Soaring Insurance Costs: When Will Investors Find Relief?

Welcome to Peaks and Portfolios, presented by PET companies. You're go-to podcasts for all things commercial real estate investment. I'm Rachel O. And together we're diving into current events, trends, issues, and opportunities impacting the CRE investment space. From dissecting the latest market move to sharing insights on today's commercial real estate landscape, it's time to maximize portfolios here in the peaks of the mountain west and beyond. Okay, welcome everybody. Thank you for joining us today. We're so excited about this week's episode, primarily, because I actually have my guest in the room with me, which I never do. So welcome, Ted. Thank you so much for joining us. I appreciate it. All the way from the big state of Colorado. We've invited Ted today because one of the things that we're finding in real estate as we do our underwriting is the cost of insurance and how it's impacting our investments. Soaring insurance rates are killing deals, if you will, in real estate. And if you look at the past decade, the average insurance costs have actually doubled over the past year. So that spike has slowed down sales. It's impacting the way we underwrite. And I imagine many of our listeners are also experiencing this. And at PEG, it's impacting the way we look at different states. For example, we're pretty heavy in Texas and Florida. So I know you're going to talk about that a little bit more. But that has impacted the way we look at those states. Sure. And so we wanted to dive into the insurance base today. And you were so gracious enough to join us. We're super excited to have Ted Brown. So Ted Brown is the president and partner at Lockton Companies. And where is Lockton based? So Lockton's based in Kansas City. Okay. Yeah. And I'm president of the West Series of Lockton. And so pretty much everything west of Denver. Oh, okay. Awesome. Yeah. No, I saw that in your bio. And it looks like during your tenure and your role, the company's significantly grown. And they attribute, at least in the bio, much of that to you. So congratulations on your success. And Lockton is super lucky to have you. Thank you. I'm lucky to be here. It's been a fabulous organization. They've supported me every step of the way. Yeah. I would admit, when I think of insurance, it's kind of like Ho-Ham-Boring, you know, state farm little sign. But you are kind of a cowboy, kind of a southern kid. Tell me a little bit about how you got into insurance in the first place and how it's morphed into what you do today. Yeah. No, a good question. Yeah. I don't think there's not a whole lot of people that, when they're growing up, say, I really want to go into insurance. Yeah. But, yeah, I was working in the outdoor industry before Lockton and ran a small part of W.O. Gore, Gore-Tex fabrics. And I wanted to get back to Colorado and my wife and I were excited to do that. I was actually looking to go into commercial real estate and had asked for some introductions from some folks I knew Lockton. And they said, well, once you come, talk to us. And I said, I don't want to sell insurance. That's horrible. And I learned a lot about the company in particular, but also the industry and how complicated it is. And it's a global financial marketplace, just like, you know, other financial marketplaces. And pretty blown away at how dynamic it is. And so it's been almost 18 years since I've been there. Wow. It was. You grew up at Lockton. Pretty much. Yeah. Yeah. That's amazing. You know, again, a super impressive background. I think something that might be helpful to our listeners too is that we just recently partnered up with Lockton. So you folks are our insurance partner. And from what I hear, that should be super creative to the company as well as our investments. So we're super excited. If I do my job, it will be. Yeah, yeah. So as we jump into this today, the two main areas insurance that we're going to be covering is liability versus property. Do I have that right, Ted? Yeah, the difference is property is going to be property. It's, you know, anything that can burn down or experience, you know, physical damage associated with, you know, with natural catastrophe, fire, water leakage, etc. Liability is going to be either construction defect or it's, you know, on the development side or it's going to be slip strips and falls at property level. So residents that are suing property owners, those types of losses. So let's start with property. It sounds like there's some good news today. There is some good news. Things are headed in the right direction. No, I really love that. So let's, let's kind of segue then into that today. Like again, my experience with insurance is quite limited just as a, you know, your typical auto home life, what not. But then of course, in my role here at PEG, I am starting to see the impacts and insurance. I mean, insurance just seems to be a little tiny line item. And now that is significantly grown. And I'm now starting to hear the analyst kind of, you know, pause and talk about, well, now it's doubled here or tripled here. And that's impacting this and because you know, be like, well, why are the distributions lower than they used to be? Well, it's because the insurance data. And again, I'm talking primarily like Texas and Florida. But I'd love for you to maybe just give us a primer on the overall insurance market today. Like how does it work and how does it specifically impact real estate? Yeah. I appreciate that. And I think I'll talk a little bit about where we are in the market cycle. Yeah. And it is a cycle. Um, so, you know, for listeners. So it's not forever. This will change. Not forever. And it's already, yeah, there's already good news in the market right now. But it is, it is cyclical, driven