Story by Jon L. Eidukas, CPA, Chief Operating Officer
Kappes Miller Risk Management, LLC
Association Underwriters of Washington, LLC

The insurance industry, much like nearly every industry in Ameica, found itself hard hit by the terrorist attacks of Sept. 11. Causing an estimated $40 billion in losses and resulting in rates that continue to climb, the attacks helped launch the industry into what is called a “hard market,” where the premiums insurance companies can charge have skyrocketed. Yet even before Sept. 11, homeowners were experiencing increased insurance premiums. The terrorist attacks certainly played a significant role in causing rates to increase steeply over the last several months, but overall they simply exacerbated already-rising insurance rates.

The driving force behind the rising rates has been the poor performance of the stock market. Just like other investors, the insurance industry has suffered big losses in the current down cycle, according to John Carder, vice president of sales for Alliance Insurance Brokers, as reported in Apartment News Magazine. In the late ’90s, the stock market’s boom more than offset the money insurance companies were losing paying out settlements. But as the stock market declined, insurance companies were forced to raise their premiums to make up the difference.

This hard market has hit the industry’s habitational segment (including condominium associations) particularly hard. Condominium associations throughout Puget Sound are seeing increases in premiums from 50 percent to as high as 200 percent — premiums that are oftentimes combined with additional restrictions on coverages and limits as well. Seeing the high costs and risks involved in providing insurance to condominiums, many insurance companies have given up on writing condominium association insurance all together.

Other factors have also contributed to higher insurance rates. The increase over the past decade in the frequency and severity of natural disasters has significantly impacted insurance rates. From Hurricane Andrew and the Northridge earthquake, to smaller disasters including wildfires, tornadoes, and tropical storms, insurers are paying out roughly $700 million per month — many more times than what has been paid in previous years. And as home repair and rebuilding costs continue to increase, so will insurance premiums.

Mold has recently become another driving factor for increasing premiums. Although mold is certainly nothing new, multi-million dollar jury awards based on mold claims are. In Texas, for example, the number of mold claims increased by 1,300% between the first quarter of 2000 and the fourth quarter of 2001, costing insurers over $850 million in 2001 alone.

Monies paid out for construction defect claims on newer condominiums have also hurt the habitational segment.

Overall, these higher expenses spell hard times for insurance companies. Over the past 10 years, for every $1.00 homeowner insurers have brought in from premiums, they have paid out $1.18 in losses and expenses. For these companies, 2001 was second only to 1992 (with Hurricane Andrew) for paying out more money in losses and expenses than was brought in from premiums — an amazing $8.9 billion more.

No one can really tell how long the current hard market will last, but most industry experts say it is likely to continue into 2004. However, there are ways to hold down the increases for what you are paying for your condominium association’s property insurance. First, be sure you are working with an insurance broker who understands condominium insurance and has the time to truly explore options for your association. Oftentimes condominium boards as well as condominium management companies use a broker that only has access to, or knowledge of, a limited number of insurance companies that provide coverage for condominium associations. The coverage and premium may not be the best available to the condominium association. Raising your deductibles is another way to save on increases in premiums. Other options are to avoid using insurance to pay for routine maintenance. Be wary when filing for smaller claims as well, since insurance companies may be looking for any reason to raise your rates or drop your coverage all together.

Many condominiums struggling to purchase or renew insurance policies have found it easier to join an affiliation of other condominium associations when purchasing insurance. Joining an insurance pool helps lower what each association pays in insurance, since insurance providers view the pool collectively as one entity.