RHONDA DEMENO: Welcome to the WTW Senior Advisor podcast. My name is Rhonda DeMeno, and I'm happy to be your host for today's episode. WTW Senior Advisor podcast series is intended to bring you firsthand information on trends and hot topics facing the senior living industry.
Today's hot topic is Senior Living and Real Estate-- Connections and Insurance Risk. I'm pleased to introduce you to our guest today, Miranda Rodriguez. Miranda is the WTW's Residential Segment Leader for Real Estate, Hospitality, and Leisure. Welcome, Miranda.
MIRANDA RODRIGUEZ: Thanks, Rhonda. I'm excited to be here.
RHONDA DEMENO: So nice to have you join us. The growing senior living population and increasing demands for senior living communities has made this sector an important aspect of the senior living industry. Real estate and senior living properties are interrelated through investment opportunities, property development, management, market analysis, and regulations.
While resident health needs continue to be an ongoing challenge and expectation for senior living operators and owners, owners and operators are also responsible for operating and managing real property. Today's discussion will address market focused topics and details concerning real estate and senior living risk.
Miranda will share her expertise and details on risk exposures concerning real estate, investment, property management, acquisition, development challenges, and the complexities of intertwining of resident care and real estate insurance placement solutions. So, let's begin our discussion.
Miranda, it seems like there's a lot of confusion on senior living and real estate. Can you weigh in on the industry verticalization topic? How can verticalization integrate both health and real estate? Can you explain the benefits for our listeners?
MIRANDA RODRIGUEZ: For sure, Rhonda. Absolutely. This is a question we often field as a brokerage firm that reorganizes business into specialized industry verticals just a short while ago. For so many organizations, the answer isn't just one or the other, for that matter. The fact is that many organizations will fall into two or more industries, what's important is that their broker has the knowledge and expertise to bring them the very best solutions for each facet of their business.
The benefits of having a broker that specializes in myriad industries is that clients know they are represented by a firm that understands them. That's connected to the right markets to place their risks. To have brokers who are exceptional with these markets and have the right relationships to make sure we're getting the very best solution for them each and every single time.
Now, as an example, for our senior living communities, our organization would bring its excellence from both our health vertical as well as our real estate vertical. So simply thinking about the occupancy of the physical location doesn't brand the business as care. You're also in real estate.
RHONDA DEMENO: That's a very, very good explanation. I really, really like that. I know as a clinical risk manager, homing in oftentimes just on safety risk within the organization and understanding general and professional liability, we know residents fall, we know they have choking hazards. I'm very in tune to that. But from a real estate standpoint and leisure hospitality standpoint, what are the top risks or types of risks that these senior living communities face?
MIRANDA RODRIGUEZ: Yeah. So, I could go on and on about this, Rhonda. But I'm going to hit just a few knowing that this is a topic you could spend hours on with your broker. So often, people think of real estate hazards and automatically think of the physical premises. The real property. What happens if my building burns down? How do I rebuild and recover?
Real estate owners and operators actually face several different challenges. In addition to property damage, which we in the industry consider a first party risk, there's also third-party risks. Now, some people may ask, well, what does that mean? So, the potential for bodily injury to occur to other people or even to other people's property. So, within senior living communities, there are residents, there are guests. And so, firms must consider their legal liabilities to these third parties, as well as their first party obligations.
In addition, as the world continues to get smarter, and I would say that ChatGPT is, in most cases, smarter than me on most days or smarter than the fifth grader, being aware of any cyber-related risks is super important. Having access to any sort of personal identifiable information puts owners and operators in a vulnerable position for hacks.
There are instances where we've seen malware uploaded into a client's system, sometimes as early as years in advance of when an attack was perpetrated. And then you also have to consider, and you touched on this, Rhonda, a bit earlier, your professional liabilities. Your errors and omissions, your crime insurance, your directors and officers. I mean, this is the list that can go on and on.
So certainly, feel free to liaise with your broker on this. But I'd recommend sitting with them to understand what solutions are currently available. And then the next step is determining what you're going to do about that.
RHONDA DEMENO: So, getting a real good understanding of the myriads of risk and getting to really know that client because their risk may be different than another organization's risk. So, I really like that person-to-person, having that meeting, and really finding out what the pain points are for that operator. So, to continue with this conversation, Miranda, can you tell me what operators can do to implement good governance and proactive risk management strategies for their organizations.
