Navigating the Softening Multifamily Insurance Market

Historical recording. Roles and market conditions reflect the time of recording.

1. 00:00:15

   Well, thank you guys for being here today. Excited about today's conversation. Collin Chlebak with the Virtus real estate practice that insures about 400,000 multifamily units and 75 million square feet of office retail and industrial. Today I'm joined by three of our wholesale and placement partners. We have Maggie from McGill across the pond, Marty from RT and Craig Russell from Amwins. Guys, thank you for being a part of this.

2. 00:00:51

   Cool. If you guys just want to give a brief intro on yourself so that people know who you are. Yeah. My name's Craig Russell. I've been a property broker with Amwins for a little over 10 years. We sit in the Midwest and my team really focuses on multifamily placements. A lot of times there's some kind of convective element there. So that's kind of what we're doing day in and day out. And that's how we started working together and built a partnership over the last decade. Marty McGee, RT Specialty. I sit here in Kansas City as well.

3. 00:01:22

   And we specialize in multifamily, hospitality, frame construction. Me and my partner, Brad Moss have a team of about 15 people now. And yeah, I've been doing this on the wholesale side for about 13 years now. Awesome. And from across the pond, Maggie. Yeah, Maggie Luchia-Puig. I work at McGill and Partners. I have 25 years of experience in the London market. I joined McGill in 2019 where I lead the property placement team.

4. 00:01:58

   McGill and Partners is a boutique specialist insurance broker. And we focused on clients with complex and, and or challenging needs. We work with retail brokers in the US that live to combine the domestic capacity with a capacity from London, European and or Bermuda markets. And by doing this, we allow the retail brokers, such as Virtus to create competitive tension between the different markets. And as a result, we have a proven

5. 00:02:32

   track record of getting the broadest cover at the best possible price. Great. Well, thank you guys. Obviously, we've got four people on this call who all specialize in property, some really hard geographic footprint placements from convective storm to name tier one named windstorm areas. And you guys are all very nice people and good friends. So I appreciate you gracing me with your presence today and

6. 00:03:02

   talking about the state of the market. Obviously, in over the past 10 years, the market has changed drastically. You know, when when I got in this business, it was a very soft market and carriers, you know, I always tell this joke that you could probably have 15 carriers lined up ready to buy business from one another. That is not the case anymore. And, you know, our insureds being a retailer, calling on

7. 00:03:33

   owners of commercial real estate, multifamily real estate and hospitality, our prospects are really struggling, right? They're kind of choking on premium. They've been pushed on valuations and rates year and year for past, you know, eight to 10 years here. I am excited about 2024. I don't think it's a night and day difference. But, you know, I think in some of our discussions, we've seen some of that, you know, the market starting to plateau. But I would love to hear what you guys are seeing, you know,

8. 00:04:09

   pull out your crystal ball and make the prediction right now. Chiefs are going to Super Bowl in 2025, I'm sure. No, but what's going to happen this year in the property market? And are you guys excited about it? Craig, do you want to kick us off? I think plateau is a good is a good way to start. It seems like throughout the beginning of the year, we're still seeing increases on our transactional type business. But those increases are muted compared to what we've seen over the last few years, substantially

9. 00:04:43

   more palatable to clients. And we've been able to offset some of those things with retention levels, but just pulling the levers that make sense and a balance of risk transfer versus premium spend. It feels like that it's going to continue throughout the year, the one one reinsurance, we have an idea of what that looks like now. But the sixth one reinsurance, assuming it follows suit. I think the trend will continue. Marty, I know, Craig mentioned some stuff about being creative and placing things a little differently. Would you say that you're seeing that within the first, you know, 50 days

10. 00:05:17

    of the month here? I feel like, you know, we were trying to, we're trying to see where things were going in the fourth quarter of 2023. And, you know, we were starting to see some of this stuff where people weren't just pushing for the 15-20% rate increases on renewals and just trying to see if that was fourth quarter or not. It doesn't seem like it is now that we're a month and a half into the new year. I feel like plateau is the word I've been using, but I do feel like there's also some markets that are being aggressive trying to write new

11. 00:05:49

    business, which is helping us out, create some competition within different layers of placements that have been historically problems the last three, four or five years. You know, the primary five, 10, the buffer layers. I feel like there's people coming back in willing to play in those spaces. There's still going to be some stuff that has, you know, really bad loss record that's going to, that's still going to experience the 15-20%, but I do think that, you know,

