For owners with extensive real estate portfolios, the rising costs of commercial insurance present a significant challenge. While traditional insurance policies remain essential for many, self-insuring certain risks has become an increasingly viable strategy for reducing expenses and maintaining profitability. Bob Waun, broker-owner of DIRT Realty, shares insights into how property owners can manage risks creatively and effectively in today’s market.
What is Self-Insurance?
Self-insurance involves setting aside funds to cover potential losses instead of purchasing insurance policies. For large portfolio owners, this approach can reduce the reliance on high-premium commercial insurance while offering flexibility in managing claims.
"Self-insurance is about taking control of your risk management strategy," says Waun. "It requires discipline and planning but can be a game-changer for owners who want to minimize premiums and maintain cash flow."
Key Strategies for Self-Insuring Real Estate Risks
Create a Dedicated Reserve Fund:
Establishing a reserve fund is the cornerstone of self-insurance. This fund should be allocated specifically for covering property-related losses, including repairs, liability claims, and natural disasters.
"Think of it as your internal insurance company," Waun explains. "The goal is to have enough liquidity to cover probable risks without overburdening your operating capital."
Diversify Property Types and Locations:
A diversified portfolio reduces exposure to localized risks, such as hurricanes or wildfires. Investing in properties across various regions and asset classes can help mitigate the impact of disasters that might affect specific markets.
Risk Assessment and Mitigation:
Conduct regular risk assessments to identify vulnerabilities within your portfolio. Implement preventive measures, such as upgrading building materials, installing advanced security systems, and maintaining proper drainage systems to minimize potential losses.
Use Captive Insurance Companies:
Larger property owners can establish their own captive insurance company. This involves creating a licensed insurance entity to underwrite the risks of their properties. Captive insurance provides tax advantages and greater control over policy terms.
"Captive insurance is an advanced self-insurance strategy," Waun notes. "It’s ideal for owners with substantial assets who want more customization in their coverage."
Creative Methods for Risk Reduction
Even with self-insurance, property owners should explore innovative ways to minimize risks and expenses:
Partner with Tenants:
Collaborate with tenants on risk reduction measures. For example, sharing the costs of installing security systems or energy-efficient upgrades can benefit both parties.
Negotiate Coverage Terms:
When purchasing traditional insurance, work closely with brokers to negotiate customized coverage that aligns with your actual risks. Waun advises, "Focus on essential coverages and eliminate unnecessary add-ons that inflate premiums."
Bundle Policies:
For risks that require external insurance, bundling multiple policies (such as property and liability insurance) can lead to significant discounts.
Implement Technology Solutions:
Leverage technology to monitor and reduce risks. Smart building systems, for example, can detect water leaks, manage energy usage, and alert property managers to potential issues before they escalate.
Shopping for Insurance Coverage
For risks that cannot be self-insured, shopping strategically for coverage is essential. Here are some tips:
Compare Providers: Obtain quotes from multiple insurance providers to ensure competitive pricing.
Leverage a Broker: Work with an experienced insurance broker who understands the unique needs of large portfolio owners.
Review Claims Histories: Select insurers with strong reputations for processing claims efficiently and fairly.
Opt for High Deductibles: Choosing a higher deductible reduces premium costs, making it easier to allocate funds toward self-insurance reserves.
The Case for Balanced Risk Management
While self-insurance can reduce costs and increase control, it’s not a one-size-fits-all solution. "A balanced approach is key," Waun emphasizes. "Combining traditional insurance with self-insurance and proactive risk management strategies creates a comprehensive plan that protects both your assets and your bottom line."
Partner with DIRT Realty
At DIRT Realty, we specialize in helping property owners navigate the complexities of insurance and risk management. Whether you’re exploring self-insurance options or looking for creative ways to reduce costs, our team is here to guide you.
Contact DIRT Realty today to learn more.
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