Why are commercial real estate rates seeing year-over-year increases?

Real estate insurance rates increased 33% year-over-year while accounting for nearly 10% of quarterly per unit owner operating costs, according to a report by Marcus & Millichap.

According to Tom Lynch (pictured), Jencap’s senior vice president, this is due to “the way claims are litigated and their payments, plain and simple.”

“However, it goes both ways, if these buildings are in poor condition, they are not physically maintained and people are tripping and falling in and around the property, the responsibility is on the landlord or building manager.”

In a conversation with Insurance Business, Lynch explains why this is a difficult type of business to secure. He also reveals whether new entrants in the space are mispricing and whether he sees this rate increase or decrease anytime soon.

“Insurance companies must underwrite to make a profit”

According to the Marcus & Millichap report, “Insurance costs are rising at a rapid rate for commercial real estate, as providers simultaneously implement new policy limits to reduce their exposure.

“Together, these dynamics are eroding the margins of commercial real estate owners and developers, particularly in states with higher environmental risk factors, including Florida, California and Texas.”

Reflecting on this data, Lynch realized how residential, or commercial insurance, continues to be a difficult type of business to insure.

“All it takes is someone within a 365-day period to file a claim,” Lynch said. And depending on the severity of that claim and the ensuing litigation, a relatively large payout can be expected.

Meanwhile, “insurance companies have to underwrite to generate revenue,” Lynch said.

Companies that have been writing business in this space for a while now have the analytical tools to back up these rates and must be transparent with insureds about the negotiation and data mining that goes into each policy.

“Even if it doesn’t make sense to consumers, in order for us to stay in this business space and pay your claims, these prices need to be where they are,” Lynch said.

In its 10 years, SVP has noted that many new entrants have come into the space, with the promise of offering rates that are half of what their more established peers can underwrite.

“However, the ones that stay the longest underwrite with integrity, manage claims and know what to expect setting reserves and defense costs,” he said.

Using emotion instead of legitimate data

Further expanding the impact of new entrants in the commercial real estate space, Lynch noted that some new carriers cannot continue to offer lower prices to attract consumers.

This is driven by a “web of greed” where offering reduced rates to a larger pool of insureds is seen as a good business proposition, Lynch said.

Lynch is quick to note that these carriers are well-intentioned, but they’re playing on consumer emotion rather than legitimate data that may negate their pricing.

“For example, they pay a very cheap rate, say $100 per unit for a 1000-unit building, collecting a $100,000 premium,” Lynch said.

“Something, unfortunately, went wrong, and now the insurance company is paying $250,000 for that claim. Think of the price they will pay in the years to come to make a profit on that risk.”

The result of this is the distrust of consumers because they are initially promised a particular rate that is largely inflated to recover from a loss or closing an operation completely due to a nuclear judgment.

At the end of the day, pricing has to make sense for the insurer

With a healthy bit of optimism, Lynch noted how insurers with a strong understanding of the market were able to price and adjust accordingly.

It doesn’t make sense for a carrier to write coverage when there’s no return on investment, but that shouldn’t deter consumers from getting a policy.

“For people who do things right there are ways to get into better insurance programs. And if you’re good, if your claims are good, your premium will reflect that,” Lynch said. .

An insurer or broker can greatly improve a policyholder’s risk profile by educating them on how to better protect their building from any of the threats or exposures that would normally lead to an accident. – claim.

“Sometimes the building is in bad shape or there are handrails missing from the stairs. There is a defined middle ground that the insurance company can point to and try to make everyone happy,” Lynch said.