12. 00:06:21

    it's getting, it's getting better. And, you know, there are people trying to put their foot forward and write business again, which is definitely positive. Maggie, is there anything different in the European markets versus what we're seeing here in the domestics? Yeah, very much along the lines of what Craig and Marty have just said. We haven't seen any new capacity coming in, but I think it's clear that markets are also fully aware that

13. 00:06:55

    the increases have stopped, or they have slowed down, and therefore they're looking to write more if they can. And that in itself is creating more competition, okay, and we don't need to use the most expensive capacity. From our point of view, we always like having players that are consistent, that they don't come in when the market is super high and take an aggressive

14. 00:07:31

    sort of position. We look for markets that want long-term relationships with our clients, and therefore we don't forget who gave a very hard time last renewal when we have to make decisions as to how the signings need to go. And always very much in combination to what the US sort of brokers want us to do and how they want to treat our markets. We don't like to be,

15. 00:08:09

    to penalise clients when there's no need for that, and I think we want consistency. So consistency, stabilisation, capacity are all things that I think, creativity, but last year in 2023, I think when I look at what happened last year, Marty, I think you were one of the first people to tell me after Hurricane Ian hit Florida in late 2022, it was like, hey, double, double half. Last time I was in London,

16. 00:08:40

    Maggie and one of her colleagues said, yeah, 23 double, double half. I mean, that's double the rate, double the deductible and half the capacity, right, is what we're seeing. And a lot of our clients that had either big exposure to convective storms, our headquarters is here in Kansas City, right in the middle of that hail belt from Dallas originally. And so we've got a lot of clients up that that tornado alley, hail belt corridor there.

17. 00:09:13

    We've got a lot of exposure down in the Gulf and things like that. And people, you know, I can say with 100% honesty that, you know, the tough renewals that we had last year, whether it be in tier one wind or in convective storm, they were the best and most creative programs that we could put together, but they were expensive. And there were more carriers because there was less capacity. It seems like this year is people is a little bit more encouraging, particularly in those tough areas. You know, have you guys had any success?

18. 00:09:50

    Have you seen any trends? And how does reinsurance play into that? So from a London perspective, I think very much along the lines of what you're suggesting, calling the retentions, the market is not looking to take the attritional losses. But last year, they were pushing for very high retentions that would probably take away a lot of the fire exposures, or they would probably be looking to show a loss record that

19. 00:10:26

    was clean of losses. Okay. Now these retentions, within reason, we are managing to get quotes excess of slightly lower retentions that last year, but still very much away from the attritional losses. I think domestically, we, the thing you hear is death by paper cuts, the markets got sick and getting beat up on these small water pops these, these, you know, two unit fires where they accumulate over the course of three years, and your burn rate is just

20. 00:10:58

    not anywhere close to where it should be. So, you know, those retentions help offset that and can bring that bring the balance sheet back in order with a reasonable premium spend. I agree. And I think that's why you see, you know, wind/hail deductibles have increased over time, too, because the market, they don't want to be a maintenance program for replacing roofs. And so I do think the market is plateauing, but I don't think you're going to see some of the percentage wind/hail deductibles go away. I think they're, they're going to be here long-term now, and that's just going to be the reality of things.

21. 00:11:32

    If I'm hearing everyone correctly, which I think I am, is that the market is plateauing, but that the exposure being pushed onto the carriers is staying, is also plateauing, right? We're not, there's no reverse trend there. How does the insured win? They've paid more for insurance year over year, and they've also retained more of that exposure. What are you guys seeing and what suggestions do you have, whether buy-downs or parametric and things like that? Speaking specifically to lender requirements, if an insured is okay and happy with the retention

22. 00:12:07

    levels, or maybe not even happy is the right word, but on board with the retention levels that the markets want to see to offer the best balance of terms and pricing, I mean, deductible indemnity wording has been used more so in the last three years than I ever saw it before. If there's a balance of lenders who have specific complexes that are requiring different retention levels, you know, an aggregated deductible buyback can make sense on the right

23. 00:12:37

    balance on the right size of portfolio. You know, on a small investor with, you know, 150 doors, that's probably not going to make sense, but on the right size, especially if you're just defining a couple of complexes that need it to satisfy a bank, that can also help solve the problem. I tend to agree on wind hail. There's definitely still some wind hail buy-downs that make sense. The AOP buy-downs are a lot harder to sell in the market right

24. 00:13:09

    now, because I think on your first claim, you're trading dollars. It just doesn't make a lot of mathematical sense unless you're going to have a couple of claims. But, you know, you mentioned parametric insurance too. I think it became like a fun topic for everybody to talk about. But the take-up rate on buying it isn't very high. And I also think it's because it's still expensive and it's, you know, there's only so much limit you can buy. And there's also another issue that, you know, we ran into lenders that can't get their heads

