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"Why Are Our Insurance Rates Going Up???" Well, It's This Way….

Ronda Kaysen in Legal/Financial on April 4, 2013

New York City, Ocean Parkway, Upper East Side

Why Insurance Rates Are Rising
April 4, 2013

For the last several years, the insurance industry has been in a soft market, where rates have fallen as insurance companies underbid one another in a race to get clients. Companies were willing to insure buildings at a very low rate just to secure their business. Sometimes they forgave claims and offered favorable policies to buildings that would have been considered risky at other times. 

"In a soft market, carriers are willing to look the other way. You have carriers who are willing to cut each other's throats to get the premium," says Ed Mackoul, president of Mackoul & Associates, an insurance broker.

Insurance companies invest the money from premiums and generate income through those investments. But if returns on investments slow down, then having cheap premiums no longer pays off. On top of that, the "re-insurance" companies that insure the insurers have raised their own rates. Additionally, insurance companies have been draining their coffers by paying out enormous claims in the wake of superstorm Sandy. The result? Insurance companies are reconsidering previously low premiums.

Changing Times

After the terrorist attacks of September 11, 2001, New York condo and and co-op boards faced a tough market: Rates spiked as carriers required buildings to add riders for terrorism (and also for mold, which was becoming a concern). Rates jumped again in 2004 when three major carriers folded.

But since then, rates have been falling — so much, in fact, that many condos and co-ops pay less today for their premiums than they did a decade ago. While a hike of 9 percent might feel like a huge increase, it is actually just bringing the policy back in line with what it cost several years ago, says Mackoul.

There are other factors contributing to the rise in rates. The cost of goods is simply higher. And as insurance companies take a closer look at policies, many follow replacement-value guidelines set by companies like Marshall & Swift, which provides software that calculates replacement values. With the cost of building materials rising as fuel costs go up, the replacement values increase, too.

Buildings that have filed multiple claims are especially vulnerable to rising rates. The Ocean Parkway condo faced a 30 percent increase partly because the building had submitted multiple claims for incidents, including falls and a burst pipe. Some insurance companies wouldn't cover the property at all.

The damage wreaked by Sandy has also had an impact on insurance rates, as companies are paying out huge claims for damaged properties. Added to that, the federal government released revised flood insurance maps in January, doubling the number of properties in New York City that must buy federally backed flood insurance through the National Flood Insurance Program (NFIP). For a building now in a flood zone, private insurance companies will not cover flood damage and may also cut coverage for wind damage.

"Sandy is devastating everybody," says Barbara Strauss, an executive vice president at York International, an insurance broker. "Rates were going up and Sandy just put the topper on it," says Strauss.


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