In the wake of a relatively uneventful 2006 hurricane season, insurance carriers have been enjoying record profits. Bolstered by skyrocketing coastal and earthquake premiums, the insurance industry recorded a $60 billion profit, one of its highest ever.
Hearing the call of these record returns, capital has flooded into the insurance market, creating new capacity, new insurance carriers, and alternatives that are all hungry for premiums and a piece of the action.
What does this mean for apartment owners in 2007? Insurance carriers will once again be fighting for your business. They cannot sustain their record profits nor their inflated property premiums for another year, but they still have to grow. Shareholders demand it. In order to expand, they have to write new lines of coverage in industries that were only recently considered taboo or too high risk, and insurance carriers can’t pick up new accounts without increasing coverage or lowering premiums to undercut their competition.
Plus, they have to deal with the new capital, the new insurance carriers and new capacity in the marketplace. Ultimately, when supply increases and demand stays the same, prices fall. In this market, they will be falling quickly.
So why are the buyers the last to know where the market is? Most only review their policies once per year. However, the market can change considerably in that amount of time. Combine that with inaccurate reports generated by some of the largest brokerage firms and insurance carriers, and what you have is some fairly “sticky” pricing on the downward side of the market cycle.
Having accurate market pricing information is key to getting a good deal on your insurance policy. But many brokers and agents simply do not do enough apartment business to accurately gauge the market, and some of the larger brokerage firms are just as bloated and slow to react as the market itself.
Most market information comes from the carriers and select industry groups. It is not uncommon to see them issuing statements and information that may be six months behind what is actually obtainable in the current marketplace. The result? Many apartment owners are renewing at lower rates and thinking they are getting good deals, yet they are still leaving money on the table.
What most agents and brokers won’t tell you
Not only does the oversupply of insurance capital favor multifamily owners these days, insurance purchasers make a host of other mistakes on a regular basis. Follow these tips to avoid making common errors and you can save big on your premium costs.
Don’t over-insure. What are the odds that every one of your apartment complexes are going to be wiped out by a hurricane or go down in any one fire or single event? The answer is, “not likely.” But we still see people buying insurance to cover against that very type of catastrophic event. They have ten $1 million properties scattered throughout the state and they think they must buy a $10 million policy.
In a tough market, these individuals are paying for limits they will most likely never need. Have a probable maximum loss (PML) study conducted. If you find that your PML is $1 million then you may want to buy $2 million worth of coverage just so you can sleep easy, but that’s cheap compared to the $10 million you may have been prepared to pay.
Have a renewal strategy. Work the cycle, don’t let it work you. When the market softens, it may make sense to cancel a current policy to take advantage of lower rates, depending on how much you’ve paid so far in premiums. Lowering your premiums mid-term may also allow you to release significant escrow dollars being held, thus freeing up more cash. Also, pay attention to what time of year your policy is set for renewal. You may want to negotiate your rates at the end of the quarter, when insurance companies are looking for premium to make their numbers. Lastly, if you have coastal properties, be sure to renew before the hurricane hype sets in.
Renew early. Don’t be held hostage by last-minute quotes. We’ve all seen those renewal options that were presented the day before the renewal. Have the broker present the quote early enough to be reviewed. Then you can look elsewhere if you don’t like what they’re offering.
Choose the right broker. A lot of multifamily companies are their broker’s only apartment client, and that means they’re probably not getting the best deal. Pick a broker who’s an expert in the business of insuring multifamily properties, not just someone who writes a few apartment policies a year. Someone who’s in the business of insuring apartments will know the best timing for renewals, the latest twists in pricing, and the companies that can offer you the best deals. Plus, because this person is the steward of millions of dollars of coverage, not just your premium, he or she can exercise more leverage on your behalf. And make sure your broker has a good team—one with claims, loss control, and alternative risk expertise.
Meet with your carriers. You should have a relationship with the carriers, not just the broker. They need to know who you are and what your expectations are. Plus, being on a first-name basis will help if you need a favor from time to time.
Figure out your replacement cost per square foot. Don’t be fooled into thinking that simply reducing your insured values or replacement cost will directly equate to a lower insurance premium. Most carriers will take your insurance schedule and run it through their own model. Some carriers are going to price you based on their replacement cost numbers. If you underestimate yours, you’ll be getting less coverage for the same price.
Morgan McMillan is a senior broker in the Dallas office of McGriff, Seibels & Williams, the eighth-largest insurance brokerage in the U.S. Based in Birmingham, Ala., the firm operates 11 offices throughout the nation, including the Dallas office, which focuses on real estate and multifamily business.