Even before the sudden and tragic collapse of the Champlain Towers South, a 12-story beachfront condominium building located just outside of Miami in Surfside, Fla., insuring condominiums was a tough proposition.
In South Florida specifically, most of the condo buildings were built at least a few decades ago and stand in close proximity to the water. Factor in rising sea levels, and these facilities become unattractive to underwriters.
The condominium insurance marketplace was already hardening over the past five years, making coverage options more limited and expensive for insureds. In Miami Beach, for instance, there was very little market availability as few carriers wanted to write business there. That, of course, meant higher premiums with less competition.
The insurance industry exists in an ever-changing landscape with new perils presenting themselves every year. Today’s insurance professionals must continue to reckon with the aftermath of several challenges including the COVID-19 pandemic, inflation and large-scale losses like the disastrous event in Surfside.
Based on the past five years, it is more than likely that the market will continue to harden in 2022. However, insurance professionals who are focused on risk management would do well to think of these circumstances in terms of a commonsense market rather than a hard market.
All of the factors mentioned above led to current policy pricing. It is now typical for carriers to charge steep premiums, given the risk assumption. This dynamic will only intensify in light of the Surfside tragedy.
The Champlain Towers collapse on July 24, 2021 in which 98 people from 14 different countries died and an additional dozen were injured but survived, now serves as a magnifying glass for all the practices that make these structures hard to insure. If condominium buildings were unattractive to underwriters before, they are even less attractive to insurers now.
This begs the question: What will happen to the insurance carriers that continue to work with condo owners and write new business? How will they move forward in lieu of what happened in Surfside?
We are still a way off from seeing the full long-term effects of the Surfside tragedy, but there have been some immediate repercussions.
First, receiving credits on rates will become substantially more difficult as insurance carriers will be much stricter when it comes to inspections and recommendations. This will result in fewer exceptions as insurance carriers simply cannot afford them.
Second, insurance carriers will be more firm regarding the requirement that building owners complete scheduled updates to the property. It is not unusual for condominium associations to find themselves penny pinching but such tactics will no longer be viable if they wish to maintain insurance coverage. Condo associations will be under much more scrutiny as carriers have to be picky. There simply is no other option now. And obviously: Pricing will continue to go up.
To work with carriers, condo associations will need to heavily invest in structural reporting. Based on the current market condition, this will likely become an underwriting requirement for years to come.
As part of the process, older buildings will need to conduct in-depth structural analysis and maintain detailed reports regarding building history and maintenance. Such requirements will become the new reality. This may initially seem difficult or taxing for insureds but will ultimately work to their benefit as their properties will be much safer than they were in the past.
Risk management also will be more important than ever. Although insurance tends to be a reactive business, strong risk management practices force insureds to be proactive. Risk management helps policyholders mitigate potential claims thanks to a thorough analysis of potential exposures.
Insurance agencies will need to follow suit. Insurance advisors will need to be more involved in helping their clients make their assets more desirable to underwriters. This will mean facilitating regular property inspections and helping insureds understand why updating their facilities is of the utmost importance.
There is often significant confusion regarding the responsibility of condominium owners and how coverage is split among individual condo policies and the building association’s master policy.
The master policy covers the actual structure as well as any common areas such as a gym, lobby, pool or parking lot. An HO-6, or the insurance coverage that an individual condo owner would purchase, is what we like to call a “walls in” policy. It covers everything inside a condominium unit.
Moving forward, it will be up to insurance agents to clearly define what their client’s policy covers and excludes to avoid any confusion when claims hit.
One final factor to consider in regard to insuring coastal condominium buildings is the new Risk Rating 2.0 pricing structure developed by the Federal Emergency Management Agency.
The U.S. government’s previous flood insurance rating system calculated flood risk and subsequent policy premiums based on a property’s specific location. Under the new pricing structure, premiums are calculated based on factors that are unique to each individual structure. In 2022, agents will have to prepare their clients for a likely increase in flood coverage premiums. Some insureds will now be required to purchase flood insurance for the first time.
Things are not going to get easier for agents in the coming year, particularly those who work with condominium owners and associations. Transparency will be required to help insureds understand why premiums are going up, even when they haven’t submitted any claims.
We are now squarely positioned within an insurance market where policyholder assets will be priced in tangent with their specific risks. Insurance advisers will need to be honest with clients about what they need to do to properly protect their structures. This means stricter guide-lines, fewer exceptions and more risk management. It may be painful in the short term. But in the long run, this commonsense approach to insurance will translate into more stability for the entire industry.
Fernando Alvarez ([email protected]) is a principal at JAG Insurance Group in Miami. JAG Insurance was a 2020 winner of the NU Property & Casualty Agency of the Year Award.
