Property Owners Try Negotiating with Lenders on Insurance

By Courtney Fingar
March 28, 2023 at 08:06

Increased insurance coverage payments have led some borrowers to breach the loan’s debt service coverage ratio.

As insurance costs become unsustainable in many high-climate-risk states, lender reform is critical, according to a report from research firm CRE Yardi Matrix.

In states such as Florida and Texas, insurance costs are rising by up to 50%, threatening new developments and property sales and causing headaches for commercial property owners.

Many reinsurance companies leave the high-risk states altogether, and those that stay raise rates by 45-100%, according to Danielle Lombardo, chairman of Lockton Global Real Estate, a New York-based advisory firm. “Something had to be done differently,” he was quoted as saying in the report.

Insured natural disaster losses have reached $100 billion in the three calendar years since 2017, raising concerns that insurers’ models will not keep pace with the increasing frequency and severity of climate change-caused disasters, according to the Yardi Matrix report.

Two routes to combat rising insurance costs that the report highlights are reducing litigation—an area where efforts are being made in Florida, where most property litigation is concentrated and which has recently passed an insurance-friendly tort reform package— and more importantly, lender reform.

There is a growing complaint that properties are often over-insured to cover rare extreme losses. A big pain for owners because rising prices are a typical requirement for them to carry hurricane insurance for the full value of the property, or at least the mortgage balance. Increases in insurance escrow payments have also led some borrowers to breach loan debt service coverage ratios, the report said.

Due to a lack of carrying capacity having to write down wind and flood limits and rising construction costs, property owners’ negotiations with lenders increasingly involve non-traditional risk transfer methods such as parametric wind and flood insurance, for which they pay a set amount. based on the risk of the event, not the magnitude of the loss.

Lombardo said setting rates through a maximum possible loss methodology would significantly reduce premium spending and fix supply/demand issues in the catastrophe insurance market. “The industry has to look at the model’s downside,” said Lombardo. “Using the risk model basis instead of insured value would be a big win for the property owner.”