We are having boards balk at the cost of their insurance and hope there is an insurance carrier out there with premiums lower than the quotes they are receiving. I don’t want to burst anyone’s insurance bubble, but these rates will remain elevated for the following reason:
Why Insurance Rates Will Remain Elevated
Previous Losses of Most Carriers
Even if the direct carrier did not suffer substantial losses and claims, they certainly did on the re-insurance market. Every carrier farms out there coverage to other carriers to mitigate potential losses. They don’t want to have all their insurance eggs in one basket, so they have other carriers join in their risk. But they do the same for other insurance companies. An insurance company with no direct policies in Maui may have been on the hook for substantial losses if they re-insured a carrier there.
Communities Keep Aging
No community is doing a “Benjamin Button” and getting younger and newer over time. Every major system and every common area for which the association is responsible for, is one year older unless replaced the previous year. An older community is a higher risk for a claim than a newer one.
Costs Keep Climbing
Most reserve studies use an inflation rate of 3%. During COVID, when inflation climbed to 8% for a couple years, the cost to repair or replace anything covered by the insurance company increased 16% instead of 6%. Just to keep pace with inflation, insurance companies had to increase their premiums at the same rate.
Boards have been balking at the ever higher quotes, sometimes 30% to 50% higher than they were just a few years ago. They may receive 3 quotes and ask for additional quotes to find that one magical insurance company offering the same coverage at 2020 premiums. We have found that there just is no “unicorn” insurance company materially lower than the other companies. In desperation to keep their premium low, some boards have resorted to or have explored these options:
Options Boards Are Considering to Lower Premiums
Increase the Deductible Substantially
Where in the past a $5,000 deductible was common, we are seeing boards increase their deductibles to $25,000 or even $50,000. That is fine, but boards should communicate this clearly to owners and understand that they may be paying out of pocket more often for claims. We have found owners who submit a $20,000 claim to us when the deductible is $50,000. Some boards have made the payment of the deductible the responsibility of the owner, making this particularly onerous for owners.
Reduce the Percent of Replacement Cost
Where in the past it was assumed that if a structure in an association were lost, the insurance company would pay for 100% of the rebuild, some boards have lowered this to 75% or even 50%. This also must be communicated to owners, but more importantly, “conventional” lenders require the 100% coverage and may not be willing to lend in communities with lower percentages. Because these communities are not only eligible for conventional financing, a buyer obtains a non-warrantable condo loan. These specialized loans require higher down payments (often 20%+), carry higher interest rates, and are usually provided by portfolio or non-QM lenders. Since fewer buyers qualify for these loans, it may put downward pressure on home values.
Change What Is Covered by the Association
This cannot be done arbitrarily and usually requires a change to the governing documents, which requires a supermajority of all owners (67%) to agree to the change. This is both relatively expensive to do and not necessarily easily achieved. Many owners feel like they have paid for what has been covered in the past and deserve the current coverage and what the association is currently obligated to pay for. But, the majority of owners may be willing to sacrifice that benefit to have a lower premium. Particularly for larger communities with 100 or more owners, or older communities with a large number of rentals, making this change is challenging.
What Boards Need to Consider
This insurance issue will not resolve itself in the near future and boards need to be cognizant of the tradeoffs to achieve a lower premium with less coverage. No matter what a board decides to do, they must communicate with their owners why the change is sought and the ramifications to the owners.
