Insurance Insights: The Circle of Storage

When it comes to catastrophes, there is very little that can compare in severity to the damage caused by a hurricane. Nine of the 11 most expensive disasters in U.S. history were caused by hurricanes. In 1989, Hurricane Hugo resulted in $6.6 billion in insured-property claims.

The two catastrophes that were not the result of a hurricane were the Northridge earthquake of 1994, which caused $16.5 billion in property loss, and the Sept. 11 terrorist attack, which caused property losses of $20.7 billion. Catastrophic losses from Hurricane Katrina in 2005 are estimated at between $40 and $41.5 billion. To put these amounts in perspective, according to information gathered by the Self Storage Association, gross revenues for the U.S. self-storage industry in 2006 were approximately $22.6 billion; the total capitalization value for the entire industry in the United States was approximately $220 billion.

The profit from years or even decades of an insurance company’s operations can be wiped out by a single hurricane or series of large losses. According to the Insurance Information Institute, the rate of return on net worth for insurance companies writing homeowners insurance in Florida was about 25 percent for 1993 to 2003. From 1990 to 2005, the rate of return on Florida homeowners insurance was -38.1 percent. Not an acceptable rate of return!

There are many different methods of spreading financial risk from catastrophic exposure—beyond the limited reserves of the direct property insurance market. Among them are private-market reinsurance; government-sponsored reinsurance such as the federal backing provided by the Terrorism Reinsurance Act; direct state and federal risk-transfer programs such as the federal flood-insurance program; and state-sponsored FAIR plans for fire insurance. These all represent different mechanisms to pick up part or all of the catastrophic risk the primary insurance market is not willing or able to absorb.

If an insurance company is not able to transfer a certain portion of risk due to catastrophic exposure, it may restrict the amount of business it will accept in disaster-prone areas to minimize the number of large losses it may suffer. This is why property owners in some areas of the country, particularly along the eastern seaboard and Gulf Coast areas, are finding insurance difficult and expensive to secure.

Disaster losses are likely to escalate in the future. People want to live on coasts or in the country or mountains, despite the unpredict-ability of natural disasters. Increased development in these areas means more potential loss from a single event. Although improvements in building codes and fire-protection equipment help control losses from individual fires and storm damage, these measures are not nearly as effective at reducing or eliminating the effects of a firestorm, tornado or Category 4 or 5 hurricane.

To be successful in self-storage, your business must be where people work and live, but don’t overlook the importance of the availability and affordability of insurance. Work with your agent to determine in advance any special considerations of your proposed location. Some areas might create a high risk of loss, reflected in a very high rate, or a problem locating an insurance carrier acceptable to you or your lender.

A quarter-mile in any direction might make all the difference in flood-plain rating or brush-area concern and raise insurance costs that inevitably put a damper on other operating expenses. If you open a facility near a population center on the Atlantic or Gulf coasts, for example, you may find the cost or availability of insurance much improved by moving just a few miles inland.

In some respects, self-storage and insurance are not so different. Location plays a role in both. Understanding its importance before purchasing a business and seeking insurance will save you from going in circles and, instead, keep you in line with your goals for success. 

Scott Lancaster started his insurance career in 1976 as a licensed insurance agent and broker in California. He is now the regulatory compliance officer for Deans & Homer, where he was hired as a commercial lines property and casualty underwriter in 1985 and has worked in the self-storage division since 1993. Deans & Homer has been providing insurance products designed to respond to the unique risks of the self-storage industry since 1974. For more information, call 800.847.9999; visit www.self-storage-insurance.com.