Underwriting for 3% insurance increase - is this a joke?

Question

Hi BP family - hope you're well!

Wanted to pose this as a question while also ranting a little bit.

Curious to know if I'm the only one feeling strongly about this?

Some Background:

I'm very entrenched with multifamily syndication space, and I've noticed deal flow pick up since start of H2 2024. I'm on a LOT of people's email lists, and I see multiple investment offerings every day of the week. I've syndicated multifamily offerings myself, and I have deep seated opinions in underwriting and asset management.

There's one thing I seems to be consistent across the industry that I vehemently disagree with, and that's the expense escalator(YOY increases) for insurance.

I STILL see people underwriting for 3% YOY insurance increases. It's like the world hasn't changed dramatically in 5 years.

Despite the fact that some markets were faced with 200% YOY increases this/last year, there doesn't seem to be a justification for this UW assumption. Hell - even our midwest property with no natural disasters was a 20% increase. IMO the insurance industry will be in catch up mode until natural disasters slow down (IF they slow down?). Until then, I'm anticipating consistent double digit increases in insurance YOY.

My Thoughts:

I personally think insurance expense escalators should have 5-10%(as an avg) expense escalators for the foreseeable future.

Am I alone in feeling this way?

Disclaimers:

Let's agree to disagree to that everyone has "conservative" underwriting. 😂

Not every deal is truly a good deal.

Thank you,

TB

Evan Polaski · Answer

@Tommy Brant, regarding your last comment about conservative underwriting, not only is that an entirely overused statement, but also, do you think you will ever hear any syndicator say "we underwrite very aggressively"? But beyond that fact, I have posed many times over "what is conservative"? Is 5% rent growth conservative? Over last 4 yrs, Orlando has seen about 10% per year average rent increases, even counting the near 5% decline in 2024.

But to your point, I could make a case either way.  While I overall agree with you, there is a case to be made that premiums will start to normalize:

Namely, major insurers pulling out of the high risk areas like FL and CA are limiting their catastrophic events.  At the same time, they "caught up" the premiums all at once for everyone in the last year or two.  The combined effect is that premium increases will normalize going forward.

I have a feeling if I had an investor on the phone that was reading headlines about insurance premium spikes, the above would satisfy them.  Am I right?  Maybe. But that is the key with investing, you need to have your educated guess of future events, place your bet, and hope you are right.

Chris Ludwig · Answer

I completely understand where you’re coming from, and you’re definitely not alone in your frustration. The reality is that the insurance landscape has shifted dramatically in recent years, and underestimating those expenses can be a costly mistake for syndicators and investors alike.

Insurance Escalators: A Changing Reality

Your point about the outdated assumption of a 3% YOY increase in insurance is spot on. The past few years have shown us that relying on historical data without adjusting for current and projected trends can lead to significant shortfalls in underwriting. As you've mentioned, markets have experienced staggering increases, sometimes in the triple digits, due to natural disasters, inflation, and changes in the insurance industry.

Adjusting Expectations

In my opinion, underwriting for 5-10% YOY increases seems much more aligned with the current environment. It’s not just about being conservative—it’s about being realistic. We have to consider the fact that natural disasters are becoming more frequent and severe, which directly impacts insurance premiums. Even in areas without significant disaster risk, we're still seeing insurance costs rise due to broader industry pressures.

The Long-Term View

For those of us deeply involved in multifamily syndications, it’s crucial to educate LPs and partners about these changes. While it might make some deals less appealing at first glance, transparent and realistic underwriting builds trust and ensures that everyone is on the same page regarding the risks and potential returns. This is especially important as deal flow picks up and competition increases—cutting corners on expense assumptions might win a deal, but it could lead to major headaches down the line.

Chris Grenzig · Answer

@Tommy Brant I have heard that there is some insurance relief coming into the Florida market, especially for new construction A class properties. Some carriers are starting to come back and bid down premiums.

However, I think it's still pretty early to trend back to 3% growth, especially if year 1 is going off their new quoted policy. We haven't bought a deal in 2.5 years in large part because I am uncertain about how to underwrite insurance, but it does seem to be plateauing, and maybe some early signs of dropping.

I would not use any percentage over an in-place policy though, but I doubt that is the case for anyone serious. Always use a new estimate/quote.

Justin Moy · Answer

I've seen/heard people getting more competitive bids in the higher risk markets, but yeah I do think the subtle increases 2-3% are a bit aggressive.

I don't think they'll double like they did in the past but I've been hearing people get 5% renewals in FL which got hit the heaviest by some of the increases. In KS we got a 5% renewal as well but of course way different than FL area.

Chris Watson · Answer

in Florida I know of several renewals in the last 60 days that came in with a decrease in the premium with as much as 20%. I would throw caution at giving credibility to news stories about rates driving people out of Florida or increased natural disasters impacting rates. Just Google a hurricane map over the past 100yrs and you will realize it hasn't increased just more sensationalized due to media.  Several of these "news" outlets/papers are very political and have an agenda. As for underwriting, when analyzing use the numbers you think it should be to see if it would makes sense.  As another mentioned about finding a better rate with the previous owners company, gone are the days of just automatically renewing insurance and a good syndicator should be shopping around for the best coverage/premium atleast twice a year. On my personal portfolio my properties in TN this year I was able to get better coverage and reduce rates by 15% this year. My Florida portfolio has not seen more than a 2% annual increase on premiums each of the past 3 yrs.  Most of my FL policies come for renewal in Q4 and Q1 and I am expecting a decrease on premiums based on what others are seeing.

Gino Barbaro · Answer

@Tommy Brant

It really depends upon the market, and I think the operator, their scale of operations, and their loss runs.

We bought a deal from a mom and pop last year, and their insurance company saved us dramatically on pricing.  I personally think the insurance market is going to stabilize, I may be in the minority, as I see in Florida there is some stabilization.

I can see 5%. Insurance going up is just as much a function of natural disasters, as it is the massive fraud in the industry. Here in Florida, all the roofs replaced and car windshields have driven up pricing also.

The only way it does go down is if we get more providers.

Kim Meredith Hampton · Answer

@Tommy Brant I agree with you. Im in Florida and sell multi family and some JV on deals, but our rates have increased significantly over the last two years 50-100%, BUT the most recent renewals are more around the 5-10% increases as 8 new insurance companies entered the state this past year. I am one to be more cautious in my underwriting. Would much rather be over than under in my numbers!

AGREE 100%, not every deal is a good deal and move on......

Underwriting for 3% insurance increase - is this a joke?

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