As with most things these days, the costs of insurance are rising—particularly in the multifamily sector.
In fact, some properties saw their premiums rise more than double the normal rate in 2021, says Jeremy Burr, vice president of sales at Insurance Office of America.
“Last year, pricing increased by 20% to 40% instead of the typical 10% to 15% increase we would typically see,” Burr says.
Insurance professionals say there are lots of factors driving these premium increases. For one, natural disasters and climate events have become more prevalent—and often more damaging—in recent years. These have caused significant losses for insurers.
“Insurers generally have lost money in six of the last 10 years, in part due to climate change, social inflation, unprecedented large jury awards, and inadequate pricing,” says Stephen Gaitley, senior vice president and real estate practice leader for Woodruff Sawyer.
Inflation also has played a role, as have the rising costs of building materials, such as lumber and other supplies.
“Supply chain disruptions and inflation have wreaked havoc on builders and insurance companies across the board,” says Reggie Reiter, senior vice president and commercial lines team lead at Univest Insurance. “The increases in the cost of lumber, concrete, and steel ultimately get pushed onto the insurance company in the case of a claim, so as claim payments increase, the insurance companies need to increase rates commensurately.”
An increase in liability claims, as well as ongoing labor shortages, also have sent insurer costs and premiums upward.
While most insurance experts don’t expect the sky-high jumps we saw last year to continue, they do predict rising premiums for the foreseeable future—though possibly at a slower rate. The weather will play a big role in whether those predictions come true.
“The most substantial increases will be felt by those builders with large fleets, high commercial umbrella limits, wind-prone geographies, and those with unfavorable claim history,” Reiter says. “The market for multifamily risks is still overheating slightly, but with a little bit of weather luck and improving economic conditions, we could see mid-single-digit increases by late 2022.”
How to Minimize Costs
While operators shouldn’t expect any premium decreases in the near term, there are steps they can take in the meantime.
“The costs of things like building materials and labor can’t be controlled by owners or developers since they are simply controlled by the market, but premiums can be lowered by owners reducing risks in their properties,” says Kenny Taylor, a public adjuster at The Greenspan Co./Adjusters International. “The best way to reduce risk is simply to maintain properties well. If property owners reduce fire hazards and other simple steps, insurance companies will note the property is well-maintained and might lower premiums because of it.”
Having a well-documented and annually reviewed on-site safety program is also vital. Plans should include detailed maps of the property and ensure managers and staff members are aware of all water shutoff valves and emergency systems.
“The best strategy for suppressing premium increases is to take ownership of your risk management plan,” Reiter says. “Firms that place a high priority on safety, loss control, and claims management can organically reduce the frequency and severity of potential claims, making them more attractive to insurance companies. The more competition for your business, the better rates your broker can secure.”
Since many insurers are seeing increased slip-and-fall and assault-and-battery claims lately, improving tenant safety and security is another way to mitigate these rising costs.
This might mean hiring a security team, making physical improvements to the property (like adding more lighting, gating the community, or installing security cameras), or simply better monitoring the property for potential fall risks. Operators should also ask their insurance broker for guidance.
As Taylor puts it, “Property owners can go one step further and ask their insurance agent if there are any additional steps they can take that would make their property lower risk. For example, if you own an old building that doesn’t have fire sprinklers, adding those sprinklers can drastically reduce premiums. It might be an additional cost on the building initially, but it could ultimately mean paying less for insurance.”