2015 Condominium Association Budgets: Factors Impacting Your Premium Changes

by Gregory W. Havemeier, Senior Vice President

Insurance premiums, for many associations, are their largest overhead cost; which is why it is very important to accurately forecast any changes for the upcoming year. Many factors in the marketplace effect insurance premiums making it challenging to budget this line item.

In this article, we list out 8 market conditions and trends that impact your insurance renewal premiums and provide you with an educated look at how it will increase or decrease the amount you budget for in 2015.

Our goal is to properly protect the assets of the association with financially viable insurance at the most competitive cost. Budgeting, requires that we take a closer look at your policies, coverages, appraisals, and market conditions and then project our best estimate of where the costs will be at your next renewal.

Factors to Consider When Budgeting for Insurance

1. Property Rates Stabilized in 2014 and are expected to remain soft in 2015. A select set of risks are even beginning to show decreased rates. Since many factors impact the final property rates, we suggest budgeting around 5% increase for property insurance premiums. Assuming a “flat” renewal rate, this would include some consideration for replacement cost values beginning to go up.

2. Ancillary Coverage (General Liability, Umbrella, D&O, etc.)
These lines continued to see some minor upward pressure in 2014, specifically on the General Liability and Directors and Officers Liability. Some carriers offer three year terms which helps to lock in the rate and avoid any increases.  We would suggest budgeting 10% for increases on these two lines. The umbrella market, on the other hand, is holding relatively flat at this time.

3. Appraisals for Insurance Replacement Costs (Are they going to go up or down?)
Depending upon which firm conducts your appraisal, we have seen replacement cost valuations vary by up to 10% or more between the various appraisal companies. Some appraisal companies are increasing the “insurable replacement cost” values this year due to increased construction costs and materials. Of course, whether or not your updated appraisal shows that the property limit of coverage should increase or decrease; the new appraisal will have a direct effect on your property premium. Insurable Replacement Cost appraisals have continued the trend in the low single digits on the most recently received appraisals.  We have seen several appraisals actually show a decrease.  So, this line item is certainly a wild card in the process of budgeting.

4. Citizens Rate Increase
Citizens Property Insurance Corporation is owned and operated by the State of Florida. At this time, we have not seen any finalized documentation from Citizens regarding their rate projections for 2015.  According to a recent article, an 8.9% increase is proposed for the commercial property residential, condo association, wind-only account. Also proposed is a 0.5% increase for the property commercial residential, condo association, multi-peril accounts.  However, these are “recommendations” that were sent to the Office of Insurance Regulation and have yet to be approved.  Until further confirmation, we would suggest all Citizens policy holders’ budget for up to a 10% increase. Rate increases of non-sinkhole coverage are capped at 10 percent by statute. The cap does not include payments to build up cash reserves in the Florida Hurricane Catastrophe Fund.

Rates for A-Rated Risks (i.e. any building with a replacement value of more than $10 million).

A-rates are not subject to the statutory 10% limitation on premium increases.  However, until otherwise noted, we would continue to suggest using a 10% increase here as well.  While rates may also stabilize or even decrease within this sector, until you receive your actual renewal offer, it is advisable to budget for an increase on these policies to be conservative.

5. National Flood Insurance Program (i.e. NFIP)
In a similar situation to our Citizens indications, last year at this time we had firm indications from the NFIP regarding the direction of their revised rates.  We have yet to see an update on future rate changes from them and will include this in the “Budget Update”. Suggested Premium Budgeting for flood policies should be at least 5% – 10% increases. While you may not see any actual increase in your renewal premiums for 2015, we do not recommend budgeting flat for flood insurance.

In regard to Pre-Firm Risks (i.e. Subsidized Risks), on March 21, 2014, President Obama signed the Homeowner Flood Insurance Affordability Act of 2014 into law. This law repeals and modifies certain provisions of the Biggert-Waters Flood Insurance Reform Act (BW-12), which was enacted in 2012, and makes additional program changes to other aspects of the program not covered by that Act. Many provisions of the Biggert-Waters Flood Insurance Reform Act remain and are still being implemented. Read more here.

The new law requires gradual rate increases to properties now receiving artificially low (or subsidized) rates instead of immediate increases to full-risk rates required in certain cases under BW-12.

• FEMA is required to increase premiums for most subsidized properties by no less than 5 percent annually until the class premium reaches its full-risk rate. With limited exceptions flood insurance premiums cannot increase more than 18% annually.
• There are some exceptions to these general rules and limitations.

6. Mitigation Inspections
2015 will not call for any budgeting changes. The revised mitigation inspection form that was released in February of 2012 is still the most current document. Carriers are asking for updated mitigation forms which allow them to confirm detailed rating information of your building. Some forms, which now require photos, have generated additional premiums based on more accurate descriptions of the mitigation features. Example: Hip roof vs. Gable roof.

7. Reinsurers rates expected to decrease in 2015
Thanks to abundant capacity and light catastrophe losses, the predictions for reinsurance during the last half of 2014 are to decline between 15% and 25%. If this holds true, this will spill over into the actual premiums paid and will continue to soften the property market further throughout 2015.

8. Discontinuation of Florida Hurricane Catastrophe Fund Emergency Assessment (FHCF)
The Florida Office of Insurance Regulation has directed the FSLSO, by order, to discontinue assessing the FHCF emergency assessment on applicable surplus lines policies issued or renewed with an effective date on or after January 1, 2015. Click here to read more.

Summary
There are many factors that can affect the overall insurance costs for your unique association. Gulfshore listed several ways that directly impact the premiums you pay and gave you our expert opinion on how to effectively plan for changes in 2015. We understand this task can be a bit confusing and sometimes even overwhelming, that is why we are pleased to help you review your current insurance program and work with you to develop an educated budget for 2015. When budgeting, we believe it is sensible to anticipate changes and prepare a realistic budget that will not be exceeded when the actual costs are realized.

Should you have any questions regarding this information or your insurance budget, please do not hesitate to contact us. We are equipped to offer you a detailed line-item budget for your review.