MIRANDA RODRIGUEZ: Yeah. You just hit the nail on the head, Rhonda. So, the biggest piece of advice here is to understand your risks. No two organizations are the same. And no one knows your story quite as well as you do. So be involved with your internal stakeholders. Understand what each business function cares about.
How are you solving for those areas before they become potential bottlenecks to your organization? So, this could look like sitting in on your investment meetings or regularly meeting with your general counsel. Being in tune with your operations folks, your finance team. Make sure that you have a seat at that table, so you can relay the same information back to your brokers.
Another piece of advice here is to have a CapEx plan in place, and to stick to it as much as the business allows. Everyone understands that there's going to be ebbs and flows. And from a financial perspective, sometimes it doesn't necessarily make sense in certain environments where maybe the budget is a bit more constrained, but you have to make sure that you have a plan in place. Property deteriorates. Invest in your properties and replace critical infrastructure before the end of its useful life.
RHONDA DEMENO: That's a very good point because we know a lot of the senior living communities are getting up in age. And they do require a lot of updates and refurbishments. So, I really appreciate that. And then moving into the other topic of understanding risk tolerance and total cost of risk, Miranda, can you elaborate on that?
MIRANDA RODRIGUEZ: Yeah. Absolutely. So, this goes back to being involved with your internal stakeholders. So often, what we found just in counsel with our clients and having many colleagues who have come from a former risk management lifestyle, understanding, again, that the decisions don't necessarily always rest with the risk manager.
It's going to be more of a communal approach where things are being done more so by committee these days where you've got several different functions having a seat at the table. So, understanding your organization's risk tolerance and the total cost of risk is extremely important. Are you spending more on insurance now due to high frequency of claims? Can you tolerate a retention or deductible to minimize that spend?
And increase some guardrails around those loss-driven areas. Those are questions risk managers should be taking back to the organizations to really understand how it is they want to shape and influence the insurance that they're purchasing from third parties. Another piece of advice here would be to, again, sit with your legal team and reviewing all of your contracts.
So much of insurance follows the contracts. Ensuring that boilerplate templates, in particular, we're not necessarily having to recreate the wheel for each and every single scenario is critically important, especially when you have organizations who maybe even they operate regionally and they're relying upon your expertise in those boilerplate templates because they may not necessarily have the time to go back to risk management on each and every single occasion and say, well, hey. Can you review this contract?
If that needs to be done within a 24-hour turnaround time, it's really important that they are already furnished with the information that they need to thrive in that particular scenario. So, in summary, if there are three main takeaways here, Rhonda, it's one, know your risks and your risk tolerance. Two, get involved with internal stakeholders. And three, invest time and resources into your physical locations.
RHONDA DEMENO: Very good. Miranda, can you expand on some of the services that enhance operator's risk profile?
MIRANDA RODRIGUEZ: Yeah. Absolutely. So, the clients want to evaluate as whether they have the necessary tools to help them tell their story. And I'd encourage everyone listening to this podcast to ask those questions. What analytical tools do you have access to which helps me determine my most economical retention point?
What are the estimated losses for my portfolio based on my CAD exposure? Or what could my organization be doing better today to help minimize or even eliminate our attritional losses? Those are the areas where broker is going to show up and make a huge difference. And not only marketing a risk but helping our clients to shape and share their story.
RHONDA DEMENO: I know. I get sometimes even as a risk manager and have daily conversations with our clients, we're always hearing about insurance and property values and property valuations. What is the big deal with property valuations? Can you expand on that?
MIRANDA RODRIGUEZ: Oh. Property valuations. This has been such a hot topic, Rhonda, on all sides of the industry. We have clients looking for counsel on what is appropriate, what is the market looking for. We have insurers who are demanding more transparency from our clients as to how they've determined current valuation. And then as brokers, we're here providing guidance on all of the above.
In short, insurers have identified a misalignment in how some accounts have calculated total insurable value of real property based on industry metrics. And so, what that means is that there have been several instances where loss payments have been much higher than anticipation due to the replacement cost valuations being out of date.
And so, what that then means is that insurers have tightened their underwriting guidelines around their valuations. And they're encouraging insurers to submit recently performed market-supported valuations. I would say that gone are the days where insurers are accepting valuations or even scheduled portfolio schedules that haven't changed or updated their valuations in three years or in five years.