by equity, just like the real estate industry is. And so, you know, if you look at, you know, kind of the anatomy of the market cycle, what happens is profitability is impacted. And that results in a constriction of capacity and lost per industries, like a lot of real estate asset classes. You see a restriction in capacity. What do you mean by restriction in capacity? It starts really with the reinsurance marketplace. So if you look at kind of the bottom of the market, it was about 2016, 2017. That we hadn't had a natural disaster for about five years prior to that. And rates really cascaded down. You know, underwriters were pricing for, you know, catastrophes that weren't really happening. And so, you know, they were really just pricing for a fire risk for the most part. Okay. And then we started to have year after year after year of natural disasters. And over that five year period, you had a whole lot more rooftops going in, getting built in capron areas. Yeah. But then also severe weather events that are outside of just hurricane. So you had, you know, a lot of hail exposure. It started crank up, convective storms, a wind. We had a hail storm just two weeks ago. I mean, in the middle of nowhere. Yeah. Okay. So, the mother nature is basically driving up insurance, what you're saying? Well, for property, that's a big factor in all of it. And, you know, liability, we can talk about in a minute. Yeah. You know, the property marketplace, when we started to have all those losses, the property carriers were trying to catch up. And you had a number of severe weather events to where the re-insurance marketplace was affected. And re-insurance affects the cost capital for all the commercial carriers. Okay. So, you know, commercial carriers just like Pag does, you know, they ensure. Yeah. So, you know, they'll have an attachment point, you know, on their book of business that they'll buy insurance for. And so, when the re-insurance market is affected, then the cost capital goes up for the commercial carriers. Got it. So, year after year of those events, and again, going back to capital and equity, if you look at, you know, the S&P during that time, the average return is, you know, over the last seven years, probably 13 and a half, 14%. Sure. Insurance has been about 7% return on equity during that time. And so, you know, until carriers have been able to get to a certain level of profitability where their return on equities creeping up towards 10, 12%. You don't see a turn in the marketplace. So, over the last couple of years, that's why rates have continued to go up. And capacity for specifically multifamily or wood frame construction is, you know, that really lags the market, that constricted. So, as a supply and demand issue, you had a ton of demand and not as much supply. And so, the pricing continued to go up. And now the carriers on the property side have finally gotten to a point where they're making a profit. Got it. So, that's when you start to see the tipping point in the market, which this was the longest hard market, I think. So, basically, you're saying from 2015 to now? 2016, 2017. 2016 to now is where it's just been. It's been going up every year. Wow. Yeah. And so, that tipping point, we've all been waiting anxiously for that as brokers for sure, that's starting to come. So, you know, last year without a major hurricane, it was still $130 billion last year, mostly due to natural events. Natural events. So, hail, you know, tornado, flood, those types of events, and the carriers were still able to be profitable. So, they've gotten to a level durability where they can absorb that loss and still make money. And so, they're hovering at profitability levels that are encouraging. And we're starting to see on the property side rates come down. So, reinsurance, again, fax costs capital for the carriers, you have a big reinsurance treaty renewal around the first of the year. Those were very favorable. So, you know, the carriers, if you look back 12 months prior, the reason why we saw another huge jump in rates in 2023 was just because of reinsurance. Okay, it wasn't necessarily because of all the underlying factors, is because, you know, they were getting to a point of profitability than Ian hit. And the reinsurance market was hammered. Got it. And so, they had to pass on those increases, those get passed on the commercial carriers, then they get passed on to you all. Right. And we have to deliver that bad news. So, 2024 should be good news then. 2024, yeah, we're starting to see rates level off. And starting to see carriers open up capacity and write more, more in catastrophic areas, write more lost prone asset classes like multifamily or wood frame hospitality. And that's, you know, a sign that, you know, they're, their appetite's growing and they're, they're going to grow their profitability through volume, not necessarily through, you know, the management of expense. So, they're looking to expand that capacity and grow. I was in London two weeks ago and, you know, the underwriters there, very stark difference from even six months prior when I was there. More aggressive, they want to write more real estate business. And so, so it's all, it's all positive. I think we've, you know, we're, we're seeing a good trend there. The liability marketplace is where property was about 12 to 18 months ago. Okay. So, they're lagging then. There's going to take them a minute to catch up. Exactly. And the liability marketplace is, it's not driven by natural disasters. It's driven by, you know, the toward environment. And, you know, certain jurisdictions. And so would, California. California is one. Atlanta is a, is a tough one. States like Texas and Florida can be pretty tough from a, you know, mass toward perspective. And that's what's driving a lot of