Trammell Crow Residential's property insurance this year cost about 60 percent more than last year–and that's one of the success stories. Companies with portfolios that include properties in places such as Florida and the Gulf Coast (hurricane risk), California (earthquake risk), and central business districts (terrorism threats) are getting hammered with increases of from 50 percent to 400 percent for certain layers of property insurance.
"For properties in areas with hurricane and earthquake risk, the market is the most difficult it has ever been," says Kevin J. Madden, managing director for the real estate practice group of Aon, a Chicago-based insurance broker. "One of the biggest [insurance] renewal dates is this June, and I'm looking forward to probably one of the most miserable months of my career."
While multifamily firms certainly expected 2005's devastating hurricane season to boost the cost of '06 insurance renewals, the increases have far exceeded the worst expectations. (Interestingly, properties with no catastrophic exposure are reporting flat pricing or increases up to 15 percent.) In addition, fewer insurers are willing to offer multifamily coverage, and they're doling out smaller amounts.
"In past hard markets, there have been pricing problems, but this is the first time in about 25 years that there have actually been capacity problems combined with pricing," says Joseph
A. Milan, vice president and risk manager at AIMCO, a Denver-based REIT. "Carriers are simply saying, 'We're not going to write your business because we don't have enough reinsurance or protection for ourselves.'" In addition to the high number and value of insured losses last year, credit rating agencies, such as Standard and Poor's, also are to blame for capacity reduction, say insurance brokers. The agencies are threatening to downgrade ratings of insurance companies that are seen as offering too much money for catastrophic coverage.
As a result, multifamily firms are being forced to find more carriers to cover their risks. "If it took two to five insurance companies to write your risk [in the past], it could take as many as 10 to 15 companies to complete your risk," says Madden. To fulfill the critical probable maximum losses level of insurance, Trammell Crow had to buy insurance from 17 providers this year; last year, it needed only eight. Like many others, the real estate firm had to reach out to the global markets. "After going to all of the domestic markets, begging and pleading, finally the linchpin turned out to be a Lloyds' syndicate [in London]," says Scott Woodward, Trammell Crow's risk management director.
Fortunately, Trammell Crow already had a strong rapport with the London markets. Such relationships are the key to piecing together a successful insurance package, experts say. AIMCO, like many companies, makes it a point to personally meet with underwriters to pitch their accounts. "It's analogous to applying for a job," Milan says. "There's a stack of applications, and if they're not personalized, you are not going to get noticed."
Advance planning also is essential. AIMCO typically plans 90 to 100 days ahead of its renewal date, but for its March '06 renewal, the company started planning right after Hurricane Katrina hit last summer, Milan says. And more planning is under way as hurricane season officially starts this month. AIMCO is reviewing its disaster preparedness plan, which includes everything from deploying satellite phones to having a construction services team ready to handle any property damage.
"We are partners with our insurance companies, and we don't take the view of a hurricane as an act of nature that we can't control," says Milan. "We do absolutely everything we can on the pre-loss preparation side." And you can bet insurance companies will take notice.
–Rachel Z. Azoff