Once a valuation is complete, do not set it and forget it. I'd encourage a fresh set of eyes on each and every single occasion every single year, every single renewal to evaluate if any adjustments are necessary. Even if that means there's a nominal increase for the adjustment of inflation, whether that's a CPI factor or some other nominal factor that an organization might rely upon.
Because what happens in those situations, Rhonda, when all of those different measures are not being taken, is that there is policy language, which can restrict coverage based on an under-representation of values. And so, insurers need to be really careful about that. Go back and review your policy language to see if there's any co-insurance provisions that might apply.
RHONDA DEMENO: Yeah. That really helps to prevent them from being caught off guard if they do see their rates increase because of inflation. Yeah. So, I can see that. And you were talking about contractual language. Is there any specific contractual language that should be included in a third party vendor agreement.
MIRANDA RODRIGUEZ: Yeah. I would suggest so. I mean, my biggest piece of advice here is to collaborate with your legal team to determine the best crafted language. I myself am not a lawyer by trade. Our organization, we cannot opine on legal provisions, but we can certainly recommend certain themes that might want to be relayed within that language.
But I would, again, encourage people to actually sit down with counsel who can help them determine what can pass and what cannot pass within these agreements. Also, pay keen attention to your indemnity and hold harmless provisions. It's not all about the insurance. And so often, what we see is that folks might say, well insurance, insurance, insurance, maybe they're doing the control app and they're doing the search and find for the word insurance.
But so often within these agreements, the buck doesn't necessarily stop with just insurance. And it doesn't necessarily stop with just the insurance provisions within that agreement. There might be several instances throughout the agreement that tie back to the insurance and indemnity provisions.
So, making sure that those are always going to be up to snuff with what your expectations are from your perspective and from the other governing relationship is really, really important. You have to think about some of your vendor relationships as well. So, when you're looking at crafting some of these agreements, understanding who's the third party? Who's on the other side of the fence? Because you might want to make it easier upon yourself by crafting a risk matrix, for instance, where you're establishing parameters for the types of coverage required by vendor type.
And so let's just say, for instance, if you're looking at a master vendor agreement, and you've got services spanning anywhere from a handyman coming in to change a light bulb to someone who is working on the structural integrity of the facility, the physical structure, you're probably not going to want to require the same types and amounts of insurance.
So again, understanding who the other party is to that agreement is really key to understanding what the insurance hold harmless and indemnity provisions need to look like. That can vary by region, it can vary by the vendor size, or it can even vary by the job type, if that's applicable to your business.
RHONDA DEMENO: When you're looking at an operator that has an active and widely dispersed property portfolio, how can they determine if they have an appropriate limit of property insurance?
MIRANDA RODRIGUEZ: This is another age-old question, Rhonda. So how much insurance is enough insurance? I'll begin this answer with a question. Do you carry any debt? This is an easy way to determine what's necessary because your lender will make it pretty clear. Besides the lender, are there any other obligations to third parties? Whether due to a partnership agreement or maybe a fund structure.
Those may set expectations for property insurance amounts. You'll want to make sure that you're always being legally compliant to any of those third-party contracts. On the other side of the fence, insurers are going to want to ensure that limits of liability are at an adequate limit to insure properties so that, again, their full insurable value in an ideal world.
So insuring properties for less than a total sum insured may trigger co-insurance clauses in the event of a loss. And we touched upon that in one of the prior questions in this set. When we're looking at active, widely dispersed property portfolios, what we want to look at is any aggregation of values and these geographic clusters.
If you're looking at, for instance, a $2 billion portfolio, but it's comprised of several locations where they're maxing out at $50 million, you're probably not going to insure that property portfolio to $2 billion, but you may not want to limit it to 50. Do you, for instance, have properties that are in close relation to one another, or maybe they're even physically attached to one another through a SkyBridge or some other sort of structure?
What you're going to want to look at is whether or not there are any physical perils that could potentially impact those locations and create damages. And if there are, what is that number? What does that look like? That even touches upon going to understand if you have any modeling done. What do those modeling numbers suggest that your total cost of risk might be? What could your physical impact be from an earthquake or there are some inland flood models, for instance.
You should look at the average annual losses in addition to the actual representation of the total insured value for those locations to help you determine what an appropriate amount of property insurance will be.
RHONDA DEMENO: That's very interesting. We had a podcast and we addressed emergency preparedness. And so, I mean, to your point about those geographic clusters and know what your risk are, is there a specific time frame for looking at severe storms and tornadoes, hurricanes, or is this just something to consider based on the geographic location of the property?
