Over the course of the last five years, insurance has increasingly become a hurdle for multifamily development, escalating to be among regulations, labor, and now supply chain issues.
While each project has its individual insurance needs due to geography and other factors, across the board, insurance hikes are being felt from all angles including general liability, property, and umbrella liability.
Longtime experts in the field are working to create solutions to absorb these quickly growing costs.
“I have been handling complex risk management programs for 30 years,” says Michael Payton, who serves as the vice president of risk management at the national multifamily development company Mill Creek Residential. “Now, with escalating lumber prices, coming out of the most active hurricane seasons on record, wildfires, global catastrophic claims, civil unrest, and a global pandemic, it’s a natural result to have premium increases and higher retentions.”
While all of these factors are hammering developers, one of the biggest challenges is builders’ risk.
“We place insured values of $2 billion per year on builders’ risk,” Payton says. “We started having concerns when a couple primary carriers and syndicates of Lloyd’s of London decided that they weren’t going to be covering multifamily builders’ risk any more, which put a pinch on capacity. When there are fewer suppliers, there are supply issues. So, we have seen a 20% to more than 30% increase for premiums on builders’ risk year over year. Many of our peers have experienced even more significant increases.”
Hand in hand with claims, insurance companies have ramped up security requirements, says Katie Santarelli, president at Wye River Insurance. Builders’ risk insurance companies mandate the use of specific security companies and the installation of cameras and sensors throughout the project in addition to the lighting and fencing. These security contracts come at a price around $150,000 per project site.
Payton agrees that site security is a top priority, particularly in areas where there has been unrest. Now the minimum is a completely enclosed construction site with cameras, lighting, infrared cameras for motion detection, having multiple security personnel on-site, monitoring water flow when it shouldn’t be flowing, and the ability to have immediate and effective emergency response.
“It’s mandatory, not an option,” Santarelli says. “Now you have to have electricity on the site and set up towers all over the site. Fortunately, we expect the builders’ risk rates to start to flatten because every builders’ risk is requiring these securities and the frequency of claims is going down.”
Payton also points out that there has been a fundamental shift to purchasing excess liability, complicating the process for buyers. Insurers will no longer offer the high limits necessary for complex construction projects, often limiting individual layers to only $10 million, so developers have to stack multiple carriers to get the needed insurance.
“Instead of dealing with one insurance, now developers have to create a tower of five,” says Santarelli. “It’s a lot of work and creates confusion. It has been the toughest market I have ever worked in. Builders’ risk has more than tripled in the past five years from $0.26 to $0.55 price per $100 of contract value. Plus, deductibles are much higher.”
To layer on to these challenges, there’s also the complication of timelines since many of these policies have expiration dates. The majority of construction projects aren’t able to be completed on time, so many policies have to be extended, which isn’t an easy proposition.
For instance, Santarelli cites a project that was scheduled to close in December 2020, but did not close until April. In December, the builders’ risk rate was $0.42, but just four months later, the builders’ risk rate had escalated to $0.53.
It’s also just taking longer to get quotes on big jobs, which only stand for 30 days. She says that carriers are looking at every project on its own merit, and wood-frame is being hit the hardest.
Dealing with the Pandemic
The pandemic didn’t make any of this easier.
“Insurance is a relationship business,” Payton says. “We spend a lot of time and money to meet in person with underwriters, here, in London, or in other parts of the world, which obviously couldn’t happen because of the pandemic.”
As another consequence of the pandemic, Santarelli has been swamped with issues surrounding habitational risk that included a flurry of claims, policy inspections, and new coverage for COVID. Plus, she says that March to January 2021 were challenging months due to insurance and delayed claims on construction. Hiccups in the supply chain were not covered, even though they delayed delivering the program, because COVID is not considered property damage.
Overall, the insurance industry has made a stand that COVID-related losses will not be covered. Both property management and construction companies were considered essential and now have many lessons learned after they had to pivot, create new policies, and spend money on contact tracing and protecting clients.
Wye River Insurance will be spending much of the next year analyzing and aggregating what has happened to then put it into forms that are beneficial to the industry. Santarelli is hopeful that positive things will come out of it, including insurance policies that cover communicable disease and more traction in the alternative risk market, specifically in parametric insurance programs.
Coping Mechanisms
Payton has been able to create some ways to deal with the crushing challenges. Here he offers five critical tips.
First, make sure your underwriters are best in class by exhibiting details of your loss control program and detailed loss history.
Second, provide detailed policies and procedures to underwriters. Carriers are really focused on water claims now. To mitigate that, Mill Creek previously implemented a water works policy, similar to a hot work policy.
Third, work with the design and construction team. Mill Creek is looking at light gauge steel as an alternative to lumber.
“In the past it didn’t make sense, but now it’s definitely an option,” Payton says. “From a builders’ risk and property insurance perspective, noncombustible construction is probably one-third of the insurance premium of wood construction. It now may make sense to change the model a little bit. There will be a lot of discussion about project types, material. You still have to build, you just have to find ways to create savings.”
Tied into that is a fourth tip: Look at different retention structures and other risk financing mechanisms including captive structures.
Fifth, Payton encourages advanced planning and transparency.
“Communication with senior management is so important,” Payton emphasizes. “I took my boss to London a couple years ago so he could hear the underwriting message firsthand. Some risk managers didn’t communicate well enough or early enough, and are now looking for different jobs. You have to remove the element of surprise.”
Payton has Mill Creek preparing for what he expects to be a significant increase in excess liability and an estimated 30% increase in cyber rates.
These two experts will share more ideas and other solutions during a session at the 2021 Multifamily Executive Conference in September at the Bellagio in Las Vegas. Their session, Negotiating Insurance Challenges, is scheduled for Sept. 14 and also includes Alex Kaplan, executive vice president of alternative risk at AmWINS Group, Inc., who will provide insights on parametric insurance programs developed to respond to the need for coverage on communicable disease.
Register now for the event with this exclusive discount—get $150 off with code MFEC2021.
