As the M&A market declined in activity from the heights of early-2022, we kept hearing that every deal was much harder to close and experienced more delays than in recent memory. The capital markets had a major impact on that, understandably, but another wrench thrown in many buyers’ M&A plans was the volatile (and pricey) insurance market for both the property’s real estate and operating business.
There are plenty of reasons to explain the increase in insurance costs in the last year. First, rates had been dropping for about 15 years until around 2018/19 due to providers wanting to build scale, even if it meant taking losses to get there. Then, as Chip Stuart of HUB International pointed out that “it was like birds on a wire. As soon as one took off, the rest followed,” meaning that when one insurer raised its rates, the rest did too. So, policy holders may have had it too good for too long, and expenses were bound to increase.
Then, COVID happened, and the risk of operating a senior care business rose tremendously as the virus targeted the frail elderly, staff were overworked and the senior care sector got hit over and over again in the media, unfairly or not. Politicians piled on, too, increasing the negative attention on the sector and the likelihood of lawsuits from family members. In addition, the acuity of seniors has been rising in recent years, increasing the risk of slip and falls (about 75% of all liability claims at senior care facilities), and casualty/liability claims as a result.
More severe claims (in excess of $25 million) are on the rise in the sector, even as claims frequency has declined so far this year. And high-profile lawsuits like the Silverado (which we opined on earlier in April) will not help, nor states that have not enacted serious tort reform since the pandemic.
From the physical plant perspective, natural disasters in coastal communities and fires in California greatly increased property insurance costs for communities in those areas, as much as 30-50% year over year in many cases. Government-produced fire and flood maps directly led to premiums and deductibles rising for communities in those affected areas. Even in best-case scenarios for communities in other locations, 15-25% increases were typical over the last year, which makes a huge impact on communities’ bottom lines. Deferred maintenance, which is a problem affecting many communities since the start of the pandemic, has also contributed to increased insurance costs. And fewer insurers are even willing to offer quotes on wood-frame buildings. The casualty and liability insurance market has seen less significant increases to rates, closer to the 8-12% range, year over year.
Finally, the reinsurance market has also seen tremendous volatility in recent months because of the successive shocks of high inflation, high interest rates, the war in Ukraine, the fuel crisis and Hurricane Ian. Higher reinsurance costs, more stringent terms and the general turmoil some described would naturally have a ripple effect on the property and liability insurance markets.
These issues have all contributed to higher insurance costs for owners and operators, the significance of which came as a shock to a number of them. Communities were already struggling with labor and other expenses eating into their profitability, and an unexpected major increase in insurance costs had to hurt. It also changed the math on property acquisitions for many investors, who saw their profitability potential taking another hit. And insurance costs likely led to some of the pricing renegotiations that were so common in late-2022/early-2023.
But Peter Reilly and Chip Stuart of HUB International offered some advice to property owners and operators to not be surprised by insurance matters and to lower costs (and headaches) as much as possible.
- Have a good manager in place. It sounds obvious, but a frequency of insurance claims (not just the severity of them) can be a sign of a bad manager and should be vetted before entering into a management agreement with them.
- For properties with deferred maintenance, owners and their operators need to articulate a clear plan for how they plan on prioritizing certain projects, completing all necessary ones and keeping their staff and residents safe in the long-term.
- Landlords and/or lenders should reach out to their insurance brokers to understand their claims volume at their properties. Once the pandemic ended, operators deserved more scrutiny from their owners and/or capital providers, and their claims history could be a good indicator of whether to continue working with an operator, or not.
- For those considering an acquisition, understand the tort environment of the states you are exploring in order to limit liability lawsuits or where insurance costs are high because of the propensity of natural disasters. Those would include Texas, Florida, Louisiana, California and New Mexico, to name a few.
- Lenders, brokers and buyers need to understand the loan covenants that are affected by the type of insurance policies or coverage a community can get. Sometimes, covenants require certain coverage that isn’t available for that particular community, for any number of reasons. Otherwise, a surprise like this could delay a deal from getting done in a timely manner, which matters in a volatile capital markets environment.
- Finally, do not buy a community’s or operators’ prior liabilities, because that makes projecting future insurance costs much more difficult. As Chip Stuart said, “ don’t buy their problems.”
