Buying Insurance in a Soft Market: How to Negotiate a Good Deal
Insurance rates for buildings spiked after the World Trade Center attacks on September 11, 2001, as companies worried about the threat of further terrorism. Before that, insurers had been engaged in a price war, cutting premiums in order to pick up new business. That all changed following that fateful day, when insurance companies and reinsurance companies (which supply the bulk of the coverage to insurance firms) paid out millions of dollars. The reinsurance companies passed those costs on to the insurers, who passed them on to you and me. But now, bargain days may be here again.
Ask Edward Mackoul. As president of the insurance brokerage Mackoul & Associates, he keeps his finger on the pulse of the industry. His prognosis? "It's a buyer's market. We have seen a softening recently. If your building is up for policy renewal, this may be a good time to get a deal."
He's not alone in his assessment. "I believe the market is more competitive this year than it has been in prior years," says Barbara Strauss, executive vice president at another brokerage, York International Agency. "A lot of the premiums are going down faster than they've gone down before," adds Marjorie Young, vice president of E.G. Bowman Company, a commercial insurance brokerage. "During the first quarter, [premiums] had a very sharp drop, the biggest drop they've had in a couple of years."
9/11 wasn't the only factor in rates having gone up. Insurers were investing premiums and profits in the financial markets, and when those markets suffered, insurance companies increased prices to make up the loss. In addition, the market became less competitive when some insurers moved out of New York entirely, others went belly up and still others had their ratings downgraded by the A.M. Best Company, which rates companies' financial stability.
But, as time went by, the insurance companies took in record profits from their much-higher premiums. And over the last few years, many insurers began returning to New York as they sought slices of the pie for themselves. That, in turn, led to another price war when established companies attempted to keep their client base and market share.
Which brings us to today. Michael Spain, president of the brokerage Spain Agency, notes that either last year or this year, "[M]ost buildings have been able to negotiate a 15 percent better deal for themselves." While deals depend on the type of building, its claims history and its location (structures near potential terrorist targets, such as Grand Central Station or the Empire State Building, may not get any price breaks), many brokers say price reductions are to be had.
"These are the types of policies that are renewed every year, so if something's coming up for renewal [managers should expect] to get a decrease from their upcoming renewal," Young says. "It's good news for a lot of insurance purchasers."
Similarly, Orsid Realty's Eric S. McPhee, a vice president in the risk-management division, says he's seen a slight cost reduction in terms of being able to "buy more coverage with a reduced premium. … Depending on the size of the building, we were able to save anywhere from five percent to twenty-five percent on renewals" overall on his management company's 140 buildings, about 85 of them co-ops.
"In a hard market," observes York's Strauss, a building with a $100 million property value "would have to spend ten to twelve cents per $100 of building value or $1,000 to $1,200 per million to write that insurance. Now, with the soft market, you can go out and find insurance for that same building and get it written for seven or eight cents" —depending, again, on location and claims history.
So, what's the best way to cash in on this buyers' boom? Strauss says the trick is to have a good broker who knows the market and deals with insurance carriers whose specialty is writing insurance for co-ops and condos.
"There are only a handful of insurance companies that write insurance competitively for co-ops and condos and continue to maintain the broadening coverage that is so vitally important to the building," she notes. Over the years, the better brokers took advantage of whatever market they could to try to keep the prices as low as they could.
"It doesn't necessarily mean that every building is going to benefit from the soft market when renewal time comes," she says. But it's clearly worth a try. When the market is soft, negotiate hard.
Adapted from Habitat June 2008. For the complete article and more, join our Archive >>