The Issue of Coverage What's Enough and Why It Costs So Much

After the terror attacks of 2001, many co-op and condo buildings in the New York area got another nasty shock: insurance premiums suddenly spiraled upward as much as 50 percent or more in the space of one or two billing periods. Some buildings were simply dumped by their insurers with little explanation or opportunity for recourse.

A building without adequate insurance is a sitting duck - not necessarily for terrorism, easy as it is to hang all our fears on that vague and ominous possibility - but for everyday mishaps and problems that without proper coverage can turn into hideously complicated, expensive headaches. On top of that, lenders are unlikely to be favorably impressed with a building that stands to lose everything if a grease fire in a shareholder's apartment leads to heavy damages, and that in turn impacts a building's ability to attract shareholders.

So what's the problem? Is it all because of September 11th or is there more to these rising premiums than meets the eye? Who's being affected? How much insurance coverage does a building really need? And most importantly, is this just an unpleasant trend, or are jaw-dropping premiums here to stay?

Consider the Numbers

Any time costs for goods and services increase, there's bound to be a good deal of grumbling, but in this case, it's not necessarily the caprice or greed of huge corporations that's to blame. During the dot.com boom years of the 1990s and the early part of this century, large insurance companies saw huge returns on investments they'd made in the stock market using policyholders' premiums as capital. With funds doubling or tripling themselves between the time they were paid in by policyholders and the time any claims were paid out, insurers could easily afford to keep premiums low - artificially low, according to James Fenniman, ARM, executive vice president of the New York division of Bollinger, Inc., an insurance brokerage and one of the prime movers behind last year's federal reinsurance bill. "You had a market that was under-priced for 10 years," says Fenniman, "and a market that, if you were to take individual rates per exposure units, the rates - even after the escalations of the last few years - were probably back to where [they] were in say, 1992."

According to Roger A. Imperial, vice chairman of Acordia - the fifth largest brokerage in America and a subsidiary of Wells Fargo, "What mainly affected the rate increases were underwriting results. The rates being charged were inadequate - and for nine and a half years [prior to the first quarter of 2001], brokers and companies were reducing rates 10, 20 percent a year just to maintain their business and remain competitive. The stock market wasn't performing, so rates went up. Then 9/11 comes around, and bang - you're in trouble. It was the single largest loss known to the insurance industry."

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