this is that you have for the first time in history, private equity is fun. Money is funding mass toward. It's, you know, several hundred billion dollar industry at this point. And so you have a lot of, a lot of capital going to, you know, a plane of attorneys. And funding mass litigation, mass lawsuits and mass towards. I'm sorry, private equity is funding towards in the US. Yeah, that's very profitable. Really? Yes. I guess I just wasn't aware. Interesting. Okay. So they're incentivized to draw up these lawsuits just everywhere because they've got capital funding behind them. And in certain jurisdictions, that's where a lot of that money is funneled. Okay. So it's, yeah. It's not just the random lady that gets scorched by a McDonald's coffee cup. No, it's not. But there's more and more. So it's much more complicated. Obviously, it's much more. It is. I think there's other factors as well. Social inflation being one of them, you know, the cost of health care, the cost of. I was going to say. It's got to be health care is got to be a big, big piece of it. And then I'm sorry, you said defense. Yeah, cost of defense. Yeah, okay. So obviously, you know, going up. And then you also have a lot of the claims that, in cases that occurred during COVID or now being adjudicated. So, you know, you had this period where courthouses were closed. And now there's this big kind of, you know, log jam of court cases that. And that's because of like COVID, you mean or something? Okay. Yeah. And so those are all coming through the system now. Yeah. You're seeing those claims go through the roof. And so, you know, with liability, you have primary, then you have umbrella, you have access, etc. Well, umbrella and excess coverage was really just there for catastrophic stuff. But over the last 10 years, it keeps, you know, these because of the toward environment, because of social inflation. These run-of-the-mill cases are settling for much higher dollar amounts. And they have historically, and it's penetrating into those umbrella and excess layers. Those layers then become working layers. They're not just there for catastrophic cases and claims. And so they've had to try and catch up to that market as well. And you see the restriction of capacity. Yeah. And you see the supply-demand curve change. And there's a ton of demand and not enough supply. So pricing goes up. Okay. And until they find a way to be profitable, short of tort-reform carries. I was going to say, unless you change that, like it seems like it'll always be. Whereas natural disasters may ebb and flow. And cost may ebb and flow. But does tort cases ebb and flow? I guess you could say they could. They could, okay. Based upon local elections. Oh, true. But right now, you know, it's not a red or blue state issue. Some of the, you know, red estates are really tough from a tort perspective. Interesting. And litigation perspective. And saying with some blue states. And so it's really, you can drill down to certain city, certain jurisdictions that are. They just have a history of tort. Yeah. They're really tough. Huh. And the plaintiff's bars and those jurisdictions do a great job, you know, pushing for massive settlements. Wow. And so they get them. Wow. Okay. Wow. I just learned a ton. I had no idea. Okay, so then you have liability on one end. You've got the property on the end. The property is starting to ease up, which is obviously, you know, happiness to my ears. Tell me then, you know, let's talk a little bit about just when I look at my readership was typically, you know, investors that are similar to us. Tell me a little bit about, like, how does it work state by state across the union? You have to look at it through a couple of different lenses. One is you have to break it down by asset class and construction type from a property perspective. So, you know, if you think about what's going to lag the market from a construction type, it's going to be wood frame because it turns down and can blow over. And so, you know, if you overlay wood frame, whether that's hospitality, whether that's multifamily, and you put that in, you know, Gulf Coast, Texas or in Florida, that's going to be what lags the market. When the market's correcting, that's still going to be, you know, those are the construction types that are going to have a hard time catching up to the market. If you have non-combustible construction, so masonry, non-combustible, concrete, steel. Which is super expensive, by the way. Super expensive. That's right. Well, but with the cost of insurance, that's, you know, something that real estate owners and investors need to think about is, okay, while wood frame may be less expensive to build, what's the cost of that over a whole, you know, seven-year-old period compared to the cost of, like, each steel or concrete? Okay. So, Ted, as we look across the US right now, what are the key states that are driving costs in insurance premiums right now? Yeah, there's a number of different factors. You have factors affecting liability that could be state-specific, jurisdictionally driven, then you have property. And that can be driven by weather events, you know, natural catastrophes, crime, et cetera. So, going back to your question, you know, what are the states that are driving this? You know, Florida's tough. It's changing. And I feel like Florida has lots to do with floods, right? Is that a big piece of it? Yeah, when you have a hurricane, you know, wind is a big issue, but storm surge flood, you know, that's what is kind of, you know, the thing that sticks around the longest and really causes a lot more damage. So, you can have, you know, great construction type that is just fine, you know, from a wind perspective, but then, you know, you have an entire parking garage get flooded. And, you know, their