9Insurance Business ReviewMARCH 2026SB-2A, approved by Florida Governor on December 16, 2022, should mitigate some of this type of insurance fraud and overtime encourage new insurance markets to write in Florida.Large real estate portfolios with blanket property limits have a reputation in the insurance industry of underreporting replacement cost building values. Replacement Cost Values is the amount required to restore an entire building in the event of a total loss. In prior years, insurance companies were more forgiving or less focused on valuations as total building losses were rare. Recent catastrophic events such as wildfires and hurricanes where entire cities were destroyed, coupled with increased construction cost has highlighted the fact that the actual cost to replace a building was significantly more than what had been reported on an insurance schedule. This meant that premiums paid were sometimes twenty-five or fifty percent less than should have been collected. This has made insurance renewal conversations strained as insureds are faced with increasing their valuations to appropriate levels and paying increased rates due to loss experience.Reinsurance Capacity The latest issue is lack of reinsurance for catastrophic events. Property catastrophe reinsurers provide cover to insurers that offer insurance quotes to real estate firms. Hurricane Ian damage estimates are putting losses at $47B - $60B. Average insured losses over the past 10 years are around $81B. Earnings for reinsurers have been wiped out for the past five years by disasters. Rising prices is to be expected. However, despite five years of unprofitable results, prices did not rise. This was due to excess capital in the reinsurance industry. In the past decade alternative sources of capital from hedge funds, catastrophe bonds and other similar products provided extra capacity into the market keeping premiums low.Persistently low interest rates following the global financial crisis drew many new investors to the reinsurance market in search of better returns than were available from financial markets. In more recent years, insurance-linked securities (ILS) investors have pulled back from the market following several years of above-average catastrophe losses. There are significant amounts of trapped capital in ILS, while higher interest rates are making non-insurance assets more attractive with less volatility. It is estimated that 15% or more of the reinsurance capital has dried up. Globally, there is likely a $25B - $50B shortfall in capacity. A continuation of this trend will extend the hardening market and result in higher rates for CAT limits in your insurance program.What can you do to minimize your exposure to the ups and downs of the insurance marketplace? Valuation and good data - If you do not have a risk management department, consider hiring a loss control consultant to visit your properties and gather the data that your acquisition department is not telling you. Frequently, the schedule of locations that a real estate firm provides to an insurance broker is missing critical information or the information is incorrect. A detailed schedule showing age of the building, roof and specific building characteristics that protect it during a hurricane, storm surge or earthquake is critical in helping an insurance broker determine the appropriate limits and obtaining the best pricing. Consider having a loss control engineer visit your Florida, all coastal and California properties to collect the secondary characteristics. These consultants can advise you on what steps to take to make your buildings better able to withstand a loss or provide tools to help detect water leaks before a large claim occurs. Small investments in improving your risk and a few years of better claims experience, goes a long way in reducing your insurance rates.Use an insurance broker that is well versed in the real estate insurance market. Not all insurance brokers are alike. You would not go to a divorce attorney to assist you with a criminal case, you should not use a general insurance broker (even if he is your brother in law) for handling a large real estate portfolio.Build strong relationships with key insurance companies. Develop relationships with insurance companies that use "house" money and do not rely on reinsurance to offer CAT coverage. FM Global, Berkshire Hathaway, Sompo, Chubb are all markets that are not heavily reliant on reinsurance. Small markets or syndicates that offer competitive quotes one year and disappear from the landscape the next are good for your excess layers or as a small percentage of your program. However, your primary relationships should be with financially stable markets that are committed to the real estate industry and will renew your account year after year. If you have a good story to tell, meet with your insurance partners annually to tell your story of how you are improving your risk and lowering your claims cost. They are not your adversary; they are your business partner.Self-insure ­ putting more skin in the game. When you are willing to shoulder the smaller and more frequent losses that slightly bleed over your current $25,000 or $50,000 deductible, the insurance companies quoting will provide a sizable credit off the premium. Cutting the indirect cost of claims handling person, third party adjuster fees, and accounting personnel to issue numerous small payments is worth something to them. Unlike your homeowners or personal auto insurance claim handling, large commercial insurance companies are not staffed to handle the frequency of small claims under $250,000. A loss fund can be established and over a few years, you can use the surplus to help minimize fluctuating insurance rates.
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