25. 00:13:41

    around it once you do buy it. So that's caused some issues too. They won't accept it. So I think it's interesting. I think it will evolve and become something hopefully more useful. But right now, I'd say that the take-up rate on buying it is probably less than 5%. We have seen more clients buying parametric, but the way they approach is very much to complement the property program and not to replace it. Maggie, you've built a lot of programs and utilized a lot of parametrics. You're seeing it. It's also a very quick

26. 00:14:16

    payout. Is that correct? That's the beauty of it, I guess. That would be the benefit. And it's probably some of them, the insurance and lenders just can't wrap their heads around it. And I think that's going to change over time, but it's going to take putting it in front of them maybe more than once so they can start to understand it quite a bit better. But yeah, I agree if you're going to use it, you use it as a buy-down of sorts to cover some of your high-deductible exposure. Last week was NMHC, which is the largest

27. 00:14:51

    multifamily conference in the United States. About 10,000 people go every year. In 2023, the conversation, there wasn't a lot of conversation. Interest rates were high, debt was very expensive, and people were really on the sidelines, the divide between what buyers could afford and what sellers wanted after being a very

28. 00:15:21

    big market, a very transaction heavy market over the past couple of years. Things came to a screeching halt. This year, I think people, and we're already seeing more transactions, it was down probably 80% across all CRE from 22 to 23. We're seeing more transactions this year. Have you seen that? Yeah, I would say on our existing portfolios, there's a lot more movement both ways on acquisitions and divestitures, which would make

29. 00:15:55

    sense. And then we're also seeing a ton of new construction, new construction added to the portfolios, where there's some kind of agreement with GC and complex owner. Yeah, I would agree too. We've got more builders risk right now in the pipeline for our development clients than we probably have in the past two years, three years almost. So what about, I

30. 00:16:25

    think the trend over the past couple years, and if we rewind it back, 10 years ago, it was a scale ruled the world. Do you think we're kind of coming back to the marketplace where we need to put everything back together? I think from a sort of London international perspective, markets are very keen to remain profitable. I think profitability is a top priority. Again, big doesn't mean good.

31. 00:17:05

    And generally, where are the carriers wanting to see when they're talking about a loss ratio, right, for our insurance here? Generally, that breakeven is somewhere around 50% of premium, they don't want losses to exceed 50%. No, I think it needs to be somewhere in the reach at least 70%, 75%. Craig, do you think that stands true domestically here as well? Yeah, it does. But in a very broker style answer, I think the truth is that

32. 00:17:39

    there are some situations where breaking schedules up still makes sense. And that's, you know, not to toot your horn too much here, but that's where the benefit of working with the specialists like Virtus Real Estate Group comes into play, because I mean, there's no way around it. It's a ton of work to structure things two, three different ways and see what makes the most sense for the client. And realistically, that's what has to happen on occasion. Sometimes it's clear cut that, you know, we put all this together, we have a good

33. 00:18:12

    loss ratio, let's build the tower, and that's bang bang. But sometimes you do have to bucket homogenous risks. And if there's certain players in the market who are aggressive on that window of characteristic, you have to take advantage of it. Well, I appreciate you tooting the horn and saying it that way. I know it becomes a lot more work for you guys as well, right? And all three of you guys in your firms waiting for us to say, well, we've got to look at different options. I mean, I think one of the reasons

34. 00:18:43

    our insureds, our clients hire us is because we work hard, we're creative. And working a deal three or four different ways is more time consuming. It's more time consuming on our partners like you guys. And it generally, we're delivering the result, kind of not last minute, but closer to that physical renewal day. Marty, what are you seeing in the timelines?

35. 00:19:16

    And what are your thoughts there? And I know it's frustrating for your insurance, and we appreciate that when things come down to the wire. But I feel like if we are going to work these things, three, four different ways to see what the best option is. The fact is, there's a shortage of underwriters, at least domestically. There's not one of our carrier partners that wouldn't tell us they could hire five or six new underwriters right now if we asked them. So you've had more business funnel into the wholesale space than ever, and it just takes

36. 00:19:48

    longer to get to it. And I do think you just keep updating, we keep updating you, you keep updating your insured as the process goes along. But the honest answer is, if you don't wait until the last few days and turn over every stone, I don't think your insured is going to get the best deal they possibly can. So if we go ahead and bind, and we're waiting on two people that just don't have the time to get to something until a few days before, you may have left something off, you know, off the table that was worthwhile. So I know it's frustrating,

