How to Win in Today’s Challenging Market

The real estate insurance market is in a state of transition. Increased frequency and severity of natural catastrophe losses have taken their toll on the real estate property market. Add in losses due to civil unrest endured in 2020 and top that off with inflation and other economic challenges, the market sees even tougher conditions ahead, says Ryan Flanagan, senior vice president at Heffernan Insurance Brokers, based in Los Angeles.

Carriers in this space are paying out substantial claims today, which is leading to a market with fewer carriers and shrinking capacity, he said. Some newer markets that came into the real estate sector just two or three years ago are exiting this space now, while the markets that are still around are being even more picky today.

“They only want class A assets in class A locations,” he said. They want to write only brand new apartment buildings in Beverly Hills, or Santa Monica, California, and not that 1970 building without a sprinkler system in Miami, he explained.

Flanagan is no stranger to helping the real estate industry strategize tough market conditions. Prior to joining the insurance industry, he worked as a real estate developer in Southern California and then as a real estate attorney for a large grocery store chain. Strategizing to solve problems around real estate transactions has been a common theme throughout his career, he said. But after nearly seven years as an insurance broker, today’s insurance market conditions have become a big concern for real estate clientele, Flanagan says.

“They’ve got to put their deals together, they want their properties to cash flow, but insurance can be an impediment to that, especially in this market,” he said, where in the past 30-60 days, insurance rates have skyrocketed. While insurers have cut capacity or left the property market altogether due to catastrophe related losses, other non-weather-related issues such as rising cost of materials and inflation are hitting his clients’ bottom line.

“Everything is going up … inflation, lumber costs, all that … and so, when clients are going up for renewal, and their lenders are sticking their nose in, and saying, ‘Hey, your building might have been $20 million last year, but we know it’s probably going to cost $25 or $30 million now.’ Well, naturally, rate on a $30 million building is just going to obviously increase the premium.”

Flanagan says it’s important to get ahead and figure out creative ways to minimize the impact for real estate clients in today’s market.

“No insurance broker’s going to have a secret weapon where they’re decreasing costs, but a good insurance broker can not only prepare his client for what’s going to happen, but put together special programs to alleviate some of the impact,” he said.

Get as much information as possible, he advises. “The best job that an insurance broker can do for a client with assets that aren’t the class As or not located in the best areas, is to get as much underwriting information as possible,” he said. Also, instead of asking for loss runs of three to five years, get seven or even 10 years, he said. If those seven or 10 years paint a better picture for the underwriter, that’s good, he added.

In regions hit hard by natural catastrophes, brokers need to be advisers to clients on risk management efforts that underwriters deem necessary.

“In terms of clients who have properties in weather prone areas, like Texas, Florida and even California, you can advise clients to weatherproof properties as much as possible,” he said. Utilizing fire retardant, clearing brush, insulating piping, even retrofitting for earthquakes can help in the eyes of an underwriter. “Then, as an insurance broker I can say, ‘Hey, my client is very diligent, they’re very hands on, they’re weatherproofing their properties.’”

Real estate is real estate. “You’ve got to be strategic with where you buy,” he said. But even in difficult markets, real estate is an attractive investment vehicle. The real estate insurance market is kind of the same, he said. “You have to be strategic with how you advise your clients on insurance” in today’s market, he said. “You can’t just renew the same insurance policy year in and year out. You’ve got to sit down with your insured, face to face, and put together a game plan for the next 12 to 18 months, knowing that this market is probably not going to improve in that timeframe.”