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Owners, managers and operators of habitational real estate properties such as apartment buildings are facing sharply increasing rates, shrinking capacity and higher deductibles as property insurers look to correct course after mounting weather-related losses compounded an already distressed risk.
Years of low prices and rising losses from wind, hail and tornadoes are finally coming to a head, and the disruption is making it harder to complete insurance programs, experts say.
Multifamily properties can be problematic for insurers due to their 24-hour exposure, experts say. Market capacity for multifamily accounts may have declined by as much as 50%, said Eric Schake, Dallas-based real estate and hospitality leader, corporate risk and broking, Willis Towers Watson PLC.
“It’s a very limited marketplace now. You can still get deals done…you can get the capacity, but it comes at a price and with higher deductibles,” said Mr. Schake.
The situation has become a “perfect storm” for owners of apartment complexes, most of which are wood-frame construction, said Barry Whitton, managing director, Burns & Wilcox Brokerage, based in Atlanta.
“Habitational is one of those ugly words in the marketplace right now. They’re seeing more drastic changes in terms, conditions and premiums in most occupancies,” Mr. Whitton said.
From a combustibility standpoint, frame habitational risks require a higher rate and smaller limit, said Mark Reisig, New York-based executive vice president and chief underwriting officer, property at WKFC Underwriting Managers, part of Ryan Specialty Group LLC.
“These risks tend to be unprotected without sprinklers and close to the next building nearby,” Mr. Reisig said.
Convective storm losses and fires, many of which are tenant-caused, are driving loss ratios in habitational, said Paul Smith, vice president at AmWINS Brokerage of Georgia LLC in Atlanta.
Even noncatastrophe exposed apartment complexes are seeing rate increases, Mr. Smith said.
“If you’re a clean account and have not had a loss, you’re still looking at 10% to 20% increases, coupled with deductible changes right now,” he said.
“If you’ve had a loss or poor performance, in some ways all bets are off. We’ve seen those accounts go for 30% to 50% increases, and it can be more. They’re difficult placements. The capacity in the primary layer is much harder to put together,” said Mr. Smith.
“When you’re used to seeing flat rates over an extended period of time and suddenly it’s going up 10% to 15% every six months or so, it’s compelling,” said Mark Humphreys, vice president of litigation and risk management for real estate developer Watt Cos. in Santa Monica, California, and vice chair of the Risk & Insurance Management Society Inc.’s external affairs committee.
“We’re looking at breaking out our multifamily assets and devising a separate stand-alone insurance program that will probably carry less coverage for a price that would not have been considered two or three years ago,” Mr. Humphreys said.
Along with rate increases, insurers are raising deductibles for multifamily properties, experts say.
Even deductibles for perils other than wind and hail have increased, while insurers are also implementing percentage wind/hail deductibles, said Mr. Whitton.
All-other-peril deductibles for apartment complexes have increased to $100,000 from around $10,000 a few years ago, he said.
Higher deductibles present a challenge for multifamily owners and operators because lenders may require them to have a lower deductible or retention than insurers are offering, and it’s not cost-effective to buy down the deductible, said Mr. Schake.
“They’re out of compliance because of the fact that retentions and deductibles have increased … so they need to get exemptions and waivers to the original loan documents,” he said.
Owners and operators are unprepared for the level of increases being charged by insurers, said Marc Reisner, Boston-based multifamily practice leader at Marsh LLC.
“Every one of their investments is at the individual asset level which needs to support its own profit and loss statement. Within a budget there’s an expectation of increases in line with inflation at 2% to 3%, but these budgets keep seeing huge swings in expenses when an insurance portfolio is increased 20% to 50% in a given year,” Mr. Reisner said.
“It’s problematic because it hits the profitability of the asset and it also affects its market valuation,” he said.
Record catastrophe losses the last two years mean insurers are paying closer attention to how owners and operators value their buildings for insurance purposes.
“Insurers are now pushing back for increased valuations. They’re requiring a longer historical loss experience,” said Mr. Reisner.
Multifamily property owners are also experiencing increased rates for casualty insurance due to higher claims, experts say.
Habitational real estate risks are generating more litigation, especially in plaintiff-friendly jurisdictions, said Brian Davidian, Los Angeles-based executive vice president and casualty and habitational expert at R-T Specialty LLC, a unit of Ryan Specialty Group.
“In California, for example, there are favorable laws for tenants, alleging things like habitability and wrongful eviction. It’s very easy to sue here and win,” said Mr. Davidian.
“It’s racking up a lot of expense dollars and insurers are finding it very difficult to defend … As a result, they’re pulling out of the class,” he said.
Liability insurance prices are increasing for multifamily assets, but not as much as for property insurance, said Mr. Humphreys.
“First party insurance is where I’m seeing a very skittish underwriter class through the industry,” he said.
Implementing risk management plans is difficult given the 24-hour exposure of multifamily properties, experts say.