They both start with the letter "H" and provide a place to sleep. However, those are two of the few things that habitational and hospitality have in common from a commercial property insurance perspective in 2022. While habitational real estate faces another tough market in 2022, many hospitality accounts can look forward to premium rate increases significantly lower than what they experienced in 2021.
Habitational Real Estate Market Is Especially Challenging for Older Properties
The commercial residential market has another tough year ahead of it, especially for buildings with wood-frame construction. The majority of insureds should anticipate premium rate increases in the 15-20% range, with hurricane-exposed properties seeing rate increases that are even higher. Many insurance companies are raising wind and hail percentage deductibles on Midwestern properties.
In many ways habitational could be a poster child for the commercial property market's undervaluation challenge. Older buildings — which would need to be rebuilt to higher code standards than those in place when the original structure was constructed — often create claims that exceed the policy's replacement cost coverage.
David Novak of Risk Placement Services (RPS) notes that the losses underwriters model for a property are inevitably lower than the actual losses sustained. The challenge for underwriters is to differentiate the better risks in a poorly operating class. "Agents who work with habitational property owners need to make sure that they're highlighting in their submissions anything the insured is doing that makes them an above-average risk," advised Novak, an executive vice president at RPS. "The quality of the information is really key."
Hospitality Real Estate Could See Better Rates
Insurance rates in the hospitality sector are determined to a larger extent by the individual property than they are in other segments.
Amenity-filled resorts typically have more complex needs, which require a multi-layered insurance program, compared to an extended stay property with less frequent turnover and fewer amenities. Resorts are also more likely to be located in hurricane- and flood-prone locations along the Atlantic and Gulf Coasts.
Many hotel and resort owners used the pandemic downtime to refresh and upgrade their properties. Those owners will want to provide their brokers with detailed information about these improvements because they could have an impact on the property's valuation. Certain upgrades, such as a newer and more extensive sprinkler system, could also positively influence rate.
Well-performing hospitality accounts may experience rate decrease. For those whose premiums will rise, the predicted range of 0-10% rate compares favorably with 2021's average 5-12.5% increase in premium for hospitality accounts that had performed well.
The trend to more favorable rates doesn't mean that this sector isn't without its own challenges. Since Hurricanes Irma and Harvey in 2018, many insurance companies trimmed capacity or even pulled out of the hospitality market and have yet to return.
Learn more about the Habitational and Hospitality Market in the 2022 U.S. Property Market Outlook.