Q&A with Marsh McLennan Agency’s Taylor Lister on Navigating Insurance Challenges

Commercial real estate owners and investors have been challenged in recent years by increasing expenses in areas ranging from borrowing costs to property management. A standout among these rising expenditures has been insurance premiums, which have gone up for a variety of reasons. At Connect Los Angeles on May 1, Marsh McLennan Agency principal Taylor Lister will give a special presentation on insurance and risk management for commercial properties. Connect CRE recently sounded her out for a preview.

Q: Is it accurate to say that we’re seeing unprecedented fluctuations in insurance premiums for commercial real estate?

A: I would more accurately say commercial real estate investors are feeling the effects of the insurance market cycle. For the past six years, we’ve been in an unprecedented hard insurance market, which caused higher rates and reduced coverage. However, we have now entered into a nuanced recovery phase. While rate increases may start to stabilize, conservative insurance underwriting practices will remain, which is prompting commercial real estate investors to change their approach to insurance and risk management. A new normal is being established in how real estate investors assess new deals and get ahead of potential insurance challenges.

Q: What are some of the factors leading to the increases in premiums we have seen over the past year or so?

A: Property insurance rates started increasing in 2017; however, rate increases started accelerating in 2020 and it wasn’t acutely felt by real estate investors until recently. According to Marsh McLennan Agency’s recently released Commercial Property Insurance Trends Report, there are three major factors impacting property rates – 1. An increase in losses driven by historically non-modeled secondary perils such as severe convective storms, flooding, hail, wildfire and freezing temperatures; 2. Reinsurance costs skyrocketed in 2023 due to extreme climate events, causing policy structures to change, leaving insurance carriers covering losses on their balance sheets rather than passing them back to reinsurers; 3. Property values have been historically undervalued; couple this with record high inflation, supply chain issues, labor shortages and rising materials costs and it has led to 86% of buildings being undervalued by 25%+. When insurers demand customers increase their property values, this causes a direct and often equivalent increase to premiums.

Q: California is among the states where these increases are most keenly felt. Are these due primarily to weather- and climate-related factors (as well as seismic activity) or are there other causes as well?

A: California is an interesting case study because our largest catastrophic exposure – earthquake – is rarely covered by a standard property insurance policy. In fact, most California property owners opt not to purchase earthquake insurance at all, unless it’s required by one of their stakeholders. However, many real estate investors are feeling the pain in California because of the heightened sensitivity insurers now have toward wildfire risk. Wildfire is one of these secondary perils that have emerged as the silent giant in the risk landscape. Many insurers have very limited capacity for wildfire exposed properties, so the limited supply naturally increases the rates as demand surges.

Additionally, the cost to rebuild in California is higher than in most other regions, which ultimately drives premiums. Lastly, we are in a very litigious state, so casualty rates have also seen drastic increases due to increased jury settlements and litigation trends for property owners, exasperating the issue.

Q: In your view, do commercial property investors give enough consideration to premium expenses when underwriting potential acquisitions?

A: Real estate investors have so much to worry about when closing on a new acquisition. Historically, insurance has been inexpensive and easy to come by, so I completely understand why it’s not high on the priority list. However, the past few years have shown that insurance considerations need to be a fundamental part of your acquisition process. I tell my clients that they must understand the risk profile of an asset, be prepared to communicate risk management strategies and assess their own risk tolerance threshold. It’s a bit of a paradigm shift, because when insurance is unavailable or cost prohibitive, would you still go forward with the deal? Are your executives and stakeholders prepared to take on more risk or adjust their compliance requirements? These conversations need to happen early to prevent insurance from killing or stalling your next deal.

On May 1, join industry leading experts when they explore the most important topics in today’s CRE markets. Register to attend and hear expert insights first-hand, network with the best in the industry, and sit in on discussions you won’t hear anywhere else. The 8th Annual Connect Los Angeles 2024, May 1 at the Intercontinental Los Angeles Downtown.