Think of your keys. House keys, storage key, basement door key, bike lock key, gym locker key…the list goes on. When your keys are all loose, it’s a hot mess. The natural solution is to purchase a key ring, so now they’re all finally in one place. Hallelujah! Then you realize all the keys look the same and without identifiers like color or markings on each, it’s tough to differentiate the locks they open. Although all similar, you must treat each key differently because of their various functions. The same concept applies to real estate master insurance programs.
Often, we’re asked, “If I’m in a master insurance program, how do I structure billing for our properties?” This is a major concern most property owners face when structuring a master property insurance program for the first time. The answer is simple: premium allocations.
Premium allocations can be a great way to manage billing within a master insurance program like labeling all of your keys. It helps to manage and track trends within your insurance program for each location. For several years, I’ve been reviewing insurance policies for real estate companies and often find that most people have implemented a stand-alone insurance policy per location within their portfolio. Typically, as a company grows, they acquire new property and buy a new insurance policy, rather than build out a program.
There’s a better way to go about this!
A master insurance program helps minimize the number of policies and renewal dates, as well as provide broader coverage. To make it work for real estate companies, we’re able to allocate premiums per location within the master program.
I’m sure you’re wondering, “Will this satisfy lender requirements?” The answer is “yes.” We’re able to allocate the appropriate amount of premium per location by:
- Construction type
- Loss ratio
For example, let’s say you own or manage 30 properties. Over the years you’ve acquired the locations and had your broker put a new policy in place each time you closed on a location. You currently have 30 or more different policy numbers, multiple renewal dates, and rates that vary based on the criteria above. Sounds like a lot of work to keep up with all of those policies, right?
Simplifying your program is the best solution. We begin by setting up the master program so you have a single renewal date and better coverage. We allocate the premium by location and ownership through underwriting guidelines. We then allocate the premium per building based on the type of construction, loss ratio, occupancy, and condition then bill accordingly. This makes it simple for accounting purposes, and lenders will be satisfied that you can provide an exact amount for what that property costs to insure. Even if there are multiple investors in a property, premium allocation alleviates those situations as well.
As previously mentioned, you’re also able to track trends and loss ratios per location to see how one property performs against another. If the rate on a property with similar construction and occupancy in the same geographic location is higher, it typically ties back to losses. This allows for greater benchmarking within your existing portfolio.
If you’d like to simplify your program and learn more about premium allocations, chat with an MMA advisor.