While a recent study says that commercial property insurance rates are stabilizing and even being reduced, some Boston property owners say that they’re still experiencing rate increases.
Commercial property owners across the country are expressing relief as property insurance rates – which had climbed steadily during the past two years – are beginning to level off or, in some cases, even drop by as much as 25 percent compared to last year, according to a recent study by the Consumer Federation of America.
While industry watchers don’t expect decreases as great as 25 percent for the Boston market, there’s still good news – most local rates are expected to drop by between 10 percent and 15 percent. In some cases, local landlords could save as much as 20 percent.
“The end of the outrageous insurance rate increases is here,” said J. Robert Hunter, a former Texas insurance commissioner who is currently the Consumer Federation’s director of insurance. “The bad news is that those rate increases were likely fueled by unjustifiably high profits, rather than a legitimate increase in insurance costs. These [study] results … should provide cause for concern from consumers and state regulators about whether there has been price gouging.”
In the first half of 2003, insurers watched their net income after taxes jump from $4.4 billion a year ago to $14.5 billion. At the same time, commercial insurers saw their loss ratios – the portion of premium dollars used to pay claims – fall from 97 percent in the second quarter of 2002 to 62 percent a year later, according to the study.
Profits at some of the country’s largest commercial insurance companies ballooned – AIG’s profits leaped in the third quarter from $1.8 billion to $2.3 billion; Travelers, also a leading underwriter, experienced a 28 percent jump in profits to $426 million during its third quarter, up from $332 million St. Paul, the fourth-leading insurance underwriter, recorded a 240 percent jump in profits, which rose from $63 million a year ago to $214 million in the third quarter of 2003, according to the Consumer Federation. Other leading insurance underwriters have not yet reported their earnings for the third quarter.
Commercial property insurance, which increased by 47 percent in 2001 compared to 2000, rose 42 percent in the second quarter of 2002 and 24 percent during the third quarter of 2002, is down by 1 percent in the third quarter of this year, according to the report. General liability insurance is down by 7 percent and construction is down by 13 percent.
Terrorism insurance rates also have stabilized across the country.
After peaking about a year ago, the commercial property insurance market has also softened in Boston, said Kathleen Nickerson, senior vice president of the Boston office of Robert M. Currey & Assoc., a risk-management firm. But while some property owners may see a break, owners of Boston high-rises may not get the same type of treatment.
“Insurance companies are still very hesitant to give them too much of a discount in the major metro areas,” she said. “The rates are still coming down but that fear [of high-rise buildings being targeted by terrorists] has not totally gone away.”
Nickerson expects that property insurance rates in suburban Boston markets will flatten out, with some owners seeing decreases of up to 10 percent. Similar decreases also are expected for many buildings in downtown Boston. However, she said, in some cases property insurance rates could drop by as much as 20 percent, depending on the company’s portfolio and the diversity of its buildings.
But some Boston owners and developers say that they are skeptical about the impending decreases being predicted. One Boston-based owner and developer, who wished to remain anonymous, said that his company just completed an insurance renewal with a new company because its previous insurer, The Royal Insurance Co., exited the U.S. market. The new policy, with Travelers, is 5 percent to 10 percent higher than the company paid previously.
Kevin McCall, president and CEO of Boston-based Paradigm Properties is also skeptical of any rate decreases. In fact, Paradigm Properties is budgeting for a property insurance increase of 10 percent for next year.
“I don’t see the property insurance dropping off yet, at least from our experience,” he said.
New Boston Fund, however, has already seen some relief. Tim Medlock, chief administrative officer, said that the company’s August renewal date for its $1 billion property portfolio may have helped. Medlock said his firm’s insurance premiums jumped by 25 percent when he renewed in August 2002, almost a year after the Sept. 11, 2001, terrorist attacks. This August, New Boston Fund experienced a much more modest increase of 3 percent to 4 percent with no increases in liability.
“The seven- or eight-month passage of time decreased my hit,” he said. “But for those who had a big whack two years in a row, I wouldn’t be surprised if they begin to see a reduction.”
Steve Kinsella, a partner at National Development in Newton, said that the Consumer Federation’s insinuations of price gouging may be off base.
“A lot of these companies are dealing with the instability [created by the terrorist attacks in New York City] and are trying to find a way to pay – with those astronomical affects, as with any industry, you have to find a way to pass that [cost] on,” he said. “A lot of [insurance] companies are in financial instability; some carriers have left the market, others are looking at hedging the risks. I don’t think it was necessarily price gouging, I think it’s them trying to cover the costs. However, there are some companies that weren’t involved [with losses incurred by the events of Sept. 11, 2001] but did jump on the [price increase] bandwagon.”
Two years after the Sept. 11 attacks, property owners are seeing more stability but also more scrutiny.
“Sept. 11 was a rude awakening, not only in cost but in being proactive” with building security and disaster-recovery plans, Kinsella said.
Insurance companies are more likely to make on-site visits to inspect HVAC systems, underground garages and other building systems, he said.
“A lot of companies weren’t so proactive,” he said. “Every asset we own is being looked at, and when they make a recommendation, we make the changes. That’s when you see stability in your [insurance] rates.”
In the months following the Sept. 11, 2001, attacks, insurance companies grappled with how to recover the billions of dollars in insurance costs. But Les Hayward, senior vice president at the Boston office of Marsh, a commercial insurer, said that the rates initially began changing in 1999 and 2000. After the terrorist attacks, terrorism insurance rates skyrocketed.
“With the [federal government now subsidizing terrorism insurance], we’re seeing those prices come down,” Hayward said.
Insurance companies are also separating their clients according to risk factors, such as susceptibility to earthquakes or wind storms, rather than lumping them together, he said, bringing rates down for some properties and markets.
