Weekend Interview: WTW’s Danielle Lombardo On Being A ‘Property Insurance Therapist’ And Her Biggest Fear This Hurricane Season

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It’s frustrating to work in a service industry and sometimes feel like the only good options you can provide clients are merely less bad, reactive as opposed to proactive.

Real estate insurance expert Danielle Lombardo has felt like that for years, as a cascade of high-cost disasters, from hurricanes to winter storms, and increasing climate risks made it harder and harder to do anything that was good enough. Sometimes it feels like she’s playing “property insurance therapist.”

“Challenging the status quo is very difficult to do in the insurance industry, because we’ve been doing the same thing for hundreds of years,” Lombardo said.

Last month, Lombardo took a new role working at WTW, serving as chair of the firm’s real estate, hospitality and leisure division, focused on corporate risk and advising larger portfolio owners about the challenges of rising insurance costs. She has long been outspoken about the dire challenges of an industry dealing with skyrocketing insurance costs.

She told Bisnow last year the situation had become desperate and deeply ingrained into all levels of decision-making, as rising premiums and difficult financing hurt deal-making. In her new role, she sees more potential in helping clients understand the mystifying, complex world of insurance and even evaluate options like alternative risk transfer and captives, which in effect allow a firm to create its own insurance company.

Lombardo sees new potential in new models for the industry, especially challenging the status quo of how the insurance industry has transacted, by having real estate clients think about retaining risk themselves and utilizing alternative risk transfer solutions to remove themselves from the volatility of the market. But a central question remains around how much these new ways of managing risk can be applied before more disasters strike, a significant worry in a year where the Atlantic hurricane season is expected to be quite dire.  

This interview has been edited for length and clarity.

Bisnow: What are the biggest differences you've noticed over the last couple years in terms of what clients are telling you, how they're acting and how they're taking insurance more seriously?

Danielle Lombardo: Insurance was probably No. 20 on their priority list, and now it's No. 1 or 2. As such, the senior executives at most real estate firms are engaged in the actual process. So there's been this forced learning around how insurance works. I think what's happened just from a psychological standpoint is that it's been a bit of the five stages of grief. I've seen clients go through anger, denial, bargaining, depression and then finally acceptance. 

Bisnow: What are you hearing about this upcoming hurricane season? How are you preparing your clients for it, and how serious do you think it may be? 

Lombardo: At the end of the day, there are three paths forward. If we have a quiet hurricane season, we're going to continue to see moderation or even reductions in property insurance. We'll continue to see more capacity come onto the market. 

There is a middle path, based on the renewals and overcorrection in the market, where the market can sustain some losses from hurricane events. It’s a matter of how severe and how many.

But if we have a very active hurricane season, that’s my biggest fear. We're going to be right back to where we were, if not worse, depending on the size, scale and severity. What I'm trying to solve for and think through longer-term is how do we solve for the volatility?

We're still dealing with what the insurance industry calls the secondary perils — your winter freeze storms, your wildfires, convective storms, things like that. And so I think we have a bigger issue at hand: quantifying what the actual risk is and hedging against that future risk by having real estate owners really take more of the insurance risk on their balance sheet.

Bisnow: That sounds a bit fatalistic. We're either going to have moderation or it's going to be terrible. It seems like a healthy insurance market would have already priced in those risks and not made it so topsy-turvy.

Lombardo: I think it's a good comment. But we saw what happened after Hurricane Ian and what that did to the insurance market last year. In terms of value, it wasn't really a significant event for the market. So the question is, how much of the volatility is actually driven by lost costs, how much of it truly is supply-demand? 

I've seen the insurance market respond to large events both practically and emotionally. Practically, if there are losses that surpass a certain amount, it does affect balance sheets, and you have to make sure that you're underwriting correctly. Emotionally, was there potentially an overcorrection?

Bisnow: It does strike me that as an owner, if you're in an area where you face these risks, your fingers are crossed a little bit. It’s the nature of natural disasters and fate. But to the degree this is central to the real estate and property market, it seems less than reassuring that, hey, if it’s going to be bad, it’s going to be really bad. 

Lombardo: That’s the core of the problem. The problem is volatility. We really don’t know what we can assume, just based on the past couple of years and how the markets have responded. Last year was historic in terms of the pricing raises that we saw. So we would hope that the insurance market is healthy enough to take on a certain amount of losses from a named windstorm. 

