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Property insurance to protect against storm damage is either impossible to come by or has skyrocketed beyond affordable. This news leaves real estate managers between a rock and a hard place as they struggle to keep their properties insured while also attempting to make money despite hiked premiums. Formerly -- before last year's Katrina, followed by hurricanes Rita and Wilma -- primary insurers could count on something called reinsurance to help spread the risk of loss among companies, so one company would not have to carry the entire burden. Reinsurance providers are being held to some of the toughest standards because they endured an unusually large share of the burden in the latest rounds of storms. Property owners and managers who cannot find adequate insurance may risk legal squabbles with lenders requiring certain levels of coverage. And those who have found insurance, but at vastly higher rates, must now consider passing on rate hikes to tenants.

This year's hurricane season may be relatively mild compared with the 2005 season that brought Hurricane Katrina's devastation to the Gulf Coast, but properties in coastal communities around the United States are still enduring a big financial squeeze when it comes to acquiring adequate insurance coverage.

Property insurance to protect against storm damage is either impossible to come by or has skyrocketed beyond affordable. From July 2005 to July 2006, the supply of hurricane risk insurance fell by 70 percent, said Aaron Davis, director of the national terrorism and property resources group at Aon Corp., a Chicago-based commercial insurance brokerage and consulting firm.

During that same time period, he said insurance rates climbed as much as 250 percent for accounts with heavy catastrophe exposure and losses. Companies that haven't suffered losses or haven't filed claims, however, have also seen insurance premiums double, Davis said.

This news leaves real estate managers between a rock and a hard place as they struggle to keep their properties insured while also attempting to make money despite hiked premiums.

"There will continue to be disasters, and when you're in the business of property management, you want to be prepared," said Chuck Achilles, vice president of legislation and research for the Institute of Real Estate Management. "You don't want to be in the position of not having proper insurance."

NO REINSURANCE, NO REASSURANCE

The dual pressure of rising rates and lack of supply is the result of the spigot tightening on coverage throughout the insurance industry's sectors.

Formerly-before last year's Katrina, followed by hurricanes Rita and Wilma-primary insurers could count on something called reinsurance to help spread the risk of loss among companies, so one company wouldn't have to carry the entire burden: Reinsurance allows primary insurers to transfer all or part of their risk for loss to another insurer in order to get more coverage on policies they write.

In turn, the reinsurance market could get coverage from a secondary reinsurance industry called the "retro" insurance market. Aon's Davis said the retro market has virtually dried up.

Rating agencies responsible for assigning market security ratings to the insurance industry are now holding insurers to higher standards. The agencies raised the capital requirements for insurance companies and now assess insurers on their ability to provide coverage for multiple disasters-not just one-during a season.

Reinsurance providers are being held to some of the toughest standards because they endured an unusually large share of the burden in the latest rounds of storms, Davis said. When all is tallied, the reinsurance market may bear as much as half of the more than $40 billion in losses associated with Katrina. Typically, Davis said, the reinsurance market bears no more than a third of the losses.

Keeping insurers chomping at the bit are storm watcher forecasts predicting hurricanes are likely to become more frequent and severe in coming decades. Further, more than two thirds of the American population lives in coastal regions becoming even denser with residents.

Through 2025, the Gulf Coast population is projected to grow at a rate of roughly 20 percent, versus the midAtlantic population's estimated growth of around 5 percent, said Marcellus Andrews, an economist with the Insurance Information Institute, citing U.S. Census Bureau figures.

"Even if you didn't have a change in either the frequency or severity of the storms," Andrews said, "you're simply going to have more people exposed to whatever storms show up."

PRESSURE COOKER

Property owners and managers who can't find adequate insurance may risk legal squabbles with lenders requiring certain levels of coverage. And those who have found insurance, but at vastly higher rates, must now consider passing on rate hikes to tenants-risking higher vacancies and making it harder to compete with other properties.

Paul White, CPM and a real estate broker and property manager in Miami, said he recently oversaw a closing on the sale of a $3.7 million church that was delayed by two weeks because the buyer, whom White did not identify, could not get windstorm coverage. Ultimately, the buyer closed the deal without windstorm coverage by paying for the property outright in cash and avoiding lender requirements for coverage. Another client-a small school-was actually able to secure windstorm coverage, but at a cost of $4.72 a square foot compared with the 60 cents a square foot it might have cost two years ago, White said.

