If anyone has been looking for insurance for their property in the last year or two, they know that costs are up. Like, way up. Outside of the usual nod to inflation that we’ve all been talking about over the past year and a half, insurance costs have been on a precipitous rise that eclipses most other costs by a large margin. As someone who helps others structure their capital stack, this has been an increasingly difficult part of the process. In order to dig into what is going on, where this might be headed and what, if anything, we can do about it, I consulted a long-time insurance broker in the MHC industry, Kurt Kelley of Mobile Insurance, to try and get some answers. With the increase in damage from natural disasters (most commonly floods, hurricanes, tornadoes and forest fires), insurance carriers have been both charging more for the same coverage and/or dropping their coverage options completely. This is directly related to the losses that these insurers have been incurring and the increased rate of those losses. Even in cases like flood insurance, much of which is underwritten by FEMA's National Flood Insurance Program, there is still loss incurred to the insurance providers. All of this leads to a major supply and demand issue. More and more lenders are requiring additional insurance to protect them from losses and there are fewer insurance companies are willing to provide that protection. Further, the cost to build or repair a building has increased over 50% in the past three years, thus the demand for increased coverage limits has risen proportionately. As with anything where demand goes up and supply goes down, that leads to big increases in price (as was the case with the price increases for toilet paper during the early parts of the pandemic).
Natural disasters are not the only things driving up insurance costs. Increased crime has become another issue that has pushed liability coverages up above and beyond what inflation caused. Since the pandemic, the rise of homelessness on many city streets, the decline of police presence due to a drop in the pure number of officers and the overall trend to decline prosecution on lower-level crimes has led to higher crime rates overall. These are hitting insurance costs at many high-density residential spots inclusive of MHC and multifamily. Furthermore, increased regulation is forcing more cost onto insurers and forcing lenders to augment coverage, both of which drive up prices. These regulatory items only add to the pressure on insurance companies for certain types of coverage, leading some to drop out altogether. With more of these insurers dropping their coverage, the remaining are facing larger and larger demands for their coverage which is, in turn, driving them to increase their prices even further.
Outside of just the sheer cost of getting insurance, the issue of the complete unavailability of insurance is becoming more and more common. We have seen this hit transactions in Florida during the most recent hurricane season where insurers that would typically quote wind related coverages will now completely decline coverage at any premium. This is due to the damage that has already been done by hurricanes and insurance companies still assessing the cost to them of that damage. While these costs are still being assessed, insurance companies are declining to quote any insurance until premiums can be recalculated. In the meantime, lenders are unwilling to take the risk that a property is without adequate coverage during hurricane season in Florida, for very understandable reasons. This leaves transactions hanging in the balance waiting for either the insurance providers to begin reissuing insurance or finding other solutions to get to the closing table.
Due to all the factors above, I asked Kurt why it’s important to use an insurance broker who is experienced in the MHC (or any commercial real estate) industry. He had this to say, “An experienced MHC insurance broker understands typical multi-family property lender insurance requirements and has relationships with the specialty insurance company programs that can meet them. A seasoned specialty broker will help avoid closing delays and can let you know early in the process when certain lender insurance requests are unlikely to be met.” At Bellwether, we have seen that an experienced broker foresees lender - insurance company hurdles before they happen and can have contingency plans in place to help get around the potential issues. Even still, many of the headwinds that face the insurance industry are new and we are all navigating them together in real time. The combination of having an experienced insurance broker and lender/mortgage banker is paramount for getting through difficult market conditions like the ones we face today.
The bottom line here is that insurance costs are projected to continue to rise in the years to come. It’s prudent to factor that into your underwriting of new transactions as well as into your budgets for the coming year. This is particularly true for properties in high-risk fire, wind, and crime zones. Further, this is a good time to evaluate your insurance landscape and make sure that you are using a seasoned professional. While they may not be able to save you every last penny on your insurance cost, they will likely save you much more by knowing what coverage is adequate, what isn’t worth paying for and keeping your deals alive.