Should You Be FORTIFIED Against Retained Risk?
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At the NAHB IBS meetings in Las Vegas earlier this month, insurance, insurance premiums, and retained risk were major topics of discussion among multifamily developers and owners.
And it is no wonder. Multifamily property rates have gone up every quarter for the past twenty-five quarters. Seventy-eight percent of apartment owners saw a greater than 10% increase in premiums from 2022 to 2023. One-third saw increases of 25% or more. Coverage that used to require three or four layers now routinely takes thirty or more. While pricing is said to be stabilizing, higher rates, driven by severe convective storms (think hurricanes and tornadoes) and $1 billion losses, are here to stay.
Developers are responding by breaking up insured portfolios, placing coverage wherever they can find capacity, and retaining more risk in the form of much higher deductibles.
As presented by Alex Cary at IIBHS and Julie Shiyou-Woodard at Smart Home America at the NAHB IBS meetings, the Insurance Institute for Business & Home Safety (IBHS), a not-for-profit created and funded by the insurance industry, has developed the FORTIFIED program, including FORTIFIED Multifamily™. It is a voluntary construction and re-roofing approach designed to strengthen multifamily buildings against severe weather. The FORTIFIED Multifamily certification program helps building owners improve their multifamily structures’ ability to resist wind, water, and hail damage from tropical cyclones or convective storms.
There are three levels of certification – Fortified Roof, Fortified Silver, and Fortified Gold.
The Roof certification promises better roof performance against high wind and water penetration with things like stronger nailing patterns and sealed seams. Silver adds strengthened wall systems and openings. Gold includes a continuous load path from the roof to the ground. Studies suggest that FORTIFIED construction adds between 0.3% and 1.4% to the cost of construction. In coastal areas with the most stringent building codes, there may be little impact on cost beyond the small cost of certification.
So why pursue a FORTIFIED Multifamily certification?
FORTIFIED is too new to have had a real impact on insurance premiums. However, there is some suggestion that in times of limited coverage capacity, as we have experienced recently, FORTIFIED projects may find coverage where others don’t. There may also be some advantages in the market as renters learn the meaning of FORTIFIED construction.
It seems that the real reason to consider FORTIFIED is retained risk and higher deductibles, particularly for wind and named storms.
As owners take on more of the risk once covered by insurance, building better apartments that can withstand storm damage only makes sense. If a Fortified building sustains less damage and is back in service sooner than might otherwise be the case, owners will see lower out-of-pocket costs and less lost revenue.
The FORTIFIED approach to building has proven effective in Louisiana and other coastal areas, with FORTIFIED buildings performing exceptionally well in hurricane conditions.
Time will tell if developers adopt FORTIFIED or other building standards, as they and the insurance industry are forced to confront the reality of more severe convective storms and $1 billion in losses.
At AGM, we do our best to keep developers informed of proactive measures you can take to get the most from every deal. Please schedule a call if you have questions or want to discuss your next project.
About AGM Financial
Founded in 1990, AGM is a leading FHA lender and GNMA seller/servicer. From new construction and substantial rehab to acquisition or refinance — for both market-rate and affordable projects — AGM gets the deal done. Family-owned with over 30 years of experience, the firm has closed over $10 billion in FHA-insured multifamily project loans nationwide. We underwrite, fund, and service all of our loans. Developers and owners can count on AGM to be accessible, transparent, consistent, and ready to lend. From new construction to substantial rehabilitation to acquisition and refinance — for both market-rate and affordable projects — we can get the deal done. To learn more about AGM, call 800.729.4266 or visit agmfinancial.com.
