The Tides Turn In The Insurance Marketplace
The tide is now turning in the insurance marketplace, which will affect your bottom line in the years to come. During the past several years the insurance industry was in what is called a “soft” market. A soft market is similar to a buyer’s market when it comes to the Real Estate Industry. The buyer has many opportunities available because of an influx of carriers, relaxed underwriting requirements and aggressive pricing that basically allows them to call the shots. In a “hard” market insurance is generally more difficult to obtain because of the limited market place, stricter underwriting guidelines and insurance carrier’s profitability over growth attitude.
Just like the tides in the ocean, the insurance industry runs on cycles. Natural catastrophes are at an all-time high, which is one of the major factors driving the change in this industry. Carriers have been hammered with one of the worst years in decades for catastrophic property losses. We have been confronted with numerous floods, tornadoes and hurricanes in the United States and on a worldwide scale we have suffered the devastating earthquakes in Japan, Haiti and New Zealand, as well as the tsunami in Thailand. This has caused insurance carrier’s loss ratios to skyrocket.
We are now starting to feel the effects as insurance carriers are increasing premiums to offset losses and implementing more stringent underwriting requirements. According to the Insurance Information Institute, these extremely low interest rates cause carriers to have to place a much greater emphasis on underwriting and pricing discipline. This leads to less competition and ultimately higher premiums. Factors that are causing the firming market are timing, higher reinsurance pricing, the prolonged low interest rate climate, and stricter analysis by rating agencies. The property and construction industries are generally the hardest hit during this type of hard market.
So what does this mean for your bottom line? You will need to be proactive in your budgeting for insurance expenditures. You should focus on funding your reserves now for future maintenance projects, instead of waiting for something to go wrong and then trying put a band-aid on the problem. Carriers will want to know that you are being proactive and preparing for future repairs to the roof, parapets, sidewalk, as well as updates to the plumbing and electrical.
Since carriers will be putting more restrictions on what is and isn’t acceptable to them, you will need to make your property more appealing with respects to the life safety of your building. Smoke detectors, emergency lights and illuminated exit signs in the common areas and stairwells are usually one of the first things a carrier looks for. Although it may not be required by city or state code due to older buildings being grandfathered, the insurance carriers will be looking for these important features when considering insurability. This can be done rather inexpensively in smaller buildings, but larger buildings may not get off so easy, so plan ahead.
You will also need to take into consideration your property’s loss history. If your building is plagued by water damage claims, insurance carriers believe that the likelihood of future claims is inevitable. Carriers will not be as willing to bend their guidelines and provide a quote, as they may have done in recent years. They will inquire about the cause of each claim and they will want to know what steps have been taken to not only make the immediate repairs, but what is being done to prevent future losses to the building.
Another red flag that carriers will be looking out for is outstanding Department of Building (DOB) violations. If a property has a long list of outstanding violations, they feel that it is an indication that the maintenance of the building is lacking and they may decline to provide a quote.
As with the tides in the ocean, you may not have much control over a hardening insurance market. By implementing these recommendations you will have advantages over other properties. Your property will be more appealing to carriers therefore you will have more opportunities to get the best pricing and coverage’s available. Start planning now as history has shown the hard market will be around for several years before transitioning once more to a soft market.
