It’s budget season, and community managers and board members are all asking the same question—What will our insurance costs be for the upcoming year? In past years, we were able to provide a somewhat accurate estimate for the upcoming renewal. However, budgeting for insurance costs has become an increasingly intricate task. This year more than ever, it’s nearly impossible to provide an accurate estimate for renewals that are more than 60 days away. We are advising all communities to write in the insurance estimate with the lightest of pencils—it’s almost certain to change!
There are several factors that are affecting our ability to provide reliable budget numbers this year. These include:
- Market Uncertainty
Many major insurance companies have ceased writing new community association business, and others are non-renewing many accounts—especially those with heavy roof exposure. This leaves very little competition if your community must move to a new insurance company. For communities with claims issues or undesirable characteristics (pre-1990 construction, aluminum wiring, etc.), only a small handful of property insurance markets remain.
- Timing of Renewal (Or Non-Renewal)
In most states, insurance companies must provide a minimum of a 60-day notice if they will be non-renewing a policy, increasing rates by more than 25%, or will be reducing coverage. If your community’s renewal is more than 60 days outside of your budget planning season, it’s difficult to know if your current insurance company will be offering a renewal. It’s rare that an insurance company will commit to any terms outside of this 60-day window.
- Result of Last Year’s Renewal
The results of last year’s renewal greatly affects the budget considerations for this year’s renewal. If your community was non-renewed last year and forced into the non-standard market, the property rate increase may only be in the single digits—the community has already felt the impact of the market volatility. However, if your community received a standard market renewal last year and faces a non-renewal this year, the increase may be 50% or higher.
- Impact of Lender Guidelines
Newly revised Fannie Mae and Freddie Mac lending standards have created the necessity to maintain certain levels of coverage, and in some cases, increase limits. Inadequate limits may prevent Owners from selling their homes to buyers seeking conventional loans. The result is that many communities have few options to reduce coverage or increase deductibles.
So how should communities budget for insurance this year? It depends on how sensitive your community’s finances are to mid-year changes. How will an unbudgeted increase affect your overall financial situation? Would Owners prefer paying dues that are potentially too high or paying a mid-year assessment for insurance if your drastically under-budget? The answer is going to be very specific to your community.
We’re advising communities to budget a minimum 20% increase in insurance expenses for the upcoming year. That said, it’s wise to review the factors listed above and decide if your estimate should be higher or lower.
The author of this article, Jim Ruebsam, CIRMS has over 17 years of experience handling condominium and homeowners association insurance coverage for hundreds of associations throughout the Midwest. For answers to questions or for more information on a related topic, please feel free to reach out to Jim or any other member of our team through our new website: Condoinsure.com.
