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Catastrophic Losses and Insurance Costs: Navigating the Choppy Waters of Community Association Coverage

06/01/2023 10:53 AM | Anonymous member (Administrator)

By Michael Schleich, Distinguished Programs 

This article offers tips for community associations to manage rising insurance costs and mitigate losses after major disasters. The increasing cost of insurance premiums is due to catastrophic losses and the need for more reinsurance. To keep costs down, community associations should focus on risk management, regular maintenance, and work with experienced insurance brokers.

What happened to getting multiple insurance quotes and saving money each year on my insurance premiums?  Where have the coverage enhancements and low deductibles gone? 

The Surfside condo collapse in June of 2021 serves as a tragic reminder of the importance of having a robust risk management program that includes planning and setting aside reserves for the future.  All properties age, and it’s never too early to develop a plan for roof replacement, structural engineering surveys, and implementing the subsequent recommendations.  Consistent and regular inspections of buildings, facilities, and systems should be a part of every association’s risk management plan.  With the help of property managers and their insurance advisors, I’d encourage board members to make risk management an important priority, not just once a year when the insurance renews but a consistent practice throughout the year.  

The Increasing Cost of Insurance

Did you know that in 2022 there were 18 natural disasters in the U.S. – each causing over one billion dollars in damages?  Bottom line, avoiding at least some changes to your insurance program in the coming year will be challenging. The question becomes – what to do about it?

Insurance is based on the principle that says the premiums of many pays for the losses of a few.  So, when a hurricane or building collapse happens in Florida, it has a ripple effect on all insurance buyers, no matter where the association is located.  

There has been a lot of discussion about reinsurance (insurance for insurance companies) as the leading driver in premium increases.  Chances are your insurance provider purchases reinsurance to help stabilize the effect of catastrophic claims.   Most insurance companies do.  The size and scope of the devastating losses has forced reinsurers to charge insurance companies more premium, which is passed along to you. 

The increased cost comes in the form of higher premiums, but it can also include increased deductibles, decreased capacity, and even reduced or eliminated coverage, i.e., wind or wildfire exclusions.  Even if your association hasn't filed any claims, the losses resulting from other parties' claims will still impact everyone, including you.

Why a High Deductible Might Be the Right Choice for Your Association

I recommend that buyers opt for a deductible that is as high as possible but, at the same time, one that the association feels comfortable covering out-of-pocket in the event of a loss. This can help keep premiums lower, but it's important to ensure your association has reserves available. Governing documents may need to be reviewed or revised to allow for a higher deductible.

How Your Claims History Affects Your Association's Insurance Premiums

A common belief by underwriters is that a frequency of claims ultimately increases the likelihood of a severe claim – “frequency leads to severity.”  Having several minor claims on your loss history might make underwriters think there is a chance the next claim will be a large one.  For example, several smaller claims on older properties can indicate that maintenance is lacking.  Underwriters may charge more for the risks with these characteristics than for a loss-free risk or decline to quote.  

Your individual claims history is critical.  A high deductible will help keep your loss history clean, and some savings might be available.  Although sometimes a high deductible might be a minimum requirement to do business with certain insurance companies.  

Conclusion: Ensuring Your Community Association Is Properly Protected for the Future

So, how do you get the best advice and receive the best options for your association’s insurance purchase?  Find a broker committed to the industry. The best community association brokers tend to focus solely on community association insurance. Many individuals showcase their commitment by becoming CIRMS – Community Insurance and Risk Management Specialists.   They are up to date on current trends and represent top-rated carriers in the market.  These specialists can offer guidance and suggestions on keeping costs under control while ensuring that the board members' fiduciary duty to protect the association is not compromised.

Michael Schleich, MBA is the National Business Development Leader for Community Associations at Distinguished Programs.  Distinguished Programs has been providing insurance solutions through its broker partners to community association clients for over 25 years.   With over 30 years of experience advising brokers and working with clients, Mike has developed a comprehensive approach to risk management programs for community association insurance clients.

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