InsurancefortheRealEstateIndustry

FirstQuarter2012

REAL ESTATE INDUSTRY MARKET UPDATE

Accounting101teachesthatifyouretakingin$1ofincomeandpayingmorethanthat outinexpenses,thenthereisnoprofit.2011wastheposterchildforthatexample,with morethan$108billionoflossesandcounting(ThaiFloodsarestillopen).Butwait,theres more.TherewerenomeaningfulNorthAmericanhurricanesthatmadelandfall(Irene certainlycausedangstbutlessthan$6billionofinsureddamage),andno California/PacificNorthwestearthquakes.Evenso,basedonstatspostedinDecember, sevenofthelargestpropertymarkets(ACE,FMGlobal,Lexington,MunichRe,Travelers, XLandZurich)allpostedlosseswellinexcessof100%lossratios,withfourinexcessof 115%. Whatisdifferentabout2012versusthepost9/11HardMarketorKatrinayearsisthat thereisstillcapacity.For2012,underwritersarefocusedonROEunderwritingand identifyingthoseassetclassesthatarecausingtheattritionallossesandtheyarepressing forincreasestooffsetlosses. Asaresult,reinsurancerenewalsforJanuary2012wereupanaverageof815%withTier 1&2windgarneringthehigherincreases.TheRMS11.0modelistheculpritwithmost carriersutilizingthisandAIRtocalculateaggregateexposuresinwindexposedregions. Thesefactscoupledwiththeanemicinvestmentincomein2011pointstoamoderateand gradualincreaseinpropertypremiumforallassetclassesexceptmultifamily,whichhas contributedinordinatelyintermsofweatherandfirerelatedlosses.Asrespects catastropheexposures,CaliforniaEarthquakeisseeinglessofanincreasethanTier1&2 windbasedonthefactthatRMS11.0focusesonwindwhileRMS9.0revisitedearthquake exposurestwoyearsago.Theprojectedincreasesassumefavorablelosshistorieswith additionalincreasesontapforportfolioswith5yearcombinedlossratiosexceeding 100%.24/7exposures(hospitalityandmultifamily)arealsobeingunderwrittenmore rigorouslyduetolossratios.Basedonmarketsurveysanddata,weprojectthefollowing for1Q12and2Q12:
Formoreinfopleasecall: BrandonCole (303)8892610 Brandon_c_cole@ajg.com

InsurancefortheRealEstateIndustry

FirstQuarter2012

AssetClass Multifamily CommercialOffice IndustrialFlex Retail Hospitality

NonCATRate +58% Flat/+5% Flat/+5% Flat/+5% +37%

CATExposedrate +1015% +7.512% +7.512% +7.510% +512%

Aspreviouslymentioned,inthemultifamilyandindustrialassetclasses,nonCATweather losses, such as hail, tornado and rain, have increased dramatically over the past three years.Asaresult,theseassetclasseswillbereceivingmorefocusfromunderwriterswith a distinct increase in deductibles and higher rates for large multifamily portfolios. GSE financing is now recognizing that the industry is moving toward $100,000 All Risk deductibles for large multifamily portfolios, and as a result, Fannie and Freddie are generally accepting those deductibles. Deductible buy backs and indemnity agreements arebecomingmoretypicalbutmoreexpensiveasthelossratioscontinuetoincrease.In theindustrialsector,agreateremphasisonconstructioninformationrelativetoageand conditionofroofsisnowthenorm,withcarriersmostconcernedaboutvacancyandthe urbanminingclaims(theftofcopper,equipment,etc)whichisnowrampant. CasualtyUpdate Thesluggisheconomycontinuestohaveamaterialimpactonthefrequencyandseverity ofgeneralliabilityclaims.WhatusedtobeaPreHolidayspikeinOctoberhasnowtaken root in every month, with more people filing medical pay claims and alleging unsafe conditions whenever possible. As a result, commercial general liability carriers have reportedanincreaseinbodilyinjuryclaimsaswellasanincreaseinthemedicalexpenses and litigation costs. As a result, we are seeing an uptick in primary premiums though competitively priced excess capacity remains abundant. In fact, there are new real estate focused umbrella programs that reward operators for low loss history, green buildings,andotherlosscontrolledemphasis.Basedoncarriersurveys,ourdatashows expected1Q12and2Q12pricingasfollows:

