U.S. - Real Estate

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Property Market Conditions

The story in property insurance for real estate is much different than it was just one year ago. The property market began to show some signs of turning in the fourth quarter of 2008 and continues to harden as we near the fourth quarter of 2009. The deteriorating economic conditions were a major contributing factor to rate increases, as insurance carriers had to make up for declining investment income. However, this was not the only factor at play. For example, as the losses for Hurricane Ike continued to spiral upward, making it the second most expensive hurricane in U.S. history behind Katrina, markets began to increase prices and cut back capacity or get out of the marketplace altogether. Several carriers also suffered severe non-CAT losses that made them rethink their underwriting strategies. These factors resulted in most commercial and residential real estate accounts beginning to see single- and double-digit rate increases, while those with the highest loss ratios saw rates often more than doubled. All of that said, there are signs that the increase in property rates is beginning to level off, a trend that will likely continue barring no significant storms this hurricane season.

Catastrophe Market

Possibly the biggest problem facing the critical wind market today is a lack of capacity. Many of those carriers still willing to write hurricane-prone areas have already maxed out in certain counties (Tri-County Florida, Houston area), which makes renewing with expiring Named Storm sublimits a difficult and expensive proposition. It also makes adding new locations to an existing portfolio much more complicated. As noted above, the losses to South Texas attributable to Hurricane Ike have caused many carriers to broaden their definition of risk-prone areas to include nontraditional Tier I counties such as Fort Bend or Montgomery.

In addition to reduced capacity, carriers are instituting tougher terms and conditions as well. The standard named wind storm deductible in Florida has risen back to 5 percent, even for noncoastal counties, while it is difficult to find less than 3 percent in Houston. These percentage deductibles are increasingly becoming “per location” versus “per building” as well. Minimum earned premiums are also increasing, as carriers seek to ensure they earn as much premium as possible. Many are requiring fully earned premiums if a CAT-prone location is on a program at any time during the six-month hurricane season.

California earthquake capacity has also declined, although not to the same degree as the wind market. There are still several markets willing to write the risk, although premiums have increased since last year. Deductible requirements remain steady at a minimum of 5 percent.

Non-Catastrophe Market

As compared to last year, the marketplace for multifamily apartments and other frame buildings has contracted somewhat as a few major players are now more reluctant to write the line of business. However, there are still plenty of admitted and excess and surplus (E&S) carriers willing to write real estate portfolios, with the competition being sufficient that most clients with a good loss history should expect a flat renewal. That said, underwriters are less willing to overlook significant fire and hail losses as they have been in the past. Finally, some carriers that were willing to include a single Florida or earthquake-prone location on a primarily non- CAT portfolio last year will no longer entertain the idea, requiring the placement of a one-off policy for the high-risk location.

Builders’ Risk Market

The increased difficulty of obtaining financing for new projects, coupled with the busting of the “real estate bubble” last year, has caused a dramatic drop off in new construction projects. While the builders’ risk market has remained relatively soft over the past several years, the smaller supply of new business has led to a more competitive environment among underwriters. While these reductions have been seen in retail and commercial segments, the biggest drop has actually been in the rates on policies covering frame construction, including garden-style apartment complexes.

Casualty Market Conditions

Most general liability and umbrella carriers are still offering flat renewals on profitable accounts, with the best loss histories securing slight decreases. This remains true for guaranteed-cost, small-deductible, and high-retention programs. Competition among the markets also means that terms have remained fairly constant and in the insured’s favor. Coverage enhancements, such as additional insured endorsements and pollution give-backs, are still available.

Current Real Estate Market Trends

Lenders—With new commercial real estate deals dropping off considerably in the past year, lenders have begun to scrutinize their current loans to a greater degree. They are now looking harder at the valuation of properties, often requiring appraisals and/ or Marshall & Swift analysis to corroborate reported replacement cost. Larger deductibles and self-insured retentions are being questioned more frequently as well. Finally, due to decreasing CAT limits being purchased by many property owners, banks are now requesting information on whole portfolios to determine additional exposures.

All of this enhanced evaluation by banks means that broker service teams must devote extra effort to both the pre-renewal and post-renewal process. For example, several arguments can be made for lower-than-suggested valuations, including that construction costs have dipped dramatically in the last year as a result of a lack of new ground-up projects, which has increased competition among contractors and suppliers. Brokers have always made sure that the requested deductible options do not exceed the maximum ceilings placed by lenders on certain properties. However, now there is an added incentive to generate alternate ideas such as buy-down policies or plus-aggregate structures. Finally, sharing probable maximum loss (PML) analysis can help alleviate lender concerns of under-insuring a multi-location blanket program.

New Construction—While new builders risk placements have slowed to a trickle, there are still many projects currently underway that will soon need to be insured on permanent programs. However, with vacancy rates on the rise at existing properties, leasing or selling all new units in a building is not likely. As a result, insureds will have difficulty finding coverage for partially empty residential buildings.

Distressed Assets—Myriad widespread problems have befallen real estate companies and lenders, including loan defaults, foreclosures, bankruptcies, liquidations, and redevelopments of real estate-owned (REOs) properties. Problems then arise with trying to obtain/maintain insurance coverage on these locations while owners or lenders dispose of or turn around their distressed assets. For example, when a property goes into receivership, it will often have a low occupancy level that will make it less appealing to insurers. This type of challenge provides agents and brokers with an opportunity to help put together innovative programs and solutions for their clients.

Please contact your Lockton Representative for further information regarding any information contained in this market update.

	Julie Eckman Senior Vice President Unit Manager Denver, CO Tel: 303.414.6429 E-mail: jeckman@lockton.com
	Pete Romano Senior Vice President Department Manager Denver, CO Tel: 303.414.6349 E-mail: promano@lockton.com
	Sarah Matthews Assistant Vice President Account Executive Denver, CO Tel: 303.414.6478 E-mail: smatthew@lockton.com
	Benjamin Carroll Account Executive Denver, CO Tel: 303.414.6075 E-mail: bcarroll@lockton.com