Has your property insurance gone up for your association? If it hasn’t yet, it may be soon. Many factors go into insurance rate increases. This article provides a good overview.
Reprinted from the Community Associations Institute, Hawaii Chapter, Quarterly Newsletter, Oct, 2020.
By Joshua German
For many community associations, their property insurance has been and will be seeing large rate increases. The biggest reason for these rate increases is the cost of reinsurance. Reinsurance is insurance for insurance companies to spread their risk to other companies around the world. All insurance companies must purchase reinsurance to ensure their long-term stability.
Over the last 10 or so years we’ve experienced very low property insurance rates. If you could look back at your insurance costs after Hurricane Katrina, they would be much higher than the premiums you are paying today. We’ve enjoyed these low rates due to less frequent catastrophic events, an influx of large amounts of capital from investors and good returns on investments for insurance and reinsurance companies.
2017 was by far the costliest hurricane season on record and damage from hurricanes Harvey, Irma and Maria is estimated at around $300 billion. The California wildfires in 2017 and 2018 are also estimated to have caused tens of billions of dollars in damage. These large losses have caused many institutional investors to move away from insurance investments to pursue higher returns in other sectors.
The decrease in profitability and capital has prompted the necessity for reinsurers to raise their rates. With a record number of hurricanes this season and wildfires raging across more than a dozen states, the outlook for insurance rates is getting worse. The top 20 global reinsurers are all expected to fall short in meeting their cost of capital this year which indicates the increased rates are not enough and will continue to rise.
As for our projections, buildings of wood frame construction have seen and will continue to see a 5%-10% increase in rate every year for the next 2 years. Stronger construction buildings like concrete high-rises are getting double digit increases from 10% to 30%. The larger increase for these types of buildings is due to an increase in the frequency of fire and water damage claims. Lack of a fire suppression system and aging water and sewer lines that have not been upgraded will cause your association to see larger rate increases than newer buildings that are equipped with fire sprinklers and new pipes.
In addition to increasing rates, companies are tightening up their underwriting guidelines and asking more questions. They want to see that Boards are being proactive in trying to reduce the possibility of a large fire or frequent water damage claims. Installing a fire sprinkler system is by far the best thing you can do to protect your association and lower your insurance premiums.
Companies also want to see that the Board has performed mandatory high-risk plumbing component inspections. Installing moisture sensors and automatic shut off valves are also a great proactive measure that can have a positive impact on your insurance premiums.
Umbrella Liability Insurance
Umbrella insurance is another line of insurance which is like property insurance in the sense that the companies are providing very high limits. This requires multiple insurance and reinsurance companies to come together and provide enough of a financial spread on each risk. Some associations are not able to get the same high Umbrella limits upon renewal or are having to pay a higher premium. We would recommend budgeting for a 10% increase in premium for each of the next 2 years.
Directors’ and Officers’ Liability Insurance
Community associations nationwide continue to be the target of lawsuits. Wrongful foreclosure claims are trending up across the country along with the usual claims for discrimination and failure to enforce the governing documents. There are only a handful of companies that provide a low cost, quality D&O policy for associations. Two of these companies are now adding mandatory exclusions to their policy which remove coverage for foreclosure related issues. We have experienced rate increases over the past 3 years and we continue to expect a 10% rate increase each year for associations that have not been involved in any lawsuits. Those that have had claims can expect huge rate increases of 500% to 1,000% and a large retention added to the policy.
General Liability Insurance and Crime Insurance (Fidelity Bond)
Luckily for us, Hawaii has not had any increase in rates for both General Liability and Crime insurance. We also don’t expect to see any increases for at least the next few years. This is in stark contrast to many states on the US mainland which are experiencing dramatic increases in rate due to a more litigious society.
Most Flood insurance policies are through FEMA’s National Flood Insurance Program. Due to past catastrophic events the NFIP is over $20 billion in debt which necessitates a rate increase every year until they can become more self-sufficient. The rates are set by the federal government and vary depending on what flood zone your buildings are located in. The increases can be between 4% and 24% with most increases being around 11% per year. About the Author: Joshua German is a member of Insurance Associates