Economists often say that markets love consistency. So do condos and HOAs – and they share that preference for stability with another important group: insurance companies. Residential communities seek to keep their costs stable, and insurance companies seek to keep their profitability high by reducing risk. In the coming year, however, residential communities and insurance companies may find themselves on a collision course due to these same factors. Premiums – the cost of insurance – are likely going up and by no small amount, as co-ops, condos, and HOAs seek to keep their operating costs down.
Alex Seaman is a senior vice president of HUB International, an insurer located in Woodbury, New York. He predicts a substantial increase in premiums for 2020. “I have been proactively providing updates to my clients on the recent changes in the insurance market which are now becoming increasingly volatile,” he says. “This is especially true with respect to umbrella liability. Many [communities] have seen several major market fluctuations, including those caused by 9/11 and Superstorm Sandy. Though the current changes are not nearly as severe, the rationale [for the fluctuations] is not nearly as clear.”
“Historically,” Seaman continues, “the insurance industry has had numerous rating cycles based on a number of factors, including interest rates, legal regulations, natural and man-made disasters, industry profits, and reinsurance requirements. Cycles have been dramatic in some cases, and they have typically lasted four to five years or less. For the past eight to 10 years, we have gone through an unprecedented period of industry rate stability. Rates have been largely flat, with relatively small increases or decreases, depending on claims experience and or property valuations. We began to see indications a few months ago that rates might begin to increase. We are now seeing indications of more significant increases nationally, and in virtually all lines of business. Although we are still seeing many renewal programs with relatively small premium increases, more significant premium increases are likely.”
What Are the Causes?
As to what might be behind these increased costs, Seaman points to several contributing factors, including the chronic underinsurance of many properties, an increase in aggressive claims against existing policies, a smaller number of risk-purchasing groups (under which many co-ops and condos are insured), and poor loss ratios.
John F. Piazza, President of Real Estate Solutions in Wilmington, Massachusetts, is a representative of HUB International as well, and says, “First of all, many large insurance companies have concerns about their profitability. That’s no mystery, because insurance companies are for-profit companies. When they run into problems, they do one of two things: They don’t renew policies where they have incurred losses, or they increase the rate structure. I have seen for the past 12 months an exceptionally challenging marketplace where rates are increasing, terms are harsher, and there’s a harder look at deductible structure. Upward movement in rates is inevitable. There is also a re-evaluation of value. There’s no more insuring under replacement cost, and a requirement for adequate insurance to meet underwriting standards.”
Seaman sees the undervaluation problem as key to the current jump in premiums as well. “Properties have been underinsured for many years,” he says. “Insurance carriers had been accepting valuations on fire-resistant high-rise buildings of $200-$250 per square-foot – [but] most of these properties cannot be rebuilt for under $400 or $500 per square-foot. Carriers are insisting on more accurate insurable values. While in some cases property rates may not increase, the premiums will likely increase based on higher valuations, providing for higher overall premiums in absolute dollars.”
Natural Disasters and Climate Change
Another major factor affecting the increase in premiums is the added risk of loss resulting from more frequent – and more catastrophic – weather events, which in turn lead to more claims. Many cases, like the hurricanes that regularly deluge Florida, or the wildfires consuming California, are at least to some extent the result of climate change.
Sally Mevers, vice president for Acentria Insurance in Palm Beach Gardens, Florida, points to these disasters as a major factor in the expected rate increases, which she says are not just a local issue, but a global one. “In Florida we experienced a lot of natural disasters in 2017 and 2018. We’ve had major hurricanes, and there has been flooding and fires as well in other parts of the country. Natural disaster claims are up, and those claims are driving this increase. In addition, there is the re-insurance factor coming into play. Over the prior seven years, investors were enamored of the insurance industry – and because during those years there were far fewer hurricanes, these investors weren’t clear on what they were getting involved with. They’ve fled the market as a result [of the less-favorable market], causing a scarcity of investor capital. We don’t have the inflow of cash we had before. With the cost of re-insurance going up, premiums go up as well.”
Clearly, the changing environment (both in terms of the literal climate, and in terms of investor willingness to underwrite additional risk and uncertainty) has made it more difficult for insurance companies to maintain financial health and flexibility. The result is a more conservative approach leading to more conservative underwriting, which in turn leads to higher premiums for everyone.
A Litigious Society
Another factor in rising premium costs is the rising level of litigation in claims cases. According to Seaman, “Labor law regulations have been present for many years. However, these regulations are now having a huge impact on the insurance industry. Claims that are several years old had been reserved for at modest levels, [but] as the injuries persist and develop, the claim reserves are exploding. Plaintiff attorneys are getting more aggressive on these claims, and due to the nature of the laws in New York State, the insurance carriers are having an impossible time limiting judgments. This is resulting in significant rate increases.”
Mevers cites similar situations in Florida. “There is an attitude among condo owners that associations carry insurance, so if something happens, they can go after the carrier with an insurance claim. They don’t consider the ramifications for each unit owner paying into the association policy premium as part of their monthly common charges. The premium will rise due to more claims, and they will pay the increase in premiums through their monthly common charges.”
One option insurance carriers are using to keep premium levels at least somewhat stable is to shift some liability away from the association or corporation and to the individual unit owner or shareholder’s home policy. Piazza refers to this option as ‘deductibility management.’ Basically, the deductible required to be reached on the overall property is increased, and the unit owner would then have to make a claim against their homeowner policy. That means that effectively, if there is a water leak that affects 15 units, but the gross cost of the repairs was less than the deductible on the association’s policy, the association – and by extension the unit owners – would not collect from the association’s insurer. Rather, they would apply to their homeowner’s policy for coverage and reimbursement. While that might lead to higher premiums for individual homeowners, Piazza argues that the increase would be substantially less, even in the aggregate, than the increase in premium an association would receive due to a large claim, which would then be passed to the unit owners as part of their monthly common charges.
Advice for the Weary
In advising her clients, Mevers offers two simple and straightforward suggestions: First and foremost, insurance premiums increase and decrease over time – so prepare for those inevitable fluctuations. Like Joseph advising Pharoah, in the good years when premiums are low or falling, set up a reserve to balance out the bad years. Don’t reduce monthly charges. Collect the same monies needed when premiums are higher, and if that results in a surplus, use them to offset increases later. Second, maintain your physical plant. Maintenance means fewer emergency repairs and unexpected mechanical or structural breakdowns. Insurance carriers are watching; if your property isn’t in good condition, they will penalize you for it!
Lastly, Piazza offers this: Be careful who you work with. Find an agent who is a specialist in property insurance. Don’t treat locating the best insurance for your building like a contract to buy cleaning supplies. Don’t flood the market. Pick one agent, research that agent, and trust that the agent will get you the best deal. Remember, the agent may get paid through the insurance company, but he or she works for you.
A J Sidransky is a staff writer/reporter with New England Condominium, and a published novelist.