HVAC goes out, you know, whatever that might be. And so, I think, you know, a lot of real estate developers are getting smarter about how they build in, in capron areas, and they're doing a lot to mitigate loss. But, you know, the Gulf Coast, Texas and Florida, certain parts of Florida, not all of it, although it gets, it gets a bad rap. There's certain parts that, you know, are a little bit safer than others. You know, those are tough states. You go up the Atlantic coast, South Carolina, in parts of North Carolina, up in Virginia, that can be kind of tough. But, the entire state of Texas is really the toughest from a natural catastrophe standpoint or not. And, just from a weather event standpoint, because if you look at like the DFW Metroplex, for example, you know, there's something like 20,000 units that are getting delivered there over the next, you know. Yeah. Camera, what is 12 to 18 months? Yeah. And that's a lot more rooftops. And you have, you have historic freezes happening. And we're staring at, you know, the predictions are this is going to be one of the most active hurricane seasons we've had. But, again, good news in the market. And according to a lot of underwriters, they can sustain a couple of major events and still be profitable. And still be profitable. Interesting. Because they've charged us that much in premiums to offset. Yes. That's interesting. Again, it's a cycle. It is. Just like it. It's just like the real state. You know, there's a cycle. I mean, we're in a development cycle right now. That's not exactly favorable. That'll come back around. So it sounds like then from what you're saying, it's brisk building activity along with weather. Those are the only two things you've really mentioned. Anything else that impacts what makes like, for example, you know, I'm living here in Salt Lake City. One of the safest places. We have nothing going on. I mean, knock on wood. Although right now they are earthquake proofing, you know, that all the temples and whatnot. I think if you are a believer, like God must know something. We don't know. But my point is, and then I grew up in Seattle. And I don't feel like anything happened there either. So are those. So you're saying like a state like a Utah is just. Yeah, state like Utah. I mean, you take earthquake out of it. It's very. Because we're on a fault technically. But I mean, nothing. Well, we had a tiny little wondering COVID randomly. Yeah, you all did. That's right. A tiny little. Yeah. Yeah. It was like a 2.3 or something. Some little, yeah, weirdly. And that that's, you know, the. Like the bigger concern is when doesn't the next big question. Sure. And so, you know, the good thing about development that's been going on is a lot of that is pretty durable construction from a quake perspective. Yeah. And that's being driven by equity investors. That's being driven by lenders. That's, you know, if you're if you're developing that's, you know, they're going to want to see. You know, the right quake fitting. Yeah. And the right secondary characteristics that, you know, go into our underwriting. Yeah. You know, help prevent meter damage in a quake. But, you know, I think, yeah, for the most part, it's construction type. And it's going to be whether it's going to be natural disasters. During COVID, we saw civil commotion, civil unrest be a factor. Oh, yeah. All the looting and all the fires are some. So crime does have a have an effect on property. And although not quite as much as liability. But the industry had a big builders risk loss and in the Bay area building that was, I think, 80, 90% complete. And due to how it works, they. And the entire thing burned down. And, you know, those are those are major losses as well. So there's a lot of factors like arson or sorry, what do you mean? Now they were welding, I believe. Oh, and then it caught fire. Okay. And. Oh, it could be. That's horrible. What happened? Yeah. So there's factors like that. And that that has to go into pricing as well. Right? Because the still one of the main causes of loss and and the insurance industry is far, especially for what frame? Yeah. So that's. But from a state perspective, Texas bad Florida's bad, you know, but there's, you know, you go into Colorado. Colorado is not really favorable right now from a wind or I mean, sorry, from a perspective, parts of the Midwest are tough. But, you know, you get into civic Northwest and it's a little bit safer. Yeah. You get into, you know, parts of the Midwest and things soften up a little bit. You know, the upper Midwest, then you get out towards, you know, New York and into New England. And, you know, you're kind of the liability markets really what's going to kill you out there. Yeah. But, you know, from property perspective, it's pretty chill. Yeah, it's not too bad. But a lot of it, a lot of it's going to be driven by construction type these days. Gotcha. You know, that's super interesting. And of course, very relevant to peg. So tell me a little bit about your partnership with peg and how that like. So, for example, one of the things that I noticed, we have a large pension fund that partners with us. And when we were working on a large portfolio, they said, hey, we have a good relationship with so-and-so insurance company. We want introduced to them and see if you can't get federal rates, which we did. And we were able to ensure that entire portfolio through that group. And, you know, that wasn't something we'd really had before because I think we were more one-off deals and now we have larger portfolios and et cetera. And then I know this move to partner with locked in big for peg. It's a big thing. I think it's going to help us on the bottom line. So just help me. Yeah. Okay. Good. So help me understand like how that symbiotic relationship will ultimately