Q1 2021 Real Estate & Hospitality Insurance Market Update

Insights into general liability, property insurance, casualty insurance, D&O liabilities and more

The year 2020 set a record for 19 events that exceeded $1 billion in losses in the U.S.¹ Seventeen of these billion dollar plus events occurred in the first three quarters, including riots and civil commotion losses, along with tropical storms and hurricanes that tapped both the English and Greek alphabets. COVID-19 claims impacted Workers' Compensation and the litigation surrounding coverage for COVID-19 related business interruption continues to wend its way through the courts, while social inflation, widespread financial uncertainty and a constriction of capacity have driven up Umbrella and Directors and Officers Liability (D&O) pricing. So what does the future bring?

Current Development: A Real Estate Knowledge Webinar

Gallagher is pleased to provide a real estate and hospitality market review focused on region, line of coverage and asset class. The information is derived from client metrics as well as public data.

We hope this resource provides valuable insight into the current state of the market to help you face the future with confidence.

Current marketplace by line of insurance coverage and asset class

Professional liability

Real estate professionals are all too familiar with the cyclical nature of business, however a global pandemic really packs a punch. The biggest factors impacting Management Liability renewals are the real or perceived threats of Litigation, Defaults or Bankruptcy. As we have seen since the onset of the pandemic, poor historical underwriting profitably has caused simultaneous capacity reduction, rising retentions, and premium increase – even for clients who have no losses.

COVID-19 did not elicit a uniform response from all asset classes. Single family residential, industrial flex, and data warehouses outperformed expectations. Conversely, indoor malls and hospitality were hit disproportionate hardships. Multifamily and commercial office received mixed results, depending on vacancy percentages and liquidity.

Short and long term debt liquidity, as well as debt maturity schedules, quickly came into focus for asset managers and D&O underwriters alike. Providing proof of liquidity and balance sheet flexibility has become critical for insurance renewals.

Large commercial office – Property insurance

Commercial office has always been a desirable asset class for underwriters. Even during the pandemic, the office segment has preserved tenants at high occupancy levels and performed well with solid rent collection rates. Following two cycles of meaningful upward rate adjustments, many markets will seek more modest rate increases in the range of 7-12% on office asset portfolios.

However, this does not apply to insureds who are transitioning from single carrier placements to shared/layered program structures. These clients will continue to see rate spikes upwards of 20-25% coupled with tightening terms & conditions.

Amplification of both frequency and severity of water damage claims is a driving factor for underwriter scrutiny. Insureds who can maintain stable occupancy and continue to spend budgeted Capital Expenditure (Capex), may want to turn their attention to water shut-off valves and water leak detection equipment. Taking on higher deductibles and engaging in this type of risk mitigation could merit premium relief.

Single family homes – Property insurance

The year 2020 and the ongoing global pandemic has highlighted the increased demand for single family homes. In a market where the demand for housing already exceeded supply, we are now faced with escalated migration away from crowded city centers and into suburbia. The desire to access outdoor recreation and community based amenities has driven up home values and inflated the need for single family home rentals.

Depending on portfolio size and exposure to catastrophic loss, the typical renewal rate increases fall between 10 and 15%. Domestic U.S. and London-based insurers are authorizing renewal rate changes below their book averages and deploying new capacity for single family home portfolios with limited attritional losses. As investment in this asset class grows, we expect to competitive renewals to be the trend.

Hospitality

Insureds in the hospitality sector will continues to face significant challenges. Carrier guidance issued for Q2 2021 property renewals is indicative of 10-20% rate increases, even for portfolios with clean loss history.

General Liability renewal rate increases are expected to range from 15 to 25% and renewal rates for the primary layer of Excess Liability could move as high as 30%. The number of markets willing to entertain this asset class has downsized significantly.

Terms and conditions will remain areas of focus for underwriters. Sexual Abuse and Molestation (SAM) exclusions abound among hospitality carriers. An insured will be required to provide in-depth detail regarding Sex, Drug, and Labor Trafficking protocols in order to combat these exclusions. Increased scrutiny further extends to terrorism and lone shooter protocols as liability carriers clamp down on areas they feel exposed to large losses. Finally, insureds can expect Communicable Disease, Fungus, and Bacteria exclusions to be commonplace going forward.

Casualty insurance

Primary liability

For those with residential exposures, the liability market conditions continue to constrict. Large court settlements and increases in habitability claims compounded by the 24/7 exposure and "stay safe at home" directives have continued to challenge Primary Liability carriers. Many carriers have exited the insurance market for Primary Liability for residential exposures or have quoted with very restrictive terms such as: Habitability exclusions, Sexual Abuse and Molestation exclusion, Assault and Battery exclusions and Animal exclusions. In addition, many carriers do not want to entertain residential risks without a significant deductible or retention.

