Budgeting for Rising Insurance Premiums
Annual budgets can be complicated when there are so many unknowns. How are you to structure a budget when many association bills vary from year to year? Now you throw in insurance. Insurance can be one of associations’ largest expenses and the premiums can differ from year to year. Since they can change, budgeting can be challenging especially when your premiums at the next renewal are unknown.
Insurance renewals have stayed steady in the recent past, perhaps increasing 5-10% annually to stay even with national inflation and the basic cost of doing business adjustments. Fast forward to 2023! You may have read the news recently where insurance companies are losing millions of dollars the last couple years. The losses vary from insurance carrier to carrier; however, the overall theme has been bleak for most. For various reasons I will discuss below, insurance companies’ townhome/condo association insurance portfolios are performing unprofitably. Since insurance companies are for-profit companies, something had to change. The ever-dreaded rate increases have begun and are continuing for the foreseeable future. Besides rate adjustments, stricter underwriting guidelines have also been implemented. Here are many of the reasons why.
- Inflation – According to a national flood and fire restoration company, the cost to mitigate and repair a property water claim has almost doubled. The costs of goods and supplies, construction and labor costs, supply change issues are a few reasons for this major surge. The cost to build or repair has simply gone up.
- Catastrophic Weather – There are more catastrophic storms and weather events than ever before. Extreme hail and windstorms and snow and ice storms are affecting associations and having a very negative impact.
- Wildfires – Especially in the western United States, wildfires are wreaking havoc. Whether the wildfire is manmade or caused by mother nature, insurance companies have lost millions on wildfires.
This is the reality for association insurance until insurance companies can get their losses under control. For now, we recommend budgeting for 20-30% rate increases. Again, it may vary with insurance carriers, but not one company has been immune to losses the last few years. (NOTE: These large increases are mostly affecting condo/townhome associations with attached buildings or single-family homes being treated like attached for insurance purposes. Associations with no property coverage can estimate a 5-10% increase)
Rather than dwell on the negative, let’s talk about solutions and how to combat some of the increases.
- Raise Deductibles – Since the unit owner’s HO6 (personal condo policy) takes care of the master property deductible of the association (when written properly), the property deductible may be raised for a very minimal cost to the unit owner. Increasing the deductible can save the association thousands of dollars. The unit owners must contact their personal insurance agent and raise their dwelling/loss assessment coverage to match the new deductible. Please refer to your governing documents to make sure raising the deductible is allowed, how much you can increase, and do you have the proper reserves set forth by your governing documents. Also, by raising the deductible, this puts more responsibility on the unit owner and their HO6 policy. This ensures less claims are being filed on the association’s policy and maintains healthier rates for the future. This also prevents cancelation which can lead to having to purchase insurance from a non-admitted or “surplus” market where rates can skyrocket! Soaring rates can lead to higher assessments and special assessments.
- Pay in Full – Most carriers offer a paid in full discount. This simple discount can save hundreds to thousands of dollars depending on the amount of premium you pay.
- Annual Insurance Reviews – Meet with your insurance agent annually. Discuss missing or new discounts or ways to save the association money. Also review coverages including general liability, property, crime, and directors and officers insurance to name a few.
In summary, insurance rates are rising and most of the reasons are out of your control. Partner with an insurance professional who specializes in community association insurance . They will help you execute a game plan to keep premiums reasonable and provide transparency and education to your association. By doing so you will be able to budget properly and make educated decisions for your association.
Luke Udy, CIRMS