Supply And Demand, Losses Drive Rise In Insurance

Managing risk and investing in proactive safety measures are ways to secure better rates.

By Hamlet Vazquez, MCAM-HR

Over the course of the past year, insurance premiums have skyrocketed. For many homeowner associations it’s also become harder to acquire insurance coverage either because of previous claims history or their geographic location in an area considered to be of high risk for catastrophic losses. To understand the growing challenges of insurance coverage and rising premiums, I spoke with Jonathan Naranjo, Senior Vice President and Regional Real Estate Practice Leader of HUB International.

Jonathan Naranjo

As a number of associations were finalizing their budgets for 2022, they noticed quite the uptick in their insurance premiums. What is driving these increases in insurance premiums?

There are a myriad of factors driving rates and premiums up for all insureds regardless of industry. The market continues to be hard, and habitational real estate has been one of the hardest hit industries due to the frequency of losses (e.g. water damage) and insurers pulling out of the market, creating a supply and demand issue.

Catastrophic (CAT) losses continue to cost insurers multi-billions of dollars each year, impacting rates. For example, 2020 was the costliest wildfire season for California (well over $20 billion) and the fifth consecutive year of multi-billion insurable losses due to the fires.

In addition, hurricanes and floods continue to impact the Midwest and East coast. Hurricane Ida, for example, is now projected to cost insurers between $25 billion to $35 billion in losses. Although CAT factors do not directly impact HOAs, insurance companies are well diversified. When they pay billions in losses each year, their entire portfolio is scrutinized, and they increase rates to help mitigate the financial hemorrhaging or pull out of the market.

Another area that is increasing in pricing is litigated defense claims (e.g. D&O claim). California is one of the most litigious states nationally, and there’s been a huge uptick in “nuclear verdicts.” In other words, large settlements that are costing insurance companies an excess of $10 million are piercing the umbrella (a.k.a. excess lines) that would traditionally be “protected.”

Lastly, in order to comply with the ever-rising cost to rebuild property and to follow insurers’ compliance standards, exposures, such as property values, continue to be heavily scrutinized in today’s hard market. Lumber, glass, steel, material, and even labor are just a few examples of increasing costs to rebuild property, which in turn, requires HOAs and communities to increase their Total Insurable Values (TIVs), equating to higher premiums.

Most CC&Rs require that the master property policy insures the HOA at a 100% replacement cost determined by the board of directors. Each year, values must be reevaluated to keep up with the rising costs and inflation.

What can associations do to become a more attractive client and secure better rates?

Have a well-documented, updated risk management and safety response plan. A great example would be something like a Domestic Water Emergency Response Plan or DWERP. Since the number one culprit of claims for high-rise HOAs is water and escaped liquids, it’s important to have an updated plan that all staff and stakeholders are familiar with in order to take immediate action when losses occur.

Keeping with the theme of water damage, it’s highly recommended to consider an investment in wireless water detection technology. Wireless water detection is gaining tremendous popularity, and many of the top insurers are asking if HOAs have these installed as a proactive measure to identify potential leak sources before they exacerbate.

What’s often forgotten but remains important is the fact that HOAs and insurance companies are partners. In the first year of the relationship and every two to three years afterwards, the insurers are going to conduct a loss control and site engineering visit. HOAs and their board of directors need to take the recommendations outlined in their engineering reports seriously.

By showcasing proactive measures and making investments in some, if not all, recommendations during the outlined plan of time or policy period builds a tremendous amount of goodwill with insurers and in turn, will not only help mitigate the HOA’s risk of loss but also the underwriting team will provide a more preferential rating compared to other peers in the industry.

Lastly, more is more in this precarious market, and underwriters are asking for more. In other words, the more documentation outlining the safeguards and investments made and demonstrating great risk management in your community that you can provide an underwriter, the better chances that an HOA will receive priority underwriting and preferred rates. The integrity and accuracy of the underwriting information is also crucial.

Accurate replacement values, square footage, upgrades and renovations (e.g., seismic retrofit or recent waterproofing), and installations of safeguards, such as water detection systems, Seismic Gas Shut-Off Valves (SGSVs), security cameras and monitoring, and hard-wired vs. battery-operated smoke detectors, are examples of data that are divulged in helping your broker negotiate preferred terms with the marketplace and respective insurers.

What future challenges do you foresee for both the insurance industry and HOA industry?

CAT losses are predicted to climb and continue given the climate change factors. Continued litigation and large jury award settlements will continue to rise especially in states like California. In the near-term, especially for Habitational Real Estate (HOAs) risks, supply and demand will continue to be an issue with fewer new entrants offering adequate and comprehensive insurance solutions in the marketplace, which will put pressure on rates and pricing. There is a bit of price moderation happening, but the term used by property brokers right now is 10% increase is the new “flat.”

How can associations and the insurance industry best work together?

Mentioned previously, work with your insurers. They are your partners and have every incentive to mitigate their risk along with your community’s. Work hand-in-hand with your broker, partner, and risk management team. Make sure that investments around risk management and safety are being communicated to your broker, so they can update your insurance partners.

As board of directors and HOAs, if your safety and risk management plan is outdated or needs to be created, that is a perfect time to partner with your broker and insurer to create proactive guidelines that can guide your HOA in navigating a loss event.

Lastly, communicate. Insurance exposures are continuous, and it’s important to communicate material changes that may reduce or increase the risk profile of your association.

Any final words of advice or encouragement to boards and their managers?

Document everything and consider your broker and respective insurance companies as an extension of your HOA (i.e., risk management division). The best practice would be to ask your broker to provide helpful data, so the board and managers can make educated decisions. Examples include valuation models, risk meter, soil, and flood reports, and Probable Maximum Loss (PML) studies to help identify earthquake exposures, etc.

Remember, when it comes to risk management, there is no such thing as a stupid question, and it’s important to have a strong and solid partnership with your risk management team.

Hamlet Vazquez, MCAM-HR

Hamlet Vazquez, MCAM-HR, is the General Manager with Action Property Management, Inc., ACMC in Long Beach.