impact our investors. Like how does that? How is that a creative to the real estate investment overall? Yeah. I mean, I think, you know, the best, the best client relationships and partnerships is when there's a couple of different things in play. One, a mutual understanding of what's driving the market. You have to have a partnership in this type of relationship. And if you're just pounding the table and, you know, upset about rates, then it's hard to think critically and strategically about, you know, okay, what's our long term plan here? How do we create, you know, some durability and, you know, from a program architecture standpoint? How do we make sure that, you know, you're beating the market or that you're your financing risk to level out, you know, the market market impact that, you know, the market different market cycles can have. And that's one thing that packs you all done an amazing job at really, you know, learning, listening and being interested in the different strategies and solutions that go along with that. I think also another big part of it is you all embrace data and you embrace analytics. And that's at the end of the day, you know, what drives a lot of the underwriting decisions. And so an understanding of your own exposure, understanding how you're underwritten in the marketplace, then you can make informed decisions on what you do long term. And that's another big factor in the relationship, but I think there's also an alignment of values between our two firms. You all are looking at your investments from a long term perspective, you're looking at your company from a long term perspective and so are we. And that allows us to come together and be thoughtful, be strategic and put together best programs, best, best solutions that, you know, will help your insurability and competitiveness in the marketplace. So your investors will benefit from that partnership because the things that we're talking about or things that are going to, you know, when the market's going up, you're not going to pay as much when the market's going down, you're going to be some of the first to track that capital. Now I love that and again, I love that I appreciate you mentioning values because values is definitely probably the most important thing to peg is making sure we align with the right groups and share the same values. From my short interaction with you, I definitely feel like, you know, I can see why we're partnering with Lockdowns and that makes you feel good because again, you know, when we're pitching to our investors and that's what my group does, we'd like to try to be as holistic as possible. So, I mean, let's face it, our returns are good, they're strong, but there are lots of other groups that have good, strong returns. And so how do we differentiate ourselves? And I think, you know, this is, as I'm listening to my, you know, we also turning out like, you know, we can talk about these kinds of things because insurance does impact the overall bottom line and partnering with a group. But like you folks and helping us to be more competitive in the marketplace, I think will be really interesting. So it's another thing I can like, you know, add to my value proposition, which I love, which I love. So this is great. Okay. So as we look ahead into the future, let's talk a little bit then about how do we then forecast for this? So we know, no, on liabilities, it's about 12, 18 months lagging behind the property, we feel like properties came to a tipping point. But, you know, we have large portfolios and we have large, we have big strategies. And so it's just an ongoing forward thinking process. How do you say this or how are you going to be guiding us as we forecast specific to insurance and the way we ensure our different properties and investments? Yeah. So the thing that you all and other investors need to think about is, yeah, at the end of the day, insurance carriers are, they really just want to pay the big claims, right? They don't want to pay the day-to-day claims. And if you're just trading dollars with insurance carriers and, you know, one year they're going to win and another year you're going to win and yeah, that's an unsustainable, you're just going to ride the waves of the market. And you have bad losses. One year your rates are going to go up. You have good losses. And next year maybe they stay flat. Maybe they go down in the soft market. And so how do you look at that over, you know, a longer period of time, you have to finance risk. So you have to get the carriers out of attritional losses. Okay. So, you know, if you're having a bunch of small fires every year, that's what eats away at the carrier's profitability. And ultimately what leads to increased rates if you're just looking at an individual risk basis. Okay. So with you all, you know, making sure that we understand clearly the loss picture. And this is for all real estate investors, operators, owners. Understand the loss picture. What's driving your losses? What's what's driving your exposure? How are you underwritten by the marketplace? And then you can start to look at, all right, how can we finance risk, you know, over over a period of time that's going to make us more attractive? So there are multiple different risk finance mechanisms that we're looking at for you all and that we look at for all of our clients. You can look at plus aggregate programs on a property basis, which is basically a large deductible that's capped and that you find it, you fund for that deductible. Got it. And then, you know, if you reach it, if you reach a million dollars. So we cover all the little things. We're going to be covering all the little things that that's not going to be chipping away at the way a carrier looks at you. If you're having a million dollars in losses a