These New York Affordable Housing Developers Created Their Own Insurance Firm

“If you got a 3 to 5 percent increase, you kind of went along with it and it didn’t really affect you,” said Susan Camerata, principal and CFO of Queens-based building manager Wavecrest Management, which mostly deals in affordable housing. “But, when we started seeing 30 percent and 40 percent increases in any given year, and not necessarily because of additional losses that any one building experienced, that’s what started us questioning this.”

In March of this year, the New York Housing Conference (NYHC) released a report which found that the average premium increase for affordable housing developers in New York City is 26 percent, with insurance costs increasing a shocking 103 percent over the past four years. The report even noted that one unnamed developer, with over 3,000 units, saw a four-year increase of 175 percent.

Cost increases of this magnitude can throw a proverbial monkey wrench into any aspect of affordable housing maintenance or development.

“We’re seeing even on the new construction side that the city has to invest more and more money per unit in upfront costs to subsidize the increases in insurance,” said Rachel Fee, the NYHC’s executive director. “We see this as a huge threat to the financial stability of affordable housing, and a barrier to creating new affordable housing.”

Lorrie Pizzola is a policy consultant with the New York State Association For Affordable Housing, an affordable housing industry trade association whose 400 or so members include developers, architects, contractors and others.

Pizzola said that rising insurance costs are currently a top concern for the organization’s members.

“Costs are going up so much, and because rents are capped and developers take subsidies, what they can charge per month in rent is capped — they can’t go over that,” said Pizzola. “So, if it’s a zero sum game, money has to come from somewhere. It affects the bottom line and other elements too. What isn’t getting done in a project because you have to pay these increased insurance costs?”

Fee goes as far as to say that on the affordable housing side, New York City does not currently have what could be considered a competitive working insurance market.

“Costs have been increasing for years,” said Fee. “We’ve been hearing anecdotally that insurance companies are pulling out of the New York market or no longer covering multifamily or residential. We have sought more information from the [state] Department of Financial Services, but they didn’t have many of the answers we were looking for.”

John Crotty is one of the founders of affordable housing developer Workforce Housing Group. Crotty, too, saw trouble ahead for his properties due to recent increases in premiums.

“We have 1,500 units throughout New York City and Westchester,” said Crotty of the county just north of New York City. “The costs were getting so overwhelming on insurance that it became clear that if we didn’t do something, we would not have the money to sustain ourselves as an entity going forward.”

It’s worth noting that New York State’s 2025 budget includes a provision banning discrimination against affordable housing properties by insurance companies — including properties that might be partly market-rate. But those Commercial Observer spoke to for this article indicated they have yet to see any deceleration in rate increases, and added that they would be hard pressed to prove these increases were discriminatory anyway.

“We were very appreciative that Gov. Hochul included that in her budget,” said Wavecrest’s Camerata. “However, I haven’t personally seen that it has meant that we’ve got lower rates, or that another insurance company has entered the market.”

Crotty emphasized that the rising rates were having a detrimental effect on his company’s ability to maintain its properties.

“If you’re taking away excess cash flow to pay for insurance, which is what’s happening, eventually it catches up — deferred maintenance is a bad idea,” said Crotty. “A $200 window that breaks costs $1,000 to replace the sill, then costs $10,000 to replace the wall broken around it. An ounce of maintenance is worth a pound of cure.”

Given all this, it was around two years ago that Crotty and Camerata began discussing their insurance conundrum, and soon expanded the circle to include other developers and managers. They eventually decided to enlist an actuary to determine whether the high premiums they faced correlated to any reasonable increase in claims or expenses.

As it happened, they did not.

“They performed a feasibility study based upon 20,000 randomly selected doors,” said Huhnsik Chung, partner at the law firm ArentFox Schiff LLP. “They looked at the loss history over five years, and that loss history examination confirmed that the risk hadn’t increased in five years, but the premiums had more than doubled.”

But on top of — or perhaps helping to drive — the higher premiums, the number of insurers that cover affordable housing had dwindled, giving developers no real alternatives. And, unlike developers of market-rate housing, these companies lack the option to raise rents beyond the legally determined maximums to help offset the increased cost.