Formoreinfopleasecall: BrandonCole (303)8892610 Brandon_c_cole@ajg.com

InsurancefortheRealEstateIndustry

FirstQuarter2012

AssetClass Multifamily CommercialOffice IndustrialFlex Retail Hospitality

Rate +510% +310% Flat +59% +35%

ProfessionalLiability Errors & Omissions and Employment Practices claims are increasing particularly in the arenaofclaimsbyinvestors,buyersofcondos,andjiltedemployeeswhofeelthatthey were intentionally misinformed of the risks associated with potential investments or career opportunities. Recent accusations by major municipalities against the investment strategiesonwellknownadvisorsarerackinguplegalexpensesregardlessofwhetheror notthereisactualmalfeasance.Asaresult,ratesarefirmingwithaverageE&Oincreases movingtowards5%.D&Ocapacityandratesremainconsistentwith2011withratesinthe +/5%range.Anotherexposureisinvestorsflockingtodistressedassets,andasaresult, potential borrowers or tenants potentially being displaced. To that end, organizations mustbevigilantaboutfollowingallrulesrelativetoforeclosingonassetsorterminating agreements. In all cases, the managing partner should review their exposures and representations to investors while service providers should clearly identify all the professionalservicesandcorrespondingexposurestheyface. AlternativeRiskFinance Captives are back in the forefront, with new lines of coverage being contemplated. In addition to Liability and Property deductible buy backs and tenant default and legal expensecoverage,captivesarebacktoassumingpercentagesharesofpurefireandCAT coverage. Additionally, Micro Captives for privately held real estate companies have meaningfulestateplanningadvantages;henceanewbreedofcaptiveownerisemerging inadditiontothetraditionalinstitutionalownership. Oneflavorofthe monthintheAlternativeRiskFinanceARF arenaisthe Parametric RiskTriggerwhicheffectivelypaysintheeventofapresetearthquakemagnitudeorwind categoryloss.Asanexample,ifaninsuredbuysatriggerthatishypotheticallysetat6.5 andtheyhavelossesresultingfroma6.0quake,thenthereisnocoverage.Conversely,if

Formoreinfopleasecall: BrandonCole (303)8892610 Brandon_c_cole@ajg.com

InsurancefortheRealEstateIndustry

FirstQuarter2012

theypurchasethetriggerat6.5andthereisnodamage,theystillrecoverthelimitthat was purchased. Whereas this may work for some property risks, lenders categorically reject any limitation to recovering proceeds based on such triggers. Companies with captivesmayusethisasareinsurancetechnique,butshouldrecognizethatlendershave theultimaterighttoacceptorrejectpropertycoverage.

Planning for 2012 IndependentPMLanalysistodeterminenecessarycatastrophelimits.Thisiscriticalin lendernegotiationsandcanlimitunnecessaryexpenditures. Verifyvaluesbasedonrecognized3rdpartymetrics.Providesecondarycharacteristics toimprovemodelingresults. Identifyassetsthatarevacantorhavelessthan30%occupancy.Manyinsurersrestrict or void coverage if the assets arent reported as vacant and higher deductibles typicallyapplytotheperilsoftheft,vandalismandmaliciousmischief.UrbanMining lossesareskyrocketing. Focus on loss control and meaningful Cap Ex that reduce claims (roofs, water intrusion/moldmitigation,lightingandsecurity). Contract review and manager training with an eye towards fraud identification and recordkeeping.Transferliabilitywheneverpossiblebutbecertainthatthatpartywill bearoundpostloss. Train property managers to identify hazards and unsafe environments that can and willgiverisetoliabilityclaims. Engage reputable service providers with experience in property management, legal and accounting expertise, and make certain that they have appropriate professional liabilitylimits.

Formoreinfopleasecall: BrandonCole (303)8892610 Brandon_c_cole@ajg.com