Umbrella liability

Umbrella and Excess liability placements have been greatly impacted by several underlying factors.

The rising inflation in claims costs associated with Commercial Automobile coupled with an increase in wage costs, medical costs, cost of goods/services and social inflation are the primary forces driving the drastic changes we are seeing in the marketplace. Many carriers have reduced their capacity from $50 million to $25 million and lower. A recurring message from the market involves capacity management. Carriers want to limit their exposure to higher attachments and lower limits. $25 million Umbrellas are rare. Lead Umbrella limits have switched to $10 million and $15 million, yet premiums are not being reduced.

Average rate increases for 2020 by asset class

Asset Class	General Liability	Umbrella	Overall
Office	12%	42%	25%
Industrial	2%	24%	5%
Mixed Portfolio	18%	63%	25%
Multifamily	16%*	190%	76%
Retail	40%	404%	150%
Single Family Homes	-11%	100%	26%

Source: Susan Patelson CPCU, RPLU, ASLI | Area Executive Vice President |Casualty Managing Director Real Estate & Hospitality Practice

Developer's general liability

Late 2020 saw many developers get underway with projects that had been sidelined for much of the year due to COVID-19 (and other) uncertainties. For some, the construction liability insurance landscape had changed substantially since the last time insurance budgets were plugged into project pro formas. Rates increases continued across most product lines (General Liability -Only Owner Controlled Insurance Program, Owner Controlled Insurance Program Excess Liability, and Owner's Interest General Liability).

Clients should be keenly aware of four major takeaways. First, the exclusion of contingent General Liability coverage within Owner/Developer operational General Liability programs for significant construction projects. Second, the rapid uptake of standalone Owner's Interest General Liability (OIGL) coverage to plug the gap mentioned above. Third, the exodus of OCIP Excess Liability carriers, resulting in rate increases amid diminished competition. Finally, the average GL-Only OCIP and OCIP Excess Liability pricing coming in at 1.4% to 1.6% project hard costs.

Environmental insurance

The Environmental Insurance marketplace will continue to struggle with claims from Mold, Legionella, COVID-19, Perfluorinated compounds (i.e., PFAS) and Brownfield redevelopment exposures. Hospitality and Multi-Family have stood out as loss leaders among other asset classes. This has led to new, more restrictive underwriting guidelines and coverage pullbacks. Most recently, a large, global insurance carrier announced an exodus from the Site Pollution business in the U.S. due to poor performance. However, capacity is still available, and towers of $100 million+ can be assembled on most fairly clean Real Estate accounts.

Ten year terms are still available from a handful of carriers, and premiums are relatively stable, with some markets pressing for 5-10% increases. Contractor's Pollution liability coverage remains relatively inexpensive, with combined terms of up to 18 years available on project-specific placements. This is enough to cover the period of construction plus 10 years post-completion for construction defect claims.

Current marketplace by region

West Coast

In Q4 2020, underwriters gained momentum on rate escalation. Capacity was difficult to secure and came at a high price.

With respect to property, underwriters are applying upward pressure on deductibles. The list of hot topics for underwriters is growing rapidly. Insureds can expect wildfire zones, protection class, crime score, building valuation, rent collection and retail vacancy to be topics of discussion come renewal time. Increased scrutiny over these elements has spilled over into new acquisitions. Twelve months ago, properties could be added to existing policies at existing rates with ease, now every one of these details is being underwritten.

General Liability and Excess Liability capacity is deteriorating, especially for multifamily. In a more restrictive General Liability environment, carriers are seeking to limit sexual abuse, professional, and development/rehab exposures. Communicable Disease Exclusions are commonplace and should be expected as a standard feature in the policy form.

While Risk Purchasing Groups (RPGs) offered relief from Excess Liability rate hikes for some insureds, these RPG's are now being heavily scrutinized by lenders.

Midwest & Great Lakes

Midwest and Great Lakes Real Estate organizations face a challenging market. Favorable coverage terms and pricing still exist in pockets, but the availability is limited to regional portfolios, particularly in multi-family.

Proliferation of percentage wind/hail deductibles is commonplace, even for locations that were not previously known for convective storm losses. In 2020, the large Derecho that swept Iowa forced carriers to rethink convective storm modeling in the Midwest. States that saw flat deductibles two years ago should brace for percentage wind/hail deductibles in the near future.

