If you’re a real estate owner or investor, you may have noticed a significant increase in insurance costs compared to previous years.
Shimon Shkury from Forbes Magazine made mention as to Why Real Estate Insurance Premiums Are On The Rise—And What Owners Can Do To Prepare he said
If you’re a real estate owner or investor, you may have noticed a significant increase in insurance costs compared to previous years. In fact, renewal increases have jumped 20% year-over-year, according to Q3 2020 data from Marsh’s Global Insurance Market Index, a measure of global commercial insurance premium pricing.
“This increased expense can affect a property’s net operating income (NOI) and thus its bank and appraisal valuation,” explained Matt Swerdlow, Director, Capital Services, Ariel Property Advisors. “Higher expenses and a lack of rent growth in NYC will lead to some borrowers facing difficulty in refinancing their existing mortgages. Because higher insurance costs eat into a property’s bottom line, this trend of climbing premiums is one that commercial real estate investors need to manage actively.”
Property and liability insurance for commercial real estate is usually bundled and provides protection against damage, fire, theft, and third-party claims. Property insurance is one of the “must-have” items on a building’s expense list and the recent jump in insurance premiums raises the question of what exactly is causing these spikes.
First, today’s low-interest-rate environment is preventing insurance companies from achieving the typical level of yield they would expect through normal investment activity. Since today’s returns are not sufficient enough to cover existing settlements and new claims, carriers are forced to increase premiums to offset the difference while still creating shareholder value.
He also defined the concept on How This Affects NYC’s rent-stabilized Apartments:
Rent-stabilized buildings are prone to deferred maintenance and so they often encounter more HPD and DOB violations. The Housing Stability & Tenant Protection Act of 2019 (HSTPA) is magnifying this issue, deterring landlords from addressing these repairs and allowing them to accumulate.
Rent-stabilized apartment buildings in the Bronx, for example, are suffering disproportionately from insurance pricing spikes. There is a lack of insurance carriers servicing the Bronx and many carriers don’t provide lead coverage for properties built between 1960 and 1978. Ariel Property Advisors has observed in some cases that typical premiums in the Bronx could exceed $1,000 per unit.
What Owners Should Do Now
Swerdlow recommends that owners should become familiar with their current policies prior to or early in the financing process to avoid any surprise pitfalls. Now more than ever it’s important to make sure one has the right relationships in place to find creative solutions to help reduce the cost of their insurance. Insurance specialists can look through one’s policies to see if there is any extraneous coverage and provide active risk management to implement different loss control strategies to potentially limit the severity or reduce the impact of a claim.
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