Florida’s apartment operators have seen skyrocketing insurance costs. Higher insurance costs put pressure on rents, limit capital expenditures and discourage new construction and acquisitions. However, there are meaningful steps operators can take to mitigate some of the premium increases they will see during the next few years.
Losses and Litigation
Insurers spread their risk by purchasing reinsurance, which covers policyholder claims made to a carrier that exceed a specified threshold called an “attachment point.” According to APM Research Labs, in 2021, reinsurance costs the average Florida insurer 60% of the premiums they collect. While Florida insurers have not been profitable since 2016 with loss ratios well over 100%, underwriting losses have exceeded $1 billion in both 2020 and 2021, and Hurricane Ian in 2022 is expected to produce even heavier losses, according to the Insurance Information Institute.
These losses have caused insurers to make claims on their reinsurance more frequently and in greater amounts, and in turn, reinsurers have pulled back the amount of Florida risk they are willing to take while increasing rates 30%-40% in June, according to Artemis. In response, carriers have been forced to take on less risk, pass more risk and costs onto policyholders or leave the market altogether.
National Oceanic and Atmospheric Administration data shows that 40% of U.S. hurricanes make landfall in Florida, which means storm damage will always be a factor in Florida’s insurance story. Compounding this is Florida’s growth, which has created many more insured assets to accommodate a swelling population. For example, CoStar data shows that Lee County (home to Fort Myers) which saw the brunt of both 2004’s Hurricane Charley and Hurricane Ian, doubled the number of apartments within that span. Recent growth has also propelled inflation, and as the Florida Apartment Association is tracking, construction costs are up 40% since 2020, which feeds into higher expenses to repair storm damage leading to increased claim severity.
However, an important driver of insurer losses unique to Florida has been the misuse of the legal system. A confluence of rules like one-way attorney fees, attorney fee multipliers and assignment of benefits to third-party contractors have encouraged inflated claims and suits against property insurers. Florida’s Office of Insurance Regulations found that Florida accounted for 79% of the country’s property insurance lawsuits, while only accounting for 9% of total property claims in the United States.
According to a recent On Point segment, since 2013, only 10% of the $15 billion in property insurance lawsuit awards went to policyholders, while over 70% went to attorney fees. Similar rules have also been misused in casualty claims like slip-and-fall accidents.
To their credit, Florida lawmakers curtailed many of the legal mechanisms misused in property insurance claims in 2022’s special legislative sessions, and against other lines of insurance through this year’s tort reform. It is expected that going forward, these changes will remove many of the incentives for litigation, reduce claim severity and incentivize competition; however, there were already tens of thousands of suits filed that will be adjudicated under the old rules. It is likely reinsurers will wait for reforms to show results and for existing suits to play out before they loosen terms on carriers. In the meantime, operators will continue to see costly renewals.
Premiums and Terms
Operators can expect property insurance premiums to increase 40%-100% this year, but this can be higher depending on construction type, location and loss/claims history. In part, these increases are driven by carriers requiring higher replacement cost figures that are more actuarially sound, accounting for today’s inflated construction costs. Casualty insurance is more competitive, but operators will still see a 20%-40% annual increase in general liability and umbrella/excess insurance.
In a standard market, a special perils policy would cover losses that result from fire, water (pipe burst), hail and wind, with varying deductibles depending on the peril/cause of loss. In today’s market, separate policies for each of these perils may be needed. For operators with over $35 million in total insurable value, limits on the coverage each policy provides will likely require the purchase of multiple policies from different insurers to reach full replacement value.
Insurers are shifting more of the risk to property owners by increasing existing deductibles and setting percentage deductibles per location, as opposed to per building, insulating themselves from paying claims while reducing the available limit of insurance they are willing to offer in a policy year. These changes in terms are intended to minimize claims and thereby reduce insurers’ risk, but these changes may make it difficult for operators to seek a claim unless the damage is catastrophic.
In the end, operators are left with higher premiums, less coverage and bearing more of the risk. For example, Mahaffey’s Central Florida property hasn’t had claims in the last five years and is in a low storm risk area for Florida. Despite these favorable conditions, there was a 400% increase in the renewal offer from the incumbent carrier.
