6 minute read
Insurance By The Fire
By Jessica Melvin, CCAM
INSURANCE BASICS
CALIFORNIA INSURANCE CLIMATE
California has seen a mass exodus of insurance companies since 2019. In January of 2020 AIG, Liberty Mutual, and Chubb among others sent a round of cancellations to homeowners in “high risk fire areas.” In 2021, State Farm closed a major center in Bakersfield, and in 2022, Geico closed all of its 38 offices in California.
It is easy to blame the issue on fire claims alone; however, drought-related claims along with landslides added to the pressure on insurance firms. Insurance companies are now using AI models to determine risk of catastrophic events. Areas that used to be outside the fire maps are now considered at risk due to these AI computations on wind factor, drought, and unmaintained vegetation.
The issue is the models currently account for naturally started wildfires (drought, heat, lightning, etc.) and not for the 96% of fires started by people in California for 2022. These AI models are also in their infancy compared to other risk models for catastrophic events like hurricanes and earthquakes.
A very thorough wildfire guide and assessment of the insurance industry can be found here
HARD MARKET VS. SOFT MARKET
Insurance companies make their money on insurance premiums and investment income with the latter being the larger source of revenue. When the economy is booming, insurance companies’ margins are padded, and they are more apt to relax underwriting guidelines and broaden coverage all while charging lower premiums. This is known as the soft market.
Conversely, a hard market is where carriers pull back on the coverage they offer, tighten underwriting guidelines, or exit a segment completely, and increase pricing in efforts to regain their profits or due to the lack of reinsurance availability (insurance for insurance companies). Less options to choose from means decreased competition and less leverage than buyers and brokers would have in a soft market.
At the end of 2019, we began to see signs of a hard market as carriers issued non-renewals and many accounts had to turn to the non-admitted, excess and surplus lines marketplace where rates are generally much higher, but the companies have higher risk appetite.
WHAT YOU CAN DO?
BE PREPARED
Insurance costs are going up 1520% for the average association that insures any kind of building or structural element. If you are in a high fire zone, such as the Oakland Hills, you can see your premium increase 20-50%. In some cases, insurance companies are declining coverage for high fire risk areas.
Due to the volume of applications in the market, underwriters are backed up, meaning insurance renewals are commonly delivered anywhere from 14 days to 72 hours prior to expiration of your current policy.
The good news is the government is introducing legislation to help mitigate pricing increases. Insurance Commissioner, Ricardo Lara, introduced legislation on September 7, 2022 that is attempting to bring pricing transparency and integrate a variety of fire hardening building measures with building codes to help reduce the amounts of structures that are destroyed in any future wildfires.
For the press release, go to insurance. ca.gov or click here.
FOCUS ON WHAT YOU CAN CONTROL
Often, I hear managers are increasingly being told that if a claim is filed on the association master insurance and that the coverage is there, then the claim should be approved. After all, we are not insurance experts, nor are we licensed in that area. While it is true that a homeowner can submit any claim upon request, the board does not have to approve the claim and, often times, shouldn’t.
For example, a single family home has a faulty supply line to their toilet that causes $80k in damages. The homeowner wants to put in a claim against the master insurance on the recommendation from their insurance provider. The policy is walls out but holds coverage for interior large water loss. Should the association master insurance have a claim for the homeowners’ damages to the interior?
In this case, no. Boards should be directed to think about responsibility and what it means to the entire community should this claim be approved for payment by them. The quickest way to become viewed as high risk and get dropped by your provider is to frequently submit claims through the master insurance policy.
Once a claim slips by, you will see the claim frequency go up as word passes around the community. It may save a small amount on their individual policies by having their insurer avoid a claim, but now, the entire community will pay increased insurance premiums for the master insurance.
CALIFORNIA GOVERNMENT ASSISTANCE
You might wonder, if an insurance company doesn’t have the money to pay claims, then what happens? If you are with an admitted carrier, CIGA (California Insurance Guarantee Association) will pay out up to $500,000 per claim that insurance companies approved but could not fund.
The last financial examination report in 2020 showed a funding surplus. This agency averages pay outs of $280 million a year in claims covering property, auto, and workers compensation. That being said, $500,000 would likely be inadequate for a total loss due to the rising costs of building materials caused by supply chain constraints and high demand for construction labor.
Unfortunately, CIGA does not pay unfunded claims for non-admitted carriers, so it is prudent to ask your provider for their A.M. best rating, financial size, and whether the particular carrier is reinsured to ensure you are working with a carrier who will not run out of money and leave you with nothing.
Insurance is always an integral part in our industry. When times are good, we are excellent negotiators to keep those premiums low and protect our associations by expanding coverage. When times are tough, we are needed more than ever to keep our boards and owners informed of the situation ahead.
Now is the time to complete your maintenance projects and bring in the insurance experts to talk with your board about the market and the importance of budgeting for these increases.
Jessica L. Melvin, CCAM
Jessica L. Melvin, CCAM, is a Portfolio Community Manager for The Management Trust, Nor-Cal division, serving Yolo, Solano, and Contra Costa counties since 2016.
