How to Make the Most of the Current Commercial Insurance Landscape
Entrata recently hosted Ken Gould, Vice President of Insurance at Lockton, for a discussion on how multifamily businesses should approach commercial insurance and how to use it as a competitive advantage for their properties. Below are some of the key highlights.
Rising premiums are a top concern for most businesses
If the years since the COVID-19 pandemic have taught us anything, it’s how volatile the market can be to ever changing forces. But it’s not just rental rates that have been impacted by this volatility. There has also been a resetting of commercial insurance premiums in recent years due to an uptick in significant catastrophic events like hurricanes, floods, tornadoes and more. Because of this, there has been a reassessment on appraisals that may have been undervaluing properties, which had averaged between $65 to $70 per square foot in recent years.
Many multifamily businesses were hit with between 30 and 50% increases in their commercial insurance premiums. There are a number of factors that the increase can be attributed to, including inflation, increased costs for contractors, and as mentioned previously, an increase in the number of claims against catastrophic weather events.
Advice for those looking to grow or build new developments
The biggest piece of advice Gould gives to those looking to grow their business or build new developments is get out in front of it when it comes to risk exposure. Show the insurance companies what capital expenditures you plan on to help mitigate risk and reduce the likelihood of needing to file a claim in the future, so you can keep your premiums low.
Position yourself for the best possible submission
The key to setting yourself apart from the competition and being able to secure the lowest possible rates for your commercial insurance premiums is starting early. For example, if your renewal is slated for spring 2024, you probably should have started to prepare in July. At the very least, you should start six months in advance of the renewal date.
Starting early will give you the necessary time you need to put forth the best possible submission to your broker. Most businesses start the process when the renewal is right around the corner. Starting early gives you a distinct advantage to show what you are doing or have done during the previous term to mitigate risk. Additionally, you’ll be armed with up-to-date costs that can be factored into the replacement costs of your submission.
Another piece of advice Gould gives is to resolve any claims you might have as quickly as possible so you don’t have anything pending when processing the submission. Finally, it’s important to note what capital expenditures you plan on making in the coming term to mitigate risk, while also noting what catastrophic events you anticipate being exposed to and what you have done or plan to do to limit the possibility of damages.
Do you have a renters’ insurance requirement in place
Presently, most property owners have a requirement to have at least some renters’ insurance in place along with security deposits or deposit alternatives to spread risk out across all renters. Gould recommends requiring at a minimum policy of $100,000 for every unit, meaning in the event if there’s a grease fire or some other resident caused damage to the unit, you won’t be on the hook for all of the damage.
Commercial insurance deductibles are high for a reason. As such, they should only be utilized when major structural damage occurs at the property. When submitting your application for commercial insurance, make sure to note what type of renters’ insurance program you have in place at your properties. This will go a long way toward showing some of the steps you’ve put in place to cover attritional loss.
There are benefits for having direct relationships with providers
According to Gould, there are a number of benefits owners and property managers can achieve by having direct relationships with the insurance market and major insurers. Gould states, “[You should] walk through what you're doing to mitigate loss and what are the risk management things that you're doing, part of that discussion is around the renters' insurance program that you have and how you're using it to protect the commercial insurer from losses.”
Creating captives can be an effective risk finance tool
For those of you who don’t know, captive insurance is when an owner creates a licensed insurance company to insure itself These can be especially helpful for businesses that have predictable losses that can be taken on and have enough capital to fund attritional losses. Gould notes that “[Captive insurance is] not a panacea. You don't start a captive and save money. There are administrative expenses around a captive. There are capital requirements. It's an insurance company.”
The amount of capital needed is dependent on the amount of premium that you're going to put in. There’s a capital requirement that goes in and there’s a ratio based on the amount of premium you’re going to put in because you have to have enough money in the captive to cover any potential losses. As a result, regulators are going to require a certain minimum amount of capital based on the premium you’re putting in. Beyond that, there are also administrative expenses with a captive. You need to employ someone to manage and audit the captive. There are also legal expenses that need to be taken into account.
“[A captive] is not there to save money initially, but as a long-term strategy and a way to, over time, move yourself away from dependence on buying insurance,” concluded Gould.