37. 00:20:24

    but I also think the insured benefits from playing it down to the wire, because I think that way you know that you didn't leave something out that would have been useful. But I do think, you know, constantly updating is the right way to do that. If you're just dropping it all at the end, it's probably a little bit more frustrating. What are you seeing where carriers want to be or need to be from a valuation perspective? I think realistically, to fight for blanket limits, you probably need to be somewhere between

38. 00:20:57

    135 and 150 a square foot right now for frame. And honestly, we do enough new construction that we know that's probably even light, but just show progress. We know that things have historically been undervalued. And I've seen them in part of claims with excess markets that have thought they were not even going to be involved in some of these losses and they get pulled in. You just need to show progress is the real answer. Are you seeing that carriers are giving a little credit from when you do use a valuation that is

39. 00:21:30

    more in line with the actual replacement costs as opposed to trying to undercut it? I mean, generally years ago, that's what everybody was doing, right? They were pushing down values in the soft market. You could push down values and you could push down rate. They're not doing either one right now, but are we getting some credit when we are going in with more realistic valuation? When you're brokering a deal, you're always trying to show an underwriter why it's best in class, right? And when you're showing a, we have a proactive insured who is actively increasing their ITVs to try and get them in line with what the market demands and

40. 00:22:06

    what is accurate. That's the pitch to this. That's why this is someone you want to partner with long-term. Maggie, valuations were a huge part of the conversation last time I was in London with 20 carriers or whatnot. It seems like London after, if I look back, after Harvey, Irma and Maria, we saw London leave a lot of the hab space and say that it was unvalued and the rate was too low. And so now we're seeing this trend where the European

41. 00:22:41

    markets are coming back into play. One, because I think the domestic markets have continued to push up those valuations and their deductibles. And now we're back kind of maybe more on the same page and it's easier to take some stuff to London and have domestic carriers sit on top of it. But the valuation is the same. The conversation is the same with your markets that it is with Marty and Craig's. Is that fair? Yeah, that's right. And I think

42. 00:23:12

    from, I mean, what we try to do, I agree with Craig, every client, and make sure that the market treats every client by their, by its merits, but also to make sure that they, I mean, sometimes when you go with lower values, we have seen that the market penalises the client twice. And we also like stopping that. Okay. Because they load the rate because they're not comfortable with the values. And on top of that,

43. 00:23:44

    they put a limit to the maximum they are prepared to pay. So in a way, there is, it makes more sense to go with what Marty suggested and show that the market, that the client is showing progress. I like the idea that we, if we end up being in a market where we can get some savings, maybe get the client to adjust the values to more real values

44. 00:24:19

    and spend the money, frankly, as opposed to be underinsured at the top end. Do you guys have any, you know, closing thoughts or suggestions for insurance of what underwriters and carriers are wanting to see? Provide the largest amount of detail about your operation as possible. That's easy to understand, easy to digest. If they provide you with the entire file dump on everything they have, then you and I can work together. You and Maggie,

45. 00:24:49

    you and Marty can work together to distill that down to what the markets really want to see. The market would like to partner with those clients that they're truly partners. Okay. And they treat the insurance to buy that catastrophic loss, but then locally, they deal with the attritional losses. We need to be able to convince them they are on the right track and this is a long-term partnership and eventually they will get there.

46. 00:25:22

    Year one, they may impose those retentions that we talked about, but that eventually they could calm down. They will never take over the attritional losses, but they will be prepared to carry a retention that the client is comfortable with or financially makes sense from a risk appetite. Good data is key. You know, understanding the risk of a really good submission goes a long

47. 00:25:54

    way with our underwriters and knowing what the expectations are, what the insured's comfortable with. But yeah, I agree with what both of them are saying. And right now with the amount of submissions that are coming into the market, having good submissions to market that have clear information, clear instructions, it puts you to the top of the stack, which is where you want to be. Yeah. Well, I can't agree with you guys more. I mean, I think a lot of the success that we've seen, you know, is getting good information and data,

48. 00:26:30

    right? It's telling the story of what the insureds have done. Yes, there was a fire at this location. Because of that, we're willing to take a higher deductible. We've also spent X amount of funds, capital expenditures on trying to make that a safer and prevent future losses. Thank you guys for the hard work and giving our insureds and our clients, you know, multiple avenues to consider. I mean, I think that's at the end of the day, right? Over-communicating,

49. 00:27:02

    being transparent with our partners, whether on a client or a wholesale or carrier, and then giving optionality is how you win in a hard market. So thank you guys for all the hard work you've done. And thank you for spending an hour with me and placating me here. Sharing some of your knowledge.