Interviews David Sterling, SterlingRisk Insurance

0:00 Speaker 1 Good morning.

0:01 Speaker 2 This is Mike Stolar for the Stolar Real Estate Report. Insurance has become one of the most expensive operations in the real estate and the general business society.

0:11 Speaker 1 So what’s happening on it?

0:12 Speaker 2 Should you be a captive insurance what alternatives can you do with the insurance to run the business today? I’m very fortunate to have my friend David Sterling, who’s the CEO of Sterling Risk, one of the top fifty private insurance brokerage firms around the country.

0:29 Speaker 1 David, thanks for being here.

0:30 Speaker 3 Oh, it’s so great to be here. Mike, great to see you.

0:32 Speaker 2 So tell me in a single word, what’s the problem with insurance today.

0:38 Speaker 3 It’s really the cost side. You know, the claims have spiraled out of control in almost every sector. Liability claims are much higher than they were, almost four times what they were, you know, ten fifteen years ago on the average settlements. And we have with the climate changing, we have all these catastrophic claims, wildfires, hurricanes, and it’s having

1:02 it’s taking a big toll on the industry.

1:04 Speaker 1 So let’s talk about the industry.

1:07 Speaker 2 What effect has it had on the bottom line for real estate owners and developers.

1:12 Speaker 3 It’s devastating, you know, Mike, We when we value real estate, we usually look at trying to obtain, for really good blue chip real estate, a five percent return. So a million dollars of profit is five percent of a twenty million dollar value. But if we take that million dollars of profit and end up with an increased cost of

1:38 insurance by five hundred thousand dollars for a building, we now have taken the value of that building from twenty million down to ten million. And that’s devastating. It’s devastating the owners, and it’s devastating the banks because now they have loans that are underwater.

1:57 Speaker 2 So how do you protect the client and how do you protect the insurance companies during the period of time. Banks won’t lend unless there’s insurance. So what type of things can we do to mitigate the risk?

2:10 Speaker 3 So what we’re seeing in the market today is that the banks are becoming far more flexible with their borrowers in terms of the amount of the size of the deductibles that clients are buying. So clients are driving up their deductibles to try to keep the cost down.

2:27 Speaker 2 So what specifically, what have the deductibles increased.

2:32 Speaker 3 So it’s you know, on the liability side for a large portfolio, it’s not unusual today to see one hundred thousand, two hundred and fifty thousand, or five hundred thousand deductible for liability, and on and on the limits side, where insurance lenders we’re requiring, you know, twenty five fifty or one hundred million in limits on liability, they’re now becoming

2:56 far more negotiable. On those limits. We’ve seen it go as low as five or ten million, when in the past, you know, nothing less than twenty five million was acceptable.

3:06 Speaker 2 Now insurance is determined by claims. Often the claims don’t take place until a couple of years after the event took place. How do you, as the insurance company, whereas as the borrower protect yourself over there?

3:20 Speaker 3 So the key is to reduce the frequency of claims happening. And there’s much that real estate owners can do to do that. For example, in New York City, you’re responsible for the sidewalk outside your building, and we know that if the sidewalk is in disrepair, and disrepair is specifically defined by legal cases. Then if somebody slips in falls,

3:47 you’re responsible. So you can eliminate that risk by maintaining your sidewalk so that you don’t have that risk. And so if we can reduce the number of claims that you have have every year, we can we have a really good shot at keeping your costs down.

4:04 Speaker 1 So we basically you’re talking about risk management.

4:07 Speaker 3 Yes, there’s another big things in New York, specific only to New York, is we have in the labor law, we have a law that makes the owner of a building strictly liable for claims that happen during construction. And under those circumstances, it’s just the question of how much, not whether we’re going to pay, but how much we’re

4:31 going to pay. And so in order to prevent the owner from getting hit with those claims, it’s important they sign hold harmless and indemnity agreements with whatever contractors come into the building. And that’s really where a lot of focus is today. And you can make a big difference.

4:50 If you don’t have that contract and a worker does get injured and you do pay a claim, you’ll find it difficult to get insurance at any price on a line ability side.

