Insurance Rates Level Off
For Commercial Property

It's beginning to look a lot like Christmas in July for commercial-property owners looking to buy insurance.

After skyrocketing in 2002, the rate of increases in the cost of property insurance for commercial real-estate owners has slowed. The average rate increase for policies renewed in January ranged from 0% to 10%, compared with 80% to 90% in January 2002, insurance brokers estimate. And if January serves as any indication, owners renewing for the year beginning July 1 should expect to see, on average, smaller or no increases in their rates. Some may even see reduced rates.

"It's a lot easier to find a good deal in the insurance business than last year," says J. Robert Hunter, director of insurance at the Consumer Federation of America in Washington, D.C. "The business is becoming competitive again."

Robert P. Hartwig, chief economist of the Insurance Information Institute, a New York-based trade group, says property-insurance rate increases have slowed partly because there were no major catastrophes in 2002, meaning insurers didn't experience as many losses, and partly because rates rose so much after Sept. 11, 2001. The passage of a terrorism insurance act last year also "helped take some pressure off the property [insurance] market," he says. The Terrorism Risk Insurance Act, enacted last November, provides a backstop in the event of foreign acts of terrorism on U.S. property that cause at least $5 million in damage. The federal government will pay for 90% of any losses above the insurance company's deductible.

The bulk of renewals for Chicago-based insurance broker Aon Corp.'s national real-estate practice take place for annual periods beginning June 1 and July 1. More than 60% of Aon's real-estate clients renew their policies for those periods, says Kevin J. Madden, managing director of the practice.

Most property owners by now should have received or are receiving their quotes and presentations from insurers. While owners generally know the increases won't be that bad this year, they should still make sure that reality is being properly reflected in their quotes and that they are getting the best rates. One way to do this is by checking to see what their fellow property owners are being charged.

"It's important that building owners look at benchmarking," says Eric Schake, a managing director with insurance broker Marsh, a unit of Marsh & McLennan Cos., New York.

This literally means using an index or survey of property-insurance rates as a reference point for measuring up against others. For larger owners, comparing against such benchmarks can be fairly easy. That's because many of the surveys compile their rate data on larger properties -- there's a clear parallel. Owners of small and midsize buildings, however, may have to do some math to determine what the surveys suggest about their properties. The smaller owners can look at the big-property trends as direction indicators in any case.

Mr. Schake points out that owners can obtain benchmarking studies from the National Association of Real Estate Investment Trusts, a Washington-based trade group for REITs, or the National Multi Housing Council, a Washington trade group for apartment owners and managers. Owners can also obtain those and other benchmarking surveys and indexes from their insurance brokers, Mr. Schake says.

The survey by the National Association of Real Estate Investment Trusts includes responses from owners of all kinds of property types -- office, retail, warehouse, and health care, among others. For apartments specifically, there's the National Multi Housing Council's cost-of-risk survey. But access to those results is limited to the participants.

If an owner determines, after factoring in his or her own history of losses and incidents, that their increase seems out of line compared with others, they can negotiate with an insurer to get a better rate -- or shop elsewhere for a better rate. But the owner should be sure to have supporting evidence in the form of detailed records on the building and its history, as well as the benchmarking studies.

Write to Ray A. Smith at ray.smith@wsj.com³

Updated June 18, 2003