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Marsh Study: Real Estate Firms Looking to Reduce Costs Must Navigate Evolving Commercial Insurance Market

Source: Marsh

Posted on 06 Nov 2009

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As commercial real estate firms look to recover from the impact of the global economic downturn, their cost management efforts have been helped during the past several months by generally favorable insurance pricing and readily available coverage. However, a new real estate benchmark report from Marsh, a leading insurance broker and risk advisor, finds these firms must address emerging challenges related to insurer credit downgrades, as well as rising costs for directors-and-officers liability insurance and difficulty obtaining coverage for certain habitational risks.

"In this environment, insureds are reevaluating every insurance cost and reconsidering coverage amounts and policy structures," said Jeffrey Alpaugh, a managing director of Marsh and leader of the firm's Global Real Estate Practice.

Marsh's benchmark report outlines recent trends in the insurance marketplace for real estate companies, including investment advisors and managers, real estate investment trusts (REITs), real estate operating companies (REOCs), third-party managers, asset managers, fiduciaries and financial institutions. The report is based on actual property, casualty, environmental, financial and professional liability insurance purchases of more than 370 U.S. and Canadian commercial real estate firms renewing their programs in the second quarter of 2009.

According to the report, with the subprime crisis and other economic and performance issues leading to credit ratings downgrades of certain insurers, some real estate firms have turned to credit wraps to comply with loan covenants that require insurance companies within their property programs to have strong credit ratings. However, this option is becoming limited in availability and potentially costly.

Marsh also found costs for some critical coverages, such as directors and officers (D&O) liability insurance had been tightening considerably across the real estate sector during the second quarter. However, the insurance market for D&O coverage generally has improved somewhat since then. Notably, while many public companies participating in the National Association of Real Estate Investment Trusts (NAREIT) program saw premium increases of 20 percent to 40 percent along with higher retentions in the second quarter, the effects haven't been as widespread more recently. Meanwhile, the mortgage REIT sector continues to experience increases.

In order to cut costs, real estate firms have amended terms of their insurance programs, increased retentions, and reevaluated the amount of property catastrophe coverage they purchase. In addition, obtaining general liability coverage for certain habitational risks continues to be challenging, requiring significant self-insured retentions for portfolios containing mostly residential properties. The report also cited emerging underwriting issues associated with foreclosed real estate assets as well as exclusions for tainted dry wall.

Additional key findings of the Marsh report include:

* Real estate sector sees steady demand for property terrorism insurance. During the first half of 2009, 70 percent of commercial property owners purchased terrorism insurance coverage, including 83 percent of firms with total insured values of $1 billion or more. By comparison, 57 percent of businesses across all industries purchase this coverage.

* Professional liability coverage for property managers stabilizes. Although this coverage generally becomes more costly during economic downturns in step with rising claims activity, costs for property managers are stabilizing with renewals ranging from flat to 5 percent increases.

* Packaged real estate mortgages coming due in the next few years have caused concern about the real estate marketplace's capacity to assume that debt. Insurance requirements for the real estate sector have evolved, and the insurance markets have had to adapt accordingly.

* During the first and second quarters, real estate companies typically experienced property renewals from flat to a rate increase of up to 10 percent. The exception: properties located in hurricane and earthquake zones or firms with recent property losses, both of which saw insurance costs rise between 15 and 25 percent during this period. Subsequently, however, Marsh found that property insurance market conditions have become more favorable for both catastrophic and non-catastrophic exposures in the third and fourth quarters of 2009.

* Environmental insurance marketplace softens. An influx of new insurers has resulted in additional capacity and lower premiums for real estate firms. Both pollution legal liability (PLL) and contractors pollution liability for real estate companies have seen premium rates at renewal range from flat to 10 percent decreases.