Problem Solved: Handling the Hard Insurance Market

As part of our Problem Solved series, Habitat interviewed Courtney Ferretti, senior commercial accounts manager at the insurance brokerage Mackoul Risk Solutions.

Many co-op and condo boards aren't aware that the insurance market goes in cycles and that it fluctuates between hard and soft. Can you explain the difference? And where are we now?

Well, a soft market is known as a buyer's market. During a soft market, we see low rates, increased capacity, higher available coverage limits and competition among the insurance companies for new business. It’s easier to obtain insurance coverage, and prices are very competitive. The hard market is known as a seller's market. We see higher premiums, lower limits are available, there's stricter underwriting guidelines and less competition among insurance companies for the new business.

We're currently in a hard market. So when we send out our renewal proposals to the board, sometimes they don't understand that. Let’s say they have no claims, they have had no issues all year and they experience, say, a 10% increase in their premium. We have to explain to them that it's because we're currently in a hard market. 

What are the reasons that we're in a hard market now?

Insurance companies are not making as much profit on their investment income. Companies usually use the funds they receive from premiums to invest in other markets. Reduced interest rates have negatively affected profitability, and as a result carriers have reduced their appetite for risk. Also, due to years of flat rates and decreased premiums, losses have caught up, and insurance companies aren't as profitable as they need to be. Finally, reinsurance costs – the cost insurers pay for their own insurance – have been increasing, and companies have started to tighten up their guidelines, which limits the number of carriers we can shop your insurance to.

All of that translates to rate hikes. Is there anything that boards can do to minimize them?

Yes, there is. One of the first things to bear in mind is that carriers look at your loss history. We try to inform the boards that they should review all their claims before submitting them, because loss frequency can be viewed more negatively than loss severity. For example, if you have five water-damage claims that are small compared to one big fire loss, the five water-damage claims look worse because it looks like there are ongoing issues at the building. 

You can also increase deductibles to save on premiums. You could add more life safety to your building to make it look more attractive, which opens up more carriers that we can submit to. Upgrading any electric fuses to circuit breakers also means more carriers we can access. And you can add deductible resolutions to your bylaws to put more onus on unit-owners.

It would seem that it would be a smart move for boards to budget accurately for the hard market. How can they do this?

We recommend that the boards or their property managers contact their insurance agents and discuss renewals ahead of time so they can get a feel of what the premium increases are going to be. We would recommend to probably budget at least 10%, if there are no claims. If there are more claims, we suggest increasing it a little bit higher because there's just no telling. A lot of carriers are increasing premiums about 15% when you have no claims. It's very difficult to inform boards how to budget, but we would definitely say to budget more than usual.

When do you see this hard market ending? Is there any light at the end of the tunnel?

Well, hard markets usually last about two to three years on average. However, with COVID we think it's going to stick around longer. Some carriers are paying out on loss-of-income claims, which is increasing rates because they are going to look to get their money back. We've also seen a lot of Labor Law claims being paid out, which is affecting the umbrella markets and increasing rates. We're hoping things will change by the end of the year, but this is a market that we've never seen before. Fingers crossed that rates will start going down sooner rather than later.