Commercial property foreclosures increase business for insurance brokers | Insurance Business America Property Commercial property foreclosures increase business for insurance brokers
“Additional efforts will be made on all fronts to keep these insurance programs competitive.”
property
By Mark Shoaf Jr.
The surge in commercial property foreclosures has increased pressure on insurance brokers, who are having to field tougher inquiries from underwriters and seek out more sources of insurance, industry insiders said.
A recent report from real estate data specialist ATTOM noted 635 commercial real estate foreclosures in January, up from 141 in May 2020. The total value of distressed commercial real estate in the U.S. reached $85.8 billion as of the end of last year, according to data from MSCI.
Commercial real estate has been hit by bad weather, slow returns of employees to the office after the pandemic, inflation and rising interest rates, which have led to falling property values, higher loan costs and higher insurance premiums. The average insurance premium for commercial property rose 18.3% in the second half of last year, according to CBiz Inc.
In this climate, underwriters are seeking more detailed information about distressed properties than ever before, said Mike Jenna (pictured below), senior vice president of Marsh's U.S. real estate practice.
Since the pandemic, the office commercial real estate sector has faced high vacancy rates, leading to declines in rental income and property valuations… The average decline in office building sales prices in the fourth quarter of 2023 was 16%. @economy
MSCI Inc. pic.twitter.com/pxSaLLzhTj
— Liz Ann Sonders (@LizAnnSonders) February 27, 2024
In the past, underwriters might have only asked for a completed application for insurance, but now they are looking deeper into issues such as the building's occupancy rate, past appraisals and loss history.
“Insurance companies are taking a much more rigorous approach to underwriting than they used to,” Jenna says. “The challenge is [for brokers] It’s about presenting the correct information to the underwriter.”
Kevin Madden, managing director and real estate practice leader at Aon, said underwriters needed to carry out greater due diligence in the commercial property sector.
“Because of this tough market, this tough insurance market, their level of doubt is [is] “The increase is incredible,” Madden says. “It just adds more work to already-busy underwriters. That's where brokers come in and do a lot of that work and highlight the positive aspects that differentiate them for their clients.”
Tougher Questioning
An example of where a broker may have to field tougher questions from an underwriter is an application for insurance coverage for a building damaged by severe weather.
“We need to outline a plan for when we're going to fix the roof,” Jenna said.
Underwriters will also want to insist on how office buildings and other buildings are maintained. For example, if a building is vacant, there is a higher chance that someone will get injured in that building.
“When a building remains vacant, a variety of issues can arise and the potential for loss increases,” said Pete Romano (pictured above), executive vice president and national real estate practice leader for Lockton Companies.
Excess lines are determined by occupancy rate
Challenges arise even when parts of buildings are in use: While the country has largely emerged from the pandemic, remote work is lingering, taking a toll on commercial real estate.
When office buildings fall below two-thirds occupancy, owners turn to excess and surplus insurance.
“Ideally, we would like to see these buildings 65 to 70 percent occupancy. [policies] It’s written in a licensed market,” Jenna said.
Given the current crisis in commercial real estate, brokers are increasingly likely to have to work with multiple insurers to find the best combination of cost and coverage.
“The job of brokers is becoming more important because there is no one-size-fits-all approach,” Romano said. “There will be increased efforts on all fronts to keep these insurance programs competitive. The ability to navigate these challenges from a strategic, tactical and transactional standpoint will be key to delivering the best outcomes for insureds.”
Can a headwind become a hurricane?
While the headwinds for commercial real estate may appear to be reaching hurricane levels, it's unclear how much of a hit the insurance industry will be from that storm.
“It's like a low pressure system in the Atlantic, but it's too early to tell if it will become a hurricane and threaten land,” Romano said. “The key is to start thinking about contingencies and compensation now so you have options for the future.”
One broker said that while property owners may be feeling the pain, the insurance industry is taking commercial property's problems in stride.
“We don't believe the rise in foreclosures will have an impact on the property insurance market,” Barry Whitton, managing director at Burns & Wilcox Brokers, said in an email. “The market is responding as it always has and providing insurance options available.”
The real estate and insurance industries have been through tough times before, Madden said, citing the financial crisis of the late 2010s as an example.
“We've had a strategy going back 15 years,” Madden said, noting that the best strategy is for property owners to “get ahead” of risk by explaining to underwriters how they plan to use and maintain the space.
“The good thing about the real estate industry is that even if you go bankrupt, somebody's got to pay the insurance premiums,” Madden said. “It's either the owner or the lender.”
Related article
Check out the latest news and events
Join our mailing list – it's free!