Interviews David Sterling, CEO, SterlingRisk

0:00 Speaker 1 Good morning. This is Michael Stoller for the Stolar Real Estate Report on the CATS Roundtable this morning. I’m very fortunate to have one of the leaders around the nation in the insurance brokerage business and the consulting business. I have David Sterling, the CEO of Sterling Risk, who have offices in New York, Connecticut, New Jersey, Indiana, Florida, and

0:18 Los Angeles, plus other little locations. They will serve you anywhere around. Insurance is really overtaking the profitability for landlords today. The premiums are outrageous. You have to go out of the way a year in advance to just follow up.

0:34 So I want David to provide his insight on the insurance business.

0:39 Speaker 2 Well, thank you for having Michael.

0:41 Speaker 1 Okay, so where do you see the world? Okay, you know expenses are going up, taxes are going up, operating expenses are going up, and one of the biggest expense that’s going up is insurance.

0:53 Speaker 2 Yes. So, Michael, you may know that I’m married to a real estate developer. So what I’m about to tell you impacts personally as well as within the insurance industry. This is a perfect storm for real estate owners. They have in commercial space like office they have declining rents and their insurance premiums are going up dramatically. And this

1:18 is a function of the capital markets around the insurance industry.

1:24 Speaker 1 Specifically, what do you mean by the capital walk is about the insurance industry.

1:28 Speaker 2 So all products and services are priced on a supply and demand model. The supply of insurance is the amount of capital in the insurance industry, and you can measure that by taking a look at the assets less liabilities for each insurance company. That net worth is the capital they have in their businesses. That’s the supply. The supply

1:52 is shrinking because over the last ten years there have been very unexpected increases in claim costs from the climate change of wildfires and catastrophic storms to the increase in liability claims for what the insurance industry has termed social inflation.

2:12 Social inflation meaning that the people generally who are on these juries are feeling more empowered and very similar to the social turmoil we have in our society. And the cost of claims seems to be doubling almost every five years in terms of slip and fall claims and liability claims that impact real estate.

2:32 Speaker 1 Now you were talking to me the other day about the claims because the age buildings that we have, let’s go over.

2:38 Speaker 2 That that’s on the property side, on the property side, aside from the wildfires and the horrific storms, in cities like New York, we have an aging infrastructure, and so the insurance companies have been clobbered with claims of water damage.

2:57 And these water damage claims come from pipes that break in a building, not necessarily from a freeze up, but just because they’re old and they’re crumbling, and so the insurance companies have put limitations on the amount of water damage insurance you can get in New York City office buildings if they’re older. And just as importantly, in order

3:15 to pay for these claims, they’ve been raising their rates.

3:18 Speaker 1 Now, how much have rates gone up over the last couple of.

3:21 Speaker 2 Years, So in the last couple of years in the real estate space, the rates have more than doubled on average, and it’s been a continuous increase over that time. And another factor impacting cities like New York is the explosion of the use of e bikes and e scooters and these lithium ion batteries, and many times the people own

3:44 these things unknowingly are buying the less expensive batteries that are more prone to fires when they’re charging, and there are charge stations in many buildings around the city. And this increase is this increase is really having an impact.

4:01 Speaker 1 When we were talking the other day, you also mentioned to me that you know, when you get your insurance premium, you should pay it and in addition, you should start going it for the next year. What do you mean by that?

4:15 Speaker 2 So, yeah, we used to say that you should start looking at the factors that impact your insurance renerals sometime around three months before you renew. I’m telling my clients who have problematic schedules that mean schedules of locations maybe in exposed to hurricane or to earthquake or to wildfires, or in cities like New York, that we want to

4:39 start looking at it twelve months as soon as you’re renew let’s take a look at what we can do to improve the risk factors to get you a better deal when you’re renewed next time. Because sometimes those steps can take a long time. So for example, we want to review or you want to review all the contracts

4:59 you have with content tractors that step foot in your locations to make sure that they’re adequately insured and that they are holding you harmless and in them deifying you. Or we may want to take a look at the condition of the sidewalks around your properties to make sure that they’re not prone to people tripping and falling, and

5:20 so sometimes taking care of these things takes quite some time to get the permits and get the work done.

