2Q 2018 Real estate and hospitality insurance market update - Gallagher
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2Q 2018 Real estate and hospitality insurance market update. Spring 2018 Property Snapshot 2018 has thus far been a year of firming property premiums due to the $135BB (and counting) of losses in 2017 and early 2018. Based on a February 2018 report in the publication Carrier Management, the U.S. property/casualty insurance industry will show a combined loss ratio of 105.1%. To put that into English, for every dollar of premium, $105.1 will be paid out. Speaking of the English, Lloyds of London has also suffered massive property losses particularly in the Hospitality industry with Irma and Maria claims in South Florida and the Caribbean. Their Combined Property Loss Ratio is now pegged at 127.6% excluding reinsurance claims. To make matters even more interesting, Colorado State University climatologists are predicting an above average hurricane year for 2018. Suffice to say, the property underwriters are re-examining their approach to underwriting high hazard flood and wind areas. Even the most “clean” (no losses) accounts will likely see single digit rate increases. Having said that, there is new capacity, but much of it is from Private Equity. Additionally, M&A activity among the insurers is expected to continue with the impact on capacity and future pricing being the question. Upon review of the first quarter renewals, we have found that the average rates are where they were in the 2015/2016 policy periods. As we noted in the last update, multifamily and hospitality continue to suffer attritional losses (fires, water damage, and collapse) at a higher rate than other asset classes. Carriers are focusing their underwriting on the loss histories and loss control protocols of these assets and their managers. In addition to the fire and water exposure, damage to older roofs due to wind and hail is on underwriters’ radar and many insurers are pressing for percentage hail deductibles and higher rates in Texas and the Midwest. This translates into low loss history accounts in non-cat regions seeing rate increases in the 3–7% range while catastrophe exposed accounts with good loss histories are in the 8–15% range. The bottom line is that every account is being individually underwritten with many more questions being asked by Gallagher Real Estate Practice underwriters. www.ajg.com/realestate On the construction side, wood frame builder’s risks (COC’s) are facing a much more limited market with rates rising by 20–30% and stringent security systems being the required norm during construction. From an operational standpoint, those organizations who are primarily the “Prop Co’s” should demand heightened risk management oversight from 3rd party managers as a strategy for reducing claims and thus keeping premiums in line. 2Q 2018 REAL ESTATE AND HOSPITALITY INSURANCE MARKET UPDATE 1
Outlook for the next two quarters: Geographic foot print, claims Umbrella Limits: The age old question is how much limit should be
history and asset class are the key drivers for renewals. Wind and purchased? In the past, umbrellas were considered to be “sleep
Flood Zone A & V exposed assets can expect a high-single digit insurance policies”. However, the $1M primary limit isn’t what it
to low teen increases while others can expect a single digit rate used to be as claims have been piercing the lead umbrella in recent
increase for assets other than multifamily or hospitality accounts. years — from multi-million dollar auto verdicts to single person
Given the previously discussed attritional losses, multifamily and injuries. In addition, if your asset class has the possibility of one loss
hospitality can expect an average of 7–10% for non- catastrophe impacting multiple third parties, you may want to have your limits
exposed assets. Rate reductions will be rare and carriers will be benchmarked against peers to ensure that your limits are adequate.
underwriting every risk on its own merits with a focus on loss Auto is seeing significant increases due to both the frequency and
control, age of roofs and protective safeguards. For California severity of claims. On the hospitality front, expect increases of 15-
assets, earthquake pricing is stable and the new RMS 17.0 modeling 20% out of the gate particularly for operations with shuttles.
will create new winners (Southern California) and losers (Northern
Pollution Legal Liability has become as ubiquitous as property and
California liquefaction and Pacific Northwest).
casualty, with portfolio pricing generally less than .005/square
foot for commercial office, retail and flex. Pricing for Multifamily
and Hospitality is slightly higher due to the 24/7 exposure but this
coverage is intended to cover not only below ground contamination
but illegal dumping and indoor air/water/mold contamination. The
recent pollution claims caused by flood and hurricane losses have
given rise to many carriers pushing for higher deductibles.
