Property insurers withdrawing from industrial, multifamily risk
Insurers are especially wary of losses arising from acts of violence, sexual abuse and dog bites.
The aftermath of record losses in the property insurance sector in 2023 is making insurers increasingly selective about writing and renewing policies for these assets and is even prompting some carriers to find new ways to diversify risk, according to a new report from Gallagher.
New housing construction reached a 36-year high in 2023, with builders completing 440,000 apartments, according to data from the U.S. Census Bureau. Of these units, 81%—approximately 356,400—were built with wood framing, which insurers have viewed as higher risk for many years. However, the current state of the market, coupled with increased exposure to fires resulting from remote work, has soured insurers’ appetite for underwriting these types of multifamily properties.
“As the hard property market eases, most asset classes are receiving risk-adjusted property rate increases ranging from flat to +10%,” the report said. “We have observed underwriters rewarding office assets with strong rent rolls and low crime scores, with ranges from flat to -5%.”
Losses from residential fires in 2023 amounted to approximately $10.8 billion, according to the U.S. Fire Administration.
Gallagher estimates that operators of multifamily portfolios can expect rate increases on primary liability placements ranging from 10% to as high as 20%. Increased losses due to primary liability policies are also making insurers offer lower coverage and require that coverage only kicks in after a higher threshold of losses has been reached.
“Larger programs are moving towards a $2 million occurrence/$4 million aggregate structure,” the report said. “There are fewer umbrella insurance programs available for habitational businesses with each renewal cycle.”
Insurers are especially wary of losses arising from acts of violence, sexual abuse, and dog bites. This has led some to implement carve-outs for canine-related injuries, assault and battery, abuse and molestation, habitability, and firearms. Crime scores have become critical to underwriting casualty policies for all asset classes, especially multifamily, Gallagher found, and insurers are paying special attention to loss history.
Underwriters of insurance for industrial assets, on the other hand, are prioritizing tenant diversity and adherence to sprinkler standards set by the National Fire Protection Association for underwriting industrial properties. They are also paying special attention to occupancy risks in older properties.
Gallagher said 1.8 billion square feet of industrial space has been built since 2020 — more than the total built in the last decade.
Although industrial and multifamily real estate emerged from the pandemic as top-performing asset classes, their outlook appears to be heading in a more bearish direction as insurers adjust their underwriting standards and these sectors continue to confront the challenges of a softening consumer market.