Real Estate Insurance Market: What You Need to Know

Property and casualty insurance rates are going up. While it’s news no real estate owner wants to hear, it’s the unfortunate reality of the current marketplace for real estate portfolio insurance. Unlike past years, the rate increase will not be dictated by an individual’s loss history or premium size; instead it is dictated by capacity and whether a carrier is even willing to entertain a real estate portfolio.

Most people don’t realize that the insurance market is a global marketplace. Much like securities or real estate, the insurance market is cyclical and dictated by external and internal factors that play heavily into rates and coverages offered by carriers. When we see years of huge losses due to catastrophic storms, fires, and floods, the market “hardens.” A hard market means that rates and coverages become constricted as capacity with both reinsurers and standard carriers dries up.

Reinsurers, simply put, are the insurance companies for insurance companies. When an insurance carrier is established, they buy reinsurance to back up the policies they write. The reinsurer works with the carrier to set parameters of what they can and cannot write, and what types of rates they are looking for. Reinsurers re-negotiate their contracts annually, which trickles down to the endinsured as rate increases or coverage changes.

Last year, a historic number of reinsurers left the real estate marketplace, more specifically in the habitational arena. According to national brokerage firm Willis Towers Watson, market capacity for multifamily accounts may have declined by as much as 50%, largely in part because these types of properties can be problematic for insurers due to their 24-hour exposure. After taking hundreds of billions in losses, they no longer are willing to write this type of business. This means that there is less competition and the carriers who are left writing this business can pick and choose what accounts they want to write and at what rates.

As reinsurers constrict capacity and raise rates, some carriers will look to offset large increases by raising deductibles and restricting coverage. This allows carriers to minimize their risk on certain types of coverage like earthquake and flood, and forces those insured to have more skin in the game. As a result, the insurers are more insulated from the smaller claims and reserved for larger claims, lowering their resource output and frequency of claims. This will translate to higher premiums for less coverage and will continue to trend this way until the market levels out. A prime example of this is in California where some homeowner’s carriers have started to exclude wildfire claims. This coverage can be bought back, but the price is high to offset the risk.

The market outlook for 2021 is going to be rough for most property owners as these changes materialize. In the past, there had been a big push to consolidate real estate portfolios into one carrier. At RogersGray, we have scoured the market to secure appointments with carriers that can produce the most competitive rates in each region of the country. This is also a critical time for property owners to be proactive. Depending on location and the types of properties within your portfolio, there may be an opportunity to bring in multiple carriers and limit the large rate increases to ride out the hard market.