Disasters are becoming more frequent and intense, leading to increased claims expenses and property valuations that can leave Midwest real estate owners, builders and developers with insufficient insurance coverage.
Consider the growing frequency of these severe storms. Over the past five years, insured losses due to natural disasters in the United States have averaged $101 billion annually, up from an average of $70 billion in previous periods. One of the most expensive weather-related events of 2023 was the Southern/Midwestern drought and heat wave at $14.5 billion. As a result, extreme weather is making traditional insurance increasingly costly and harder to obtain.
Insurance rates rose by 4.56% in 2023, continuing a trend of rate hikes for commercial properties. Property owners in the Midwest are experiencing higher deductibles, lower coverage limits and, in some cases, insurers are withdrawing from markets deemed too risky. In states like Ohio, Indiana and Illinois, commercial property insurance premiums are expected to surge 5% to 25% in 2024 alone.
With the increasing frequency of named storms and other disasters, property owners need to prepare for potential risks and disruptions. One way to achieve this is by exploring alternative insurance options like captivesand self-insurance. These alternatives can offer greater control and stability over coverage and potentially lower long-term premium costs.
However, alternative insurance programs aren’t suitable for every organization. Here are three key details for Midwest builders, developers and owners to ponder before deciding if an alternative insurance program is the correct option:
- Explore your options. Property insurance pricing for real estate accounts has reached a point where certain sophisticated insureds, either with strong balance sheets or unencumbered assets, are exploring various strategies to manage rising insurance costs. Owners can utilize higher retentions, aggregate deductible programs, and captive insurance to offset increasing insurance costs. These strategies involve assuming a larger portion of the initial risk, which can result in lower premium costs over time.
Owners can utilize higher retentions and aggregate deductible programs to offset increasing insurance costs. By accepting higher retentions, property owners take on a larger portion of the risk before insurance coverage kicks in, which can lead to significant premium reductions. Aggregate deductible programs, where a single deductible applies to multiple claims within a policy period, can also offer cost savings. These strategies require a thorough evaluation of the owner’s risk tolerance and financial capability to absorb potential losses.
Additionally, some property owners, particularly those without restrictions from lenders, are moving to sublimits or exclusions for specific perils such as named storms, wildfires, and wind/hail. These approaches reduce the overall premium costs but require owners to carefully assess their risk tolerance and financial capacity to handle potential losses. Opting for sublimits on these perils means that coverage is limited to a specified amount for these events, which lowers premiums but increases the financial risk if a major event occurs. Excluding coverage for these specific perils can further reduce costs but leaves the owner entirely responsible for any damages resulting from these events.
Captive insurance is another viable option that allows property owners to form their own insurance company to cover specific risks. This method provides greater control over insurance costs and coverage terms. Captives can be tailored to address unique risk exposures, and while setting up a captive may initially be more expensive than traditional insurance programs, a well-managed captive can become profitable within a few years. This profitability can help reduce market uncertainties and offer long-term financial benefits. Captive insurance not only stabilizes costs but also allows for the potential accumulation of underwriting profits and investment income, further enhancing its appeal as a long-term strategy.
- Go slow and remain vigilant. Establishing an alternative insurance program, such as a captive, is not a quick process. Avoid attempting to set one up just before your next insurance renewal. It’s essential to assess your financial strength and ability to fund potential losses without traditional insurance. This involves understanding your risk tolerance and evaluating all insurance alternatives well before your coverage expires. Typically, it takes 90 days or more to establish an alternative insurance plan.
- Engage in open communication with an expert. Given the complexity of alternative insurance options, with numerous choices, opportunities and potential pitfalls, partnering with a knowledgeable insurance advisor is crucial. An expert can provide insights and guidance tailored to your specific situation, considering the unique regulatory environment in the Midwest. A specialist in captive or self-insurance can help restructure your insurance policy to meet your long-term needs effectively.
The evolving insurance landscape in the Midwest necessitates careful consideration of alternative options and understanding financial capacities. By taking their time, evaluating various insurance structures and collaborating with experts, Midwest property owners and operators can make informed decisions about whether an alternative insurance program aligns with their risk management goals and financial objectives.
Austin R. Smith, CLCS, CAWC is a Senior Vice President in Commercial Risk at Chicago-based international insurance brokerage Hub International. Grant Allen is a Senior Risk Consultant and Real Estate Practice Leader at Hub.