MIRANDA RODRIGUEZ: Well, I would suggest that modeling should always be current and up to date. And so most clients will have their modeling done on an annual basis when they're looking at renewing their insurance portfolio. I wouldn't necessarily say that there's a right time of year to do that. And so, every single risk should probably do it at the same time.
But I would suggest that clients would have it done on a regular basis. And whether that's through their broker, whether that's through an independent third party, there are a number of different avenues that organizations can look to have their modeling done on an annual basis, which can help them determine what those appropriate amounts of insurance might be.
And another point to note here, too, Rhonda, and I failed to mention this in the first part of my answer, was to regularly review your portfolio. Because if you have a fairly transactional portfolio with ads and deletes or acquisitions and dispositions, you'll want to determine throughout the policy term whether or not that policy limit is still going to be sufficient for the remainder of the policy term.
RHONDA DEMENO: Yeah. That's very important. You also mentioned that if a senior living organization carries a certain amount of debt, what would the best structure for insurance requirements be? How does that affect insurance requirements?
MIRANDA RODRIGUEZ: Yeah. Well, certainly prohibits you in the sense that you need to make sure you're always complying with your debt agreement, unless you want to have a pretty sticky situation or a pretty tense conversation with your lender. So, understanding that the lender is not the enemy. The lender's position, as well as your own are both going to be critically important aspects of the conversation where you're crafting almost bespoke language to the position of the collateral property.
Both sides need to have an understanding as to what's practical for the deal at hand. We've seen, for instance, some of our clients struggle with the lender requirements because they might seem a little bit opportunistic in some cases where you're looking for full wind limits on a skyrise in the middle of Manhattan.
And so, from a lender’s perspective, they might say, well, hey. This is not something the property's necessarily going to be exposed to. So, you should be able to source it pretty easily. And it is not going to cost very much. And then from the other side of the table, from the negotiating power, you're then saying, well, hey. Listen. I've got a skyrise in the middle of Manhattan. Why would I carry full limits. And it is going to cost me something.
And that is going to impact my total cost of risk. And ultimately, it's going to impact my operating margins. And so, again, it's a conversation. I've often found, it's not a black and white conversation where lenders are saying, well, this is absolutely what you need to have, and we're not budging from this. Picking up the phone and calling them and just trying to work it out is really critical.
But again, going back to the same theme of reviewing the loan agreement in its entirety. Making sure you understand what all of the insurance obligations are, but also understanding what the indemnification obligations are going to be. We always encourage our clients to negotiate the retentions as high as possible, which gives them flexibility throughout the entirety of the actual contract term so that you're not necessarily being stuck with obligations you can no longer meet.
And we often saw this for loans that were executed, let's just say 10 years ago, where the property deductible or an AOP deductible was fairly common at $25,000, let's just say, for a mid-size portfolio. That's not something you're seeing in today's market. We're now seeing retentions $100,000 or $250,000 or even sometimes higher than that. So, you're going to want to make sure that you're negotiating the provisions of that agreement to be as favorable and as flexible as possible to cover you for the entirety of that term.
RHONDA DEMENO: I guess what you're saying, Miranda, is really make sure that the coverage is specific to the organization's risk profile in a nutshell. Is that correct?
MIRANDA RODRIGUEZ: Absolutely.
RHONDA DEMENO: We hear a lot of concerns now about climate change. What are operators seeking for climate considerations? And what do operators need to know before performing due diligence on expanded geographies?
MIRANDA RODRIGUEZ: I would have the line of sight that all locations are not equal. Some territories will naturally pose an escalated concern. Whether that's due to the litigious nature of the state or sometimes even the county or even due to the natural perils based on the location.
We're seeing increased scrutiny around states such as Florida and California and Texas, Georgia, and New York, because these are areas where we're finding, there's an increased amount of litigation coming out of them and third parties who are seeking an absurd almost, it seems, amount of monetary damages.
And then you've got very sympathetic juries who are providing awards in the millions of dollars, and then insurers are on the hook for some of these payments, depending on the way that the policies are structured. So, understanding the climate that you are looking to invest in. And again, whether that's the physical climate. You could have your hailstorms, earthquakes, floods. But then also the third-party concern about litigation is extremely important as well.