5:00 Speaker 2 After that, what about the video surveillance cameras to protect the claims Because this way, you have information that took place a couple of years ago as you’re installing that information.

5:12 Speaker 3 Yeah, it’s incredible. We have many many of our clients are now adopting video surveillance of their premises, and what we’re finding is a significant number of claims go away when presented with the evidence that whatever happened to the claimant, it didn’t happen on your property. And so as long as you maintain those that video surveillance records for you know,

5:38 at least a year, you have to give it time for the claims to come in. We can refute those claims, and video surveillance is fantastic of that.

5:47 Speaker 2 Now, when we were talking the other day, you were talking about the political involvement is having an effect on insurance.

5:52 Speaker 1 What do you mean by that?

5:54 Speaker 3 So the first reaction of many owners when they’re faced with rapidly rising insurance costs is that the insurance companies are out of control and that all we have to do is go to the government and have them regulate the insurance so they don’t raise the prices. And if it were true that the insurance companies were taking advantage,

6:21 that might work, But the reality is the insurance companies are raising the prices because they’re losing money. And so if you go to the state and tell the state, we need you to tell the insurance companies not to raise prices, the natural result will be the insurers will stop offering insurance in that state because they can’t. They

6:42 can’t offer insurance and lose money. And so what the natural result of that is the opposite of what people are trying to accomplish. With fewer insurers offering coverage, then the prices will go up. So if we do involve the state, the only way to really move the needle on the liability claims, which really are out of control

7:04 in New York right now, is a port reform or reforming the labor law in New York’s case, and a captive insurance company makes sense. David’s golden rule is if you’re paying insurance premiums that exceed your claim costs in the last ten or fifteen years. In New York State real estate, if you add up all the liability claims,

7:28 they probably exceed the premiums that the clients have paid over those years. But today the rates have gone up so much many owners are beginning to see that their premiums exceed their claim costs. And when that happens, it makes sense for you to take the risk yourself. Why pay it to somebody else if they’re going to charge

7:49 you a huge service fee to pay your claims.

7:52 Speaker 2 Which type of assets would you take for different coverages? I remember Workers Sensation really was involved with captive insurance companies. Okay, also captive insurance companies on health insurance.

8:08 Speaker 3 So health insurance right now, captives are very popular. We just moved My company has about three hundred employees. We just moved our health insurance to a captive insurer. And to my employees, it’s going to look like United Healthcare has their insurance. But underneath it, we’re financing that coverage through a captive.

8:31 Speaker 1 Insurer with a stop loss coverage.

8:34 Speaker 3 With reinsurance to protect us. And it’s dropped our costs considerably. And what we did with that is we were able to offer some slightly better benefits to our clients and still achieve some savings. So captive insurance companies work in health insurance, on property and casualty insurance, it will work whenever you have a claim profile that is predictable.

9:01 Speaker 2 Okay, The next question with regard to co ops and condominiums, you said, the insurance companies like them. They haven’t raised the premiums that much.

9:09 Speaker 3 Well, you know, I think the co op and condominium owners might take issue with hasn’t gone up much. They’ve gone up far less than the other asset classes are. There are still many insurers in New York that are looking to write, you know, condos and co ops, Greater New York Mutual, Berkeley Luxury, Hartford CNA. All these companies

9:32 are actively pursuing condos and co ops in New York City and so therefore it’s mitigated the increases that the other asset classes have been paying.

9:41 Speaker 2 So what do you look for in twenty twenty five with regard to premiums insurance and the effect on the bottom line.

9:49 Speaker 3 It Unfortunately, the picture isn’t getting a lot better. I would say we’re still looking at increases for twenty five, not as steep as twenty three and twenty four. And if you engineer your program by adding larger deductibles and shaving some limits, you can in many cases end up with a flat renewal. But that also is very dependent

10:16 on your claim profile. Have your claims been getting better or worse. Have you done things to prevent claims from happening so you have fewer claims? These are all the things that go into the mix.

10:27 Speaker 2 So I’d like to thank David Sterling for being here and look forward to you next week. Take care,