United States Insurance Market Report 2016 Real Estate and Hospitality 1 Insurance Market Report 2016

INSIGHTS 2016

UNITED STATES INSURANCE MARKET REPORT 2016 REAL ESTATE AND HOSPITALITY 1 INSURANCE MARKET REPORT 2016

FOREWORD

As part of our commitment to keeping ȫȫSome insurers’ disposition of you informed, Marsh is pleased to present unprofitable segments. you with this excerpt regarding the real ȫȫRecent announcements estate and hospitality industry from our regarding potential and actual US Insurance Market Report 2016. Through reinsurance underwriting. data and analysis, it provides a snapshot of current market conditions and risk These developments may ultimately trends across major lines of coverage and produce positive outcomes, such as a industry/specialty sectors. The report prolonged healthy, competitive market reflects the experience of Marsh insurance with higher levels of innovation, new professionals who work daily with the product offerings, and improved service. global insurance marketplace and provide clients with risk management advice. Companies of all sizes and in all industries around the world choose Marsh for our With 2016 under way, the global insurance breadth and depth of experience, expertise, marketplace appears to be heading in and capabilities. These traits are critical the general direction of soft pricing, in a volatile market, as is our ability as reflecting insurer capacity, competition, a trusted strategic advisor to help you and relatively low catastrophe losses. At navigate complex risk challenges and the same time, the insurance industry assess and recommend markets. will continue to be affected by macro dynamics, including global economic, We thank you for the trust you place political, regulatory, technological, and in Marsh every day. Should you have environmental developments. any questions about this report or the industry and market environment, In addition, the insurance industry please do not hesitate to reach out to is also experiencing some significant your Marsh representative. developments that bear watching throughout 2016, including: Best regards,

ȫȫLarge-scale mergers and acquisitions.

ȫȫExecutive leadership changes.

ȫȫA reduction in and changes Robert Bentley in underwriting appetite President, US and Canada Division at several companies. MARSH 2

EXECUTIVE SUMMARY

Following are some key takeaways from Marsh’s US Insurance Market Report 2016.

RISK ISSUES Mergers and Acquisitions (M&A) ȫȫThe quality of data that insureds submit to underwriters will continue M&A activity in 2015 was exceptionally Cybersecurity to play a significant role in determining high in many industries, including property insurance pricing, particularly Cybersecurity is now a mainstream insurance, health care, and regarding catastrophe risks. business concern across all industries communications, media, and technology. as most companies have either been Activity is expected to be high again in ȫȫCyber issues are playing out in the victim of a cyber-attack, conducted 2016, barring any unforeseen changes. property policies as business business with a company that has been Among the risks heightened by M&A interruption losses stemming from attacked, or expect to be attacked at activity are environmental exposures, cyber-attacks are an increasing some point. There is a realization that including legacy pollution issues; concern for many organizations. cybersecurity needs to be managed across technological risks, such as integration the enterprise. From individual employees of systems, data protection, and Casualty to the board of directors, everyone cybersecurity; and regulatory issues. ȫȫThe US casualty insurance market has a stake in cybersecurity. generally softened in 2015 and, barring unforeseen changes, these conditions are Drones INSURANCE likely to continue into 2016. Insurers are paying increasing attention COVERAGE ISSUES ȫȫAutomobile liability remains among to the use of unmanned aerial systems — Property the most challenging of casualty areas. drones. Coverage for the risks presented by Nearly half of all auto liability clients drone use may be excluded from casualty ȫȫThe US commercial property insurance renewed with rate increases in the fourth policies, and insurers are concerned market continued a two-year softening quarter of 2015, with trucking exposures about personal and advertising injury trend in 2015, one that is expected to facing a particularly difficult market. risks related to drones, although bodily continue into 2016, barring unforeseen injury and property damage coverage may changes in conditions. Rates are ȫȫThe workers’ compensation insurance also apply. In 2016, organizations that generally decreasing for buyers as market continues to improve, with use drones may be expected to answer catastrophe (CAT) losses were again generally favorable conditions for detailed questions from insurers including, low in 2015, insurer competition buyers. Prescription drug prices remain but not limited to, questions about is at a high level, and alternative a cost management concern. drone size and intended purpose. sources of capital are expected to continue to buoy the market. 3 INSURANCE MARKET REPORT 2016

