• Multifamily issues when it comes to fire and weather
  • Four categories of insurance to consider
  • Controlling rising insurance fees
  • Tips for the little guys
  • What the experts recommend

Against the larger picture of rising operating expenses, apartment owners are getting more resourceful when it comes to managing insurance costs.
Even before the terrorist attacks of Sept. 11, 2001, the multifamily industry had been hit hard by the tightening of the insurance market. With premium increases for certain types of coverage rising anywhere from 50% to 400%, finding ways to cover costs can be tantamount to staying in business.

After the terrorist attacks, the problem had become even more critical, as some insurance companies began to exclude terror attacks from their policies. More generally, the attacks prompted a broad reassessment of risks of all types, making property owners and insurers alike much more aware of potential threats.

“Before, nobody thought of [terrorism] as a major threat,” said Robert Hartwig, vice president and chief economist of the Insurance Information Institute. “Now it is. It needs to be explicitly priced in a policy, instead of being thrown in at little or no cost.”

“Sept. 11 has showed us that business is a target of terrorists, so insurance companies now have to reevaluate the risk,” added Jeanne Salvatore, vice president of consumer affairs at the Insurance Information Institute. “While they have the capital to pay for this disaster ... insurance companies now have to reevaluate the risk. That’s difficult, because [future terrorism] an unknown.”

In a survey conducted by the href="http://www.nmhc.org" National Multi Housing Council (NMHC), almost a third of the respondents listed higher property insurance premiums as the primary reason for soaring operating expenses. Experts told Apartment Finance Today the best ways to fight back are to implement an aggressive loss control program to negotiate deductibles and decrease the frequency and severity of claims.

Dramatic increases in premiums and deductibles can be attributed to insurance companies passing off their rising costs to insured policyholders as well as a declining number of insurance carriers for the multifamily industry.

Reinsurance companies, which basically provide insurance for insurance companies, suffered shrinking profit margins at the end of 1999, according to Chuck McDaniel, president and CEO of the Lockton Companies of Colorado, Inc., a nationwide insurance brokerage firm.

“Insurance companies were hit hard because the reinsurance companies were charging more for their renewals,” McDaniel said. “The insurance companies can’t absorb the costs from the reinsurers so they have to pass it off to the client.”

Multifamily issues when it comes to fire and weather

When it comes to weather or fire insurance issues, this is particularly problematic for the multifamily sector where the magnitude of losses in the industry is greater than in the rest of the insurance market.

“The makeup of multifamily construction units are predominantly wood-frame, and that burns,” McDaniel said. “Many apartment schedules can have up to a 200% loss ratio from fires or from the weather.”

The cost outlook for the future remains grim. “In order to get back to pricing profitability, these reinsurers are going to have to raise pricing in the multifamily industry by 30% to 50% in the next three years,” McDaniel said. “We’ve been in this mess for about a year now and anticipate at least another year to get out of it.”

Compounding the problem is the shrinking number of insurance carriers that will write for apartment properties. More carriers are exiting the market because of the complexities involved in the multifamily industry.

“There are a lot of companies that have decided not to underwrite for multifamily anymore, which is a trend that started last year,” said Mark Benotti, director of Risk Management at Home Properties in Rochester, N.Y., and member of the Risk and Insurance Management Society (RIMS). “Underwriters are conservative by nature, and they don’t understand all the risks they are taking with multifamily so they pull out. The companies that are staying in multifamily are the ones that actually know the business.”

Four categories of insurance to consider

There are four major categories of insurance that are typical to the multifamily industry. Property owners can pick and choose what elements of coverage best suit their needs.

There’s the standard property insurance, which covers damage to the physical structure of the buildings. Casualty insurance includes general liability, workers’ compensation and EPLI, or employment practice liability insurance, and excess liability, or umbrella coverage. There’s financial services insurance that covers company officers and directors for any fiduciary liability, and the fourth is benefits insurance, which covers medical and dental benefits offered by the company.

The most dramatic price increases have been in property insurance and general liability. But deductibles for all types of coverage are on the rise, and the amount of coverage is eroding.

“We’re definitely seeing property insurance costs go up,” said R. Lee Harris, president of Cohen-Esrey Real Estate Services, Inc. The Kansas City, Mo.-based real estate service firm offers leasing, brokerage and consulting services, and manages more than 33,000 apartment units.

“We had property insurance costs in the $90 to $95 per unit per year range, and now we’re up to $110 to $115 per unit per year, and that’s only basic property coverage,” Harris said. “That only included general liability and property, but not EPLI or workers’ compensation.”

“Our flood insurance deductibles are going up this year,” Benotti said, “which is included in our property insurance. Last year, we had a flood deductible of $25,000 and this year we can expect around a $100,000 deductible, which means our deductible went up 300%.”

Insurance companies are becoming more and more careful to cover their own losses by charging more and covering less. “Whereas previously insurance companies would accept broker manuscript coverage forms as they were, now they’re redlining policies and not accepting them as they stand,” McDaniel said. “They’ve been revising the forms submitted to them by reducing the coverage and in many cases increasing the deductibles.”

Controlling rising insurance fees

With this insurance environment looming on the horizon for the next year, apartment owners and managers are looking at different ways to mitigate those rising costs.

