Landlords and property developers are increasingly frustrated about the cost of insurance premiums but applying strategy will help them strike back.
It’s fair to say that until just recently, insurance was something the Real Estate industry didn’t spend a great deal of time thinking about. Property owners and developers simply viewed it as a necessary evil. A box on the list to be ticked. But insurance is now ranked as high as number two or number three on the expense line items list, and a clear sense of strategy needs to be brought into play. Much like a baseball pitcher considers which type of ball to deploy.
It’s all in the timing
Full transparency. Varney Agency Real Estate, for which I’m Senior Vice President – Commercial Real Estate and based in New York, is focused on highlighting the opportunities for insurance to be a commercial enabler rather than just a cost.
Clients have said things like, “This is a sunk cost. We need it. We know we need it. The banks require it. There’s no way around it. Give us a ballpark number”. So I’m speaking from experience here. And the biggest impact I believe anyone looking at taking care of their P&C insurance coverage could make is improving their timing. Not leaving it to the last minute to get a broker involved.
To leave it less than two weeks before a policy renews is leaving it too late. It doesn’t give your broker enough time to properly advocate for you, to fully analyze the property/project and secure you the best coverage and pricing.
Ideally, if you have enough time, it’s best to gather and analyze as much data as you can and submit a full story to carriers about the property being insured and the family or company involved. It’s worth considering that submissions to insurance companies are close to ten times what they were five to ten years ago. Carriers are overloaded and, if you are able to submit a detailed dossier, your insurance requirement goes to the top of the list and is underwritten a lot faster.
Not that eleventh hour requests for coverage are always the fault of the client. It’s not unheard of for some brokers to only send out a policy renewal reminder a couple of days before, when not much by way of an alternative policy or lower premium can be arranged.
The customer’s overriding feeling in that instance is that they’ve been ‘handcuffed’ and are looking for an escape clause. Brokers could share terms with clients well ahead of renewal, although it’s not always in their interest to give clients time to look for alternatives.
Frankly, my advice would be to play hard ball. Policyholders can approach their own broker, or a rival broker, to analyze their cover requirements and costs as earlier as 120 days before renewal. That’s without any obligation or incurring any services fees. So get it in a lot quicker, be proactive instead of reactive, and the outcome is far more likely to be in your favor.
Beautifully controlled and delivered with nuance
Just as a professional baseball pitcher has more than one pitch in their arsenal (a splitter, slider, or curveball for example), I can’t emphasize enough how necessary it is for businesses seeking help with their P&C to resist the ‘one-size-fits-all’ approach.
Some brokers might be complacent in this regard. You might find that the more long-standing your relationship is with your broker, the less likely they are to investigate new angles on your properties and portfolio.
For instance, the conversation might go a bit like this: “’You’re in the Northeast? Boom. Here’s a boilerplate insurance requirement. Thanks. It’s a pleasure doing business with you”.
Whereas what you really want to hear from your broker is: “I see the building is in the Northeast. Well, not every property in the area is in the flood zone – including yours – so you won’t be needing $50million worth of flood risk limit.”
It’s this kind of due diligence that can have a real impact on lowering insurance premiums. Especially as, whether you’re a landlord for an existing building or perhaps applying for a new mortgage or new acquisition loan, there are always lending requirements stipulated by your bank that need to be satisfied. If only to ensure that you have the insurance in place to pay for any claims that might occur so that the building remains functioning and your cashflow isn’t affected.
Thinking outside the box
It’s decision time. All the bases are loaded. And the standard play is to see which of the insurance company big hitters are willing to take your risk. But what if you could play it differently for a change? What if you could share it?
A new approach is emerging called ‘alternative risk financing’. It’s designed for good performers in the market who have sizeable, well-run portfolios that make few claims each year.
At the moment, the premiums paid by these business owners are heavily subsidizing the claims of bad actors who have recently contributed to a sharp rise in litigation and whose poor management keeps driving premiums higher.
But alternative risk financing gives them a mechanism by which they can take a capped share of their own insurance risk. As long as they continue to make few claims, they can turn their insurance policy into a profit center every year.
Viewing insurance as an asset instead of purely as an expense? For many, alternative risk financing is like the four-seam fastball strategy that pitchers call on to fundamentally change the game to their advantage.
Patrick Yannotta is the Senior Vice President of Commercial Real Estate for Varney Agency.
This article was first published in PropertyCasualty360