Finding the Right Agent and Carrier
Carriers accept renewal submissions 120 days before current coverage ends, and carriers can provide a renewal rate estimate, referred to as an “indication,” by 60 days, and actual renewals arrive 20-30 days before the end of the current policy.
At 120 days, an operator should contact their agent to discuss the marketplace and to request their wholesale broker’s marketing list. The marketing list provides valuable information such as which carriers were sent the renewal submissions, which are no longer writing habitational insurance for the asset based on construction type, the maximum amount of coverage each offers and which perils they will cover. More importantly, requesting the list is an accountability measure the ensures the agent is doing all that can be done to find the best rates.
In commercial insurance, there are both generalist and specialist insurance agencies. Generalists sell all lines of insurance and usually work with only a portion of the carriers that cover multifamily housing. Operators may want to consider working with a specialist because they tend to have a deeper understanding of multifamily insurance needs and will have access to a wider network of carriers, programs and wholesale brokers. They also typically have relationships with insurance review boards at many of the larger commercial lenders and are abreast of Fannie and Freddie loan covenant requirements.
Operators considering a new agent should request the following from their current agent at the 120-day mark: 1) the Loss History for the property for the last five years; 2) the property’s Statement of Value (SOV), which was used as the basis for the current policy; and 3) the results of risk modeling data (either AIR or RMS), which actuarially measures the Probable Maximum Loss (PML) from future weather events. Florida Statute 627.444 gives agents 15 days to provide the Loss History. A prospective agent will need all this data to draft submissions they can send to their network of carriers and brokers. Operators should provide this information as early as possible, but any later than 45 days before renewal significantly reduces the chance a new agent will find a better rate.
Operators considering a new agent should ask whether they use a master policy that pools risk across multiple clients, if they have exclusive access to any proprietary insurance products and which carriers outside the current marketing list they have relationships with. Prospective agents will not be able to secure quotes from carriers the current agent has already contacted. Operators should also inquire about ancillary services that agencies offer that add value, such as whether they have a claims advocacy team that can aid in the adjustment process, if they have existing relationships with adjusters or third-party administrators who manage claims for surplus lines carriers, or if they have a relationship with an on-call restoration and remediation company that can respond when weather events strike that has existing relationship with claims professionals.
In addition, Citizens Insurance, the State-run carrier of last resort, has recently expanded underwriting capacity for multifamily, so it may be a viable renewal option that offers the lowest rates, though there are drawbacks to be aware of. Citizens Insurance commercial habitational policies do not cover loss of rents and limits coverage to a restrictive list of named perils, which may be in direct violation of loan covenants. An operator could find commercial carriers to cover what Citizens doesn’t, but those policies are extremely slim and very expensive. Typically, Citizens’ underwriting process is long and requires significant documentation of roof and electrical work, so operators should initiate this process as early as possible. Lastly, all Citizens policies are subject to hurricane assessments of up to a 45% surcharge of the premium in the event additional funds are needed to pay claims.
Lenders and Insurance Alternatives
Another strategy is for operators to work with lenders to reduce the insurance coverage required in their loan covenants. Fannie, Freddie and larger banks tend to be more flexible on insurance requirements in the current environment. Operators should be ready to show how the cost of required coverage will be a hardship that can impact mortgage payments, and data that indicate lower coverage amounts will be sufficient to cover the property’s PML.
Lenders may also be willing to consider alternatives to traditional insurance that provide risk financing, like parametrics or captive insurance products. Parametric insurance provides a payout regardless of damage if conditions during a named storm (i.e., wind speed) are met. Parametric products are not any less expensive than a regular insurance policy, but they can provide part of a property’s insurable limit in a market where coverage amounts are decreasing.
An operator may also choose to self-insure by forming their own insurance company, referred to as a captive. Premiums are still paid to the captive in this model and while this approach could mean greater exposure, it also can offer various tax advantages, improved cash flow, stability in pricing and control over the program tailored to an operator’s own unique risks.
While operators in Florida will see increases in insurance due to damage sustained from natural catastrophes that are unavoidable, as well as the lingering effects of litigation misuse, those who understand the insurance market can take a proactive approach to find the best rates in this difficult environment.
Chris Conlon AIC, PRC, is Director - Risk Management at Mahaffey Apartment Company.