A story of challenges and solutions in a world of increased insurance costs.

The rental housing industry is working through a perfect storm. While hurricane season is over in the Southeast and Gulf Coast regions, disasters and catastrophes remain an ever-present possibility. This is one of the reasons, like consumers and other industries, to have insurance—to protect against losses and to help become as whole as possible should disaster strike. But being a policyholder is becoming increasingly expensive for those in the rental housing industry, some reporting double-digit percentage increases in just a few years.

It’s easy to point to the pandemic as the reason behind this increase—inflation, too—but nevertheless, the industry is feeling the pressure of these cost increases.

Hurricane Idalia

The 2023 Atlantic hurricane season ranked fourth all-time for the most named storms in a year since 1950, according to the National Oceanic and Atmospheric Administration. There were

20 named storms, but Hurricane Idalia was the only one to make landfall in the U.S. And despite it being a Category 3 hurricane, the financial impacts were devastating.

According to Reuters and Walker & Dunlop, commercial property insurance rates jumped from 68 cents per $100 in 2022 to 93 cents per $100 in 2023. And Reuters reports UBS estimates Idalia insurance losses to be more than $9 billion.

Multifamily housing is drastically affected by these weather issues and insurance costs. “Compared to other CRE asset classes, multifamily has half, if not a third the amount of insurers willing to underwrite the risk,” said Ryan Barber, a Managing Director at insurance broker Marsh, in Reuters’ August 2023 article, “Idalia to boost Florida apartment insurance costs further,” by Matt Tracy.

“Wood frame multifamily assets in Florida will be skewed in the impact from a financial standpoint,” said Martha Bane, Managing Director of the Property Practice at insurance and reinsurance broker Gallagher, in the Reuters article. “They are most likely to suffer significant damage, already have high deductibles, and they are going to see elevated rate increases and just a general pullback in coverage.”

The Cost of Insurance

More than a quarter of every dollar of rent goes toward operating expenses at apartment communities, according to the latest Breakdown of the Rent Dollar from the National Apartment Association (NAA). That’s 27 cents going toward items such as insurance and other operational budget line items. The rise in insurance was noted in the 2023 State of Multifamily Risk Survey and Report from the National Multifamily Housing Council (NMHC) as well, with respondents saying they witnessed a 26% increase of insurance costs during the past year. One-third of respondents said insurance carriers limited or reduced coverage, while 57% said carriers added new policy limitations. More than 60% increased deductibles.

In a separate NMHC report with ndp analytics and the National Leased Housing Association,
29% of respondents reported premium increases of 25% for 2022-23 fiscal renewals. That’s up from
17% of respondents the year prior and 16% in 2020-21. In fact, 41% of reported premium increases were under 10% in 2020-21 compared to 25% in the most recent report. Among the top reasons for the increases: Limited capacity, renter population and claims history.

“The surge of multifamily property insurance premiums is primarily linked to the decreased capacity of the reinsurance companies to sell to the insurance companies,” says Max Sharkansky, Managing Partner at Trion Properties. “When there is less insurance to buy, there is less insurance to sell to the consumer, thus creating a prevailing supply and demand issue across the entire market. As a result, insurance companies are taking a risk off approach, making it much more challenging and expensive for operators to obtain coverage.”

Challenges

Inflation and the rise in insurance costs are interconnected and have an impact on the underwriting process in the industry. “It is the underlying issues driving inflation which, in our industry, are construction labor shortages and material volatility both driving higher replacement costs, municipalities having less resources resulting in longer permitting processes and the cost of capital today compared to when the project was constructed,” says Ryan Swingruber, Principal with Heyday. “All these items are considerations for the insurance underwriter when writing a policy. These are risks driving higher insurance costs. We are going back to our insurance brokers and having monthly discussions on the marketplace, providers, risk and mitigants and how they all affect our development, construction and property management strategies to best determine how to mitigate the impact.”

Elie Rieder, Founder and CEO of Castle Lanterra, called the weather impacts and inflated property values a “perfect recipe for driving insurance costs up to the extent that these increased costs are squeezing deal flow. As far as limiting the effects, there is nothing owners and/or operators can feasibly do.”

New York City has seen insurance costs jump dramatically because of underwriting policies. “We have seen dramatic price increases in insurance premiums because many carriers have left the market or are refusing to write policies for a select group of multifamily buildings such as pre-war, rent-stabilized properties that house a large number of [residents] paying low rents or holding vouchers,” says Shimon Shkury, President and Founder of Ariel Property Advisors. “In some neighborhoods in the Bronx, for example, premiums can run up to $2,000 a unit when the cost was around $500 a unit 10 years ago.

