Mortgage Market News and Insight

For the Weekend of February 24^th, 2024

 

Hawaii’s Most Read Mortgage Publication for 16 Years

 

Volume 16 – Issue 25

More Bad News on Condo Insurance

I recently sat in on a presentation by Sue Savio, owner of Insurance Associates – if not the largest, one of the largest providers of condo insurance in the state.  Her comments were sobering.

 

Hawaii is a small market for insurance carriers, yet we have a higher claims percentage and higher risks than many other states.  That means that there aren’t a lot of insurance companies wanting to do business here.

 

Let’s first distinguish between high-rise condos that are concrete and low-rise condos made from wood.  Low rise condo projects get their insurance from secondary carriers, versus primary carriers, because of the perception of higher risks.  Those risks include wind damage due to hurricanes, and now the new risk of destruction due to wildfires.  Not until the disaster in Lahaina did Hawaii get classified as a high risk due to wildfires.  Secondary carriers charge more and take on greater risks.  Primary carriers file their rates with the State’s Insurance Commissioner and need to get the State’s approval before those rates go into effect.  Secondary carriers don’t have that restriction.  In the insurance world these secondary carriers are part of the Surplus Market.

 

Most of Hawaii’s high-rise condos get their policies from primary carriers.  We currently have 3 companies that service our state.  With so few options, if one insurer decides to limit coverage or reduce coverage, condo projects have nowhere to turn but to the higher priced surplus market.  Of the 3 carriers in Hawaii:

 

• First Insurance isn’t issuing any new business.
• Fireman’s Fund is also not taking on any new business.
• DB Insurance is dropping 20% - 30% of their existing policies.

 

 

The condo projects that are being dropped by DB will now have to look to the surplus market for their insurance which can run 8 to 10 times as expensive from what they were paying.  Sue gave an example of a large condo project on Oahu that was dropped and had to find insurance elsewhere.  The project’s annual insurance increased from $200,000 annually to $1,200,000.

 

In 2023 for the condo projects that did get renewed, they saw an average increase in premium of 40%.  Those rates are expected to increase another 25% to 30% with renewals this year.  If your condo board is not bracing themselves for these increases, they may need to issue an assessment to each owner in order to have enough money to pay the insurance bill.

 

Why is Hawaii facing this problem?  Most of our high-rise condos are old.

 

With old condo structures you have issues with old pipes and concrete that is starting to deteriorate, called spalling.  Also, a majority of older condo buildings don’t have sprinkler systems.  Not only do the old condos face issue with age, but the new condos have lots of defects too.  Hawaii has one of the highest rates of claims due to water damage in the country.  In 2022 Fireman’s Fund – a global company, recorded 80% of their losses here in Hawaii.

 

Insurance companies are in business to make money.  If they see too many claims, they try to minimize their losses by raising rates and reducing their exposure.  Fireman’s Fund is reducing their exposure for Hurricane coverage and not renewing policies with 100% coverage.  Without 100% hurricane coverage in place, lending in those projects is limited.

 

It is estimated to there are 375 condo projects lacking 100% hurricane coverage throughout the state.

 

In some cases, the reduction in coverage is due to the company’s inability to obtain surplus policies themselves.  Without getting too deep into how insurance works, the primary carriers don’t have sufficient capital and reserves to cover losses for all the policies they write.  They take on some of the risk themselves, but the majority of their policies are covered by purchasing coverage from one of 40 global reinsurers.  The risk gets spread, which keeps rates low, and prevents a large disaster from bankrupting a primary carrier.

 

If you live in or own an investment condo, or are thinking of purchasing one, insurance is one more item you now need to be aware of.  With huge increases in premiums, you’ll see your monthly maintenance fees increase sharply over the next few years.  And if your Board of Directors are asleep at the wheel, you may see a special assessment in your future.

 

Sue concluded her presentation with some sound advice.  It is always cheaper to fix things before you run into an issue or have your insurance policy dropped.  For older buildings, they should be looking at the age of their pipes and plan accordingly to get them retrofitted.  And while doing that, add your sprinklers.

 

Being in the mortgage industry myself for over 25 years and having owned several condos, I personally never considered the age of the building and how old the pipes were.  Now with the possibility of owning a condo and facing mounting insurance costs, owners and potential buyers need to do their homework.

 

• How old is the actual structure?
• Has the pluming ever been retrofitted?
• Does the building have a sprinkler system?
• Has the building’s concrete structure been evaluated recently?
• What is the board’s plan to address any of these issues?

 

 

With the memory of the Marco Polo fire not too distant in our memory, and that condo building that collapsed in Florida a couple of years ago, insurance companies are carefully scrutinizing the condo projects they insure.  If your building is becoming a higher risk, you’re going to see significantly higher insurance premiums.

 

 

 

 

 

And now the week’s economic news…….

 

Home Sales Rise

With a lack of major economic news, it was a quiet week for mortgage markets.  The most significant data came from the housing sector and caused little reaction.  Similarly, the Fed minutes contained no surprises and had a minor impact.  Mortgage rates ended the week nearly unchanged.

 

Sales of existing homes in January rose modestly from December but still were 2% lower than last year at this time.  Inventory levels remain stuck near historic lows, standing at just a 3.0-month supply nationally, far below the 6-month supply typical in a balanced market.  The median existing-home price of $379,100 was 5% higher than last year at this time.

 

Additional inventory of homes continues to be badly needed in many areas, but the latest data was mixed.  In January, single-family housing starts fell 5% from December.  By contrast, single-family building permits, a leading indicator of future construction, rose slightly to the best level since May 2022.  In addition, a separate survey of home builder sentiment on housing market conditions from the NAHB unexpectedly jumped from 44 to 48.

 

The minutes from the January 31 Fed meeting released on Wednesday revealed no significant new information beyond what officials have said in recent speeches.  The consistent message continues to be that they are in no hurry to cut interest rates.  Officials generally feel that the risks of maintaining tighter policy for too long and loosening it too soon are roughly balanced, so they prefer to wait for "greater confidence" that inflation will continue on a path down to their target level of 2.0%.  At the beginning of the year, most investors anticipated that the first rate cut would be seen at the next Fed meeting on March 20, but the consensus now is that it will not take place until June.

 

 

 

 

Next Week

Investors will continue to watch for Fed officials to elaborate on their plans for future monetary policy.  For economic reports, New Home Sales will be released on Monday.  Personal Income and the PCE price index, the inflation indicator favored by the Fed, will come out on Thursday.  The ISM national manufacturing index will come out on Friday.  The key Employment report will be released on March 8.

 

 

Until next week…….