Technology TransactionsStrategies For Building Owners Facing Higher Insurance Costs
The World Trade Center attack is unquestionably the most significant event in the history of the insurance industry. The events of September 11th have sent insurance costs soaring for many companies around the country with large building and property holdings leaving many firms wondering how they can possibly manage the enormous surge in insurance costs. And these rising costs are not simply limited to major metropolitan areas, costs are surging for companies nationwide and many firms are looking for answers to this crisis.
Initial loss estimates from the WTC attacks of $13.6 billion have increased to the current consensus of at least $40 billion and losses could go as high as $68 billion. In comparison, Hurricane Andrew, previously the largest insurance loss in the industry’s history resulted in losses of $19.3 billion. These losses came just as insurance companies realized decreased returns on investments and as premiums were beginning to rise after an unprecedented 12-year soft market.
As a result of the WTC crisis, retail insurance companies and re-insurers are looking to recoup their losses through higher premiums. Since the attack, we have seen standard property premiums rise 20 to 100%. Depending on several factors such as location, age, loss history, and class of construction, property owners generally pay 5 cents to 50 cents per $100 of coverage. Before the attack, insuring a $100 million location or portfolio would have cost between $50,000 and $500,000. Since the attack, the same location or portfolio could cost between $82,500 and $825,000.
Insurance costs are escalating nationwide and it is not just major metropolitan areas that are being affected. Companies and individuals that own a ‘landmark’ building or have property immediately adjacent will now find it difficult to secure insurance coverage at any price. Owners of such locations will have to use more creative techniques to insure their properties. The property owners might want to consider various forms of self-insurance, layered coverage, large deductibles and restrictive policy language.
In addition, many insurers are beginning to exclude coverage for acts of terror and many of my colleagues and industry analysts expect even greater rate hikes in the near future.
The current insurance situation is not likely to change for several years. Even if the government and insurers team up on currently proposed legislation to share the burden of future terrorist attacks, the losses of September 11th will not be erased and insurers cannot expect increased return on their investments.
So how does a property owner cope with these unprecedented insurance costs? Building owners and managers should plan ahead for upcoming policy renewals. One should anticipate increased premium and be proactive in securing the best renewal value. Owners and managers should take the time to assess renewing policies four months prior to renewal.
Additionally, consideration should be given to grouping properties onto one policy, higher property and liability deductibles, securing competitive quotes from various brokers, and participation in an insurance program specific to the Real Estate industry. Thus far, we have seen little increase inside Real Estate insurance programs that group together the best performing locations. One can secure an excellent value by grouping multiple locations inside these programs.
Finally, careful consideration must be given to the choice of brokers. First, and foremost, choose a broker that specializes in Real Estate. These brokers should be intimately familiar with the current Real Estate insurance market in your region. Choose a regional broker that has access to many insurance companies, provides risk management and loss control services, and has access to or control of the previously mentioned programs.
Most importantly, planning ahead and being prepared will enable property owners to endure future insurance policy increases.