Boost Multifamily Returns by Reducing Total Cost of Risk with AI Analytics

Recent surveys reveal that TCOR is skyrocketing for multifamily firms, straining budgets and threatening profitability. Total Cost of Risk (TCOR) encompasses all costs associated with risk management, including insurance premiums, claims losses, risk mitigation expenses, tenant default and administrative costs.

The Causes-Numerous and Diverse

Several key factors are driving up TCOR for multifamily real estate owners and operators:

• Rising Insurance Costs—Average annual increases in insurance premiums frequently exceed 20% across most lines of coverage. Property and liability rates have soared, sometimes doubling or even tripling. Deductibles are also being raised to maintain coverage. This dramatic rise in insurance costs is a major contributor to multifamily's swelling TCOR.
• Persistent Claims Losses—Frequent claims, especially related to water damage, are plaguing multifamily portfolios. High claims frequency and severity are prompting rate hikes from insurers. Self-insured losses are also climbing. Addressing the claims epidemic is critical for getting TCOR under control.
• Tenant Default—Whether due to lease breaks, skips or applicant fraud, one recent survey found that 25% of bad debt comes from rental fraud, costing up to $4 million per year for ownership groups surveyed.  Additional data has indicated that post-pandemic delinquencies are 1.5 times higher than before 2020.
• Inadequate Risk Management—With limited resources, many firms struggle to quantify risks, implement loss prevention measures, or leverage risk transfer options. This lack of risk mitigation allows losses to persist unchecked, further elevating TCOR. More strategic risk management is essential.
• Administrative Inefficiencies—Managing TCOR requires significant personnel resources for risk, security deposits, insurance, claims, and vendor management. Outdated systems and manual processes lead to administrative inefficiencies that inflate expenses. Streamlining operations is key to optimizing TCOR.

The Impact is Significant

The financial impact of rising TCOR is immense. Recent surveys reveal average annual spending on insurance premiums and retained losses exceeding $9 million per firm. Add over half a million more on risk management, administrative costs, and the economic impact of uninsured losses from tenant default, and over a quarter million on outside services, and TCOR poses a significant burden.

Effective Risk Management is Key to Controlling TCOR

Investing in risk management tools and practices is crucial to controlling TCOR. Risk management helps identify and mitigate risks that lead to financial losses. Implementing risk management systems lets companies monitor risks in real-time. Investing in risk management ensures sustaining cost control long-term as new risks emerge. Robust risk management infrastructure helps organizations anticipate threats, keep optimal cost levels and improve asset returns.

Powering Solutions with AI Analytics

To gain control over runaway TCOR, multifamily firms need solutions that provide actionable risk intelligence. This is where AI-powered analytics solutions - explicitly built for multifamily that leverage massive datasets, predictive modeling, machine learning algorithms, and automation are now emerging.

These tools provide unmatched capabilities to quantify risk exposure, model economic impacts, identify targeted mitigation strategies, and capture the return on risk management investments.

Intelligent Risk Analytics Capabilities

Historical Insights—AI analytics generate granular risk scores at the unit, building and portfolio levels. Risks are quantified for resident cohorts and aggregated at the property level based on advanced statistical models and correlations uncovered for past and active leases. This enables accurate exposure measurement.

Performance Monitoring—The AI analytics continuously monitor leasing and operations data for risk levels and mitigation outcomes. Results are measured against targets to enhance strategies over time. The capabilities of AI analytics suites align perfectly with the risk intelligence needs of multifamily firms. Applying these tools can provide the actionable insights essential to controlling escalating costs associated with tenant default.

Snapshot or Live Data—AIRA utilizes Assurified's ART platform's flexible integration capabilities to seamlessly switch between live and historical data sourced from PMS systems using batch (ETL) or live (API) integrations.

Underwriting Analysis—Analyzing risk drivers and economic risk factors allows AIRA to simulate mitigation strategies and quantify the potential financial return. This reveals the most effective solutions to implement.  Powerful financial models integrate risk metrics with asset data to project economic risk impacts on asset returns under various scenarios. Metrics like NOI, IRR, and residual value illustrate the financial risk profile.

AI-Powered Risk Management in Action

One example of an AI-powered risk transformation platform purpose-built for CRE is the Assurified Risk Management (ART) Platform with powerful AI risk underwriting models and analytics. Assurified is rolling out its platform and analytics in 2024, initially targeting tenant default risk, a $20B problem for the multifamily segment of CRE. Additional risk sectors and commercial real estate (CRE) segments are planned for future platform releases, including commercial property, liability, and business interruption insurance for office, mixed-use, industrial, and retail properties.

Assurified's Intelligent Risk Analytics

The company’s Intelligent Risk Analytics, aka AIRA, is aimed at multifamily asset managers, investment officers, and risk professionals struggling to get their arms around the true cost of bad debt related to lease skips, breaks and applicant fraud, which threaten portfolio profitability. 

AIRA focuses on transforming tenant default risk, providing:
•    Automated risk scoring of leases, properties and portfolios using predictive AI 
•    Granular risk & loss analytics 
•    Risk pricing models and scenario analysis 
•    Optimized risk mitigation strategies, including captive insurance programs

For multifamily asset managers and risk officers, AIRA enables data-driven decisions that lead to:
•    Enhanced risk visibility for better mitigation and decisions
•    Ability to price own risk at property and portfolio levels for the first time
•    Optimized risk financing expenses
•    Reduced claims losses and resulting bad debt
•    Improved NOI and asset returns

Technology Approach 
AIRA combines advanced predictive analytics, machine learning algorithms, API connections to property management systems, configurable risk models and scenarios, embedded insurance structures and more.

The Path Forward

With TCOR expanding into an existential threat for many multifamily firms, leveraging AI-powered risk analytics provides a pathway to control costs and risk. Quantifying exposure, modeling economic impacts, optimizing mitigation strategies and tracking performance can transform risk management capabilities.

Purpose-built AI analytics solutions finally offer multifamily firms the sophisticated capabilities needed to understand risk drivers and project outcomes and maximize returns. Adopting these tools can drive better risk decisions and contain the TCOR beast before it devours profits. The time for advanced multifamily risk analytics has arrived.