Insurance investors have been major players in Commercial Real Estate (CRE) lending for decades, with the commercial mortgage industry fitting nicely as an asset against the liabilities that life insurance companies have. Characteristics such as fixed-rate interest and ten-plus-year terms benefit both sides.
However, the pandemic, the threat of inflation and emerging global pressures are creating unusual market conditions for insurers, who are required to generate returns that not only allow them to cover claims but also provide a return for stakeholders.
CRE has always been a nice fit for them. In fact, about 11% of the insurance industry’s investments are in commercial mortgages, but the profile of those mortgages has shifted over the past few years in terms of property types and complexity—along with the availability of talent and staff who manage and service portfolios. In this blog, webriefly discuss how we got where we are in terms of CRE investing and what insurers can do to keep winning.
A quick summary of how we got here
The first half of 2022 was the strongest on record for commercial lending, with life companies well above the $105 billion pace set last year. In the second half of 2022, pricing differentials started with public markets flowing into other markets. On the supply capital side, there has been a reaction to rising interest rates more so than on the demand for capital, so there is some slowdown in the market as buyers and sellers reevaluate their properties’ worth. The uncertainty has also led to a slowdown in sales transactions, with public markets feeling it the most.
In the wake of the COVID-19 pandemic shifting more offices to work-from-home or hybrid models, downtown urban office space is significantly less of a focus for many firms, with certain exceptions for very strong growth markets. On the other hand, industrial investments like warehouse space and logistics centers are more attractive, while hotels and multi-family seem to be back after surviving a significant stress test.
What must insurers do differently to keep winning with CRE?
We have talked to some insurers who report moving away from smaller loans in favor of larger more complex loans. And, while the due diligence process doesn’t change, the amount of review does. There may be more collateral, so there are more appraisals, engineer reports, surveys, etc.
With what equates to more complex borrowing structures, smaller—possibly less experienced—teams to manage it all, and stakeholder expectations that are just as rigorous as ever, technology can go a long way toward protecting your yield. To stay competitive, satisfy customers and meet profitability goals, look for technology that enables you to make optimal use of resources, achieve near-perfect accuracy, and aggregate data from multiple sources while maintaining the ability to scale and pivot as business conditions change.
SS&C offers a variety of solutions that can help, from our modern full-service loan management platform to automation and digital workers that can address high volume, repetitive, manual tasks allowing you to reinvest the time savings into more value-added activities.
If you would like to learn more about how SS&C can support your commercial lending needs for 2023 and beyond,contact usordownload our "Comprehensive Loan Management Delivered in a Single Solution" brochure.
FAQs
Insured is the person who is covered against risk. On the other hand, the insurer is the company that is providing coverage. It is a service that an insurer provides under a particular insurance policy against a premium paid by the policyholder.
Why is commercial property insurance important? ›
Commercial insurance can protect you from some of the most common losses experienced by business owners such as property damage, business interruption, theft, liability, and worker injury.
Do insurance companies invest in real estate? ›
Although insurers invest in a diverse set of industries, they have significant investments in industrial and manufacturing firms, financial firms, and real-estate-related securities.
How would you describe the agreement between the insurer and the insured? ›
The Insuring Agreement
This is a summary of the major promises of the insurance company and states what is covered. In the Insuring Agreement, the insurer agrees to do certain things such as paying losses for covered perils, providing certain services, or agreeing to defend the insured in a liability lawsuit.
What is the relationship between agency and insurance? ›
When an “agency” relationship is created, the agent steps into the shoes of the principal and acts on the principal's behalf, per the terms of the agreement. In the insurance agency relationship, the agent often acts on behalf of the carrier in an insurance transaction with a third party (the insured).
What does relationship to insurance mean? ›
§ 404.354 Your relationship to the insured.
You may be related to the insured person in one of several ways and be entitled to benefits as his or her child, i.e., as a natural child, legally adopted child, stepchild, grandchild, stepgrandchild, or equitably adopted child.
Why are commercial property insurance rates increasing? ›
Although reinsurance capacity improved in 2023 and into 2024, the cost of available reinsurance capacity remains high. The continued impact of catastrophic events is a major factor driving up costs, along with the increasing cost of capital, financial market volatility and inflation.
Is commercial insurance the same as property insurance? ›
This insurance essentially provides the same kind of protection as property insurance for consumers. However, businesses can usually deduct the cost of commercial property insurance premiums as expenses. Commercial property insurance generally does not cover losses arising from tenants using the building.
Which of the following does not apply to commercial property insurance? ›
Commercial property insurance generally does not cover the following, which may be covered with separate insurance policies or additional coverage endorsem*nts: Business vehicles. Employee theft. Employee injury or illness.
Do life insurance companies invest in commercial real estate? ›
Many life insurance companies invest in real estate and offer commercial real estate (CRE) loans, which differ from other CRE mortgages.
Most insurance companies generate revenue in two ways: Charging premiums in exchange for insurance coverage, then reinvesting those premiums into other interest-generating assets. Like all private businesses, insurance companies try to market effectively and minimize administrative costs.
What is the contract between insurance company and agent? ›
An insurance agency agreement is an essential contract between a company and the independent agent it hires to sell insurance. It sets expectations for how both parties will work together and the terms of compensation, including commissions.
What are the four elements of an insurance contract? ›
There are four necessary elements to comprise a legally binding contract: (1) Offer and acceptance, (2) consideration, (3) legal purpose, and (4) competent parties. The effective date of a policy is the date the insurer accepts an offer by the applicant "as written."
Why is the insurance contract important? ›
It protects you from unplanned expenses and offers a financial cushion from accidents, illnesses and more. Insurance safeguards the financial interests of your family in your absence. It helps them cover immediate expenses and secures their long-term financial stability.
What is the difference between an insurer and the insured? ›
The insurer is an entity, usually an insurance company, that underwrites the insured risk. By contrast, the insured is a person or organization whose life, health or property is covered by an insurance policy.
What is the relationship between the insurer and the broker? ›
Depending on the particular role undertaken by the broker in any given transaction, a broker may be found to be acting either as agent of the insured for certain functions (completing and filing the application for insurance) or as agent of the insurer (binding coverage). The broker's primary duty is to the insured.
What is the contract between the insurer and the insured in insurance law? ›
A policy. - A contract between an insured and an insurance company which agrees to pay the insured for loss caused by specific events is a policy.
What is the owner relationship to the insured? ›
What is a Policy Owner? The policy owner is the person who buys and owns an insurance policy. That individual may be the insured, meaning they bought life insurance on themselves, but people can also take out life insurance policies on others. In those cases, the policy owner and the insured are two different people.
