The Rise of Self-Insurance and Other Insurance-Risk Mitigants in CRE
Commercial real estate property owners have faced increased pressure in obtaining property insurance coverage because of lack of affordability—and in some cases no coverage—being readily available in the market. This trend is driven by rising insurance premiums, environmental climate change resulting in more frequent and severe catastrophic peril events, and capital volatility in the insurance market due to rising rates and higher payouts of losses.
According to the Deloitte Center for Financial Services, it is projected that some high-risk areas will see insurance costs more than double by 2030, as there has already been an average increase of 31% in costs year-over-year and a 108% increase over levels from five years ago1. With increases in premium costs and some insurance carriers exiting high-risk areas, as seen with Farmers, Allstate, and State Farm exiting new business and policy renewals in California, commercial real estate property owners are at a juncture where they should start considering other risk-mitigating activity to protect the real estate assets in their portfolio.
One alternative is to self-insure, though not all commercial real estate property owners have the available liquidity to do so. For those that do, self-insurance can be a risk-management strategy for making funds available if there is a loss at the property. While self-insurance can provide reassurance for property owners who have been unable to get coverage, it can also give property owners more flexibility managing direct risk. This allows them to tailor the self-insurance program to focus on a risk-based approach determined by the composition of the real estate assets in their portfolio.
For property owners thinking about a self-insurance program, several factors need to be considered:
Does the program have dedicated funds and a clear risk management framework?
Is there a combination of self-insurance and traditional insurance coverage?
Has there been an assessment of risk exposure and the financial capacity of the company to cover potential losses?
Should a risk management group be hired (or established) to manage the program?
In addition to self-insurance, other risk-management strategies should be considered in diversifying the insurance program to provide appropriate coverage:
Higher deductibles: Opting for higher deductibles can result in lower insurance premiums which can make it easier to afford coverage for catastrophic events. The 2023 NMHC State of Multifamily Risk Survey & Report shows 60.6% of respondents increased their deductibles over the past three years to keep the insurance coverage affordable.2
Risk mitigation and loss prevention: Establishing a program that provides a framework for risk-management strategies can reduce the severity of incurred losses. A strong framework can include, but is not limited to:
Property resilience: Upgrade existing properties to reinforce structures and suppression systems.
Maintenance: Ensure regular maintenance occurs to address any issues that will impact the structural integrity of the property.
Security: Increase and surveillance at high-risk properties.
3. Diversification: Commercial real estate property owners should also review the assets within the portfolio to diversify between high-risk and low-risk areas. Also, consider the type of activity being performed at the property. This can allow for more flexibility when trying to procure insurance coverage and creating an insurance program that distributes the insurance risk across the entire portfolio.
4. Contingency planning: Working with a third-party risk management firm to establish a strong contingency plan can help the property owner define areas of high to moderate risk and further plan for catastrophic events or losses from suspended operations.
Implementing additional risk strategies like these can lead to more affordable options and more diverse insurance coverage. If self-insurance is possible, it is important to detail what the self-insurance program covers. Either way, commercial real estate owners should continue to work with their insurance brokers and provide them the steps they have (or will take) on additional risk mitigation plans.
Suzanne Rathbun, National CRE Loan Admin Manager, U.S. Bank
Suzanne is responsible for leading the loan administration and construction disbursement teams that support the U.S. Bank Commercial Real Estate, Housing Capital, and Middle Market CRE Business Lines.
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