But again, it's really hard to quantify, because even a year ago, the market was, on paper, fairly healthy from a premium standpoint. 

I think there needs to be a bit more transparency and getting clear on what is really making these insurance carriers profitable. How are they underwriting the risk? Where are they parking their money in case of a storm in the future?  

Bisnow: How are insurance risks and insurance costs impacting commercial real estate? Of course, premiums are going up and impacting lending. But maybe can you list the secondary and even tertiary ways this is driving up costs.

Lombardo: I think anytime you have properties with deferred maintenance where there's issues around the structure, around the management of the property — life safety issues, things like that — anytime there's more exposure to loss, you're going to have higher claims, and the premiums are going to increase. 

The challenge when insurance premiums continue to rise like this is people pay less attention to investing their dollars in risk control because they have fewer dollars to invest. So then it becomes a cycle. If owners are not investing in what's going to prevent losses but they don't have the money to invest, then the losses increase and the premiums keep increasing. 

Bisnow: How are data, AI and analytics changing the understanding of risk? I imagine predicting what’s coming is the million- or billion-dollar question.

Lombardo: Essentially, the larger catastrophe-modeling companies take thousands of years of storm data, including the past five years where it's been really the most volatile, and they overlay it on a property based on the geography and run storm simulations to tell you what your average annual loss or probable maximum loss might be during that year. There's also some secondary models that help to model around winter storms and tornadoes and wildfires.

Modeling companies are trying as quickly as they can to make sure that some of these newer, more emerging issues are included in the model. The biggest challenge is it's so new that you can't use thousands of years of data to predict the future. You're using one year or two years. 

Bisnow: So that’s going to be a central issue. We have hundreds of years of “normal” climate data to base this on. But we don't have exponentially changing climate change data to base this on. It’ll be hard to calculate risk as the very complicated climate system constantly changes and evolves.

Lombardo: So then the question is, how do we make sure that we're allocating the risk appropriately between the lender, the borrower and, in some cases, the states where we have the most issues? Because again, I don't suspect that we'll all of a sudden have quiet and stability around the weather.

Bisnow: When you look at the way you're advising investors to think about their portfolio in terms of investments and regions, what's important for us to understand about how that strategy is evolving? Do we need to really rethink how bigger portfolios operate and price them accordingly?  

Lombardo: One of the things that we've seen over the past couple of years is stakeholders within real estate firms who didn't traditionally have to think about insurance are now being forced to. Part of that is integrating insurance and risk management from the beginning of the process, from due diligence to divestiture. Beginning with the architect and how you're building these buildings, if you do certain things to the structure, how does that change the risk? It's really integrating throughout the entirety of the process. 

Bisnow: Are there specific markets that are really being impacted by changing weather and insurance risks in new ways?

Lombardo: I think the biggest challenge underwriters have had over the past five years is every year they would increase rates thinking that they were meeting their exposure, and every year they'd have a new set of events that they didn't underwrite for. They’re constantly trying to play catch-up. A lot of these events are coming more inland. As an example, at this point, all of Texas is considered a Tier 1 insurance risk, whereas five years ago, just coastal Texas was considered a problem.

Bisnow: Out of curiosity, as someone who spends so much time thinking about risk, how does it alter the way you approach risk in your personal life? 

Lombardo: It’s so funny, in my personal life, my husband's the risk manager and I take on a lot more risk than I probably would advise clients. I put on different hats, depending on the person's risk tolerance. So if I'm talking to a CEO who wants to take on more risk — “I want to get in the game” — versus a risk manager who wants to be overly conservative and make sure everything is covered, my role is to really understand the client and their risk tolerance. Helping them understand the pros and cons and advising.

Bisnow: What is a bold prediction you have for the rest of the year?

Lombardo: Oh, my goodness. I haven't allowed myself to emotionally feel what it would look like to have a really active hurricane season and that effect on clients. Part of me believes there's going to be some activity. When I think about continued volatility, especially because the real estate market hasn't fully recovered by any means, it's hard for me to imagine how the real estate community will react. If we do have an active hurricane season, that creates more volatility in the market. My hope is that it's stable and quiet.

Bisnow: Can you give us a sense of what your typical weekend routine looks like?

Lombardo: I have a 3- and a 4-year-old, so it’s all about my daughter dressing up as Cinderella and having a tea party or watching my son run around pretending he’s a superhero.