The real estate industry is always in flux, but during the COVID-19 pandemic, it’s been especially turbulent. Massive changes have taken hold since the start of 2020, and more industry transitions are likely over the next several years. At the same time, the pandemic has only intensified difficulties in commercial insurance markets that existed pre-COVID-19.
Amid these shifts, property owners and managers may need to rethink elements of their insurance programs, and adopt new approaches and strategies.
Real Estate trends
State of the Insurance Market
Risk Management Strategies
5 trends impacting your risk strategy
The ongoing pandemic will have profound and lasting effects on companies across all sectors, particularly real estate. COVID-19 will fundamentally change the industry and has already accelerated a number of trends that first manifested before the pandemic. These include:
- Offices being reshaped. Many commercial tenants have explored new floor plans and smaller real estate footprints in the last decade. With the pandemic highlighting the value of videoconferencing services and the ability of employees to remain productive while working remotely and not traveling, employers are expected to pursue such strategies more aggressively even after the virus has been contained, especially as the pre-pandemic trend of urbanization potentially slows or is interrupted.
- Cyber risks evolving and expanding. Ransomware and other types of cyber threats are growing more sophisticated seemingly every day. As property managers increasingly rely on building automation systems and other technology tools, they will remain squarely in the sights of attackers.
- Shopping centers in transition. The rise of e-commerce was already a threat to brick-and-mortar retail locations before the pandemic, prompting many mall owners and operators to explore finding new life for existing facilities as fulfilment and lifestyle centers. COVID-19 will only hasten this shift, but a notable exception may be grocery stores, which are increasingly becoming anchors of shopping centers.
- Multifamily property demands emerging. Building amenities and features have always been a differentiator for multifamily properties, but the pandemic is driving a shift in condo owners’ and apartment renters’ priorities. Homeowners and tenants are increasingly focusing on the ability to be productive while working from home, and looking for upgraded ventilation and more space, especially outdoors.
- Affordable housing needs growing. COVID-19 has highlighted the lack of affordable housing for many populations, including health care workers and others in “essential” jobs. Real estate developers and property owners may face greater pressure post-pandemic to invest more in affordable housing options in large cities and smaller communities alike.
The net result of these industry shifts is that property owners and managers’ risk profiles are also changing. While certain risks may recede, others will likely grow. And it’s important for risk professionals and senior leaders to understand what that means for their risk management strategies, including insurance programs.
Insurance market growing more challenging
Building effective insurance programs has similarly become more difficult as the pandemic has exacerbated a number of challenges for real estate industry buyers. In the first quarter of 2021, commercial insurance pricing in the US increased 18%.
Conditions have been notably difficult for buyers of property insurance, which traditionally has represented the most significant line for the real estate industry. In the fourth quarter, US property pricing increased 19%, which follows pricing increases of at least 18% in each quarter in 2020 (Figure 1).
In addition to rising prices, underwriters are generally applying greater scrutiny during renewal processes, restricting capacity, and seeking higher retentions. Some insurers have denied policy term extensions, sought to introduce exclusions, and carefully reviewed loss histories and open claims.
Data and analytics, industry expertise is crucial
As massive changes in the real estate sector and insurance marketplace continue to develop, it’s imperative that risk professionals are supported by trusted advisors with specific real estate industry experience who can help them understand the implications for their risk profiles and insurance programs.
Your risk advisor should understand the real estate industry and how broad trends may affect your organization, and work with you to anticipate new and emerging risks. To thrive amid uncertainty and in a dynamic industry, risk professionals and senior leaders will need to anticipate and proactively manage risks rather than merely reacting to change.
As underwriters more closely scrutinize risk and carefully deploy capacity, buyers will be challenged to differentiate their risk during renewal processes and may need to rethink elements of their insurance programs. Doing so effectively will require an approach that’s rooted in data and analytics.
Your broker should be able to help you:
- Model various risks, which can help to make critical decisions about coverage limits and/or sublimits, deductibles and retentions, insurer participations, and other program features.
- Ensure your underwriting submissions are robust. Seek to differentiate your risks from your peers’ and offer insurers a mix of qualitative and quantitative information on which to base their decisions.
- ·Use data to evaluate alternative approaches and solutions, including captives and parametric solutions. Parametric policies can be beneficial to real estate properties with significant catastrophic property risk, as they can sometimes offer more attractive terms than traditional policies and may result in quicker claims resolutions after losses.
- Access innovative capital sources. Alternative capital insurance solutions can offer more favorable terms than traditional commercial markets, including competitive pricing. Dedicated insurance facilities — including some designed specifically for multifamily properties and other real estate industry companies — can enable a more cost-effective use of limited insurance capital.
- Market your program globally. The appetites of individual insurers can vary — and if you’re focusing solely on domestic insurers, you may be limiting your options. Reaching out to insurers around the world — with the help of an experienced advisor who can access all key players — can enable you to stimulate competition and secure insurance coverage that fits your needs, potentially with more favorable terms and conditions and more competitive pricing.