So Crotty approached Richard Ravitch at Waterside Management to discuss what might be involved in him and other developers setting up their own captive insurance company.

“Dick knew a lot of business leaders and titans in the industry,” Crotty said of Ravitch, a former lieutenant governor who died in June 2023 and who also had served as chairman of the Metropolitan Transportation Authority. “We got great access into the highest levels of a couple of different insurance companies. We were with the chairman or vice chairman of one of them, and they told us how they could do it. But I said, ‘Wouldn’t we be better off just doing it on our own, because we’re still going to have to pay you?’ And they said, ‘Yeah, but you’ll never do it on your own.’ So I thought, ‘Bet you that’s not true.’”

Ravitch began working on the issue with his partner, Peter Davis, and the eventual result was the Milford Street Association Captive Insurance Company (Milford), an insurance company that is owned by its premium payers and, according to its introductory announcement, will “provide insurance only to New York affordable rental buildings that have a regulatory agreement limiting rents and receive public financing.”

The announcement also points out that developers’ liability insurance premiums through Milford will be “significantly lower” than from other companies due to “changing the focus from profit to stability, simplifying overhead and operations and instituting tailor-made risk management controls.”

Davis, who has served as Milford’s chairman since Ravitch’s death, notes that while establishing the company took some doing, it’s hardly an unprecedented effort.

“It was a long and arduous process that involved hiring advisers who were experts in the field and finding the right partners, including the right captive manager, underwriting company, and claims adjustment company,” said Davis. “A ‘captive’ is the hub of a wheel of partners who provide specific expertises. When you put it all together, you get an insurance company. I believe there are, like, a hundred thousand captives in the country.”

Milford is just coming together now, with four founding members, including Crotty and Camerata on board. That number is expected to increase to as many as nine by Sept. 1, and the law firm ArentFox Schiff is handling all legal aspects of the company’s formation. The company hopes to begin writing its first policies soon.

While Crotty anticipates a much more affordable insurance regime for Milford policyholders moving forward, with initial premium savings of at least 30 percent dropping even further over time, he reiterates that the move was purely out of necessity.

“We really didn’t have a better choice,” said Crotty. “There wasn’t a more obvious plan to do something. The idea was to get the whole industry together to do something good for itself. The real value is in stability going forward. People will understand exactly where their premiums are going to be based on what their losses were.”

In time, the participants anticipate that Milford will scale, bringing in more developers to ensure that the company can continue to self-fund.

“It’s really a cooperative,” said Camerata. “Any profits stay within the company.”

At this point, the founding members are each putting up an undisclosed amount to develop a fund to handle claims, with the hope that the government will also participate at some point.

“We had hoped that the city and state would be our partners,” said Davis, who notes that the current participants represent around 50,000 units. “We still do, but that hasn’t happened yet. So, because there’s an existential need for it, the founders all decided to self-finance.”

While saving on premium costs was the main impetus for Milford’s creation, Crotty notes that this new endeavor will also help its insured stay up-to-date on how to avoid various pitfalls associated with maintaining their properties.

“There’s two purposes for this,” said Crotty. “One is cost saving, the other is operational efficiency, to make sure we are preventing liability issues across the board. Plaintiff’s counsel has very active communication about what works and what doesn’t, plus a court system that tells people the same. Landlords have none of that.

“So to be able to track that as an industry and to make people aware of it will be tremendously valuable. When there’s a new liability trend, we could tell everyone about that in relatively short order, like, ‘Hey, one of our insureds got hit with this. Make sure you’re looking after it.’ Knowledge is king. If you don’t know what’s going on, how can you protect against it?”

Davis notes that the company’s current priority is identifying an appropriate reinsurance carrier, after which they hope to begin writing those policies. He believes that getting this company off the ground will be not just helpful, but vital to the health of affordable housing in New York.

“Developers are threatened, absolutely. Their existence is threatened. This is not a minor problem,” said Davis. “Affordable housing developers are being crushed by insurance premiums. The healthier the bottom line of affordable housing developers, the more housing can be built. It’s a question of survival. This captive insurance company is the best hope we have of relieving some of that pressure so that we can build more affordable housing.”