Financial and Professional Employee Benefits Marine

ȫȫEntering 2016, demand for cyber ȫȫEmployers predict that in 2016 their ȫȫThe marine market significantly insurance continues to grow across health benefit cost per employee softened in 2015, largely driven by a all industries and segments. Demand will rise by 4.3%, on average, continued influx of capacity, a soft for protection against data breaches according to Mercer, one of the reinsurance market, and reduced losses. remains strong as concern over business Marsh & McLennan Companies. ȫȫA high number of mergers among interruption risks is growing. Capacity ȫȫEmployers are becoming more creative marine underwriters in 2015 did will continue to increase for most in how they support workforce health. not affect the overall market. classes, barring unforeseen changes, but For example, about one-fourth of organizations should be prepared to fully large employers (24%) encourage Political Risk outline their cyber security controls for employees to track their physical underwriters for the best results. ȫȫDespite significant global political activity with a “wearable” device. turmoil and violence, political ȫȫEmployment practices liability risk insurance rates generally insurance rates generally declined in Energy declined in 2015 and should 2015 and are likely to do so again in 2016, ȫȫOverall energy insurance market do so again in 2016, barring a barring unforeseen events. Wage and capacity increased in 2015, putting significant change in conditions. hour claims filings have increased, as downward pressure on pricing. have related insurance offerings. ȫȫHigh risk areas are exceptions. For Barring unforeseen events, soft market example, it is difficult to obtain ȫȫDirectors and officers (D&O) conditions will likely continue in 2016. coverage for Russia, while portfolios insurance rates are likely to continue ȫȫEnergy companies have generally that included Turkey or Brazil generally to decline in 2016, barring unforeseen increased their focus on cybersecurity, saw increases of about 10% in the changes in conditions. Insurer including on regulations and adherence fourth quarter of 2015. and broker coverage innovations to certain contractual risk allocations are also expected to continue. to better manage each party’s risk and Surety exposure to cyber loss. Aviation ȫȫSurety market outlook for 2016 is positive, assuming continued strength in ȫȫThe airline insurance market is Environmental the construction industry. expected to remain soft in 2016, ȫȫBarring unforeseen changes, the soft barring unforeseen events. In the environmental insurance market Trade Credit fourth quarter of 2015, most buyers conditions seen in 2015, which renewed with decreases of between ȫȫThe market for trade credit insurance is were driven by abundant capacity, 15% and 25%. Competitive markets expected to remain generally favorable are likely to continue in 2016. are also expected for general aviation for buyers into 2016. and aerospace manufacturers. ȫȫThe rapid pace of M&A activity has led to ȫȫLarger rate reductions were possible an increase in environmental insurance in 2015 for portfolio programs Captives purchases to help facilitate transactions. covering multiple debtors (as opposed ȫȫIn early 2015, the Internal Revenue to single-debtor programs). Entertainment Service (IRS) included the formation of small captives on its annual list of ȫȫThe market for entertainment questionable tax avoidance strategies. and events insurance was Note: For specific insurance market and Any company seeking to form a small relatively soft in 2015. risk trends by industry, see the “Industry captive should follow a strict and Specialties” section of this report. ȫȫDrone use and terrorism risk are detailed approach to ensure compliance. expected to be prominent issues in 2016. ȫȫMore captives may access terrorism insurance in 2016 as awareness of the potential benefits increases. MARSH 4

AHEAD IN 2016

Competitive rates likely across most lines.

Habitational segment remains challenging for casualty insurers. Real Estate Growing interest in cyber and Hospitality insurance solutions.

INSURANCE MARKET CONDITIONS

COVERAGE SEGMENT RATE CHANGE Q4 2015 RATE CHANGE Q4 2014

NON-CAT-EXPOSED ORGANIZATION 10% DECREASE TO 5% DECREASE 10% DECREASE TO 5% DECREASE

MODERATELY CAT-EXPOSED ORGANIZATIONS 15% DECREASE TO 5% DECREASE 15% DECREASE TO 5% DECREASE PROPERTY (1% TO 30% OF VALUES IN CAT ZONES)

LARGELY CAT-EXPOSED ORGANIZATIONS (MORE 15% DECREASE TO 5% DECREASE 12% DECREASE TO 5% DECREASE THAN 30% VALUES IN CAT ZONES)

UMBRELLA/EXCESS LIABILITY 5% DECREASE TO 5% INCREASE FLAT TO 5% INCREASE

GENERAL LIABILITY 5% DECREASE TO 5% INCREASE FLAT TO 5% INCREASE CASUALTY WORKERS’ COMPENSATION 5% DECREASE TO 5% INCREASE FLAT TO 5% INCREASE

AUTOMOBILE LIABILITY FLAT TO 5% INCREASE FLAT TO 5% INCREASE

PUBLIC REITs 5% DECREASE TO FLAT 5% DECREASE TO 5% INCREASE MANAGEMENT REAL ESTATE INVESTMENT ADVISORS 5% DECREASE TO FLAT 5% DECREASE TO 5% INCREASE LIABILITY REAL ESTATE OPERATING COMPANIES 5% DECREASE TO FLAT 5% DECREASE TO 5% INCREASE

The above represents the typical rate change at renewal for average/good risk profiles.

