive savings…” Right? Well, maybe not like we once thought.
Today, insurers have refined their reinsurance strategies and have recommitted their efforts to profitably underwriting business. And to do so, they have become much more selective in their appetite for risk, placing new limitations or prohibitions on particular locations, vintage, or other property conditions. So, counter to the conventional wisdom of “size drives savings,” trying to blend a portfolio of 1970s vintage in Dallas with 2000s in Houston, for example, will actually result in HIGHER rates for each!
Instead, we’re finding the best solutions often come from categorizing properties within a portfolio based on common characteristics and then carefully aligning those characteristics with the insurers’ appetites. This allows each carrier to focus on the type of business they want to write, which (we hope) translates into better rates.
3. Analyze Your Loan Documents
Another tactic for reducing your premiums is re-evaluating your loan documents to make sure you fully understand the permissible terms required of your insurance. You may have selected a certain deductible when you first closed the loan because pricing deltas among various options were minimal. That may not be quite as true today, so consider revisiting key papers to see if there’s a way to trim costs.
Also, see if your loan specifies an A.M. Best rating requirement. A.M. Best reviews the financial stability of most insurers and assigns a rating based on two components: financial reserves available to settle claims (represented with a letter grade) and overall premium collected annually (represented by Roman numerals).
Perhaps your loan allows for a carrier rating with an A- VI, and your insurer is an A XV. In our experience, smaller carriers tend to provide more competitive pricing. And by checking your loan requirements and being flexible, you may lower your premiums.
With this in mind, look over your loan documents to see what’s permitted.
How Are You Staying Profitable Amidst Change?
When it comes to reducing property coverage premiums, this isn’t an exhaustive list of potential tactics to employ. However, these are a few of the approaches that we’re taking that have helped us create substantial value for our clients in unprecedented times.
Given our current circumstances in a hard market, the details matter more than ever. If you have questions about your existing policies or are considering an acquisition and need a discerning eye on the details of your property coverage, my team and I are happy to help.
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