year, carriers are probably charging. No, you're not. Just as an example. But if you are, you know, carriers are going to charge you $1.7 to $2 million to ensure that. Okay. You know, why trade dollars? If you want to finance for that, then you, you know, you're, you're funding a million dollars. If you, if you pay it, you know, great, you know, then carriers aren't, you know, aren't paying that. If you don't, you keep that money. Got it. Right. Then you can start to look at more sophisticated risk finance mechanisms. You can look at, you know, captive solutions. Yeah. So there's, there's multiple ways in which you can see captives. And you can do that, you know, through renders insurance programs, you can do that through security deposit programs. And that allows you to build up retained earnings and a captive. And then once those retained earnings get to a certain point, then you can expand into other areas that might be a little bit riskier, maybe on development. It's through subcontractor default insurance. And you can re-insure your deductible there through a captive and you build up that, you know, further retained earnings. And then now all of a sudden, you've got a, you know, your captive has a pretty robust balance sheet. Then you can take bigger tranches of risk. Got it. Okay. So there's ways in which, you know, over time, you have to have kind of an immediate mid and long term strategy around risk finance. But if you do that, then over the long term, you're going to outperform the market and you're going to be more aggressive and, you know, on the deals that you're competing on, you're going to, you know, generate higher returns. And you're going to attract more capital. More capital, which is what I need. Yeah. Industry. So interesting. I did not think you were going to say that somehow I thought it was some other voodoo magic, but it sounds like it's super practical. Yeah, that's pretty simple. I mean, it's kind of the way I approach my health insurance, right? It's very similar. Yeah, very similar. But it's not, it's not complicated. And I think, you know, the insurance industry is, it's a pretty traditional industry. I mean, up until, you know, pre-COVID, I mean, going over to London, Lloyds of London, you still had, you know, Underwater, sitting out with, you know, inside the boxes with their files and waiting in line to go and negotiate the deals and, you know, all of that. And now you're seeing an evolution in the insurance industry, AI is driving a lot of that. So there's a lot more. How is AI driving that? I'm so curious. Yeah, so, you know, AI algorithms. Yeah, there's, you know, the carriers that have done it well, the brokers that have done it well have been aggregating data for a while. Okay. And now that data is starting to tell a story. Yeah. Now you're getting machine learning involved, you know, predictive analytics that are going to be able to tell you things like, okay, well, you know, if you build like age steel versus wood frame, what could that affect be in a hardening market or in a softening market? Yeah. And we're starting to build solutions that they can tell us that. Underwater is using it to underwrite and we're using it to advise. So it's a, it's not a complicated deal, but it has also been a pretty slow industry to adapt. And because of that, there's a lot of uninformed insurance buyers out there. Yeah. Because they don't understand it. And it's been hard to understand. But at the end of the day, it's all about how many losses you're having versus how much premium you're paying. How can you get the carriers out of that? Right. Finance that risk on your own, if you're able to. And then carriers win, you win. Yeah. No, I imagine our underwriting team, because if you think about that, it's not that they're generalists, but they have to know a little bit of everything in order to plug in the right assumptions. And I imagine with insurance is probably a line item. Like I said, they probably like, okay, who's the lowest, you know, who's the cheapest or whatever. Just plug up person in, we're going to use them and without maybe taking a step back and thinking through the implications of such and what is that really garnered you. And then in the end, are you paying more because you didn't consider this as this. And that can be a decent short term solution for a lot of companies. But when the market's fluctuating, you're going to end up writing it. So taking a longer term strategic view of risk is ultimately what's going to pay off. And those are the clients that that end up doing well. Interesting. So insurance is a strategy. Absolutely. So then is insurance like, so like debt is something where you have, you know, terms, you know, what not, is insurance like that? Meaning if we have existing insurance policies with certain properties or portfolios, are we able to exit those? Or are they like, you know, do you have to, and I should know more than this, but I just don't. So as an advisor, would you, are you going to come, I imagine you're coming in looking at a portfolio as a whole. And hey, these are the areas where we feel like you can, we can, we would suggest some improvement. And, you know, does that, and is it nimble enough where you can change things? Sure. Yeah, it is. You have to look at it again through a couple of different lenses. Most insurance contracts are going to have 90 day minimum earned. So you're not going to, you know, once you sign on, you got 90 days before you can make any changes. Then if you look at cat-prone areas, if you're, you know, for hurricane insurance, I mean, you know, it's, it's earned once hurricane seasons over. So if you make a switch after that, you're not going to get any return premium for, you know, the hurricane exposure that was insured during that time. And so there's