Pay more, get less.
Talk about a kiss-of-death sentence—but that is what property owners in the Gulf States have faced following the devastating 2005 hurricane season.
A recent report published by the nonprofit research company, RAND Corp., Santa Monica, Calif., details developments in the commercial wind-insurance industry and offers insights into emerging challenges.
Co-authors Lloyd Dixon, James W. Macdonald and Julie Zissimopoulas researched existing data and conducted interviews through April 2007, with 69 stakeholders impacted by the need for commercial wind insurance. Among the policyholders interviewed were a large number of retail property owners, including mall owners and shopping center developers.
The report noted that at least one insurance broker saw insurance premiums increase 80% for real estate clients with catastrophic risk exposure, while the coverage limits for losses resulting from wind fell approximately 30%.
In areas of highest risk, availability of insurance coverage has become as big a concern as the cost of coverage. The report shared statistics from a survey of 529 buyers of commercial insurance that was conducted by the Florida Office of Insurance Regulation, including:
17% were unable to obtain insurance at any price;
39% found insurance at prices considered “unreasonable”
25% experienced inadequate policy limits or increased deductibles; and
Only 19% obtained insurance at “reasonable” prices.
Additionally, 29% of the businesses surveyed reported insurance premiums had increased 200% and another 9% said the premiums were up more than 100%.
On a positive note, the RAND report determined that insurance prices in hurricane-exposed areas remained flat in the first quarter of 2007, with only modest increases from the costly adjustments the preceding year.
It also concluded that companies with national or multi-regional locations were in a better position to absorb the price increases, or negotiate better averages across their portfolios. “National companies were able to combine the risk of their coastal properties with the risk of properties in other geographic areas [so] prices were declining.”
Unsurprisingly, those owners with a concentration of properties in the Gulf States region had little negotiating power and were most adversely impacted.
However, neither wind nor rising insurance costs will keep retail from returning to consumers in the Gulf Coast. Next month, Chicago-based General Growth Properties will host the grand reopening of Oakwood Center, on the West Bank of New Orleans. The 947,000-sq.-ft. enclosed shopping center, anchored by J.C. Penney, Sears and Dillard’s, is the largest mall in the market.
Insurance woes are certainly not limited to commercial entities. Consumers have faced huge increases as well.
Like most retailers reading this column, our company has locations around the country. Last month as I updated my laptop with our Tampa-based IT department, my techno buddy told me his flood insurance has increased 300% since 2005, while coverage has declined, and options for insurance providers have evaporated. Like many Floridians, his only resource is the “insurance of last resort” provided by the state.
Huge leaps in insurance premiums can easily drown a consumer’s reserve of disposable income, which can have a pronounced effect on retail sales.