“Owner/operators with scale have started exploring captive insurance, which would allow them to mitigate the impact of the constrained insurance market by taking a more active role in managing their risk.”

Michael Collins, President, Property Management, with Flaherty & Collins Properties, says the company created its own internal captive insurance company to allow them to be more creative in their buying power… “to see if there are places to capitalize on the increased premium spend in relatively low-risk markets.”

Derek Hammond, Chief Financial Officer, President of Affordable Development, with Flaherty & Collins Properties, adds they use a builder’s risk insurance prior to flipping to a longer-term insurance. They shared an anecdote about the transition from builder’s risk insurance to long-term policies, closing on a property the day of a hurricane in September 2022, but locking in the rate a couple weeks ahead of time. The underwriting in Florida has changed, resulting in $2,000 a door compared to the previous $600 per-door premiums.

The increase in damages has turned into an increase in premiums being passed onto customers, says Laura Khouri, President of Western National Property Management. “Insurance firms are passing on to their customers the expenses of paying claims on these damages, which has in some cases prohibitively increased the price of doing business for multifamily operators.”

While much of the talk is surrounding natural disasters like hurricanes, fires and tornadoes, they are not the only reason for the increase in insurance costs. “The ongoing supply chain disruptions have raised material costs, prompting insurers to increase replacement cost requirements,” says Derek Graham, Principal and Founder of Odyssey Properties Group. “In response, some insurance providers are electing to no longer offer coverage in certain geographies. With fewer provider options available per region, the remaining carriers are increasing their rates to make up for increased claims. Additionally, when legal disputes arise, insurance carriers are more frequently than ever caught up in expensive litigation, adding complexity and cost to the insurance process.”

Meanwhile, on the causality side, claims both in number and dollar amount are also increasing, says Chris Phillips, Executive Vice President, Chief Financial Officer at The Bainbridge Companies LLC, “along with some very large verdicts for liability claims, have driven liability rates for multifamily up tremendously in this same cycle of high increases on the property side. At the same time, carrier capacity has decreased, as certain carriers have left the multifamily market or insurance market altogether, other carriers have reduced their lines, and the reinsurance market has also lost capacity and carriers as well.”

Potential Solutions

Firm size and business model have helped mitigate increases a little for Khouri. “Since our firm manages its own portfolio together with third-party client portfolios, we take maximum advantage of our size and employ an economy of scale for insurance procurement,” she says. “We maintain a master package which encompasses various types of coverage, limits, sublimits and SIRs with the end result of minimizing gaps, loss exposure and, ultimately, premiums.”

Also using its size to mitigate insurance increases is Avanath. “[We have] found that leveraging our scale can help lower our overall insurance costs,” says Carly Stevenson, Executive Vice President of Property Management, Avanath Capital Management. “By having a portfolio-level policy, we can diversify our geographic concentration and thus de-risk our portfolio, resulting in lower premiums. We also employ active risk mitigation strategies such as secured access, security camera systems, fire prevention devices, etc., which help to make our portfolio more attractive to potential carriers.”

Khouri says they also have a loss control and prevention plan that includes unit inspections, garage inspections and accounting audits, among other features.

“We are attempting to mitigate some of these effects of the above by looking at different plans, considering different plan structures and weighing various levels of coverage for certain lines, sublimits and deductibles, as well as considering alternative risk strategies,” says Phillips. “The current environment has made insurance a major factor when considering developing and acquiring multifamily assets. Borrowers and lenders also need to consider the current insurance market as it pertains to loan requirements related to insurance.”

Graham says operators can diversify their approach to help mitigate risks from increasing insurance rates. “To secure better rates, operators are exploring options such as master policies to cover larger portions of a portfolio or dividing portfolios across various carriers to obtain more favorable pricing. Operationally, proactive measures can be taken to actively implement preventative maintenance measures to reduce risk for insurance providers.” Some options include updating electrical panels and keeping up with deferred maintenance.

Master policies have also been used by Sharkansky. “To scale these impacts, we have been dynamically building out master policies for our portfolio to help relieve some of the downward pressure on costs. To ease the burden and achieve more viable rates, one of the best strategies is dividing a portfolio into regionally specific policies, which can be dispersed among various carriers with the most competitive pricing per region.”

Michael Miller is NAA’s Managing Editor.