Many mid-sized real estate investors, including family offices, are currently struggling with the skyrocketing costs of property and liability insurance. This volatility makes placing coverage and analyzing new transactions increasingly difficult; investors often wonder if they can even match the seller’s existing coverage terms at the time of purchase. However, a significant opportunity exists for investors who own substantial portfolios but haven’t yet reached REIT-level scale. The middle market can now access insurance through a member-owned group captive company, such as Real Property Captive insurance.
Why is Insurance so Important in Commercial Real Estate?
While it may seem obvious, it’s crucial to restate why commercial real estate businesses must have an insurance plan. It’s always a good idea for businesses and individuals to have coverage in case of disaster, but this is especially important for commercial real estate owners, as they have potential responsibility not only for themselves, but for their tenants. Having a plan set out before an emergency happens ensures that everyone knows their responsibility and is treated fairly. This is the same reason that owners should require tenants to provide their own certificates of insurance (COIs) to confirm that everyone involved is protected.
What are the Biggest Challenges Commercial Real Estate Owners Face when Seeking Insurance?
As stated before, the major challenge for business owners and investors looking to choose an insurance plan is cost. Insurance prices have skyrocketed recently, due largely to inflation, regulation issues, and an increasing rate of natural disasters such as wildfires.
Aside from prioritizing regular upkeep of your portfolios, another important strategy in reducing these costs is to shop around for the best price. However, as costs rise universally, this can remain challenging. Today, business owners may want to consider alternative insurance models.
The Captive Advantage
This structure provides mid-market owners with the same sophisticated insurance tools that REITs and institutional owners have utilized for decades. In a captive model, the clients (the insured) own equity in their insurer. The captive takes ownership of the primary layers of risk and purchases reinsurance to protect against catastrophic losses. This ownership stake allows the captive to distribute excess premiums and investment income gains back to its members.
While these dividends typically begin after the first three years, they serve as a powerful financial reward for owners who maintain low loss ratios—specifically those with claims under 30% of their annual premium spend. Even a year or two of significant losses does not jeopardize the captive’s stability. Reinsurance layers are designed to absorb large hits, and excess premiums accumulated over time provide a financial cushion. Furthermore, programs like Real Property Captive use A.M Best Credit structures, paying a fee to A.M. Best A-rated insurers to issue policies. This ensures the coverage is fully compliant with all lender and investor requirements.
How Captives Differ from Traditional Insurance
In a traditional insurance model, approximately 15–25% of your premium is immediately directed toward brokerage commissions. There is rarely transparency regarding the remaining dollars, as they are pooled by the carrier. Ultimately, your premiums are priced based on broader market trends and the insurer’s total risk appetite, rather than your specific portfolio performance.
In a group captive program, the premium breakdown is more transparent:
- 40% is allocated to cover potential losses.
- 20% goes into a shared member pool.
- 40% covers reinsurance, fronting fees, and operational costs.
What Remains Constant?
Despite the different financial structure, the core protections remain the same as a standard commercial policy:
- Identical Coverage: Limits and terms are actuarially determined to match or exceed your current policy.
- Lender Compliance: Policies maintain an A.M. Best Credit rating, satisfying all institutional requirements.
The Bottom Line
To qualify, the typical minimum annual premium is $300,000. This usually involves a portfolio of at least 10 properties to spread risk effectively. The financial upside is compelling: assuming a loss-free three-year period, an investor could expect a dividend in the range of $300,000 to $360,000. Once fully vested in the plan, this translates to roughly $100,000 per year in returned capital. These savings are often simply unavailable through standard insurance markets.
Summary
Captive insurance creates a unique opportunity to reclaim insurance spend and transform a necessary expense into a potential profit center. If you are looking for real savings compared to standard insurance, it is worth taking a few minutes to explore this model.
Clifford A. Hockley is Principal Broker at SVN | Bluestone, as well as the managing member of Cliff Hockley Real Estate Consulting, LLC. A Certified Property Manager & Designated Managing Broker, Cliff has 42 years of experience in the brokerage and management of Real Estate companies. Bluestone and Hockley Real Estate Services managed condominium associations, multi-family, and commercial properties in the greater Portland area. Focused on running the company and involved with investment property brokerage, he worked with financial institutions, governmental agencies, private investors, and not-for-profit organizations. He also has vast knowledge in budgeting, organizational management, and building structures. His previous experience includes over five years in accounting, production supervision for a manufacturing company, and work for state agencies in California.
Contact us at https://www.chockleyconsulting.com/contact-us or reach out to [email protected].
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