Where does a condo association insurance premium go?

I’m sure, more than a time or two, you have gotten your condominium association insurance quote and cursed the insurance company, your agent and made references to the questionable parentage of both of them.

You aren’t alone. Not only are the premiums rising for your condo association, they are on the rise for the condo unit owner as well. Although there are many external factors that are driving insurance premiums up such as coastal storms, other factors are just as important to the formula. In order to better understand your insurance dollar, it’s important to know what the formula is.

Insurance premiums are made up of several components:

1) Loss cost – This is the part of the premium that is the expected loss component. So, for all condominium associations in your state and your geographical territory, this is the amount of the insurance dollar that the insurance industry expects to pay in losses.

2) Expenses (overhead) – Every business has expenses. An insurance company has employees, they pay those employees benefits, they have electric bills, the pay states taxes on the premiums they collect, etc. This piece does not include profits.

3) Profit – If you weren’t aware of this, insurance companies are for profit entities. They are in business to make money. With that said insurance company rates are regulated by state insurance departments. Your insurance company, if they are authorized to do business in your state, has to file a rate plan. Any profit calculations are capped. They are not allowed to make excessive profits. Usually, the profit component is capped at around 5-10%.

4) Acquisition costs – Your insurance agent is in business to make money. The insurance company, unless they deal directly with you, has to pay your agent a commission for his services.

As you can see, there is quite a bit that goes into the formula. Some other things to consider include:

1) Individual account experience – What has your insurance claims history been? If your particular condo property has been plagued by fire or water damage claims, an insurer’s loss pick (loss cost) will be higher for your individual property. On the other hand, your good experience should reflect in your premium as well.

2) Loyalty – Do you bounce from agent to agent and insurer to insurer to get the best premium? An insurer will take into account your buying patterns. If you bounce around all the time, an insurance company will err on the side of caution and expect a short history with you as a client.

3) Attitude – Are you a proactive or reactive manager? Most insurance companies see attitude as one of the most important risk traits to evaluate. If you deal with problems before they become problems, your loss history should reflect that. Don’t get me wrong—stuff happens! An insurer can live with a shock loss happening to an account. They can’t live with poor or sloppy management!

I hope this primer will help you appreciate the cost of your condo association insurance and help provide you with some basic tools to help keep your insurance costs under control.