For many real estate companies and investors, insurance is viewed as a necessary evil that is an often overlooked cost of doing business. I get it, very few people want to deal with insurance unless they have to. If this sounds familiar and you haven’t carefully considered your insurance program as part of your company’s overall financial and risk management strategy, you may be leaving your company at risk and significant dollars on the table. This is especially true now more than ever as catastrophic property losses are on the rise nationwide and market challenges abound.
According to the Insurance Information Institute, over the past 28 years, the average annual cost of catastrophic losses in the United States was $19.3 billion. In 2017 that number skyrocketed to $104 billion, followed by $50 billion in 2018. There is no doubt about it: repetitive weather patterns and increased catastrophic incidents are causing the insurance industry to pass added costs on to property owners. For example, rates rose 13% on average in 2019 for office, industrial, multifamily, and hospitality properties across the United States. That figure trends even higher for commercial properties in high-hazard areas that regularly experience severe weather events. In those areas, companies are seeing rate hikes as high as 30% to 50%.
Given these concerning statistics and trends, if you haven’t considered your insurance and risk management strategies lately, it may be time to take a fresh look. One of the best and most fundamental strategies for real estate companies and investors is to consider is something known as a Master Insurance Program.
Insurance programs for real estate companies and investors can take several forms. The most common include a bifurcated insurance program and a master insurance program. In a bifurcated program, the company or investor relies on independent insurance programs for each of its properties and operations—each with their own policies, renewal dates, carrier or broker partners, etc. On the other hand, a master insurance program “rolls-up” all of the company or investor’s properties and operations under a single consolidated program. While there is never a one-size-fits-all approach, a master insurance program typically offers significant benefits for real estate companies and investors over a bifurcated approach.
More often than not, when we see a bifurcated program, it occurred by default. As companies or investors scale by adding properties or operations to their portfolio, their existing insurance programs are left untouched and a new insurance program is placed to cover the added exposures. While this ad hoc approach may satisfy an immediate need and get lenders off of your back, over time, it often results in an unorganized and overwhelming web of insurance programs that has numerous administrative, financial, and risk-mitigation pitfalls. Some of those pitfalls include:
- Increased Administrative Burden. With a bifurcated program, you constantly need to manage separate policies that each include their own renewal dates, coverage terms, underwriters, and claims adjusters. Furthermore, with several different insurance programs continually being negotiated, bound, and financed, it leaves more room for errors to occur during the process.
- Coverage and Limit Concerns. With several different insurance programs covering several different properties and operations, there is a higher likelihood that there is a gap in coverage or inadequate limits. For example, if one insurance program includes a stated valuation for an insured property, there is a higher likelihood that the stated valuation is not sufficient to cover a total loss, resulting in an uninsured loss.
- Increased Underwriting Burden. With different insurance carriers handling separate properties and operations, carriers are more likely to look at each property with a more skeptical eye due to a lack of premium volume. This can result in fewer insurance markets and/or increased annual premiums.
- Increased Costs. Duplicated costs and fees associated with marketing properties and operations to numerous carriers and lack of premium volume often results in higher insurance premiums for each exposure.
Designing a master insurance program that consolidates all of a company or investor’s properties and operations under one roof can eliminate or mitigate many of the pitfalls described above. For example:
- Decreased Administrative Burden. A master insurance program significantly decreases the administrative burden of the insurance marketing and renewal process by having a one renewal date, one broker, and fewer insurance carriers. Furthermore, because all of the properties and operations are all under one program, coverage terms will be standardized between all locations and operations, resulting in a better, more comprehensive insurance program.
- Broader Coverage Terms and Limits. By consolidating all properties and operations under one program, there is more leverage to negotiate enhanced coverage terms and broader limits. For example, a master program would be structured with a “blanket” limit of property insurance or a “loss limit” that is adequate to cover the largest possible loss in any one occurrence.
- Economies of Scale. Combining all properties and operations under one program will create economies of scale savings that cannot be achieved by procuring insurance on a bifurcated basis, often resulting in significant overall premium reductions.
- Stronger Relationships. A master insurance program will place more insurance premium with fewer insurance carriers. This will result in stronger carrier relationships, leading to more favorable underwriting and claims leverage.
If you haven’t considered whether you could benefit from a master insurance program, consider your options and work with a trusted insurance advisor who can help you navigate which program is best for you. No matter which program is right for you, prioritizing your insurance and risk management strategies is more important now than ever, and will provide you peace of mind and more time and money to focus on your business.
Brendan Bush is an Account Executive in the Milwaukee office of M3 Insurance. Specializing in construction and real estate, Brendan counsels owners, developers, and construction companies on property and casualty insurance and overall commercial risk management needs. Brendan pairs his legal background with his industry experience to serve as a trusted advisor to his clients.