Dec 2024

COMMERCIAL INSURANCE PREMIUMS: Understanding & Limiting Increases By Steve Roderick, EBP, The Baldwin Group

“Both local and global economic conditions play a critical role in insurance premiums.”

N avigating the landscape of commercial insur ance can be daunting, especially for community associations. Understanding the factors influ encing insurance premiums can empower associations to drive costs down rather than passively accept increases. With over 7,000 communities in New Jersey alone, and a staggering 355,000 nationwide, the insurance industry’s financial impact on these entities is substantial. By gaining insight into how the industry operates, community associa tions can effectively manage their risk profiles and improve their standing with insurance carriers. The Economic Landscape Both local and global economic conditions play a crit ical role in insurance premiums. The insurance industry operates on a global economy, not a local or even a domestic economy. The U.S. insurance market, valued at approximately $1.3 trillion, reflects a complex interplay between localized risks and broader economic trends. For community associations, understanding this landscape is essential for mitigating costs. When we consider the cost of reinsurance, only then can we begin to understand why premiums are rising.

Understanding Risk Effective risk management revolves around three key strategies: • We can assume the risk, which means accepting certain risks as a cost-saving measure • We can reduce the risk by implementing safety mea sures that can lower potential claims or... • We can transfer the risk by utilizing insurance policies to transfer risk to carriers. As seen above, the insurance industry operates on the principle of risk management. There seems to be some mis conceptions about how premiums are derived; however, we can break down the calculation into its simplest form. A basic formula helps clarify how premiums are determined: Total Insurable Value (TIV) × Rate = Premium. Improving Our Risk Profile The perception of a community association by prospective carriers hinges on various factors. First, the geographic loca tion; some areas are more prone to specific risks. Though it would be nearly impossible to relocate an entire community, the geographic area itself could be subject to risks related to weather events, geological features, socioeconomic variables, and any number of unforeseen perils. Carriers routinely change their appetites for certain locales based on these risks. Another factor that is a close second would most certainly be the number of units and type of construction.

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DECEMBER 2024