Insurers give you more to think about

Posted: May 20th, 2009 | Author: mfguide | Filed under: Costs, Operations | No Comments »

floodmap.jpgHurricane season in the US starts June 1, 2009 the forecast predicts slightly above average activity. Multi-family owners and operators from New England, Mid-South, Gulf Coast, and Southeast must be aware of their risks. I know this from professional experience after Ike damaged my Arkansas and Tennessee portfolios.

Keying off the calendar, Multifamily Executive highlighted a recent report from the Resilient Coast Initiative of the H. John Heinz Center. The report, “Resilient Coasts: A Blueprint for Action” makes these recommendations:

  • Designing adaptable infrastructure and building code standards to meet future risk;
  • Integrating climate change impacts into due diligence for investment and lending;
  • Requiring risk-based land use planning;
  • Maintaining a viable private property and casualty insurance market;
  • Developing flexible adaptation plans;
  • Strengthening ecosystems as part of a risk mitigation strategy;
  • Enabling planning for climate impacts by providing the necessary science and decision-making tools.

    Despite the title, it’s not just a problem for coastal states. Flooding throughout 2008 and the early part of 2009 should encourage you to keep that flood map handy. Delving further into the report, it cautions that existing maps created for land use, infrastructure, and mortgage due diligence ” do not accurately reflect current risks, let alone future risks, posing significant challenges for adaptation.” In addition to advocating more and better research to improve the accuracy of these maps, the report suggests that in exceptionally vulnerable areas, property owners be encouraged to relinquish (through exchange, purchase, or transfer) development rights.

    Importantly for multifamily owners, the report strongly encourages insurers better price the risk “[to] give appropriate consideration and weight to the demonstrable reduction in risk provided by improved building standards and other risk mitigation efforts.”

    Nor do asset managers or lenders escape an item on the ‘to-do’ list:

    “Wise investing will involve asset managers understanding the impacts of climate change on their investments and managing that risk, especially in real estate, infrastructure and other financial instruments. Responsible banks will need to understand the levels of exposure within their investment and lending portfolios by incorporating climate risks into their due diligence.”

    The short report is worth reading and contemplating. It was inspired in part by a 416-page Wharton study “Managing Large Scale Risks” (PDF Link) which highlighted two big items that affected my portfolio costs:

    1. Insurers’ cumulative total profits in Florida from 1992‐2006 have been negative during the entire period. [Which explains some of these events.]
    2. Flood coverage [i.e. the value of insured property], provided by the federal government through the National Flood Insurance Program (NFIP), has significantly increased over the past fifteen years. [GAO Proposals for fixing this]

    So get better maps, review your structure’s resiliency, and start buttering up your insurance broker.

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