Ostrich in the sand approach is deadly…
We all know the image of the ostrich with its head in the sand. In the same step we all know individuals in business that seemingly disappear when challenging business environments, mistakes, problems or conflicts arise. The head of the ostrich goes in the sand and instead of meeting those challenges head-on they let others take them on or they wait for the tide to change before re-emerging. While in life we all know an ostrich or two, in today’s turbulent commercial real estate insurance market the placing the head in the sand approach is deadly.
Hard Market for Commercial Real Estate
For those commercial real estate holding partners, you have seen both the insurance industry and myself communicate that we are presently experiencing a “hard market”. Many will point to this as the most challenging landscape the insurance industry has seen since the fallout of the tragic events which unfolded on September 11, 2001. We as an industry have pointed to the news of large wildfires, hurricanes, flood, and wind/hail events in 2017 and 2018 which severely impacted insurer’s balance sheets globally but that is only a portion of the story.
Trends in Litigation
The trends in litigation with both Auto and General Liability claims have increased in frequency and severity. You could take the exact same liability claim scenarios and had it occurred earlier this decade it likely closed out in the range of a five (5) to low six (6) figures settlement including defense costs. Fast forward to the last few years and that same claim scenario closing out in the six (6) figure range we look at as a success as we now commonly see these matters going into the seven (7) figures more frequently.
As a direct result of this is we have a commercial real estate insurance market place where insurers across the board are chasing premium increases, reducing limits, reducing participation, increasing the deductible and/or pulling out of writing certain classes of business altogether.
Moving Parts First Ingredient
There are a lot of moving parts in this challenging landscape but what does this mean for you? As respects, a class of business owners with 91% or greater Office holdings with mostly fire-resistive construction types are the most favorable. Industrial, Self-Storage, and Retail occupancies are somewhere in between. Whereas Habitational occupancies, of which I include Hospitality, are tending to have the worst experience. The occupancy class, however, is just one ingredient in that pie.
Moving Parts Second Ingredient
The second main ingredient is location and insurers are looking at exposures to Fire, Crime, Flood, Hail, Hurricane, and don’t forget Litigation environments to how they will consider writing and what rates they will write with. The environment continues to change weekly as just this month one of the largest Primary Umbrella Excess Liability insurers took a stance to non-renew any account with greater than 10% or more Habitational holdings. This leaves a very thin group to fill in the capacity which are driving rates not seen in more than a decade.
Questions to Ask Yourself in Commerical Real Estate
So how exactly does one meet this hard market head-on? Ask yourself these questions:
- Does my broker know my business? In today’s market partnering with someone who knows your business is critical. Insurers are under intense scrutiny to not miss a detail in underwriting an account. These are not the days of putting as much business on the books as possible when an account “generally” fits the bill. There is a story to be told on every account and every asset. You will find the most success when your agent can tell your story from the cradle (who is the owner/operator and if applicable their investors), to the investment (how was it found, due diligence, what are the debt levels, what is the plan for holding), to the grave (what is the end goal of the ownership group and the individual investments).
- Does my broker have the resources? Now more than ever having resources to every inch of the market place is critical. A broker competition where the marketplace is split will leave you without the best solution as most medium to large real estate portfolios is comprised of at least three to four market components that are required for both basic risk management but also for lender and/or investor compliance. If you have the best deal in three areas with one broker but not the last one your broker is unable to deliver on the best complete commercial real estate insurance program. I recommend committing to a single broker to deliver the best complete program.
- Is my broker consultative rather than just transactional? Don’t focus on just the transactional side of your commercial real estate insurance program. As I put “Does my broker know my business?” as in the first point here I believe that partnering with someone whom you can trust to work directly with your lending, legal, leasing, and vendor partners is equally important. Insurance and Risk Management is a service and having the absolute best price down to the penny does not always equate to a good service partner. You need someone who will help guide you in proper risk transfer through contract review and consultation. You also need someone whom your other business partners like to work with as your Broker should understand the importance of every part of your business of which a cost-effective insurance policy is just one small but important piece.
- Is my broker someone whom I want to partner with for the long haul? Hard markets come and go. No one has a crystal ball that can tell you exactly how long this will last. What I can tell you is that the next ten years will look different than the last. I am not focused on winning just one game but rather on how best to navigate an infinite journey for what I hope are life long clients. The best businesses last forever as their leaders do not solely focus on tomorrow but in building an organization will thrive when they are gone.
This moment in the commercial real estate insurance marketplace will pass and while it may be painful, look for those who choose to meet challenges head-on.