AS THE US economy strengthens on the back of strong corporate earnings and optimism around potential tax cuts, the commercial real estate space is expected to grow, which in turn represents a wealth of opportunity for insurance agents.
Commercial property insurance is a massive space that involves any entity that owns and operates real estate, including owner-occupied buildings such as factories or restaurants, office buildings, strip malls, and even residential real estate like apartments and condominiums.
“There are numerous types of claim exposures to which a commercial real estate entity may be exposed,” explains Jason C. Schiciano, president at Levitt-Fuirst Associates, a 2017 IBA Top Specialist Broker for real estate. “Normally, it takes multiple policies to properly cover commercial real estate.”
Besides standard risks such as fire, smoke, water, vandalism, leaks and slip-and-fall injuries, commercial property owners may also face several other exposures, depending on the type or location of their building and the nature of their business. These risks usually require customized endorsements or separate policies and could include coverage for construction or asbestos liability, earthquake, or flood damage.
The coverage requirements of a condominium association paint an accurate picture of the multiple layers of insurance often needed in the commercial property space. According to Schiciano, whose firm is the insurance broker for hundreds of condominiums and apartments, in addition to a package policy for property and general liability coverage, a condo association should also maintain a D&O policy, an umbrella liability policy for additional liability protection, workers’ compensation and disability policies for injuries to condo employees, and a crime policy to protect against the theft of association funds. Other policies in a comprehensive insurance program for a condo association include an employment practices liability policy (sometimes built into the D&O policy) and possibly certain specialty policies, such as environmental or pollution liability, cyber liability and fl ood insurance.
“It would not be uncommon for a condominium association to have at least four insurance policies to cover basic exposures, and possibly eight policies for a more complete insurance program or to address more unique exposures,” Schiciano says.
Property owners face a range of differing risks, which vary in terms of cost and coverage needs, but there are few building improvements that incur as much cost as the replacement of a roof.
The difficulties surrounding roof-related issues are often substantial and can lead to serious interior water damage and mold.
“In addition to having insurance, it is important for property owners and managers to conduct regular roof inspections and budget accordingly for repairs to avoid deferred maintenance,” says Andrew Branoff , president and CEO of Apartment Insurance Consultants. “Older roofi ng shingles lose their protective oils over time and become brittle and can curl/split, causing them to become ine_ ective. Weakened shingles are more likely to be blown o_ by wind gusts, exposing the property to structural rot and additional damage.”
The insurance industry has responded to the increasing costs related to roof replacements by moving toward actual cash value [ACV] evaluations on roofs older than a specifi ed age. Agents working in the space must have a good understanding of the coverages and deductibles and how they can vary.
“Coastal locations will likely have a named storm deductible in addition to a wind-hail deductible,” Branoff says. “Deductibles can apply on a per-location, per-occurrence basis; on a per-building, per-occurrence basis; or on a per-client, per-occurrence basis.”
The commercial property space is fi lled with many of the big players, and is soft, competitive and aggressive. Getting a property policy on a monoline basis is fairly easy for clients, and some carriers even package the risk with general liability coverages at a discount, making the space even more competitive.
“Standard companies are gobbling up Main Street risks, like stores or strip malls, so the risks that are left are candidates for excess & surplus lines companies,” says Ron Abram, president and CEO of Interstate Insurance Services. “These clients usually have past claims, are located in a high-crime area, may have high TIVs or are more likely to be affected by some form of natural catastrophe, which makes them more di_ cult to insure.”
Results for carriers in the commercial property arena are driven by the huge losses associated with natural disasters and catastrophes such as hurricanes, fl oods, earthquakes, wildfi res and tidal waves. No major disasters have struck in the past couple of years, so performance has been relatively good, and many carriers in the space are posting strong profits.
“As a result, insurance carriers want to write more of this business, and that means it’s getting increasingly aggressive and competitive in terms of pricing and underwriting fl exibility,” Abram says. “There are only so many catastrophes and exposures that can occur, so when we don’t have the big disasters, excess & surplus lines companies and brokers do pretty well.”
This also means many carriers operating in the space have large reserves of cash sitting in investment accounts. Carriers are eager to deploy that money and put it to work, and there is a scramble for increased exposures on risks that are considered relatively benign.
“Insurance companies are competing for these risks, and that leaves the hard-to-place risks for the surplus lines market,” Abram says.
Advice for agents
Although the space has the potential to be lucrative, it’s not for the “weak-hearted,” Abram says. There are lots of property markets out there, each with slightly different appetites, and in order to achieve any level of success, agents need to choose a particular specialty to focus on and then align with the right carrier. “The property business is so broad that without specifi c industry expertise, a new agent entering the space is going to have a hard time making headway,” Abram says.
As competition in the commercial property space heats up, both carriers and agents must fi nd a way to differentiate themselves from the crowd. “At Atlas, we’ve been able to achieve success with commercial property by being truly monoline,” says Lee Glaser, senior vice president and property manager at Atlas General Insurance Services. “It’s all we focus on in the property division. We have all risk facilities that can include CAT as well as several DIC facilities, and our focus is on building relationships with other people who only focus on monoline property. That’s how we’ve continued to fi nd success – by specializing in one area.”
As new agents and carriers enter the commercial property space on a consistent basis, established agents need to be able to increase their value proposition and solidify relationships if they want to hold onto their most lucrative accounts. Annual renewals are the norm, so agents and brokers are going after business in a highly aggressive manner.
“I can’t emphasize enough how important it is for brokers to have strong relationships with their retailers, clients and carrier partners,” Glaser says. “When there is an issue that may prevent a deal from getting done, it’s those relationships that get the deal over the line.”