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NEW YORK CITY-Insurer credit downgrades, rising costs for directors-and-officers liability insurance and increasing difficulty obtaining coverage for residential portfolios are just some of the challenges commercial property owners must face amid the downturn, says a new benchmark report from Marsh. However, the insurance broker and risk advisor says these issues co-exist with generally favorable pricing and readily available coverage.

“The economic environment and credit environment have had a major impact on real estate factors,” Jeffrey Alpaugh, a managing director of Marsh and leader of the firm’s global real estate practice, tells GlobeSt.com. “The debt markets are frozen and fewer buildings are trading, and a result, many real estate investors are focusing on asset management and decreasing costs within their portfolios.” The result, he says, is that many clients are restructuring their insurance programs to decrease the premium costs.

Among other things, real estate firms have amended terms of their insurance programs, increased retentions and reevaluated the amount of property catastrophe coverage they purchase, according to the Marsh report. “We’re seeing that the biggest total cost of risk for real estate firms is property insurance,” Alpaugh says. “When we look at their overall premium spend and divide it out, it could be 60% to 70%.”

In addition, “as investors are looking at their overall portfolio, they want to make sure they’re meeting lender requirements,” says Alpaugh. “As they’re going out and buying buildings, many of the loans have covenants that stipulate the insurance requirements. There could be certain limit requirements: in California, it’s earthquake insurance; in Florida, it’s hurricane insurance, in New York, it’s terrorism.”

The Marsh report notes a new concern for the credit ratings of the insurers, particularly among institutional investors. “Over the past year, there were insurance companies, including a couple of high-profile ones, that were downgraded,” Alpaugh says. “In some cases, the downgrade was just by one notch, but it may have been a pretty significant notch” that meant that clients couldn’t stay with that insurer and still meet the terms of loan covenants.

As a result, “We’ve had to develop a lot of credit wraps where we go out to higher-quality insurers and use their paper as a credit wrap” in order to comply with loan covenants that require insurance companies within their property program to be rated “A” or higher, says Alpaugh. However, according to the report, “This option is limited in availability, and can be costly.”

Marsh also found that costs for some critical coverages, including D&O liability insurance, tightened considerably during the second quarter but have “improved somewhat since then.” In particular, while many public companies participating in the NAREIT program saw premium increases of 20% to 40% in Q2, the effects haven’t been as widespread lately. “Meanwhile, the mortgage REIT sector continues to experience increases,” according to Marsh.

What Marsh calls the “variable behavior” of the commercial property insurance marketplace is not expected to abate soon, particularly when it comes to the risk of catastrophic events. “Increased competition will somewhat limit expected rate increases of up to 5% for companies with minimal or no CAT exposure and from 5% to 15% for those with moderate to high CAT exposure,” the report states. “CAT exposure, limits purchased and loss experience determine extremes on both sides of the estimates.”

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