Apartment vacancy levels are up and real estate owners' insurance costs are, too. What's an owner to do? Many are increasing their deductibles and retaining more risk when they renew their policies in order to moderate the premium increases. This can be a smart move, but only if firms implement loss-control policies that are commensurate with the risk they are assuming.
Insurance costs are skyrocketing, according to a survey conducted by the National Multi Housing Council. The median cost of property insurance is 31 cents per $100 of insured value, according to the “Apartment Cost of Risk Survey” (ACORS), which explores insurance rates, deductibles and retentions, loss histories and other key coverage terms for a range of insurance products.
The results of the survey, based on reports from 36 firms with a median portfolio size of 14,400 units, are available only to survey participants, but the property insurance data excerpted here provides a snapshot of current insurance market conditions for real estate providers.
Nearly every firm surveyed reported higher rates at its last renewal, with a median rate increase of 57% and a median deductible increase of 250%. Because coverage type and cost varies greatly by property location, property type, owner claim history and the owner's tolerance for risk, these reported medians and averages are intended to be general gauges.
Survey participants also reported a wide range of deductibles. Some owners prefer to save on claims and underwriting fees by taking a deductible as high as $1.5 million, while more risk-averse owners, including some fee managers, report deductibles as low as $5,000 per occurrence.
Identifying the Big Risks
As owners raise their deductibles, loss control becomes more important. Owners can begin transferring some risk by requiring or promoting renters' insurance and verifying that each contractor has adequate liability coverage.
In addition, smart owners can personalize loss-control measures based on the kind of risks their firm is experiencing. Are loss dollars coming from slip-and-fall incidents? Are resident fires the largest risk to the firm or is it water-leakage claims? After the key risks are identified, owners should compile a prioritized list of loss-control measures that will address these recurring losses.
For example, fires in resident kitchens and balconies are not uncommon in apartments. Therefore, many firms allot their first dollars for oven range fire suppression devices or, in a few cases, voluntarily install sprinklers on balconies.
It is important to note that smarter loss-control measures can mean higher capital expenditure budgets. More than one owner has been surprised to discover that cost-cutting pressure on capital expenditure budgets led site and regional management staff to view insurance claims as a way of replacing aging roofs, parking lots and sidewalks.
With higher deductibles and liability retention, firms now shoulder the risk for the claim. Thus, many firms are now finding they must adequately fund their capital maintenance schedules and site budgets, as well as offer incentives to encourage site-level personnel to invest in loss-saving maintenance.
A Multi-Faceted Approach to Mold
Finally, a special word is in order regarding mold — a good example of the multi-faceted approach smart owners can use to mitigate risk. Many firms are developing specific damage-mitigation plans for mold by evaluating their portfolio's exposure to the problem based on such factors as construction materials and geographic location.
The firms then educate residents about their responsibility to adhere to good housekeeping practices and to quickly notify management of water leaks. They train their site staff to respond to resident inquiries and concerns and implement the practices outlined in NMHC's Operations and Maintenance Plan for Mold, a set of guidelines for managing the risks and operational realities of indoor mold. Taken together, these actions are a persuasive response to questions from insurance underwriters.
Apartment owners have experienced the same general property insurance trends as other sectors. What they've learned can be useful for owners in other sectors who are evaluating ways to manage insurance costs in a higher-risk environment.
Jay Harris is vice president of property management for the National Multi Housing Council. Additional information on the NMHC survey is available at www.nmhc.org.