As respects hospitality, some carriers are pushing for “per room”
deductibles for mold and microbial, so be warned. It’s critical to
be aware of these potential changes as terms and conditions are
negotiated. Many organizations will purchase the PLL on a blanket
basis as a means of reducing the overall cost while others prefer
project specific which can then be assigned to a new buyer.
Commercial General Liability , Auto and Pollution Snapshot
Outlook: With the exception of auto, these Stable is the watchword
The Commercial General Liability market is trending flat to very
and owners/managers with robust loss control and transfer of
low single digit increases for portfolios (other than multifamily)
contractual liability will continue to benefit.
with combined loss ratios under 50%. Underwriters are focused on
active loss control and contract review given that the best way to Professional Liability Snapshot
reduce expenses is by reducing claims and transferring liability to In 2017, publically traded companies experienced a 52% increase in
the appropriate party. There is no better time than now to perform the frequency of securities class actions, mostly due to the increase
a thorough review of vendor, tenant and contractor agreements as of mergers and acquisitions claims being filed in federal court, but
respects indemnification, additional insured status and appropriate also due to an increase in non-M&A lawsuits, such as “event driven”
limits. securities lawsuits that follow a significant press release, claims
Multifamily is trending at slightly higher premium increases due to stemming from activist investors, and claims relating to executive
the development of claims. Multi-family claims are taking longer (5–7 compensation. In particular, real estate companies have seen activist
years) than typical liability claims (3–5) to be resolved. In addition to investor suits rise after a broadening of their shareholder base
the 24/7 exposure, the fact that children are often claimants leads to following the new GICS code.
the longer review and adjustment process.
2Q 2018 REAL ESTATE AND HOSPITALITY INSURANCE MARKET UPDATE 2
For privately held real estate asset management companies, we are seeing some regulatory investigations from the Department of Justice and Securities and Exchange Commission relating to conflicts of interests, fees, and related party transaction. Private held owner/operator companies with residential exposure continue to see frequency in third party discrimination lawsuits such as Fair Housing Act Violations. The most frequent losses continue to occur in the Social Engineering space, with companies of all sizes at risk. The “fake” emails are looking increasingly real and involving more complicated transactions, such as hijacking existing vendor payments or even insurance payments. In Employment Practices Liability, we are seeing increases in claims regarding gender pay differences, but Outlook: Professional Liability is getting more complicated by the have not yet seen a jump in sexual harassment claims that we would day and it’s not just the owners/managers who are confused, but have expected from the #metoo trend. Many real estate owners many attorneys and generic insurance agents who don’t understand are seeing an increase in American’s with Disabilities claims, often the exposures and the options. Given the personal nature of the from plaintiff’s firms with a history of casting wide nets with serial liability for the owner/manager, we cannot stress enough the allegations. importance of working with a specialist. Premium in the public company space is feeling some upward Take Away for 2018: Owners and Operators of RE&H must focus on pressure, especially in the primary layer, following the large increase differentiating their portfolios and business operations to receive in claims in 2017. For privately held companies, the premium is the lowest possible increases. Loss control for all lines of coverage, more stable with most clients’ seeing flat renewals in 2018. There including Cyber, Employment Practices and other professional is some upward pressure on Cyber pricing for large residential real exposures is key to improving the underwriting results and estate owners, but abundant supply is keeping most rates fairly secondary characteristics for the actual real property virtually stable. Overall for all professional and management lines, real estate always improve the earthquake outcomes for modeling. companies without significant claims experience should anticipate roughly flat to a slight increase in premium in 2018 with a potential for increases in retention on Employment Practices Liability, especially on the Third Party Discrimination and Harassment coverage. Gallagher Real Estate Practice www.ajg.com/realestate © 2018 Arthur J. Gallagher & Co. All rights reserved. 18BSD28440B 2Q 2018 REAL ESTATE AND HOSPITALITY INSURANCE MARKET UPDATE 3
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