As a property manager, HOA board member, or general consumer, you are likely well aware that the cost of insurance is on the rise. According to The Business Journal, multifamily investors have recently reported a 40-50% increase in insurance premiums. In a hard insurance market, these rate increases are likely to continue. To mitigate the rising cost of property insurance, some managers and decision-makers have turned to self-insuring. Is this the right strategy for your community? Read on to find out more.
Note: The following isn’t legal or financial advice. To determine if self-insuring is right for your property or community, please consult your internal stakeholders.
What is Self-Insurance
Self-insurance, also known as self-funded insurance, is the absence of third-party insurance. Instead of paying monthly insurance premiums, you set funds aside to cover any losses yourself. Without an insurance policy, your property assumes all the risk if anything goes wrong on your property.
This can be an effective cost-saving measure if you can set aside enough funds to pay for damages caused by unforeseen events, making it a good alternative to additional coverage options like earthquake and boiler and machinery insurance. However, you will likely still need to have liability coverage.
The Advantages Of Self-Insuring
There’s a reason more property managers and HOA boards are considering self-insurance as a means of saving on insurance costs. There are three primary advantages of self-insuring:
No Premium Payments
With premiums on the rise, setting aside the funds instead of paying into a policy can be a more affordable option in some cases. Filing insurance claims can increase the cost of your premiums as well. If you self-insure, you won’t need to worry about this since you will cover the cost of all damages in their entirety.
Financial Control
Some insurance policies have exclusions that may require you to pay the full cost of damages that aren’t covered by the policy. Self-insuring removes the potential element of surprise when you’re left to cover a hefty repair bill despite paying into an insurance policy. Additionally, since the required work isn’t dependent on a claim being filed and approved, you can have the repairs done on time by your preferred contractor.
Potential Accrued Interest
If you can limit the number of issues you have to pay for, the money you set aside can accrue interest in an account that allows your funds to grow over time. According to the Federal Deposit Insurance Corporation (FDIC), the average savings account interest rate is 0.33% APY, with high-yield savings accounts offering higher rates of return. This can add significant value to your reserve of cash that you would otherwise pay into an insurance policy.
The Disadvantages Of Self-Insuring
Self-insuring may make financial sense, but there are some downsides as well. First and foremost, you will be responsible for the full cost of any event that your insurance policy would otherwise cover. In the short term, having the ability to set money aside may sound appealing. But if you self-insure, you assume all the risk. This can lead to:
Significant Out-of-Pocket Expenses
Air conditioning systems, electric water heaters, and other pieces of equipment or machinery on your property are all essential to the health, safety, and satisfaction of your residents. Yet even with the most diligent maintenance, these items are going to need extensive repairs or even outright replacement. Such external factors as earthquakes or floods may damage your equipment as well, and these two events aren’t typically covered in standard insurance policies.
Self-insure and your property would potentially have to pay tens of thousands of dollars in repair costs. Should things go wrong and your property or association doesn’t have enough funds set aside, you may have to take on debt to cover these expenses.
Challenges in Assessing Risk
To understand how much you need to set aside, you need to analyze your risk of loss. Do you have older equipment that is prone to failure? Are you already having to invest substantial funds in maintenance and repairs? Having a thorough understanding of your overall level of risk will help you know how much you need to collect and set aside. This would typically be the job of an insurance company’s underwriter, but if you self-insure you will have to evaluate this on your own.
The Need for Disciplined Administration
Conventional property insurance provides certainty in that you know how much your premiums will cost in advance and there will likely not be many unexpected expenses related to what is covered. If your property is self-insuring, it can be difficult to know how much to collect and set aside. Even if you do it routinely, maintaining those funds requires far more due diligence than paying a monthly premium. Management costs are another factor to consider when deciding if self-insuring is more affordable than conventional insurance.
How to Mitigate the Risks of Self-Insuring
Self-insurance is potentially riskier than having standard insurance, but there are ways you can mitigate these risks through diligent maintenance and improving communication throughout your property, from your front-office staff to your maintenance workers and management team.
Perform Routine Inspection & Preventative Maintenance
As the old saying goes, an ounce of prevention is worth a pound of cure. In the property management context, preventative maintenance is a powerful tool that can help you mitigate the risk of catastrophic loss. If your property is currently managed in multiple software solutions or by pen and paper, having a clear picture of the maintenance status of your property or building’s equipment may be challenging.
BuildingLink can help here. Our property management software’s maintenance solutions put all the information you need in one place. Schedule recurring tasks; assign them to your internal team and outside vendors; and track weekly, monthly, and annual maintenance needs. When your team conducts inspections, they can upload their reports and photos directly from the staff mobile app or the web portal. You can also manage your equipment and assets directory (including warranty information) and use our vendor management tools to track your vendors’ insurance, licenses, and more.
When your residents add work orders, you can manage the status of the task and assign it to your staff or vendors as needed. Finally, our smart home integration with Ecobee automatically creates tickets when thermostats require routine or emergency maintenance.
Managing your property’s equipment is essential to minimizing your risk. Our property management software offers all the tools you need to stay on top of it successfully.
Train Your Employees to Identify & Report Hazards Before They Become Losses
Regardless of how diligent and organized your maintenance team is, they may still miss issues that can become much larger problems. To reduce the likelihood of things slipping through the cracks, consider implementing a procedure that encourages your other team members to identify and report issues and hazards. With BuildingLink, your staff can use the Incident Reports module to add incidents related to equipment failures organized by severity. These can then be linked to specific units, residents, staff, contractors, and locations.
Thoroughly Vet Your Contractors
Maintenance mistakes can be costly. Ensuring the people who do the work on your property are reliable and insured is of paramount importance. Verify the status of their licensure (each state may have different requirements) and ask for references if you haven’t worked with them before. If possible, see about getting listed on their insurance policy. Before signing any contracts, include your legal team to ensure the indemnification language is in your favor.
In a hard insurance market, the cost of premiums will likely continue to rise. For some, self-insuring is a viable option to save money for residents and stakeholders. Whether this is right for you depends on the kind of coverage you need, your ability to collect enough funds to cover any future expenses in their entirety, and how well you can mitigate your risks.
About BuildingLink
Trusted by property managers around the globe for more than 20 years, BuildingLink is an industry-leading property management solution built to meet your needs. Our cloud-based software consolidates nearly all your management tasks into one place, empowering you to run your property more effectively. Leaders in innovation and support, we empower you to master your property’s operations by turning data into knowledge. Ready to get started? Book your demo today.