different windows of time depending on how the contracts are written that allow you some flexibility. And, you know, the ability to be more nimble. Yeah. There's also timing with the marketplace. Yeah. So right now we're moving in the right direction from property standpoint. We want to harness that. Consolidation is, is important when we, when the market was shifting about three years ago, we started to look at client portfolios. And 75% of the time and, you know, scale one out. So your economies of scale are going to help you. But there's 25% of the time where it made sense to break things up. Interesting. Well, so when you break things up, you're dealing with, you know, different carrier partners that, you know, will do smaller regional deals. They lack the market as well. Okay. So, you know, the excess and surplus lines markets right now are doing better. Certain standard insurance carriers, travelers, jobs, you know, and cheese the world. They're doing better. Yeah. And then some of those regional carriers are still, they're, they're kind of lagging. Okay. So, you know, that, you know, piecing things together may have worked a couple of years ago. But now, because of where the markets headed from property standpoint, those economies of scale are generating better, better results these days. Interesting. Wow. Okay. Now, I love that. It brings up probably my biggest exposure was this, again, the largest portfolio we had ever raised for and where there was the most impact because it was an acquisition portfolio. So typically we do development. This was an acquisition portfolio. You've got aging assets. So, you know, the insurance was a little different there. But as asset managers ourselves, so, you know, it sounds like we have the benefit of partnering with a group I locked in. But as asset managers, when we're training our analysts and underwriting teams, what information would be, like if you could say, hey, as you're underwriting these consider these things too. Like what, and that could be market driven, it could be not just specific insurance, but tell me what are some things that you would suggest to them that can help them in their underwriting as they're evaluating, again, both development and acquisitions. Yeah, I'd say that, you know, you want to let data drive your decision making. So, really understanding the risk and exposure for, you know, different assets. And making sure that you're making an informed decision, you mentioned this earlier, right? You know, sometimes the cheapest solution might present itself, but sometimes the cheaper solutions don't actually address the exposure that you need. And I can see that. Yeah, we earn a lot of business because of that. So, I think understanding the exposure basis is probably the most important thing and understanding what's driving either cost or loss or, you know, your exposure. If you look at development, you know, construction type is going to be a big one. Okay. The population density is going to be another jurisdictions are going to be another. So, you know, Oakland, for example, a lot of population density, also a lot of crime. Yeah. And that's where we saw a lot of ours occur, same with certain parts of LA. Interesting. And so, that's going to factor into builders risk, which is property insurance for development. Then you have construction defect, which, you know, again, certain states are going to have, you know, tougher construction defect laws than others. So, understanding what the construction defect laws are in the states that you're working in is really important and then how do you address that exposure? So, liability is going to be, you know, on the construction defect side, on, you know, anything that happens from a third party stamp. Yeah. That's going to drive, you know, liability exposure. The construction type, like we've talked about, is very important. No, wood. That's what I've learned. No, I'm just kidding. We do a lot of wood, by the way. Yeah, yeah, you do. And, you know, a lot of our clients do, and because it's the least expensive way to build something. Well, height too, right? Like it's easier, like most areas are zoned for certain height restrictions. And so, oftentimes it's just easier. Like it's, we're not really this high-rise state, at least our areas. Of course, now we're, you know, we're doing more significant building outside the state. But yeah, I mean, I hear stick construction all the time. But really, you had said that it doesn't really matter, because there could be other factors that impact. It does matter, but there are other factors that affect it. Yeah. That we can consider, at least. Yeah. I mean, you look at like age steel, like age steel. There's some incredible companies out there that are doing, that have, you know, really amazing technology from like age steel perspective. Build, I think it's BYLD, is one of them that, you know, their technology basically, you know, input in the architectural drawings. And it comes up with a package that is already pre-cut, prefabricated, that it just gets assembled on site. And so, it's not just the cost of the material, it's also the cost of labor. Yeah. And what goes into it? Well, labor is expensive. And I think labor is one of the biggest things that impacts everything that we do, including down to operations, not just the building phase. No, it's management. Yeah. It's all the things. Yeah. You know, that, you know, some of that labor is contract labor. Yeah. We're a self-contractor. Some might be your own employees. Yeah. You know, that's another factor. But, you know, I think from a construction type perspective, there are a lot of things that can influence things positively. In terms of the evolutions that are happening in that marketplace. So, you know, you look at core core plus