For several years, insureds have faced widespread decreases in the affordability and availability of insurance, across all industry sectors. Policy premiums, deductibles, and claims costs have risen dramatically, further straining costs of conducting business in many industries and geographies. Affordable housing owners and operators have been particularly hard hit, as they currently face one of the tightest insurance marketplaces in decades. In areas where cost of living is already untenable for many existing and prospective tenants, lawmakers are looking to ease the strain by introducing favorable changes to promote an unbiased and equal playing field.
With existing operating budgets already facing extremely thin margins, affordable housing communities are faced with critical decisions on how to modify insurance programs to accommodate inflated insurance spend. In October 2023, the National Multifamily Housing Council (NMHC) released a study on insurance premiums and its impact on the affordable housing community. Of 418 responses received from providers with affordable housing interests (including predominately market-rate owners), a majority of providers reported insurance cost increases of double digits year-over-year for the prior three-year period. 29% of owners saw an increase of 25% or more in 2022 to 2023 alone.[1]
Due to these increased costs, real estate providers are encouraged to look at alternative policy structures, higher retentions, or decreased coverage limits to offset total cost of risk. On the business side, firms may also explore deferring planned improvements, lowering operational expenses, or slowing new hires.
On April 22, 2024, Governor Kathy Hochul signed into law New York’s FY 2025 budget, which included various measures to protect the affordable housing community from potentially discriminatory insurance underwriting practices. These measures are part of Gov. Hochul’s increased focus on initiatives to encourage the creation and sustainability of additional housing supply throughout New York State, while maintaining reasonably priced living accommodations for existing units.
Beginning in 2025, insurers operating within New York state must modify their underwriting practices to adhere to these legal changes. Insurers will no longer be able to make inquiries regarding:
The changes implemented by Gov. Hochul are designed to be favorable to policyholders. The efforts seek to avoid stigmas and bias that may be associated with housing individuals or families in housing categories other than market rate living accommodations, and to ensure equal access to coverage. Practically, these changes may have mixed results, as carriers may take alternative action to avoid violations of the new laws, but still reduce their assumption of risk.
In light of these changes, landlords, owners, and operators must be aware of how individual risk affects individual underwriting results. Insureds and locations with adverse loss history (property, casualty, or other coverage lines) will directly influence rates, premiums, and the availability and cost of ideal coverage terms. Good underwriting is centered on inherently understanding the risks at issue. Insurers aim to build into their models the potential for uncertain results due to various characteristics of a policyholder, an operation, or a location. These can range from location, physical nature, amenities, surrounding operations and frequency of use. For example, certain physical characteristics may improve modeling such as superior building materials composed of steel and reinforced concrete, fully sprinklered residential and communal areas to quell a fire, or flood gates to prevent water intrusion to critical infrastructure. Alternatively, properties without such features may face increased costs or a limited availability of coverage. Additionally, locations within catastrophe-prone areas (traditionally earthquake, flood, or high hazard wind – but now increasingly extended to hail, wildfire, and earth movement) are also typically subject to surcharges as compared to locations situated in non-catastrophe geographies.
Measures such as the new laws in New York may become increasingly common as the cost of insurance becomes more expensive for policyholders, and as insurance carriers seek to limit their exposure to the increased cost of claims. As insurance costs rise, carriers may decline to write certain risks, or add a surcharge onto those risks they will insure, to compensate for a reduced ability to factor in certain aspects of a risk to their underwriting and pricing. Tenants may see a direct impact, as between rent increases could be used to offset the increase in operating costs due to the rising costs of coverage or the reduced ability to fully insure certain risks.
Housing providers must take a holistic view of their risk management, addressing myriad factors before they become underwriting concerns. Insurers actively seeking to write residential accounts have dwindled, with few remaining in this class of business. Those retail and wholesale insurers who offer capital behind these risks are diligent in understanding the risk narrative. Getting in front of insurers to tell your story is more important than ever before. Highlighting proactive risk management measures in place to mitigate, or eliminate, risks from occurring is always well received. For instance, proactive upkeep of individual properties through planned capital expenditures is a wise investment. Residents are also a reliable intel source. Tap into their experiences to determine if there are unintentionally overlooked improvement areas at a community.
These recent New York law changes are a welcome protection for housing providers though it will not be the only influencing factor in an underwriter’s risk review.
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast Inc. (in the United States) and Willis Canada, Inc.