So far, instances in which properties like the Miami church are going without insurance altogether are rare, said Joseph Pappalardo, CPM and a president at Latter & Blum Property Management Inc., AMO, in New Orleans, which manages properties ranging from single-family houses to office buildings.

"We've had lenders tell property owners that they have to go out and secure wind and hail coverage from another source, and in some cases they have been successful," Pappalardo said. "In other cases they have been unsuccessful, and the banks have had to try to provide it themselves to protect their interests."

Pappalardo has yet to see lenders take back properties unable to secure coverage, but that posture may be short-lived, he said.

"I think what we're going to start seeing is a lack of available mortgage money because the properties are going to be uninsurable, and the lenders are going to be unwilling to lend the money," he said.

Amid the severe insurance climate, White said property managers are going to be under more pressure from owners to keep costs in check; to hurricane-proof their buildings; and to repair any damage suffered last year. By summer's end, White said some 30 percent to 40 percent of hurricane-inflicted damages in the Miami area had not been repaired.

The pressure to control costs is severe, White said, because some owners loathe passing along insurance costs to tenants and opt to absorb the premium hikes themselves. He said they fear they won't be competitive, which will impact the rate of return.

HONESTY IS THE BEST POLICY

Getting coverage and securing coverage at less inflated rates requires real estate owners and managers communicate with underwriters-passing along detailed and honest data that might influence coverage, said Jeanne Delgado, vice president of property management at the National Multi Housing Council in Washington, D.C.

"It's strongly recommended risk managers meet with underwriters personally because it's all about making them understand your property in a more intimate way," Delgado said. "In a market where insurance is now limited, you want to differentiate your property. If you've made any improvements, you want to make sure they know about those."

Dispensing that information accurately scores even more points with underwriters, said Aon's Davis. The insurance industry bases its cost structures on models built around what are known as probable maximum losses, which can increase by as much as 100 percent if based on sloppy information. With quality information, however, he said probable maximum losses are likely to increase by less-closer to 40 percent.

Davis said even basic information like construction type, the year a property was built, number of stories and occupancy helps. While this information is not difficult to get, Davis said it isn't necessarily what many risk managers have been getting for all of their assets in the past.

The real challenge comes when providing information about post-hurricane improvements. It can be a daunting task for property and risk managers who cannot make repairs because insurers have yet to settle claims on the damages.

That is precisely the Catch 22 facing Papallardo at one of his New Orleans properties-the 30,000-sq.-ft. Signorelli Building. Its policy is coming up for renewal and the current insurance company will not renew the policy if the building is not repaired, yet the company won't settle the claim so the building can be repaired.

"It puts the owner in the position of having to fund the repairs to fight with the insurer in order to keep them as an insurance company or find another insurance company," Papallardo said. "Yet no other insurance company will look at the building if it's not fully repaired."

SOLUTION BRAIN STORM

The frustration of acquiring insurance coverage for properties is driving real estate managers and owners to get creative with their portfolios-diversifying where they invest as well as what they invest in, in hopes of alleviating some of the pinch.

Pappalardo said about half his company's portfolio is not dramatically affected by die insurance problems plaguing coastal properties. His company manages properties in Louisiana, Tennessee and Mississippi. He said geographic diversity in a portfolio helps.

Aon's Davis, however, said broader geographic diversity can actually be a burden.

"Real estate portfolios that used to have a great deal of geographic diversity used to be viewed by the insurance industry as a positive because it spread risk," Davis said. "Now diversity is seen as potentially a triple threat in that it creates exposure to earthquakes, hurricanes and terrorism."

Looking ahead, Pappalardo also may consider diversifying the portfolio by taking on more industrial properties, which he said are more sturdily built, and their windstorm damage is less costly to repair. He said insurance companies are trying to stay away from wood frame construction and joisted masonry because they are the most problematic for them.

"We've spent the last 12 months trying to recover and trying to get properties back up on stream, and not a lot of time anticipating how to expand," he said, "but going forward I would certainly prefer to have a portfolio that was heavier on the industrial side."

In the meantime, real estate managers are hoping for at least several relatively mild hurricane seasons. White, from Miami, recalled the calm that settled in after Hurricane Andrew struck in 1992.

"After Andrew, insurance became very expensive, but in a matter of two or three years, the market stabilized because we had no storms that hit us," White said. "We need a couple of years of no hurricanes, and the market will adjust."