construction, you know, high rise construction. I mean, those are going to be easy to enter. Yeah. You're going to be safe. They're easy for us to enter right as well. Yeah, exactly. Well, at least in terms of longevity and investment. Yeah. Okay, great. So, as we kind of wrap things up, what are the lessons that you and your company have learned probably in this last period? I think you called it the hardening market. Or, you know, as we're kind of at least on the property side coming out of it a bit. And you're kind of looking at liability. But what are some lessons learned and takeaways and advice you would give to real estate investors today? Yeah. So, I think we talked about a lot of it. But letting data inform decisions around risk is really important. And it's not a black box. It's, you know, fairly simple to understand what driving exposure and therefore cost. Making sure that you're taking a long-term view, not just of the way that your program is architected. Yeah. But also of the relationships in the industry. You know, the underwriters don't write a portfolio like yours to make money in one year. No. They're doing it from a long-term perspective. Yeah. And so, sitting with those underwriters, sitting with those executives and understanding how their business works. Ultimately helps create the best carrier partnerships out there. Okay. Because when we look at all of our benchmarking data, you know, yes, people that are controlling risk. That's something else that we can talk about briefly. But people that are financing risk, you know, they certainly see better rates. But the people that have stuck with historic relationships over time. Those are the ones that have beat the fluctuation in the markets. And so, you know, if, and we've, we've, we have some clients. And that's a risk control. It sounds like from kind of what you're saying now. Not necessarily. No, risk control is separate. That's, that's what you have to do to control risk. So, you know, what are you doing to control fire? What are you doing to control water? Oh, I see. You know, all those things. How are you controlling the cost of claims? That's very important. But all of that gets funneled into that relationship. Okay. And unless you're sitting in front of those underwriters telling that story. Yeah. Talking about all the things that you're going to do to improve your, your exposure base. Yeah. You're not really going to, you know, I'm going to see the benefit of it. It's just going to be in a, in an underwriting submission. And so, at the end of the day, this is a relationship driven industry. It is. People industry. And those, like all industries are. Is what I'm learning. Everyone that's come in here. That's one of the themes I hear. And I would not have, I mean, I see that insurance now. But I don't think I would have thought that. Yeah. It's, yeah, it's, it's critical. Yeah. And the clients that have that philosophy and that take a long term view of their business and the carriers business, then, you know, those are the ones that find alignment with carrier partners. And that's, that's critical. But you got to do the stuff on the other end to control loss. Yeah. And going back to technology, there's great technology out there that, you know, from a leak detection standpoint, water damage, huge cause of loss. Yeah. From fire standpoint, from, then also controlling the claims. So making sure that you're not, you know, looking to inflate claims just to make money, making sure that you're controlling those costs because those costs go into your loss experience, your loss experience is what's going to be used to underwrite. Yeah. And then end up paying for it one way or another. Yeah. And so making sure that you have good alignment with those carrier partners around, all right, this is what we're going to do. This is our litigation strategy. Yeah. This is what we're going to do from a, you know, loss control standpoint. This is what we're going to handle claims. That's where the rubber meets the road for them. Ultimately, you can't do anything about a hurricane, can you do anything about hate? Right. But if we have all those controls in place or policies or if we've thought it through and we have those mitigation things, and that's what you're saying is, is, it's additive to just the heart numbers. That's right. It's blocking a tackling. Okay. Yeah. I like that. But I think, I think the other thing that I've learned is that it is cyclical. Okay. I'm glad that you said that it will get better. I feel like in, at least in construction, we've kind of accepted the fact that construction costs are here to stay. Like, it is not going, like, this is the new norm. We know that interest rates in a way are cyclical, but we don't see any reprieve there. Right. But the fact that you're telling me the insurance costs are cyclical, that's like, you know, music's my ears. Yeah. That's amazing. Yeah. Well, I think, I mean, interest rates, I think it was, I think it was Citibank or one of the big banks just said that they expect over the next 12 to 18 months, 200 basis points and breakouts. I mean, that's cyclical and in a positive direction. So it's all. I would love 200 bibs reprieve. That's awesome. Yeah. Okay. That's all. Yeah. I can't control that. Come on. Come on, Ted. Okay. Well, awesome. Well, I love that. I appreciate your time and helping us to better understand insurance as it relates to commercial real estate and the investment side. I've learned a ton and I imagine our listeners have as well. Thank you for having me. I hope it's helpful. Very much. Appreciate it. So, again, from the peaks of the mountain west, I am Rachel O, host of peaks and portfolios by pet companies. Thank you, again, Ted, for joining us and for all those who joined in and we'll see you all next time.