Property Owners Try Negotiating with Lenders on Insurance

As the cost of insurance becomes untenable in many states with high climate risk, lender reforms have become paramount, according to a report from CRE research firm Yardi Matrix.

In states such as Florida and Texas, insurance costs are rising upwards of 50%, threatening new development and property sales and causing headaches for commercial property owners. 

Many reinsurance companies are abandoning high-risk states altogether, and those that stay are raising rates by 45-100%, according to Danielle Lombardo, chair of Lockton Global Real Estate, a New York-based advisory firm. “Something has to be done differently,” she is quoted as saying in the report.

Insured natural catastrophe losses have topped $100 billion in the three calendar years since 2017, raising concerns that insurers’ models will not keep pace with the growing frequency and severity of catastrophes brought on by climate change, the Yardi Matrix report reads. 

Two routes to combatting the increase in insurance costs highlighted by the report are reducing litigation —an area where efforts are underway in Florida, where a substantial portion of property litigation is concentrated and which just passed an insurance-friendly package of tort reforms— and more importantly, lender reform. 

There are growing complaints that properties are often overinsured to cover extreme losses that rarely occur. A major hardship on owners as rates escalate is the typical requirement for them to carry windstorm insurance for the full value of the property, or at least the mortgage balance. Increased insurance escrow payments also have caused some borrowers to breach loan debt-service coverage ratios, the report said.

Due to the lack of capacity carriers must write on wind and flood limits and the rising cost of construction, property owners’ negotiations with lenders increasingly involve non-traditional risk transfer methods such as parametric wind and flood insurance, in which they pay a set amount based on event risk instead of magnitude of losses. 

Lombardo said setting rates via a true probable maximum loss methodology would significantly reduce the premium outlay and fix the supply/demand issue in the catastrophic insurance market. “The industry should be looking at modeled losses,” Lombardo said. “Using a risk model basis in- stead of insured value would be a huge win for property owners.”