Insurance Issues Increase in Downturn

Insurer credit downgrades, rising costs for directors-and-officers liability insurance, and increasing difficulty obtaining coverage for residential portfolios are just some of the challenges commercial property owners must face amid the current economic downturn, says a new benchmark report from insurance broker and risk advisor Marsh. However, these issues co-exist with generally favorable pricing and readily available coverage.

“The economic environment and credit environment have had a major impact on real estate factors,” comments Jeffrey Alpaugh, a managing director of Marsh and leader of the firm’s global real estate practice. “The debt markets are frozen and fewer buildings are trading, and as a result, many real estate investors are focusing on asset management and decreasing costs within their portfolios.” The result, he says, is that many investors are restructuring their insurance programs to decrease the premium costs.

The Marsh report notes that, among other things, real estate firms have amended the terms of their insurance programs, increased retentions, and reevaluated the amount of property catastrophe coverage they purchase. Alpaugh says that the biggest total cost of risk for real estate firms is property insurance. “When we look at their overall premium spending and divide it out, it could be 60 percent to 70 percent,” he points out. Another hurdle for investors trying to meet lender requirements as they are getting ready to buy buildings: Many loans have new or increased insurance requirements or limitations, namely for location-specific risks like earthquakes, weather, or terrorism.