CRE Industry Risk & Insurance Trends
As we reported in our the August issue of CRE Hot Topics (As Risks Go, Flood Beats Fire 5 to 1), the new era of billion-dollar weather events has put enormous pressure on the National Flood Insurance Program (NFIP) . Flood insurance is expensive and availability has been unpredictable with the NFIP on the brink of expiration for two years.
In an unfortunate convergence of trends and timing, two federal programs that support key risks in all commercial real estate sectors—the NFIP and Terrorism Risk Insurance Program (TRIA)—are both about to expire.
Properties rated as threatened by flooding must have flood insurance in order to secure many kinds of financing. Loans with any federal backing will be unable to go to closing should this program lapse. Loan refinancing will be similarly impacted.
In September 2019, Congress passed its most recent short-term reauthorization that will keep the NFIP going until Nov. 21, 2019. Congress has been considering two different long-term proposals to extend the program since this summer, but it’s not clear when these proposals might become law. The uncertainty has the potential to delay or increase the cost of capital, according to Kevin Donnelly, vice president of government affairs with the National Multifamily Housing Council (NMHC), an industry trade group. Speaking to the National Real Estate Investor, Donnelly noted that “typically, the window of concern begins three to six months before any lapse given how long transactions can take to close.”
Similar concerns attend the potential expiration of the TRIA program, set to expire at the end of 2020. Reauthorization via H.R. 4634 would extend the expiration date to Dec. 31, 2030. Needless to say, industry advocates are eager to get the bill passed before the expiration.
Consumer Trends – “Tenant Experience”
Looking at consumer trends, tenant preferences for digitally advanced properties are driving technology innovation in all commercial real estate sectors. The Internet of Things (IoT), artificial intelligence (AI) and mobile apps are essential features of the “tenant experience” and the driver of more efficient and responsive operations. These technologies, however, have ushered in cyber vulnerabilities and the concomitant liabilities associated with data and systems protection. Additionally, currently lacking the on-staff skill set to manage this exploding tech trend, companies are opting to collaborate with proptechs. As companies look to third parties for specialty services, new and increased connections can give attackers more opportunities to break into an organization.
Insurers Take Affirmative Stance on Cyber
Business Insurance Holdings reports that the insurance industry is undergoing a shift as it moves away from “silent cyber,” where coverage for cyber-related losses is left unaddressed in standard commercial policies, toward policies that explicitly affirm or exclude coverage. Meanwhile, the cyber insurance sector continues to grapple with other issues, including risk aggregation, contingent business interruption coverage and malware. But the market remains competitive.
Insurance Rates Continue Upward Trend
Rate increases started in early 2019 in business lines that have seen significant losses, such as property, excess casualty and directors and officer’s liability. The upward trend has spread to most lines in successive quarters, especially for large accounts.
Overall U.S. commercial property/casualty insurance rates rose 4% on average in Q3, up from 3% in Q2, according to online insurance exchange MarketScout Corp. A relatively calm Q3 for property insurers helped slow the rapid pace of increases, but property rates continue to trend upward, with habitational seeing the highest average rate increase at 6% in Q3.
Liability and other lines also continued the upward trend while workers compensation rates remained down. Other MarketScout Q3 data reported online by Business Insurance:
- Commercial property, umbrella/excess, and directors and officers liability increased 4.5%.
- Business interruption and professional liability rates were up 4%.
- All other lines saw smaller increases except for workers compensation where rates fell 1.5%.
- Small accounts (those with up to $25,000 in premium) and medium accounts ($25,001 - $250,000 in premium) saw a rate hike of 4.5%.
- Large and Jumbo accounts were up 3.5%
For Q4 and into 2020, expect significantly more expensive coverage and decreased limits available from single insurers.
- Commercial Property – Rates look to be accelerating in the wake of two big years of property losses. Expect increases in the range of 6 to 15%, depending on location and risk history.
- Habitation Multifamily – Expect liability rate increases from 10 to 30% with risks that have had poor experience receiving far greater increases.
- Workers comp and small cyber accounts are still seeing little change.
The expectation from insurers is that increases will be imposed for at least one and probably two renewal cycles.
Jim Judd is National Real Estate Practice leader for CBIZ Insurance Services, Inc. He brings more than 20 years of expertise in risk management and tailored insurance solutions. Jim can be reached at (816) 945.5630 or firstname.lastname@example.org.