They can control costs by carefully selecting how much coverage they buy. “Owners and managers can reduce their limits of liability on a number of coverages in order to cut costs. Overall costs can be affected by hiring a broker or a consultant that can advise on how to cover loss control, claims management and limits of liability,” McDaniel said. “But hire a broker that has the capability to do an analysis for your company and find out how much you need to be carrying.”

Managers can hire an outside consultant or have an internal risk management director to assist in insurance selection, but there are other options.

“There’s a multi-prong approach to dealing with rising insurance costs from the apartment management standpoint,” Benotti said. Home Properties owns, manages, acquires and develops apartment communities in the Northeast, Mid-Atlantic and Midwest, with more than 50,000 units.

“We transfer as much of the expense as possible by means of the contracts with the companies that we do business with, or ‘risk transfer,’” Benotti said.

“It’s a standard of indemnification. Our contracts and requirements are such that if a contractor we’re using causes a loss to us or one of our residents, then their insurance companies pay.”

“We’re also retaining more losses, particularly in workers’ compensation and general liability. We have a higher deductible per claim and pay the insurance costs if the claim goes over,” he said. “That makes the premium less, but we do have to pay out of pocket if there is a claim.”

Many large apartment firms can afford to self-insure, which is another way to blunt the edge of increasing premiums. “We look at the deductibles,” Harris said. “If there’s a way to self-insure a larger portion of the risk it’s worthwhile to consider, but that’s on a case-by-case basis.”

Self-insuring and taking on the extra risk is a reasonable way to manage higher costs. “The most you can do is accept more risk yourself because that way you have control over your losses, and it provides incentives to your operating units to control those losses,” Benotti said.

Also, waiting for the insurance company to handle the claim may be more time consuming than handling it yourself.

It’s typically less expensive for clients with properly trained personnel to administer the claims than the insurance company, McDaniel said.

Tips for the little guys

For owners and managers of smaller apartment firms, however, self-insuring may not be as feasible. Regardless, sources say that implementing a wide-ranging loss control program is a good way to respond.

“With an aggressive claims management process in place, you can reduce the cost of an individual claim by up to 30% to 40%,” McDaniel said. “The majority of claims in multifamily are slip and fall, and many of those can be prevented with aggressive loss control.”

Scheduling and adhering to a routine maintenance schedule is key. “Check electrical systems, check hazardous materials storage, life-safety systems, and make sure that your winter maintenance practices are keen,” Harris advised. “Preventative maintenance is a long-term process that won’t cost too much but will help keep losses down.”

Engaging residents in preventative measures is another way to control costs. “Educate your residents about their responsibilities, reminding them that they are responsible for their personal property and any damage they may cause to your property,” advised Amy Mayes, risk manager at Camden Properties Trust. The Houston-based developer owns 149 residential properties nationwide. “We are also considering adopting full participation of renters insurance, and are [trying] that at four of our communities.”

One such option comes from the online insurance company LeasingDesk.com. The company’s eRenterPlan provides renters the option of personal property and liability insurance.

“Programs like ours fill an insurance void and transfers costs to residents by forcing them to be insured,” said Dirk Wakeham, president and CEO of Leasingdesk.com.

The eRenterPlan offers liability-only coverage as well as traditional renter’s insurance for apartment residents for a monthly premium.

Property owners can offer the eRenterPlan as an insurance option on site, but all residents must be insured. “Under our program we work with owners who are willing to insure all of their residents. By making sure that everybody living in a community has insurance, it allows us to sell coverage to residents for less,” Wakeham said.

Another key factor in mitigating insurance costs is to have a good track record: Having a good loss history goes a long way toward helping you negotiate a more attractive premium with the insurance carrier, according to Harris.

“You provide a three- or four-year history of your losses to the insurance carrier to determine your premium amount. You’ll get the best rates if you have a good loss history.”

It’s also important to consider the financial viability of the insurance carrier. “If you go with a top-rated company, there’s less likely to be a problem,” Harris said. “There are some insurance companies that may sell a low-cost policy, but if something happens they may not be able to pay the claim.”

Harris recommended going through a rating agency, such as A.M. Best, to obtain reports on the financial condition of the company.

Rather than dealing with the insurance company directly, owners also can opt to hire a consultant or an independent insurance agent to ensure that they get the best policy.

“It’s important to find a consultant that knows the market,” McDaniel advised. “You need a broker who knows the apartment industry, who the major insurance players are, and who has a relationship with the carriers and can get you the best deal.”

What the experts recommend

To help curb rising insurance costs, experts recommend the following:

  • Consult with a broker on how much coverage is needed for your properties and where you can reduce your limits of liability.
  • Transfer as much risk as possible to contractors’ insurance companies.
  • Self-insure a larger portion of the risk, and manage claims in-house. It may prove to be more expedient and inexpensive than waiting for an insurance company to handle the claim.
  • Schedule and adhere to a routine maintenance schedule to ensure that the proper safety procedures are in place and functioning.
  • Maintain a good loss history through preventative maintenance measures. This may help reduce premiums in the long run.
  • Advise residents on their own personal property responsibilities and what damages to your property they are liable for.