Aug
29
Don’t wait until a hurricane is imminent: Proactively prepare before the next hurricane to help keep your organization, employees and yourself safe.
Filtered by tag: Financials Remove Filter
Jul
31
As the summer winds down and we approach the latter part of the year, it’s time for our community association to turn its focus to one of the most crucial tasks on our calendar: budget season. This period is not just about crunching numbers; it’s an opportunity to reflect on our achievements, plan for the future, and ensure the continued well-being and growth of our community. Here’s what budget season entails and why it’s essential for all of us.
Understanding Budget Season
Budget season is the time when the community association reviews its financial status, plans for upcoming expenses, and sets priorities for the next fiscal year. It involves several key steps:
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Jan
25
As we begin the year, community managers, board members and insurance brokers are still taking deep breaths to recover from the fast and furious insurance market we had in 2023. Many Community Managers had to incorporate major rate increases in their 2024 budgets. Most board members had a hard time approving these increases with very limited time and options. The participation of insurance brokers in board meetings and town hall meetings became critical in helping to control and mitigate this insurance crisis.
Key factors in 2023
- Reinsurance: By the same manner that community associations buy insurance to protect their buildings, insurance companies also need to buy insurance to be able to pay for claims. Most carriers enter into reinsurance renewal agreements twice a year, January 1st and July 1st. In addition to rate increases, these agreements have also resulted in new underwriting guidelines and capacity restrictions in the last four years. This means that for reinsurers to back up insurance companies, a very limited amount of coverage will be available subject to very specific criteria (age of building, type of construction, building limit, loss ratio, etc.) You could say that reinsurers dictate the rules of the game and insurance companies have to enforce those rules to maintain their reinsurance agreements. The insurance brokers’ role is to keep board members and community managers informed about how the rules of the game are changing so they can budget properly. In 2023, the biggest challenge was that reinsurers deployed less capacity and imposed stricter rules, sometimes impossible to meet especially for aging communities.
- Billion Dollar Natural Disasters: In the insurance world we refer to this as CAT exposure, which is catastrophic losses such as hurricanes, wildfires, and floods. Unfortunately, there has been an increase in the frequency and severity of these events, especially in California and Florida, in the last 5 years. According to the State of the Market report published by Amwins in October of this year, 2023 marks the 16th consecutive year with insured U.S. severe convective storm losses topping $10 billion dollars. “Through the end of September 2023, there have been 24 confirmed weather or climate disaster events in the US with losses exceeding $1 billion. This puts the U.S. on pace to exceed any prior annual record number of billion-dollar disaster events.” Even though community associations in the DC metro area are not directly exposed to these disasters, they are directly impacted financially because their coverage comes from the same insurance pool.
- Rising Property Values: The increased cost of construction, the supply crisis, and labor shortages were still a major factor in 2023 from an insurance perspective because of the need to adjust building valuations based on the current cost to repair or rebuild in today’s dollars. Another factor is the insurance requirements from an association’s governing documents and from Fannie Mae, buildings need to be insured at 100% replacement cost, and this is non-negotiable.
A few years ago, insurance companies were renewing policies for the same valuation for consecutive years and were only applying a rate increase. However, this year there has been a substantial increase in rates as well as adjusted valuations. This is not to be confused with market value. Many communities are seeing valuation increases between 10% to 25% or even higher if these values have not been adjusted periodically. These adjustments are strongly enforced especially by insurance companies that are writing coverage enhancements such us Extended Replacement Cost of 150%, 200% or Guaranteed Replacement Cost. When a board refuses to accept the proposed increase in the replacement cost of a building, the underwriter will most likely apply a coinsurance penalty which will result in a reduction of premium. However, the community will immediately disqualify from new Fannie Mae insurance requirements as coinsurance provisions are not accepted.
What to expect in 2024?
While supplies remain limited and the cost to repair or rebuild increases, the need to increase property values will continue to increase. The fact that higher values are needed while lower capacity has been deployed is exacerbating the current market conditions.
As a result, some insurance companies have decided to exit the market and the remaining carriers have been obligated to tighten their underwriting guidelines. There has been a significant increase in the number of cancellations or non-renewals issued by insurance companies. Underwriters are now scrutinizing the Construction, Occupancy, Protection and Exposure of every single property they renew. In the insurance industry we refer to this as the COPE.
I highly encourage board members and Community Managers to become familiar with their association’s COPE to be able to anticipate any potential cancellations and budget for renewal increases. An association that is cancelled by their insurance company will most likely need to take coverage from the non-admitted market. This change will easily generate a premium increase between 100% to 450% with deductibles that range between $50,000 to $250,000.
While each insurance company has its own guidelines, below are the most typical factors that are currently triggering cancellations:
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Oct
26
Community associations should incorporate preventive maintenance and structural inspections into their reserve studies—the important budget planning tools that identify the components a community association is responsible for maintaining or replacing, indicate the status of the reserve fund, and provide a stable and equitable funding plan to offset anticipated future major common area expenditures. The recommendations are part of new Reserve Study Standards released by Community Associations Institute (CAI), the leading international authority on community association governance, management, and education.
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Sep
26
In July, Fannie Mae and Freddie Mac released updates to project eligibility standards for condominiums and housing cooperatives.
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Aug
31
Some insurance carriers refer to Directors and Officers (D&O) Liability as miscellaneous liability. Take my word, it is not a coverage that should be considered miscellaneous. There is a world of difference between D&O coverage offered to you as an endorsement on your master policy and proper D&O coverage specifically written as a stand-alone policy.
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Aug
17
Your association’s budget impacts the financial and physical health of the community and residents’ property values. The budget is the first, crucial step to restoring aged, once-beautiful communities to their former glory, and it determines the enjoyment residents will derive from their community.
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Inheriting Old Violations
Category: Legal Issues
Apr
19
"Our Board Just Inherited a Host of Old Violations - What Should We Do?"
We often get calls from new board members after transitioning from developer control. They have questions like this one: Some of the homeowners have added fences, above-ground pools, and sheds without getting approval from the Association. Many of these changes do not appear to meet the standards that are part of our documents. No action has been taken to correct these violations. How do we go about enforcing the covenants and rules?
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Why Are My Assessments Going Up?
Category: Finance
Oct
10
There is a widespread belief among homeowners who live in associations, that if their assessments stay flat and do not increase, their community is in good shape and the Board is doing its job. And while it’s easy to understand the appeal of a historically flat budget, a lack of increases in an association’s assessments could be an indication of rough seas ahead.
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Budgeting - What's the Point?
Category: Finance
Sep
27
Winston Churchill once stated that, “Plans are of little importance, but planning is essential.” There are several different facets of a community association that allow it to operate properly and effectively, but none so important as the organization’s financial stability. Within the next couple of months, managers, Boards, and committees will begin acquiring costs of current contracts and projections for the upcoming year to start the arduous process of creating the operating budget for next year.