Property insurance costs are on the rise, posing a budget challenge for organizations across all sectors, including municipal governments, school districts and other public entities.
Factors that play a role in cost escalation include severe weather trends, deferred maintenance practices, and the reinsurance market. With effective planning, preparation and prevention strategies, however, municipalities can help to mitigate costs and losses.
Cost Factors
The reinsurance market, which provides insurance for insurance companies, has become increasingly volatile, with rates charged to insurance companies rising as much as 50% in recent months, which in turn has led to higher customer premiums. The increased intensity and frequency of stormy weather has caused more property losses, leading to higher rates, and uncertainty around the world related to conflict and political situations has been a contributing factor. Further driving up costs, reinsurance companies have raised the threshold for how much insurance companies must pay in claims before reinsurance kicks in.
As many homeowners are aware, premiums for property insurance have risen more than 20% on average since 2015, again, in large part due to changing weather patterns and higher risks for storm damage, flooding and fires. At a recent congressional hearing, Eric Andersen, president of the global services firm Aon PLC, testified that, “Just as the U.S. economy was overexposed to mortgage risk in 2008, the economy today is overexposed to climate risk.”
The practice of deferring maintenance — putting off infrastructure repairs, equipment upgrades and other maintenance projects — can impact insurance premiums and amplify later maintenance costs as much as 7% per year, according to Opengov.com. Infrastructure in the United States faces a $1 trillion backlog in maintenance needs. And cities and towns are among the top entities that tend to defer maintenance, often because of budget constraints, staff shortages, and aging buildings that require more frequent repair.
Stephen Batchelder, MIIA’s vice president of claims management and operations, noted that deferring maintenance can lead to further collateral damage and additional costs.
“If you decide to defer maintenance on a heating system, for example, you’re not only paying to repair it on an emergency basis later on — which costs more — but you may be dealing with other downstream, costly repair issues if the system fails, such as flooding and water damage to other areas of your building,” Batchelder said. “Capital planning for predictive maintenance programs such as roof assessments and HVAC repairs can be challenging for many reasons, but in the long run, deferring maintenance until it becomes an emergency is a losing proposition.”
Plan, Prepare, Prevent
Municipal leaders should consider several key areas when it comes to planning and preparation to better mitigate risk and prevent property damage and related costs, Batchelder said.
The following are some examples:
MIIA encourages its members to focus on planning and prevention strategies through programs such as MIIA Risk Management grants, which reward communities for efforts to create a safety culture and mitigate property losses.
“Helping members to identify and address specific risk areas helps everyone in the pool to keep insurance costs down,” said Stan Corcoran, executive vice president of MIIA. “The function of the pool isn’t just to provide services and good pricing, it’s about us working with our members as good pool participants to help moderate costs through safety efforts, versus us just passing along any increases.”
As part of its mission, MIIA provides suggested best practices for preventing property losses. Risk Management Programs and Resources are available on the MIIA website.