Regional carriers are issuing low to middle double-digit increases, assuming a loss ratio of 35% or less. It is worth noting that these regional carriers are tightening their eligibility requirements. Which in turn forces some insureds into more expensive Excess & Surplus programs.

Clients should focus on submission quality, more detail on risk characteristics pays dividends when marketing a program by removing the uncertainty that drives rate.

Northeast & Mid-Atlantic

Underwriters want to understand now, more than ever, why they are working on an account. This means submission qualification is front and center. Clients should expect to encounter underwriters intensely focused on risk engineering, appraisals and risk control supported by data. Planned responses to open loss control recommendations will not cut it anymore. Underwriters are demanding compliance.

Throughout Q1 2021, insurers have been cutting capacity and amending renewal terms. Trends like water damage deductibles of $50 thousand to $100 thousand are the new norm and should be expected to continue into Q2.

Asset classes like retail, hospitality, and office will encounter increased financial scrutiny as COVID-19 concerns loom. Industrial flex is burdened by the type of tenants they contract with and habitational risks remain troubled. The keys to navigating this market will be solid data and attention to detail.

Southeast & Mid-South

Insurance underwriters operating in the Southeast and Mid-South regions issued large property rate increases in 2019 and 2020. For this reason, increases are still expected, but to a slightly lesser degree headed into Q2 2021. Overall, property rate change for accounts will be driven by occupancy, location, and historical rate change and loss experience. For accounts with loss ratios greater than 50%, clients should expect rate increases of 15-20% and in some cases as high as 50%. For accounts with good loss experience, 5-8% increases are more likely.

The Excess Liability market is hardening much faster than other lines of coverage. Q2 2021 will see increases in the range of 15 – 20 % for the best in class risk profiles.

Builders risk accounts in the Southeast should expect to see a continuation of large rate increases in the range of 15-20%. Those engaging in Historical Mill Renovation will see more sky high rates due to a limited marketplace.

South Central

Property renewals in the South Central region are experiencing high single-digit rate increases with some as high as 20%. Underwriters are hyper focused on asset class, loss history and the amount of exposure to wind/hail roof damage in a given portfolio. The result is persistent pressure for wind/hail deductibles and currently valued building appraisals. Portfolios with top notch assets, clean loss history and an exposure to catastrophic risk, should expect a minimum rate increase of 10-15%.

Turning our attention to casualty insurance – office, industrial, and retail risks can expect rate increases of 5-10% at a minimum. Multifamily portfolios plagued by either frequency or severity losses, will experience significant rate hikes. Loss experience in the Primary Liability layers will continue to make multifamily umbrella renewals extremely challenging. Underwriters are simultaneously drawing back capacity and becoming more selective with the risks they are willing to entertain. Underwriters are intensely reviewing claim history and will expect insureds to be exceedingly diligent when it comes to incident descriptions going forward.

Because of the highly nuanced nature of this market, it is imperative that you are working with an insurance broker who specializes in your particular industry or line of coverage. Due to the variability that we're seeing in this market and specific account characteristics, individual rates may vary from the ranges noted in this report. Gallagher has a vast network of specialists that understand your industry and business, along with the best solutions in the marketplace for your specific challenges.

Sources

¹ National Oceanic and Atmospheric Administration | "Record number of billion-dollar disasters struck U.S. in 2020" (2021) https://www.noaa.gov/stories/record-number-of-billion-dollar-disasters-struck-us-in-2020?utm_medium=email&_hsmi=106342315&_hsenc=p2ANqtz--oPHmeiVkOpNXfPOmXc2f2TrHT1wthlYXAKxMNQjBjWj7SKqFtlZovELgY9-rDcyMmFytkvgPmOCKy0mhaP719N94vJg&utm_content=106342315&utm_source=hs_email#:~:text=It%20was%20an%20extraordinary%20year,a%20record%2012%20making%20landfall

Disclaimer

Please note, a client's risk profile is the primary variable dictating renewal outcomes. Loss experience, industry, location and individual account nuances will also have a significant impact on these renewals.

Gallagher provides insurance, risk management and consultation services for our clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance/risk management perspective, and offer broad information about risk mitigation, loss control strategy and potential claim exposures. We have prepared this commentary and other news alerts for general informational purposes only and the material is not intended to be, nor should it be interpreted as, legal or client-specific risk management advice. General insurance descriptions contained herein do not include complete insurance policy definitions, terms and/or conditions, and should not be relied on for coverage interpretation. The information may not include current governmental or insurance developments, is provided without knowledge of the individual recipient's industry or specific business or coverage circumstances, and in no way reflects or promises to provide insurance coverage outcomes that only insurance carriers control.

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