BLOG | Insurance Insights: Insurance Headaches and the Related Question — Why Are We Paying A Premium On The Premium?
By: Ken Fuirst and Jason Schiciano, Levitt-Fuirst Insurance
(TARRYTOWN) Lately, everyone seems to be talking about insurance, but for an unfortunate reason: rising premiums.
Anger and frustration brews at Condo and Co-op Board Meetings when the Annual Renewal is presented. Affordable Housing Advocates rant that increased premiums are a key factor in stifling the development and operating stability of affordable housing. Apartment owners lament that higher insurance costs are yet another dagger – along with insufficient rent increases, post-COVID rent arrears, and oppressive regulations – piercing the financial viability of multi-family real estate ownership.
And, commercial property owners wonder in disbelief at the growing divide between their insurance policies’ building replacement limit, compared to the market value of their properties (which is declining, in many cases).
A Seinfeld fan might ask: “What’s the deal with insurance premiums? Why are we paying a premium on the premium?”
We wrote about this topic last summer, but since then the pace of insurance premium increases has not slowed, so it’s worth revisiting the root causes of this unwelcome trend.
The Facts
The core issues driving Insurance Rate Increases remain:
· Continued poor overall industry financial performance. “The 2023 net combined ratio for the property/casualty industry is forecast to worsen to 103.9 percent, from 102.4 percent in 2022” (Insurance Information Institute). Combined Ratio over 100 percent means insurance companies paid-out more in insurance claims and related expenses than they collected in premiums.
· Reinsurance rates continue to increase. “…in the global property-catastrophe reinsurance market, prices have seen an additional increase of three percent on a risk-adjusted basis, following a 37 percent rise last year” (Reinsurance Business). Continued increases are due to nationwide catastrophic claims events (hurricanes, floods, wildfires, tornadoes, etc.). Higher reinsurance rates generally result in higher insurance premiums to consumers.
· More Restrictive Underwriting: difficulty insuring old homes and buildings; coastal locations; high-risk flood zones; undesirable construction (wood frame, non-sprinklered, etc.); and homes/buildings that are considered high-risk exposures.
· Fewer Carriers Offering Insurance: in recent years, multiple insurance carriers have pulled-out of the New York’s personal insurance and commercial insurance markets. Remaining carriers are often non-renewing clients whose properties are considered higher-risk, or that have a poor loss history. Less competition means higher insurance rates.
Additional Factors
But, besides rate increases, building replacement limits (i.e. the maximum amount that an insurance carrier will pay to replace your home or building for a loss, as noted on your policy Declaration Pages) have risen dramatically over the last two years.
When told that the increases are in response to inflation, policyholders respond: “my policy’s building replacement limits (and resulting premiums) have gone up far more than inflation!” or, “the building limits far exceed the market value of the property!” Typically, these are accurate statements. But why?
Building Replacement Limit Increases have exceeded inflation. In the past, homes and buildings were frequently under-insured, compared to their actual replacement cost (i.e. the cost to completely rebuild the structure after a loss, for instance due to a fire or tornado). For years, many insurance carriers ignored the shortfall, allowing replacement limits to remain unchanged, or requiring only moderate increases that were still below actual replacement costs.
Many policyholders were either unaware that they were under-insured or were aware but happy to keep lower coverage limits in exchange for lower premiums since they considered a total loss highly unlikely. As severe inflation has widened the gaps between policy dwelling/building limits and actual replacement costs, carriers have been focused on insuring homes and buildings at accurate replacement costs (as determined by construction cost estimating software). There are several reasons: pressure to do so from reinsurers; to avoid claims where insurance proceeds are insufficient to fully replace the insured property; and of course, to collect more premium. The last reason is arguably justified, since sound insurance underwriting relies on carriers collecting the proper amount of premium from all clients, to pay the large claims of relatively few clients, and also make a profit. Keep in mind, as noted above, the property/casualty industry has generally under-performed in recent years.
Building Replacement Limits Far Exceed the Market Value of the Property
Policyholders frequently compare their dwelling or building replacement limits to the market value of their property and note with frustration that the former often far exceeds the latter. Simply put, there is no correlation between insurance replacement limits and the market value, period. For various reasons – house/building is in a flood zone; house/building is 100-plus years old; building is a five-story walk-up with no elevator; house/building has an undesirable floorplan; location of house/building has become undesirable – a house or building may have a low market value per square foot of $150 – $250 per square foot.
But, an insurance company may pay $500 – $1,000 per square foot, or more, to rebuild that property from the ground-up. A 25,000 square foot office building or a 3,000 square foot home could cost the same to rebuild in the most desirable area of town (higher market value) as it would in the least desirable area (lower market value.) An office building or home that hasn’t been renovated in 40 years will have a lower market value, but the lack of renovations have a relatively small effect on the total replacement cost (insurance pays to replace an old, un-renovated building with a brand new building).
So, let’s ask Seinfeld’s hypothetical question again: “What’s the deal with insurance premiums? Why are we paying a premium on the premium?” The answers, as explained herein, are: 1) insurance rates continue to increase; and 2) carriers are requiring major increases to home and building replacement limits.
If you have questions, or need some perspective relating to your insurance premium increases, call your insurance broker, or contact Levitt-Fuirst Insurance at (914) 457-4200.
Editor’s Note: Levitt-Fuirst Insurance is the Insurance Manager for The Builders Institute (BI)/Building and Realty Institute (BRI) of Westchester and the Mid-Hudson Region. Ken Fuirst and Jason Schiciano are Co-Presidents of the company. The firm is based in Tarrytown.
This article was featured in the June/July 2024 edition of IMPACT newspaper (PDF.)