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When it comes to cheap insurance, the party is over for apartments

Ask apartment owners or managers what their biggest expense challenge is this year and many will answer, “Securing affordable insurance coverage.” For several years, coverage had been widely available and premiums reasonably priced. Suddenly, premiums and deductibles are rising rapidly. At least one publicly traded apartment owner has lowered its projected earnings because property and casualty insurance costs doubled at renewal. Another has reported a 32% increase in its premiums.

Speaking at a recent National Multi Housing Council (NMHC) meeting, Chuck McDaniel, president of Denver-based Lockton Cos. of Colorado, said Florida premiums were up 400%. Rates have increased in eastern and southern coastal states because of high-wind risk, and in California, Oregon and Washington because of earthquake risk.

Overall, the multifamily insurance crunch is the result of higher-than-expected losses by carriers, litigation over coverage issues, and the decision of several primary carriers and reinsurers to exit the multifamily market. The remaining firms are raising premiums and deductibles. Despite relatively low catastrophic losses in 2000, one NMHC member estimates multifamily carriers would have to raise rates 60% a year for the next two years to bring premium income in line with losses. Most insurance experts project the crisis will continue well into 2002.

Apartment firms respond

Many apartment firms currently negotiating insurance renewals are trying to secure coverage for longer periods of time to hold costs steady, while others are negotiating reduced premium increases for higher deductibles. A few larger companies are deciding whether to create a captive insurance company within the firm. Some are cautious, though, since previous efforts to establish captives did not yield enough savings to justify the administrative expense and complexity of managing the captive.

Meanwhile, leading firms are paying more attention to loss-control activities. However, each portfolio requires its own strategy, as the risk profile of a coastal developer of rent-controlled properties is very different than that of a multi-market owner in the Midwest. Even common elements throughout a portfolio may require different approaches at each property. For example, the risk associated with a swimming pool depends on a property's location, the pool's condition and any prior loss activity associated with it.

Many firms are stressing the implementation of risk management. They are training personnel to identify hazards, report them and document loss-control efforts. Some companies are providing compensation incentives to staff to make sure loss-control activities are being followed.

Some owners are decreasing risk by promoting and/or requiring renter's insurance. Apartment companies are less likely to be the sole insurer for damage to residents' property, such as in the event of a fire or other natural disaster, if renters have their own insurance. According to the Insurance Information Institute's Factbook, only 29% of renters, apartment and otherwise, are covered by some form of renters' insurance. Owners and managers are encouraged to familiarize themselves with applicable law before requiring or marketing renters' insurance. (NMHC members can request a white paper on the legal and regulatory framework of offering/requiring renter's insurance by calling 202-974-2350.)

Risk management also has become an issue in negotiations between apartment owners and third-party managers. The questions being raised include:

  • What fire prevention techniques will be followed on-site?

  • How often, if at all, will units be inspected for evidence of mold?

  • What site-level techniques will be followed for clearing snow?

  • What benefit, if any, accrues to the manager who reduces or eliminates a property's insurance claims?

A few cutting-edge apartment companies are exploring enterprise risk management (ERM). ERM analyzes all the potential risks that could substantially affect a firm's profitability, identifies the biggest risks and develops a plan to guard against those risks. For instance, some NMHC member firms report higher-than-inflation increases in worker's compensation and health insurance costs. Containing those costs could yield greater bottom-line savings than would new measures to contain property insurance costs.

Risk management's dividend

The tight market for property and general liability insurance is imposing higher operating costs on all apartment operators. But it is not doing so indiscriminately. Carriers continue to pay close attention to management's attitudes toward risk reduction. Firms that have implemented effective risk management and loss-control techniques are benefiting through lower operating costs, and lower premiums and deductibles. NMHC will address property insurance as part of its Risk Management Roundtable on Oct. 19 in Washington, D.C., and employee insurance issues at its Human Resources Forum in San Antonio, Nov. 5-6. For information on both meetings, visit

Jay Harris is vice president of property management for the National Multi Housing Council and its joint legislative partner, the National Apartment Association.

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