What does the toughest commercial real estate insurance market in years look like?
Andrew Meadors, CEO of Sunstar Insurance Group’s Arkansas and Tennessee markets, answers plainly.
“It is the most difficult market to place business with in my 38 years” in the industry, Meadors said this month.
To get coverage for Riviera Condominiums in Little Rock this summer, he had to make an unusual pledge to the insurance company.
“I won’t tell you the insurance company, but I had to cut them a deal,” Meadors said. “I said if you do this one for me and take care of these good folks, I won’t ask you for any more property insurance for the rest of 2024.”
Asked if he was serious, Meadors said he’d rather do one deal with the company this year than zero deals. “I’ve never been through anything like that in my career.”
Losses for insurers and premiums for commercial properties are at all-time highs. Powerful storms are raking more areas of the country more frequently. And inflation has pushed up the cost of rebuilding apartments, stores, restaurants and warehouses.
Some insurers are pulling back in Arkansas and pulling out entirely from coastal states, Meadors said. And property owners find themselves in a vise.
“These are crazy times,” he said.
Commercial property insurers’ pure direct loss ratio in Arkansas last year was nearly 127%, up from 120% in 2022 and 81.2% in 2021. Those numbers are from the Arkansas Department of Insurance, whose leaders have been testifying before lawmakers on the crisis.
A New Risk Profile
Albert Beer, a professor of risk management, insurance and actuarial science at St. John’s University in New York City, said risk realities have changed with the weather.
“I won’t mention the phrase ‘climate change,’ but I will simply tell you that the risk profile has changed significantly,” he said in a telephone interview. People commonly think of California’s earthquakes and wildfires when they ponder catastrophic events, he said. Or hurricanes that hit Florida and the Gulf.
But “over the last few years, more than half of national catastrophe losses have come from what are known as severe convective storms,” Beer said. Those storms caused six of the 10 most expensive insurance events in the nation last year, he said. “So they’re a lot more common than most people think, and they create a lot more damage.”
High interest rates, inflated construction costs and big payouts have all sent property premiums soaring.
“Jury awards are also increasingly large, and this has put a squeeze on both insurers and policyholders. I wish I could tell you there is a magic bullet to solve all these factors, but it doesn’t exist. If you’re going to conduct commercial business in Arkansas, then you’re going to be exposed to the weather,” he continued. “My recommendation to people is to recognize that and focus on loss reduction.”
Property owners should consider employing stronger roofing materials, enhanced drainage systems and storm shelters, he said. And businesspeople can possibly limit their risk by spreading operations across multiple smaller facilities instead of in one large building or warehouse.
“Of course if your business is established, that’s shutting the barn door,” Beer said. “But if you’re getting into a new business [or expanding], think about ways you can diversify your exposure.”
Businesses should think twice about increasing their deductibles, he said. “It sounds like the easy thing to do, because you write a smaller check” initially, but “you run a much bigger financial risk if disaster strikes.”
‘Skin in the Game’
Meadors, the Sunstar executive, said that commercial property premiums are still going up, but not at the pace of the past few years. “Agent brokers are thrilled with that, because our clients are our friends, and they can only take so much,” he said.
But premiums don’t tell the whole story, he said. Business and real estate owners have to have far more “skin in the game.”
Just 20 years ago, $1,000 deductibles were common in the world of property insurance, Meadors said. “Most carriers had a 1% wind-hail deductible, and that deductible on a $20 million condo tower, that’s $200,000. That’s more than the cost of a new roof. So agents and brokers really have to educate the public on what they are getting here. Some companies are going to 2%, 3% wind-hail deductibles of a building’s value.”
Agent brokers are negotiating separate policies that pay down deductibles on wind and hail. “Let’s say Travelers has a 3% wind-hail deductible that’s equivalent to $300,000,” Meadors said. “The additional policy can buy that down, for a reasonable additional premium, to say $25,000, which is a more palatable level for the risk management of the insured.”
Recent hurricanes’ effects far inshore have also complicated risk assessments.
“Who would have thought flood damage would be so extensive in Asheville, in a mountainous region of North Carolina?” Meadors said. “Those poor people lost their houses, businesses and everything. Their bankers and lenders didn’t even require them to buy flood insurance. There’s really no climate safety zone to escape to anymore in America.”
Banking Perspective
Lorrie Trogden, president and CEO of the Arkansas Bankers Association, said insurance anxiety is growing among her members. Lenders sometimes have to block struggling property owners from altering their policies to save money, she and Professor Beer said.
Two factors worry lenders, Trogden said. “The first one would be the higher premiums,” she said. “They are built into the mortgage payment. The bank prepays the insurance premium, then it’s in your payment every month. Well, if that premium goes up, your mortgage payment goes up. And the problem is that some homeowners and some businesses may already be at their max for their mortgage payment or commercial loan.”
If the borrower can’t pay a higher premium, “the bank has already prepaid it, so it has to be recouped,” Trogden said. These situations can lead to foreclosures. One troubled businessman told her recently that his premiums were doubling.
“The second thing is replacement costs,” she said. A lot of the insurance companies have changed the percentage that they will cover for replacement costs. “Instead of your new roof costing you your deductible, it may now cost you $10,000 depending on what your percentage of replacement coverage is.”
Businesses may not be able to pay the cost out of pocket, so they often turn to credit card debt, increasing their interest costs.
“I think the anxiety for the banking side is they’re already starting to see a little bit of this happen,” Trogden said. “I had a banker just a couple days ago tell me, ‘I just, you know, I don’t see a solution here.’ As far as the banking side of things goes, you know, there’s just not much we can do about that.”
Trogden’s advice to commercial property owners facing costly insurance options is to build a financial safety net. She also recommends a careful review of insurance policies before every renewal.
“Try to build that savings account up so you’ll be ready if something does happen,” she said. “And do your best to have that safety net to help pay your deductibles. Also look to see if replacement costs have changed before you renew your policy.”
Trogden, Beer and Meadors all suggested shopping around for coverage and taking care with the option of raising deductibles.
“Try to become an informed insurance consumer,” Beer said. “At minimum, have a conversation with your insurer about ways to limit the premium. Or work with a broker to shop around and see if there are other companies that might help.”
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