5:26 Speaker 1 Now, what is owning your claim history?

5:29 Speaker 2 So I like to say that our clients need to own their claim history. Owning the claim history means that you’re entitled to that information. This is a large part of what goes into pricing your insurance. So if you have control over those claims, meaning that you have a list of them, you can dispute claims that you think

5:50 shouldn’t belong to you or are reserved by the insurance company too high and so getting it right before you’re renewed doesn’tee any good. Getting it throughout the year and challenging some of the claims so that you don’t have to pay too much for insurance, I think is a very important step. You need to own that claim history

6:10 and control the narrative.

6:11 Speaker 1 Okay, risk management, how do you take care of risk management.

6:14 Speaker 2 So risk management takes various forms. One is you have to take a look at all the exposures in real estate that impact you, such as we were talking about, how is the housekeeping of your building and the surroundings, how is your contractual risk transfer for people who are working within on your building. Taking a look at do

6:39 you have adequate fire protection in your buildings, and so all of these factors get pulled together into one grouping called risk management. And it’s important that if you don’t have a full time risk manager because you don’t have a large enough business, that you partner with an insurance professional who can provide that insight and the services for you.

7:00 Speaker 1 I mean the banks are requiring more and more insurance also.

7:05 Speaker 2 Yeah, So the biggest tension that we have is that we have a high inflation hitting building costs and has been for the last few years since COVID, and both the banks and the insurance companies are requiring building owners to increase the amount of insurance that they buy. And some of it makes no sense whatsoever. And so yes,

7:27 you have to have you have to and by the way our experiences, if you give your bank the adequate amount of backup they will allow you to ensure the value that’s more reasonable, but you have to be prepared to do that.

7:42 Speaker 1 With regard to the markets, which are the markets that’s the most difficult to get insurance today?

7:48 Speaker 2 Wow? Okay, so right now, if you wanted to get wind insurance, Florida and the Gulf Coasts into Texas area, all those areas is that are impacted by the Gulf and by the Atlantic down south are really really difficult to get insurance, whether it’s home insurance or office insurance or shopping center insurance. Those rates have gone up very,

8:13 very dramatically. I would also point out if you have some sort of exposure in a wildfire area in California, it may even be worse than Florida for wind and for homes. There are people who are finding that there aren’t any insurers who are even willing to ensure their homes in these wildfire areas and for resorts that have

8:36 very similar issues in these areas. So wherever you and in the middle of the country, you find that where there are hailstorms or tornadoes, we also have a great deal of difficulty getting reasonably priced insurance.

8:48 Speaker 1 Okay, with what’s going on with these shootings and these malls. Is it having an effect on the premiums around the country.

8:56 Speaker 2 Having two impacts. One impact is many of the insurers are excluding assault in battery, so that if there’s a shooting in or about your real estate and you get sued for not having the proper security, then you wouldn’t have insurance with such an exclusion. There are insurers who have stepped forward to sell assault in battery insurance as

9:19 a standalone, but it’s expensive and if you do get it included, you may pay more with an insurer who is willing to write it. Believe it or not. The insurance companies have something called a crime score, which is provided to them by national you know, national outfits that measure this stuff. And if your address has a high

9:43 scrime crime score and they break it down by murder, assault, rape, robbery, on and on, depending upon the type of insurance you’re getting. If you have a high score for that, then you’re going to have a great deal of difficulty getting insurance.

9:58 Speaker 1 What do you see taking place by the into the year any better or worse? I mean, it sounds that it’s a rather difficult time in the insurance business for a consumer or company or in general.

10:09 Speaker 2 Yeah, it’s it’s a it’s a terrible time for insurance. Uh and uh I don’t see it getting much better anytime soon. For the real estate industry, David.

10:20 Speaker 1 I would like to thank David Sterling of Sterling Risk, the CEO, for being here today.

10:25 Speaker 2 Thank you, Mike. It’s my pleasure.