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Shopping Centers Today -> March 2003
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MORE INSURANCE UPHEAVAL ON WAY FOR INDUSTRY?
BY DEBRA HAZEL
The world of shopping center insurance is relatively tranquil again, now that the U.S. government has agreed to chip in on future terrorism claims. But other issues are looming that could shake things once more, says one expert.
Changes are afoot as a financially stressed insurance industry carefully evaluates just what and whom it can underwrite, and owners should be prepared, said Michael D. Horvath, vice president of risk management at Simon Property Group.
In the past, getting and renewing insurance was fairly routine. But of late, a series of events has increased the financial pressure on insurance companies, creating what Horvath calls a “perfect storm” of circumstances that could bode trouble for policyholders in the future.
Other woes besides the massive claims related to Sept. 11 — not all of which have yet been filed, let alone settled — have been plaguing insurers.
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The stock market’s decline since mid-2000 has seriously eroded their income, cutting into underwriting ability. In addition, the industry has seen significant casualty losses from floods and hurricanes, liability losses from asbestos litigation and other losses from settling shareholder lawsuits against directors’ and officers’ malfeasance.
Even the decline in interest rates hurt the industry, by cutting into the earnings on funds held between premium collection and loss payout. As a result, the reinsurance market (where insurance companies get insurance) has dried up.
“When you put all those things together, 2002 would have been a difficult insurance market without [Sept. 11],” Horvath said. “Then, add in the highest and grandest losses in mankind. So they stop writing, or they restrict the type of policy they’re going to write.”
Some changes are apparent today. Insurers require more information, particularly about loss histories and corporate solvency, before renewing policies. More of them insist on a site visit to see for themselves whether a property is well tended. It is incumbent on developers, then, to be proactive in explaining to their insurers the safety measures being taken at their centers, Horvath said, from flooring, to lighting, to the sprinkler systems.
“It certainly behooves the insured to walk them through the process,” he said. “There is a big difference between being concerned about loss prevention and being proactive about loss prevention.”
Simon has its 27 insurance companies visit its centers at least once each year, particularly after renovations and to see new construction.
Other questions raise flags as well. The Americans with Disabilities Act remains an issue for owners, particularly as they renovate older centers, because compliance is hard to define, which could therefore lead to litigation.
Post-Sept. 11, architects and designers are being asked to accommodate more security cameras into their designs.
“I think there’s probably more a beef-up of security staff, and that’s certainly helped the carriers,” said Greg Moe, group manager of Southwest retail centers at Fort Worth, Texas-based architecture firm Carter & Burgess.
Asbestos hasn’t gone away, either, and a more recent threat, mold, is coming up. Mold has thus far been more a concern for office owners (particularly in the humid South), but some insurers have started to exclude the coverage in writing their policies this year, Horvath said. Insured companies are now turning to the environmental impairment liability market for coverage, he added, but “time will tell if it’s an issue five years from now.”
Not all developers are feeling an impact from the insurance industry’s tribulations, however, at least not yet. By and large, the terrorism insurance question has been settled, and most developers report that their relationships with underwriters are pretty much back to what they were before.
“We haven’t heard anything from our insurance companies at all,” said Richard E. Brown, senior vice president of real estate operations at Developers Diversified Realty Trust, Cleveland.
Nor have insurance companies begun to focus more closely on such things as security, others say.
Aside from an occasional question, “our insurance carriers are not too concerned about the security issue,” said David Burnham, CFO of The Rappaport Cos., McLean, Va.
That comes as something of a surprise to at least one security expert.
“I keep expecting to hear that they’ve started to look more, but I’ve not heard anything in our operations department,” said Jonathan Lusher, senior vice president of consulting and inspectional services at IPC International, Bannockburn, Ill.
Nevertheless, things are likely to remain touch and go well into 2004, as the insurance companies sort out their finances, Horvath said. And the current calm could yet be broken, he added, warning owners to be ready for a call from their insurance company.
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