New Captive Insurer Eases Rising Insurance Costs for Affordable Housing

A new captive insurer has been formed to provide stable, cost-effective liability insurance for affordable housing developments in New York. The Milford Street Association Captive Insurance Company, domiciled in Vermont, was established in July 2024 by affordable housing developers, landlords, and other stakeholders.

The affordable housing industry has faced significant challenges in recent years due to rising insurance costs, driven by ongoing macroeconomic pressures such as inflation, climate change, reduced reinsurance capacity, and fewer commercial insurers offering multifamily building coverage. According to the New York Housing Conference, the average cost to insure an affordable apartment has increased by 103 percent since 2019, with premiums expected to rise by 26 percent annually. These increases threaten to outprice landlords and others in the marketplace.

The captive insurance company is the first of its kind designed to address the growing challenges in the affordable housing market. It exemplifies the innovation seen in markets facing unsustainable rate increases and capacity challenges, as industry stakeholders seek alternatives to better manage their risks and expenses.

While New York's housing market is unique, it is not alone in facing these challenges. Other cities struggling with rising insurance premiums and reduced capacity may follow New York's example and form affordable housing captives, especially if the captive succeeds in providing more stable and cost-effective liability coverage. This trend is evident in cities across the United States, such as Los Angeles and Houston, where insurance coverage for affordable housing buildings is increasingly scarce.

Captive To Address Unique Risks in New York Affordable Housing Market

According to a report from New York City Comptroller Brad Lander, New York City consists predominantly of renters, with 69 percent of households renting their homes. About half of these renters live in rent-controlled apartments. The January 17, 2024, report states that one of the "greatest challenges facing New York City's economy is the availability and affordability of housing. Economic growth and stability in NYC depend upon the ability for workers and others wishing to move into or within the city to find housing they can afford."

This statement emphasizes the need for innovative solutions, like the new affordable housing captive. As the most densely populated area in the nation, New York City faces a scarcity of affordable housing, creating challenges for tenants and landlords. If high insurance costs can be better managed, it could potentially provide some relief for both renters and owners.

John Crotty, founder of Workforce Housing Group and a founding member of the newly formed captive, highlighted the connection between affordable insurance premiums and affordable housing costs, saying in a July 8, 2024, Coverager article, "If you don't solve this insurance cost problem, you will not have affordable housing." As noted by Mr. Lander, the city's economic viability relies on workers being able to find affordable housing to move into and around the city, underscoring the importance of addressing this insurance issue.

Another challenge landlords and managers face when shopping for insurance for affordable housing units in New York City is discrimination from insurers who do not want to cover these developments. According to the New York Housing Conference report, "insurance carriers discriminate against affordable housing based on income source and income level and many insurance providers will not consider insuring developments in New York City." The report provides examples of insurers asking if tenants received Section 8 rental assistance, were low income, or were previously homeless—and in some cases, declining to insure the risk if the building included affordable housing units or was located in specific boroughs deemed lower income.

In June 2024, the New York State Department of Financial Services issued a circular letter providing guidance to insurers, producers, underwriters, and excess line companies to address the discrimination issue. The letter states, in part, "that insurers, including excess line insurers, and [New York Property Insurance Underwriting Association] cannot inquire about on an application or cancel, refuse to issue, refuse to renew or increase the premium of a policy, or exclude, limit, restrict, or reduce coverage under a policy based on the fact that the real property being insured is an affordable housing development or contains affordable housing units."

While this guidance and the new law may mitigate some of the discrimination problems described by affordable housing advocates, the formation of the Milford Street captive will give landlords and property managers immediate relief from higher premiums and reduced capacity.

Captive Offers Lower Premiums, Additional Capacity to Members

Applicants must meet several requirements to become members of the new captive.

• Be based in New York
• Operate affordable housing units subsidized by city, state, or federal agencies and subject to regulatory agreements limiting rent
• Pass a risk profile rating and have robust risk management and mitigation strategies
• Possess a loss history within acceptable maximum limits

Once accepted into the captive, members can secure up to $1 million in primary coverage and up to $5 million in excess liability coverage. In addition to premiums, which are anticipated to be significantly lower than those available in the open market, insured members will pay a one-time per-unit returnable capital contribution and a per-unit association fee to cover administrative costs.

Elliot Kroll, partner at ArentFox Schiff, the law firm that advised the founders through the formation of the captive, said in a July 12, 2024, Business Insurance article, "This is precisely the purpose of an association captive—to provide the most cost-effective insurance solution for those who understand their risks and employ the best risk management practices."

The founding members of the captive include Peter Davis (J Cubed Residential), Susan Camerata (Wavecrest Management), Mr. Crotty (J Cubed Residential), Ruben Diaz (former city councilor and state Assembly member), Nicole Ferreira (nonprofit mortgage lender CPC Mortgage), and John Murphy (private equity investment Murphy & Partners).

Sources:

1. New York Housing Conference, The Alarming Risk of Risking Insurance Costs for Affordable Housing, March 2024.
2. Franklin Schneider, Shelterforce, "Soaring Property Insurance Rates Threaten Affordable Housing Development,” March 26, 2024.
3. New York City Comptroller Brad Lander, Spotlight: New York City's Rental Housing Market, January 17, 2024.
4. Gabriella Ben-Hutta, Coverager, "Introducing Milford Street Association Captive Insurance Company," July 8, 2024.
5. Andrew G. Simpson, Insurance Journal, "Markets/Coverages: Captive Insurer Targets New York Affordable Housing Market," July 12, 2024.