Market Commentary generally are offering significant rate programs from standalone placements reductions to retain existing accounts. Also: into “all risk” property placements. PROPERTY

The property insurance market for ȫȫInsurers are seeking to hold all Property insurance market conditions commercial real estate owners and other peril deductible levels for pure multifamily portfolios were operators remained favorable to buyers constant in order to avoid picking up generally favorable for buyers in 2015. in 2015, driven by an oversupply of capital more attritional losses. In the fourth quarter, rate reductions of and market competition. In the fourth 5% to 15% were typical, depending on ȫȫCatastrophe percentage deductibles quarter, renewal rates were generally loss experience. The number of insurers are decreasing for many buyers, most down 5% to 15% for most buyers, including willing to quote at $10,000 or $25,000 notably around named windstorm. hospitality and gaming organizations. deductibles and retentions is limited. However, conditions were less favorable ȫȫFollowing passage of the Terrorism Risk Multifamily owners and operators able to for portfolios with poor loss experience. Insurance Program Reauthorization take higher deductibles and/or retentions Rate reductions are expected again in Act of 2015 (TRIPRA) several real estate (of $100,000 or more) are generally 2016, barring unforeseen losses. Insurers companies switched their terrorism seeing larger rate reductions. 5 INSURANCE MARKET REPORT 2016

CASUALTY beds and fitness equipment. Standalone Insurers are also concerned about a rise in hospitality portfolios also saw greater mold and legionella claims for hospitality The casualty insurance market rate increases than mixed portfolios, and multifamily clients. Insureds that conditions were competitive for most driven in part by growing legionella have suffered significant losses may real estate risks in 2015. In the fourth claims. However, rate decreases were face a more difficult market. quarter rates generally renewed: still possible for hospitality clients with especially strong risk profiles. ȫȫFlat to up 5% for commercial real estate. RISK TRENDS ȫȫFlat to up 10% for FINANCIAL AND PROFESSIONAL Cybersecurity habitational properties. The market for management liability A recent data breach involving a large ȫȫFlat to down 5% for hospitality clients. insurance, including directors and officers multifamily property operator has raised liability, softened in 2015. New capacity concerns about data and privacy exposures Individual buyers’ experience was continues to enter the market and for real estate companies. Multifamily generally influenced by loss histories, competition remains strong. In the fourth property owners and operators and third year-over-year exposure changes — quarter, renewal rates were typically flat to parties that they work with often retain including changes in occupancy type — and down 5%. Results varied, however, based personally identifiable information length of time since previous marketing on individual risk profiles. about residents and employees, efforts. Some jurisdictions — including including Social Security numbers. Interest New York — are also drawing Despite generally favorable conditions, in cyber insurance is especially strong in greater underwriting scrutiny. Diversified insurers are concerned about trends in the hospitality and gaming sector. real estate portfolios saw ample capacity the real estate investment trust (REIT) in the marketplace, and competition sector. For example, consolidation Data Quality tempered significant rate increases. among REITs has led to an increase in In some cases, buyers were able merger objection litigation. In addition, To position themselves to achieve the to secure rate reductions. activist investors are emerging in the best possible outcomes at renewal, REIT sector, often seeking the sale of real estate companies should work The habitational segment remains a assets, changes in dividend policies, board with their insurance advisors to challenge for insurers and general liability seat nominations, or even wholesale review and improve the quality of their insurance rates increased faster than change of company management. property and casualty data: for any other segment. Few insurers are willing to write portfolios with significant ENVIRONMENTAL ȫȫLocation, occupancy, construction type, habitational components, particularly and other property data are critical to The environmental insurance market on a guaranteed cost basis; this trend is catastrophe modeling. remained competitive for most real estate expected to continue in 2016, barring any and hospitality industry buyers in 2015. ȫȫCasualty insurers expect insureds to unforeseen changes. Many insurers are Capacity remains abundant, and insurers provide detailed exposure data, including now requiring maintenance deductibles, are competing aggressively for most occupancy rates and payroll information, which some carriers will use to mitigate accounts. In the fourth quarter, rates were historical loss data, and workers’ potentially larger rate increases. Other generally flat, although rate reductions compensation class codes. concerns for underwriters include: were possible for buyers with strong risk profiles. A competitive and generally stable ȫȫThe legalization of medical and market for most insureds is expected in CONTACT: recreational marijuana, which 2016, barring any unforeseen changes. JEFFREY S. ALPAUGH could create general liability Global Real Estate Practice Leader claims involving tenants. Real estate companies are showing a +1 617 385 0476 ȫȫPhysical violence on properties, for tendency toward redevelopment of [email protected] which owners are increasingly being held existing properties, which can present responsible by courts. significant environmental risk. Insurers’ appetite for redevelopment risk is The student housing sector generally limited; some insurers are seeking rate experienced rate increases in 2015; among increases for portfolios that include other risks, insurers are concerned about properties being redeveloped on potential liability related to tanning brownfield or industrial sites. For further information, please contact your local Marsh office or visit our website at marsh.com

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