Managing Multifamily Property Risk in a Transitioning Market

Commercial insurance market conditions have generally favored buyers in recent years, but multifamily properties have long faced a more challenging environment. As the overall marketplace has recently begun to shift, an already trying multifamily market has become even more difficult for some — especially in property, traditionally the industry’s largest insurance expense.

Here’s how multifamily property owners can prepare for more challenging upcoming renewals and better manage their total cost of risk.

More Challenging Conditions for Some

Multifamily has long been a difficult segment for insurers, owing in part to the strict lender requirements owners must meet and the industry’s high claims frequency. But conditions have gotten worse in the last few months as the impact of frequent catastrophe and attritional losses in 2017 and 2018 have caught up to the overall property insurance market.

In 2019, insurers are pushing for higher rates for multifamily properties, and pressing for higher “all other perils” deductibles. And yet it is still possible for buyers to differentiate themselves in the market. Concrete high-rise apartment complexes with extensive sprinkler systems are generally seeing better results than smaller, wood-frame buildings. Naturally, insurers will offer better pricing and terms and conditions to buyers with limited catastrophe exposures. And an individual buyer’s loss history can substantially affect how underwriters price coverage.

What Risk Professionals Can Do

In managing their total cost of risk it’s important for multifamily property owners to properly balance how much risk they retain against the amount they transfer. Lenders’ insurance requirements could complicate matters, but demanding low deductibles from an already small pool of insurers can limit your options.

Consider using insurance primarily as a means to protect against catastrophic and larger-than-expected losses. Be willing to take on higher deductibles and entertain shared layer programs with multiple insurers. Meanwhile, self-fund for attritional and expected losses like tenant fires and burst pipes and take steps to prevent losses.

Beyond these steps, seek to meet with underwriters early and often, beginning the renewal process at least 120 days before your current policy expires. In addition:

• Consider marketing your insurance program. Even if you have a longstanding relationship with your insurer, you might secure more favorable pricing and terms and conditions elsewhere.
• Provide insurers with complete data. More effective modeling means less uncertainty for underwriters and generally lower pricing. Ensure your COPE data is accurate and reflects building code upgrades and other changes to your properties over time. And make certain to provide five full years of historical loss information.
• Show insurers that you’re not simply relying on insurance and are instead proactively managing risk. Enact and enforce no-smoking policies, screen tenants and require them to purchase renters insurance, and properly maintain your properties and track all repairs.

Even as the market transitions, multifamily buyers can take steps to optimize their renewals and better manage risk. Work with your insurance advisors to prepare for challenging renewals and optimize your total cost of risk.