If You Can't Beat 'Em, Buy 'Em, Real Estate Owners to Self-Insure

Tired of skyrocketing insurance costs, real estate owners are entertaining the idea of forming their own property and casualty company. Aon Corp., the world's second largest insurance broker, recently presented the idea of self-insuring to large New York City-based landlords such as Tishman Speyer Properties Inc. and SL Green Realty Corp. With an ownership stake in a captive insurance company, the real estate firms would jointly share each other's losses and profits.

Aon Corp. has been conducting a feasibility study on a Bermuda-based industry association captive since December 2001 and is currently working with the Real Estate Board of New York. It plans to begin with New York owners and later roll out the program to the rest of the country.

"I don't know of any broad real estate industry captive program before this one," said Kevin Madden, director of the real estate industry group at Aon Risk Services. "There have been various real estate insurance programs, but this is different in that the participants will have a real ownership in the company."

A broad self-insurance vehicle might be new to the real estate industry, but the concept is fairly common among corporations. Kmart Corp., for example, has a large self-insured book, as does McDonald's Corp., which also buys a portion of its insurance. Establishing distinct insurers is particularly common during economic downturns, when pricing spikes. Although a number of factors, not just Sept. 11, are driving property and casualty prices up, the lack of terrorism insurance provides additional motivation for self-insuring.

"In terms of terrorism exposure, there's very limited supply right now," explained Cliff Gallant, vice president of equity research at Keefe, Bruyette & Woods Inc. "Terrorism insurance is very expensive and policy limits are pretty low, so there's really no choice for owners but to carry risk themselves or to form their own insurance company. I would think this is definitely terror-related, but even in normal commercial property risk, pricing is rising dramatically, and will continue to rise until at least 2003."