Crittenden expects competition in the apartment space will push carriers to maintain soft pricing and to take on more risk in the coming months. But these conditions won’t last too much longer. The primary market has been taking on more business traditionally placed with excess and surplus carriers, and the amount of risk added by these apartment accounts is slowly outpacing the amount of premium and investment income they generate. The abundance of reinsurance and alternative capital structures available will likely mitigate any drastic rate revisions in the near future, but many large carriers don’t have enough reserves to cover potential losses in the event of a catastrophe. Carriers have been using catastrophe reserves to offset common apartment loss costs, such as those from tenant-caused fires – the most common claim in the apartment segment. Large carriers, such as Travelers, AIG, Chubb, Cincinnati, AXIS, Selective, RLI and Allied World, reported rising non-catastrophe weather-related losses last year despite the absence of any U.S. catastrophes. So far, 2015 is on track to finish with similar results.

Apartments in the primary market will see underwriting tighten and pricing increase sporadically, albeit still at a low level of 2 percent to 5 percent, in line with higher occupancies, more frequent weather losses and the rising costs of building materials used in repairs. Rates in the excess and surplus market, however, will continue to fall as competition for high-risk properties ramps up. Beazley has seen pricing drop about 30 percent for E&S properties over the past year and a half, with rates cut as much as 50 percent for properties in Florida.

Some carriers may exit the apartment segment, especially in E&S lines. Chubb Custom, Zurich’s Steadfast and Beazley are among those already pulling back from the segment due to unfavorable loss trends and thin pricing. But demand will make it hard for carriers to completely exit this segment. More than half of Beazley’s submissions are apartment accounts.

Apartments remain a big area of growth with construction booming in metro centers, such as San Francisco, Seattle, New York and Washington, generating steady amounts of organic premium growth. Regional insurers will selectively target new areas for expansion. W.R. Berkley’s Clermont Specialty Managers recently expanded its habitational program for luxury apartment buildings and complexes to the D.C. Metro area, where an abundance of new apartment buildings – more than 20,000 units from mostly luxury projects – were constructed during the past few years. The program became available in D.C. a few months ago and in Maryland last month. It is still awaiting approval in Virginia. Clermont Specialty has also been adding endorsements and enhancements to the habitational program, which was already offered in Illinois, New Jersey and New York. Shelter Insurance, which focuses on small apartments in the Midwest, is looking for several new agents to service Colorado, Iowa, Illinois, Indiana, Kansas, Kentucky, Missouri, Nebraska, Oklahoma and Tennessee. The mutual carrier typically insures small apartment complexes of four or fewer family units but will still consider properties with more than four units.

Crusader plans to expand its California-only program into Arizona, Nevada, Oregon and Washington. With some carriers nonrenewing apartment accounts, Crusader is putting more energy into enhancing its program, which focuses on apartment buildings and complexes of five or more units. The carrier most recently added replacement cost and actual loss sustained options. Crusader also maintains a broad appetite, entertaining submissions for mixed-use buildings with retail exposures, apartments without sprinklers, and buildings with electrical systems on fuses. The carrier does not require earthquake retrofitting and does not have any age restrictions. It has been growing its book with all types of apartment accounts in the past few years and will maintain current rates in favor of growing premium through volume rather than higher pricing.

High Occupancy Rates Make for Stable Pool of Insureds

Large, middle-market carriers like Nationwide, Liberty Mutual, Travelers, Farmers, AIG and Zurich, count on high occupancy rates to lift apartment books nationwide. Although the boom of new construction has calmed down compared with a few years ago, demand for apartments still outpaces the erection of new units. Nationwide expects continued growth on its habitational book with its eye on small apartment complexes. This includes duplexes and four family-unit properties that can be written on its Premier business owners policy paper and have occupancy rates higher than 70 percent. The carrier has experienced slow steady growth of less than 10 percent to its habitational book during the past few years.

The lingering effects of the mortgage crisis and collapse of the housing market that triggered the Great Recession in 2008 continue to drive a larger population, mostly young adults and retirees, into rentals. This population is also remaining in rentals much longer than before the recession. A recent survey indicated that 60 percent of the U.S. public still believed it to be challenging to purchase a home as of April 2015. Young adults entering the housing and job markets reported even more pessimism about owning a home, with 77 percent of Millennial respondents indicating they feel they face more significant challenges to owning a home than previous generations.

Expect this trend to continue into the next few years, driving up rental prices and in turn creating better property and management conditions for apartments. As property conditions improve and catastrophes remain light, pushing property insurance prices to all-time lows, primary markets will increasingly take on risks that were once forced into the excess and surplus market to pick up more premium. Carriers like Nationwide, Crusader and Shelter already will take on older buildings as long as they have been updated or well maintained. Nationwide will write supplementary perils coverages, such as wind and hail, tornado and flood, but will be careful not to take on too many accounts with such risks. Shelter will write perils coverages with more retention and higher deductibles.

Coastal Risks Moving to Main Street

Citizens Property Insurance, the government-established insurer providing peril coverages for Florida properties, has seen its pool of insureds decrease dramatically over the past few years. The carrier lost 666 multi-peril policies and 400 wind-only policies from the end of 2013 to the end of 2014. This is partially due to depopulation plans through Heritage Property and Casualty and Western Insurance Cos. that are aimed at reducing the number of accounts insured by Citizens to limit the availability of excess and surplus coverage for apartments in the Florida Market and return pricing to adequate levels.                                

Citizens typically insures older properties in coastal regions and run-down urban areas, many of which are frame or joisted masonry construction and converted condo buildings of one to three stories. The carrier will also take on mixed-use buildings as an apartment account as long as the retail exposure does not exceed 25 percent of the building use. Citizens will also insure apartment buildings with transient occupancy as long as the amount of units rented out for periods of less than 30 days does not exceed  25 percent of the total number of insured units. The carrier will, however, look at the condition of wiring, smoke detection, unprotected cooking exposures, maintenance of protective devices and roof conditions when underwriting a risk. Properties that exhibit evidence of existing damage or disrepair, have not updated electrical systems and/or significantly updated or replaced roofs during the last 30 years as well as any properties constructed partially or completely over water are ineligible for coverage. Citizens reduced rates for multi-peril apartments in 2015 but is requesting a 5.2 percent overall increase for 2016. Wind-only accounts will likely see an increase of up to the statutory 10 percent limit in 2016, following similar increases of the last two years, as the insurer strives to make this portion of its book more actuarially sound.

Virtual Concerns for Habitational

Cyber liability is quickly growing as a product offered to all kinds of middle market and small businesses, and apartments are no exception. Apartments are among the growing classes being targeted for this coverage since managers tend to store personally identifiable tenant information. Nationwide began offering cyber coverage to small businesses, including apartments, with endorsements to its business owners packages late last year and has seen a steady increase in demand for the coverage. The cyber liability endorsements include data compromise coverage with limits up to $1 million, identity coverage up to $25,000, and CyberOne, which includes first-party hardware and network security coverages up to $100,000.

Copyright © Crittenden Research Inc., August 24th, 2015