By Brad Henderson, Network Insurance Services
Several years ago, my wife suggested, "You should run for a position on our HOA's Board of Directors. You attend so many board meetings; you would be great at it!" Today, more than ever, I appreciate those who volunteer to serve their community as a board member. This often thankless position can demand so much time that it feels like a part-time job. I considered my wife's suggestion to run for a board position much longer than I would today. It seems that increasingly over the last couple of years, boards have been faced with a barrage of difficult decisions with far-reaching consequences for their community members.
Early in my insurance career, inviting the insurance broker to present a renewal proposal was often a formality and limited to 15 minutes because "we have a lot on the agenda." As the United States experienced a soft real estate property insurance market with healthy competition, low premiums, and robust coverage availability, discussions regarding maintenance, landscaping, and legal matters often took precedence over the insurance renewal.
The days of quick insurance renewal meetings have, for most communities, come and gone. The once-soft market evolved almost overnight into the hardest insurance market in a generation, putting immense pressure on communities and their financial and insurance positions. What happened?
According to the NOAA, since 1980, the United States has sustained 371 separate weather and climate disasters where the overall costs and damages exceeded $1 billion, averaging about 9 billion-dollar events each year over the last 43 years. The US experienced a record-breaking 22 weather and climate events in 2020 that exceeded $1 billion. With a few months remaining in 2023, this previous record has been surpassed with 23 weather events exceeding the billion-dollar disaster threshold in the United States, exceeding a combined cost of $57 billion.
Disasters of this magnitude are having dramatic repercussions in the insurance market. In 2020, the US Property & Casualty industry experienced a net underwriting loss of $3.8 billion. In 2022, that loss ballooned to $26.9 billion. The US Property & Casualty recorded a $24.5 billion net underwriting loss in the first half of 2023. The number of costly disasters has increased over time, and the resulting underwriting losses have caused dramatic changes in the insurance market.
Underwriting capacity is the maximum amount of liability an insurance company is willing to insure or risk they are willing to assume. The market is experiencing a capacity shortage; carriers are reducing the amount of property coverage they are willing to insure. For example, a carrier that would previously insure a Colorado association with a reconstruction value of $120,000,000 or more has recently reduced their maximum per-account capacity to just $30,000,000.
Rising reinsurance costs have contributed to this dramatic reduction in available capacity. Reinsurance, simply put, is insurance for insurance carriers. Reinsurance transfers some of the risk and financial exposure associated with issuing insurance coverage. Reinsurance plays a valuable role in the overall insurance landscape, giving insurance companies the opportunity to take on additional business and effectively allocate their risk. Reinsurance costs have increased and capacity reduced dramatically, and, in some cases, reinsurance has become unobtainable. The impacts of this are being felt downstream by insurance carriers and their policyholders.
These market conditions have caused many of the most competitive standard market carriers to pull out of the HOA insurance space completely. Communities across the state have experienced non-renewals over the last 24 months. This has caused confusion and frustration for many communities who may have never turned in a claim.
The few standard market carriers left have become increasingly selective about the communities they will insure. Communities with buildings built prior to 1990, with large property schedules, high reconstruction values, located in high wildfire areas, and those with poor claims history are being pushed into the excess and surplus lines marketplace. These 'carriers of last resort' typically provide less coverage for a higher price. Premium increases of 500% or more have become common, forcing board members to make challenging decisions for their communities. Residents often seem to disregard the fact that the volunteer board serving the community are members of the community themselves. The request for security services at meetings by board members has increased nearly as much as insurance premiums. If my wife attended one of these tense community meetings, I suspect she may take back her suggestion for me to join our HOA's board.
Insurance premiums will come down - the insurance market is cyclical and hard markets always soften. The big question is when this will happen? We will need to see a decrease in the cost and/or frequency of catastrophes, or insurers’ ability to collect premiums and offer coverage that can sustain such significant loss activity.
The US property and casualty industry has not yet reached the inflection point between premium increases and claim costs. House Bill 23-1288, establishing the Fair Access to Insurance Requirements (FAIR) Plan, was passed by the Colorado legislature and then signed into law by the Governor in May 2023. Over 30 states currently offer some form of a FAIR plan. This program is designed to provide property insurance coverage when coverage is unavailable from standard insurance companies. While this is aimed at alleviating some of the challenges in the current market, access to FAIR Plan policies in Colorado is not expected until early 2025.
Communities should prepare for another year or two of potentially increasing premiums until the market begins to soften. Allocating funds in the budget earmarked for potential premium increases can help offset sudden spikes in insurance costs. Increasing assessments now in anticipation can prevent a special assessment later. Higher deductibles can result in lower premiums but should be combined with rigorous risk management practices to minimize potential losses. Protecting the master policy’s claims loss ratio is a good investment. Effective and regular communication with residents about insurance-related changes and the importance of properly structuring personal lines policies ensures that both the HOA and unit owners are prepared for any new cost-saving strategies the community implements.
Successfully navigating this volatile insurance landscape requires a partnership with an insurance broker with an established reputation and trustworthiness with underwriting partners across the globe. Securing coverage for a community in a soft market can typically be done by marketing coverage to 3-5 standard market carriers. In the current insurance market, a reputable insurance broker may approach up to 40 carriers worldwide to build a comprehensive policy portfolio that adequately addresses the coverage needs of the community. Plan for quotes to be received closer to the renewal date than your board would like, as many carriers won’t release a quote until sometimes within just a week of renewal. Your broker will be able to give you a pretty close estimate of the premium within 30 days of renewal.
Will rates ever come back down to where they were in 2019? Unlikely, at least in the near future. Will rates come down from where they are today? Absolutely. Enthusiastically, "Yes!" Weathering this hard insurance market with an insurance partner well-versed in the complexities of the HOA marketplace is key to identifying and implementing strategies to position your community for success, both now and when the market begins to cool.
