March 16th, 2007
APARTMENTS/CONDOMINIUMS, THE BEFORE AND AFTER
Because input for this article was being assembled prior to Hurricanes Katrina and Rita, we will look at this class of business from a “before and after” viewpoint.
In the last few years, the apartment and condominium market has been reasonably stable. The property rate spike that hit the market after 9/11 tapered off, and new construction in this class reached an all-time high.
Before the hurricanes
Metro Insurance Services’ niche market is primarily the nonstandard apartment business, says Steven Gross, chairman and CEO. “Nonstandard to us is the best of the worst. This includes risks that have been rejected by the standard market due to age, loss experience, subsidies and other reasons.”
According to Gross, rates have continued to soften in the property and casualty areas of the apartment and condo business. “More standard carriers appear to be offering coverage for the best risks; however, it still appears that a large portion of the apartment class still goes to the alternative markets, including RPGs and surplus lines. Condos continue to be written in standard markets. Property rates have dropped at least 50% since 2003, when rates appear to have peaked. In my estimation,” he continues, “property rates are now at levels that they were prior to 9/11 and appear to be stabilizing. I don’t think that business is profitable at these rates and that they will be sustained for very long.”
Underwriters do appear to be a little more disciplined in terms of underwriting criteria and risk selection than in previous softening markets, observes Gross; however, it is still very early in the cycle and the jury is still out on that issue.”Loss control is still of the utmost importance to this class of business,” Gross observes. “The insured still must be cooperative in responding to loss control recommendations and have interest in upgrading properties on a regular basis. Life safety is of critical importance to the underwriting of apartment and condo business. Obtaining certificates of insurance from independent contractors is essential. This practice helps mitigate numbers of losses through subrogation where the owner has hired a contractor to be responsible for certain areas of their property. Examples are elevator contractors, snow removal, paving and plumbing contractors.”
Willis Programs offers ResortGuard^sup SM^, a specialized program for this class of business. According to Linda O’Der, senior vice president and program director of marketing and compliance, property pricing is stabilizing but GL rates continue to rise in order to build toward profitability of that line. Nonprofit D&O capacity, as well as following form umbrella coverage that will drop down over the D&O is readily available.
The American Resort Development Association (ARDA) reports that interval ownership is the fastest growing form of vacation ownership in North America, says O’Der. “This growth is driving the industry toward different and more complex and diverse forms, therefore creating tough risks.”
O’Der says that the trend is toward larger timeshare companies managing many properties in order to offer their customers more vacation choices. These trends create opportunities for the agents and brokers who are able to understand the various structures timeshare companies present.
After the hurricanes
A large percentage of the property on the Mississippi and Alabama coasts was made up of condos, interval ownership/timeshares, and resort-based condos, so this class of business will contribute significantly to the total loss figures. Property loss projections are astronomical. “Guesstimates” place them between $35 billion to $60 billion. It will probably be mid-year before any credible figure will be established.
The condo and apartment sector had been extremely soft in the recent years leading up to Hurricanes Katrina and Rita, mainly owing to the fact that the additional surplus in the industry spawned increased competition among insurers, according to Michael Sillat of WKF&C Agency. “As in any transition from a softening market to a hardening market, it creates opportunities for E&S carriers,” Sillat says. “The traditional carriers begin to unload some of the business and reduce capacity. This, in most cases, is the scenario in a hard market. Simply put, the carriers that stay within their business plan may well be poised to take advantage of a hardening market while those that do not will take steps backwards. Unfortunately for us in the insurance industry, we have never had a ‘normal’ market; it’s either soft or hard.”
Sillat does not see an immediate dramatic impact on pricing but did see accounts renewed with no rate reduction. “As we get closer to the renewal season on the Catastrophic Treaties, expect the high costs of reinsurance to be passed down into primary carriers, thus forcing insurers to increase rates tremendously.”
Sillat foresees that owners will probably have to come to terms with increases in their cost of insurance in the near future as reinsurers pass down rate increases they are faced with post-Katrina. “Unfortunately,” he warns, “this will be compounded by the already significantly increased fuel prices. Owners in turn will probably seek reimbursement of these aforementioned increases in costs by passing them down to tenants via increased rents. Let’s hope for their sakes it is a mild winter. Ironically enough, once again the public will likely blame the ‘greedy’ insurance companies.”