Why Insurance Rates are Rising for CRE Owners

Night time view of San Francisco from Rincon Hill.

Right now, commercial property owners are dealing with rising rates in both property and liability insurance.

“In the past eight months, the umbrella rates have gone up, and that’s attributable to the financial capacity available in the market,” says Garet Marr, director of Insurance Services for Franklin Street, which has an insurance portfolio of 400,000 multifamily units and 30 million square feet of commercial space. “There’s a low-interest-rate environment, and carriers depend on that for investment purposes.”

Additionally, insurers are getting hit by a series of lawsuits. “The litigation environment in the country has gone in a direction that’s not favorable to claimants lawsuits,” Marr says. “Settlements that were maybe $200,000 or $300,000 in the past for a terrible situation are now $1-million plus. Settlements that were once $1-million plus are now settling for $10 million. As soon as these issues go into some type of mediation or settlement, it ends up being a largely inflated claim just due to the legal environment.”

For real estate owners, specifically apartment owners, the umbrella insurance market has been an enormous challenge, according to Marr.

“People are seeing 100%-plus increases, and that’s because an umbrella policy might have historically been $10 or $20 unit,” Marr says. “Now, they’re $30, $40 or $50 for a unit, and that’s just if there are no losses. If there’s been a bad loss or a couple of significant losses, which happens if you own a large number of multifamily units, it has been a challenge. That’s what people have been seeing.”

To get the best results in this environment, Marr says that CRE owners need to take a unique approach to the marketplace and leave no stone unturned from upon renewals and when buying deals.

“Each property segment has its own problems and own strategies to solve those problems,” Marr says.

Marr says COVID hasn’t yet had a direct impact on renewals results or pricing increases. But that’s primarily because these price increases can move slowly through the system.

“Whether it’s property insurance claims, like hurricane claims or fire claims, or whether its liability claims, it takes a long time for them to be paid out often, especially after a hurricane where you have thousands of businesses affected,” Marr says. “There are only so many adjusters that can go out there. Then there are contested payouts, public adjusters and all these different parties involved in a large claim. Up until early this year, a lot of hurricane claims from 2017 were still open and still being dealt with.”

Given that timeframe, Marr says it’s too early to draw conclusions about what the turbulent 2020 will do to the market.

“Covid and the claims from the storms and wildfires this year haven’t had an impact on the market at this point,” he says. “That is something that will be baked into next year and the year after and the year after that simply because it takes a long time for these carriers to understand truly what their profit and losses are.”

The world’s 10 largest insurance markets, in order, as defined by total premium written in 2018-2019, are: the United States, China, Japan, the United Kingdom, France, Germany, South Korea, Italy, Canada and Taiwan. The Triple-I’s projection of a 4.5% GDP decrease in the world’s 10 largest insurance markets in 2020 as compared to 2019 was weighted based on the total premium written in each one.

“The extent of new lockdowns, the success of vaccine trials and the efficacy of vaccine distribution will determine the pace of economic recovery in 2021, with consensus pointing to Q3 or Q4 2020 as rounding the corner out of the pandemic part of the recession. However, economic activity will not heal and recover until well into 2021 and early 2022,” Léonard said, adding, “Under best scenarios, economic growth will not start to fully recover until Q2 and Q3 2021 in advanced economies and Q3 and Q4 in developing economies.”

Global GDP is expected to contract between -5.5 percent and -6.5 percent in 2020, the Triple-I’s report said, citing benchmark forecasts such as the ones issued recently by the International Monetary Fund (IMF) and the Organisation of Economic Co-operation and Development (OECD).