Increased costs in insurance are hampering housing provider’s essential responsibilities.
Rising property insurance costs are no stranger to the rental housing industry. Costs have steadily been rising during the past several years—some markets seeing larger increases than others, or insurance companies are exiting the market altogether. This has ultimately left multifamily housing owners-operators and management companies struggling to carry forward.
“Breaking Down One Dollar of Rent: 2023" from the National Apartment Association (NAA) shows 27 cents for every dollar of rent goes toward operating expenses, which includes insurance.
The impact of rising insurance costs has resulted in declining property values across the country, most notably in the Sun Belt. According to CBRE, increased insurance costs have caused multifamily property values to drop 3.6% in the U.S. since the fourth quarter of 2019. The South-Central region, consisting of Kansas City and Omaha, Neb., and markets in Texas and Oklahoma, witnessed a 7.8% decline in property values, while Florida was at a 6.8% drop since the last full quarter prior to the start of the pandemic. Houston saw a more than 11% decline in property values, and Jacksonville was at slightly less than 10%.
A recent study from the New York Housing Conference (NYHC) shows rising insurance costs are impacting the rental housing industry across the five boroughs. Premiums are increasing 26% annually, and affordable housing is seeing the brunt of the impact. The average annual insurance cost for an affordable housing unit has increased 103% from 2019 to 2024. One example shared was that in as little as five years—2019 to 2024—the insurance cost per unit in The Bronx has jumped more than four times the new construction budgeted amount ($257/month/unit vs. $58/month/unit).
A decline in coverage is also happening. The study cites owners mentioning excess liability coverage being cut in half, while premiums also increased. Other wrenches being thrown into the mix include not being able to access coverage, deductibles increasing and additional risk mitigation requirements such as cameras or other security features.
Causes
One of the main scapegoats for the rise in insurance costs is inflation. But rising costs begetting rising costs is not the lone catalyst for owners-operators and communities seeing the uptick in premiums. Other causes include weather events such as fires, hurricanes and earthquakes; legislation; reinsurance markets; and availability.
An increase in weather-related disasters during the past several years has been a driver of insurance cost increases, and that won’t stop anytime soon. “Many parts of the country that are more prone to natural disasters will likely continue to see moderate to severe price increases and almost certainly see higher deductibles remain,” says Sean Kent, Senior Vice President of Insurance at FS Insurance Brokers, a subsidiary of FirstService Financial. “Other parts of the country may see a leveling out, especially for those properties that have already been hit with significant increases consecutive years in a row.” The demand for insurance is still there, yet insurance carriers are pulling back coverage, ultimately causing less competition, higher premiums, less coverage capacity and more problems overall.
State Farm General Insurance Company no longer offers commercial apartment policies in California, impacting roughly 42,000 policies, and the company is non-renewing about 30,000 homeowners, rental dwelling and other policies. This is roughly 2% of State Farm’s policies in California. The company cites inflation, catastrophe exposure and insurance regulations as major challenges to doing business in California.
“Insurance has become a–significant challenge for multifamily owners as they seek coverage in an unpredictable marketplace where premiums are increasing,” says Cyndy Breit, Senior Vice President of Risk Management, Human Resources, and Investor Relations at Western National Group. “We advocate for partnering with brokers early in developing a strategic marketing and underwriting plan to design the most competitive program covering a broad range of multifamily exposures.”
Crime is another item impacting the cost of insurance, mainly firearm coverage, says Laurel Hart, Vice President of Asset Management and Preservation, Columbia Residential. “Because of the cost of insurance, because of the difficulties getting insurance, because of increased crime, you are seeing owners of businesses increasingly having less and less insurance to cover risk. That puts the property at risk. It puts your [residents] at risk…. It puts a lot of people at risk not to have the adequate insurance.”
Hart outlines: “In 2021, we were only able to get 7 million of access coverage and that cost us 1.8 million. To give you an idea of the cost increase in two years, in 2023, we paid 3.3 million for our umbrella coverage, and we only had
2 million of excess coverage. So, our coverage for our portfolio, which got bigger, went down from 25 million to 2 million in 2023, and the cost of that extra liability insurance went from 62,000 to 3.3 million.”
