Image courtesy of Florida Fish and Wildlife
Soon after Hurricane Ian slammed into Florida’s West Coast last week, proving even more destructive than the most dire predictions, questions beyond the human tragedy inevitably began to arise. One area of concern for the multifamily industry relates to risk management and insurance. Will multifamily rates rise? If so, what lines will be most impacted? Will the impact of higher rates be felt beyond Florida? And how can owners mitigate higher rates?
It could be too early to forecast rate increases, remarked Marc Reisner, Boston, Mass.-based U.S. multifamily practice leader for Marsh. These are early days for the hurricane season, and more than a month of that season remains. What the next 30 days deliver can help determine premiums, he noted.
“We’re 20 quarters into a property rate increase cycle,” he added. “What this event will certainly do is continue that trend, but I don’t think it’s catastrophic in the sense there will be plenty of capacity for insurers to handle losses. You’ll see a continued firming of rates. Florida was already a focus of reinsurers so you may see a little more selective firming for those with exposure to Florida.”
READ ALSO: Preparing Construction Sites for Hurricane Season
Stephen P. Stern, executive vice president with SternRisk in Atlanta, Ga., is another expert loathe to issue categorical forecasts. The effect on insurance premiums of Winter Storm Uri wasn’t felt for a year, he said. Claims trickled in after the February 2021 weather event, and insurance companies didn’t react until the spring of this year.
Multifamily development expert Jeff Klotz, CEO of The Klotz Family of Companies, had a stronger take on the issue. Florida insurance companies have hemorrhaged cash to the tune of $1 billion since 2020. Hurricane Ian won’t make life easier for them, he said.
Since 2021, more than 10 Florida carriers have become insolvent. Many more have pulled up stakes and abandoned the Sunshine State market. Insurance premiums are already rising, and have soared since 2020.
“The catastrophic losses of Hurricane Ian are sure to create additional insolvency in the Florida market, push more insurance carriers out of the Florida market, and force those willing to stay to increase premiums to a point that pays them for their risk,” he said.
Kevin Donnelly, vice president, government affairs, technology and strategic initiatives with the National Multifamily Housing Council, is similarly downbeat. Increasing insurance premiums of all types have posed a substantial hurdle for owners and operators in recent years. “Catastrophic storms, like Hurricane Ian, only worsen the financial standing of insurers and ultimately those costs get passed to policyholders,” he said. “Multifamily owners and operators are certainly not exempt and can expect an even harder insurance market as a result of these types of severe weather events.”
Property insurance will sustain the bulk of the premium rise, Stern said. A hurricane is expected to some degree. Companies underwrite for that eventuality. “What insurance companies try to avoid are additional losses that are programmatic or resulting from operational problems,” he added. “Grilling on balconies, you can control for that risk. But hurricanes, earthquakes, tornadoes, there’s nothing you can do to stop them.”
Insurance premiums are likely to rise beyond Florida, based on how many insured losses are experienced, Stern said. Pressure could be felt nationwide.
Donnelly believes property, flood—private coverage above NFIP—and other lines will likely increase in cost. But he believes it’s too early to undertake a line-by-line breakdown of those most likely to increase in price.
The Fallout in Florida
The Sunshine State attracts plenty of multifamily development. Will the repercussions of the storm affect investment in the state? Klotz believes they will. Builders risk insurance has risen across the state over the past few years. Ian will do nothing but to send costs higher. Those growing expenses, along with increased costs of property and casualty insurance, will impact underwriting for new construction projects, which will ultimately be forced to project higher rent premiums to get them to pencil out, he said.
Many developers and investors already sidestep Florida, Stern said. Those who don’t avoid the Sunshine State know the risks, and know how to deal with insurance issues and the costs. “We have clients who avoid coastal regions on purpose, while others flock to them,” he said. “Some operators are really good at it, and they’ll continue to be.”
Because the challenges of Florida are nothing new, those developers and owners entrenched there have built climate resilience and flood mitigation into their business plans, Donnelly said. Yet it’s likely local and state officials may attempt to further fortify building codes, and that may come as an additional cost of development.
Beyond Florida, the Southeast and Gulf States likely will feel the pinch of higher rates.
Many of their insurance companies were already on state watch lists, said Kim Harkobusic, Pittsburgh, Pa.-based vice president, Liberty Insurance Agency. She believes how seriously they are ultimately affected will depend on how many more named storms occur this year. “Insurance companies are insured by reinsurance companies and are generally prepared for these types of losses,” she said.
Owners can take steps to mitigate premium increases, Stern noted. Buying insurance is a financial transaction, which involves insuring for those risks you can’t afford to retain. However, owners and investors need to ensure they don’t simply renew policies but really study them. “You can get to the point where the rises are flat or up just a little bit,” he said. “Mitigating premium increases is more of a long-term approach.”
Mitigation steps are available to property owners before disaster strikes and upon rehabilitation, Donnelly said. But they are very expensive. That’s why NMHC has vigorously prodded FEMA and the federal government for increased financial support in this space. “Raising utilities, installing flood gates, flood proofing, all have a big impact on resilience,” he said. “Yet they are often out of reach for multifamily property owners, especially those that are smaller or operate affordable housing properties.”
The fact that one of the worst storms to ever hit Florida came so soon on the heels of insurance companies leaving the state constituted exceptionally bad timing, said Daniel Smith, Black homeownership advocate and founder and CEO of Keepingly, a platform homeowners use to manage and maintain records of home services and expenses. But some positives can result from Ian, he added. Among them: Helping ensure hurricane-resistant options are built into housing upgrades and new housing developments.