When It Comes to Business, Are You the Tortoise or the Hair?

Overview

Anyone who runs a real estate company is by nature a risk taker. After all, only a risk taker would accept the countless variables of shifting market conditions and regulatory modifications while meeting the needs of residents, employees and investors. But at Bonaventure, we’re not risk takers in the usual sense. In fact, we’re a pretty conservative company with a slow-and-steady approach. You know, we’re the tortoise, not the hare.

Insurance premiums, which are all about risk, can play havoc with your NOI. The insurance market has shifted incredibly in the last couple of years, especially because of intense losses in California due to wildfires and to Hurricane Ian in Florida. Even though we at Bonaventure don’t have exposure to those markets, we’re impacted. Effectively, insurance risk gets spread throughout the industry because of reinsurance contracts, which are essentially insurance contracts for insurance companies.

Basically, this means that everyone is expected to pay more for their insurance than they did last year. So, at Bonaventure, we’re developing the tools to manage our own risk of exposure to increased insurance rates.

We’re self-insuring our risk in some cases. Look at it this way: when you buy a car insurance policy, you have very few levers to pull to change your premium. You can adjust your deductible or increase your liability insurance. But when it comes to insuring commercial real estate, there are about 300 variables. On a commercial policy, you can slice and dice different portions of the risk. For example, if our general deductible is $10,000, it could be $50,000 for wind damage. If the wind is part of a named storm, that deductible could be $200,000.

But we can manage our own risk. We can make our deductible $300,000 for every wind event and self-insure to cover any damage up to that amount. That can save us thousands of dollars a year in premiums across our portfolio.

Of course, like every other developer, we have minimum insurance requirements from our investors and our lenders. To manage that, we’ve created a captive insurance company. We’re working towards being nimble. That way, if an insurance renewal comes in and the price of a particular risk exceeds by a healthy margin what we think we could self-insure, we can retain our own risk and do it in a way that meets our contractual obligations. We’re still working on this, since we can’t self-insure for everything, but we anticipate that this process will result in a strong competitive advantage for us.

That may sound risky, but it’s actually just a smarter way to take control of our exposure to rising insurance costs, and, in the process, pass our savings onto our investors.