Unfortunately, Hart says, the rising cost of insurance takes funds away from the industry’s essential job of serving and housing residents and maintaining properties, especially at the affordable level.
Problem-Solving
Owners-operators and management companies are searching for answers for the rise in insurance costs and other solutions to insurance impediments. Like submitting a resume for a job application, the point is to standout above the rest and want others to see a multifamily portfolio as an exclusive insurable risk.
To do this and standout from others in the industry requires “a holistic risk management approach that focuses on best-in-class risk control practices, solid contractual risk transfer strategies, effective post-incident/claim management practices, continual partnership with your insurance broker and current insurance companies, and a continual evaluation and improvement of the program you are managing to make sure that your program is still addressing all of your risk exposures,” says Michael C. Hodges, Director of Risk Management & Safety, Pratum Companies. “Underwriters want to see an effective and robust risk management program that views and works with them as a partner. If this is achieved and your practices are best in class, then the insurance company tends to be more comfortable writing certain coverages and insurance premium increases and coverage availability becomes more palatable.”
Having large dollar amount insurance policies may be a thing of the past as coverages reaching $25 million are out of the question financially in the current insurance climate, says Hart. “We’ve started looking at how we can be more innovative—how we break up our portfolio, how we insure based on risk, where properties are located.” The lender being used is also a factor.
Self-insurance has been one solution Columbia Residential has used during the past couple of years. It’s a way for the company to have a pool of funds in case it can’t find coverage, for example, in Georgia, where crime, the lack of available insurance and legislation have been thorns in the side for Columbia. The idea behind the self-insurance creation was for smaller incidents that don’t require claims or for ones that might not want to be on the overall policy coverage.
Owners-operators can also turn to state-sponsored insurance programs for assistance; however, those tend to be price-restrictive, says Kent. “We are beginning to see more opportunities for creative solutions aside from traditional insurance, such as captive insurance and high-deductible programs, that are beginning to make their way into the multifamily space.”
Breit says, Western National Group has a set of risk management best practices they follow. They include loss prevention inspections and real-time incident reporting. “These practices, along with bundling our assets together under a master-controlled insurance program and exploring all available deductible options, can help owners acquire lower bids and reduce costs.”
FirstService provides support for onsite teams through educational training about insurance. “We assist in the coverage overview process by identifying potential pitfalls and filling coverage gaps as best as possible and then explain the correlation between master policies and homeowners’ policies to ensure duplicate coverage,” Kent says.
Prevention is also key. Having an insurance policy doesn’t dismiss communities or companies from responsibilities. Kent says, “installing water leak detectors, providing onsite risk reduction and prevention training for property managers and homeowners, installing flood barrier systems, and financial planning for insurance programs with higher deductible structures,” can help companies mitigate risk and, in the long run, avoid potential financial losses.
The pandemic brought to light items in need of addressing such as avoiding unthought-of or new risk failures and unforced errors in coverage or protection—having a force majeure clause, for example. This, ultimately, can cause companies to pay out of pocket.
“Companies should evaluate their risk exposures on an ongoing basis and meet with their insurance broker regularly to evaluate new market trends, update their exposure and potentially purchase new or remove old insurance policies,” says Hodges. “In addition to purchasing new or removing old insurance policies, companies should also continually evaluate their internal risk controls. This will help mitigate the loss severity when claims (covered or not) occur.”
Working with Vendors
"All vendors are required to submit a Certificate of Insurance (COI) to our vendor management service. This service has licensed insurance agents that check and verify that the vendor has all of the appropriate coverage and that we, our properties and our property owners are additionally insured, and that the vendor’s insurance is primary, non-contributory and provides a waiver of subrogation. Our vendor management service also stores and updates all COIs after they have been obtained. This ensures that only vendors that meet our requirements are working on our properties and that if they cause a claim, they have the insurance that will pay for it."
— Michael C. Hodges, Director of Risk Management & Safety, Pratum Companies
Michael Miller is NAA’s Managing Editor.