RHONDA DEMENO: You turn the news on every day, and you hear about climate. And you hear about severe weather. I mean, right now, I live in Florida, and we're getting ready to have-- it looks like a pretty bad thunderstorm. So, we know that there's big concerns related to climate change. So how can risk be analyzed relative to the geographies?
MIRANDA RODRIGUEZ: Yes. I'll refer back to my response on broker services here. Lean into any available tools which can help you determine just that. Help you determine the short and the long-term perils that your portfolio might be subjected to. Now, it's funny because much of this can now be modeled with diagnostic tools using a location's address, the construction details. And if it's even known, then also the total insurable value as well.
It's actually pretty nifty, Rhonda, with some of these tools can do in helping you determine, again, what the long-term view is on your portfolio and helping you solve for some of those long-term goals. You got to be mindful of those traditionally susceptible natural perils by geography. And so, Rhonda, you mentioned you're in coastal Florida.
So, you might be worried about the water or the proximity to the water. There’re other risks where communities are becoming targets of nefarious attacks, whether based on religious or secular viewpoints. This is becoming constant in the media as well. And we know that these unfortunate things are happening. What are some of the recommendations that WTW can offer in insuring against terrorist attacks or active assailants?
The reality is that crime happens. And it doesn't always need to make sense. For owners and operators of senior living communities, this is one of those third-party risks we need to think about. And we touched upon that, again, a bit earlier. But protecting the residents and not just the property.
There are products available in today's market, Rhonda, which will respond to property damage or liability arising from qualified attacks. And these should be explored to see if it's a worthwhile investment to a firm's insurance solutions. The market is really quite sophisticated, and they offer standalone solutions or bundled with other products.
So, we, in particular, have a pretty robust team of experts in crisis management, and they have global experience managing crises and crafting bespoke insurance solutions for threats and active assailants and terrorism. They're all sort of falling into the same bucket today, Rhonda, where how do you determine whether it's a threat, or does it turn into an act of assailant, or is it actually an act of terrorism?
And so before, we had these policies that were structured in a sense where they were fairly rigorous, and they may not have paid out based upon the way that the attack was actually perpetrated. And so now, we're thinking about it a bit more holistically because unfortunately, we're seeing that these attacks and these motivations-- I mean, sometimes, quite frankly, they're just unknown.
So, in addition to insurance products, I'd also encourage all owners and operators of senior living communities to mandate active assailant training for their employees and participation in webinars to increase their knowledge base. I mean, some of these may even be offered at no cost. So, it's a win-win.
RHONDA DEMENO: Yes. WTW does a lot of work with Argentum and other senior living organizations where we have actually provided the active assailant training. We do have an active shooter policy. We do a lot of work in that area. So, it's unfortunate that we do have to provide that training and that these situations are occurring. That's one thing. No one or no organization is really immune to these threats.
So, the more prepared they are, the better. And having a good partnership with a broker does help to really get resources that are available for them. So, I think we've covered quite a bit of ground today. Is there any final thoughts that you want to discuss with our audience today?
MIRANDA RODRIGUEZ: Today we'll cover a lot of ground, Rhonda. And I'm really excited to be having this conversation because it means that we're heightening awareness around these subjects. And they're all critically important. If there are some takeaways for the audience here, and I'd leave one last thought, it's to continue to be curious about not only what risks your senior living communities face today, but where you'll be in the future.
Know your organization. Be deeply ingrained with your stakeholders. And help your brokers best position you for success. We're here to help. We're here to support. And we're here to drive the very best outcome for our clients.
RHONDA DEMENO: Very well said, Miranda. And thank you very much for being a part of this podcast today. I hope our listeners really found the information helpful and informative. And Miranda, again, thank you so much for your time.
MIRANDA RODRIGUEZ: Thank you, Rhonda, for having me. It's really been a delight.
RHONDA DEMENO: And to learn more about Miranda and about our upcoming events, please visit the WTW Senior Living web page. We have our podcast posted there and as well as additional information on future educational events. This does conclude our podcast for today. And thank you all for joining. Have a good day.
SPEAKER: Thank you for joining us for this WTW podcast, featuring the latest perspectives on the intersection of people, capital, and risk. For more information, visit the Insights Section of wtwco.com. WTW hopes you found the general information provided in this podcast 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, WTW offers insurance products through licensed entities, including Willis Towers Watson Northeast Incorporated in the United States and Willis Canada Incorporated in Canada.
