Outlook 2004
When looking at 2004, Toomey expects multifamily expenses to be much like 2003, rising at a 3 percent clip. But there is one very important caveat: If the nation’s energy providers have to upgrade their facilities, they may send costs back to customers, he says. This would not only cost firms more, but it also will increase residents’ utility bills, making them less likely to be able to stomach rent increases.
Despite Bolton’s optimism about increased revenue possibilities in 2004, he does not think the expense-cutting craze will go out with 2003. “The progressive operators will continue to look for ways to squeeze costs and improve productivity,” he says.
The Solution
This dramatic rise in pricing forced many executives to change the way they work with insurance companies. In the past, firms called their insurer whenever there was an incident.
Now that insurance rates “have become so restrictive, that instead of immediately going to the insurer, owners won’t turn the claim over unless they have to because they don’t want the loss on their claims history,” says Jeffrey Masters, a partner in the litigation department and co-chair of the development risk management practice group at Cox, Castle & Nicholson LLP in Los Angeles.
This is not the only reason firms seem to be avoiding insurers. In many cases, owners take higher deductibles to cut their insurance costs. This means that smaller accidents, which used to be reported, are no longer large enough to even reach the deductible, giving firms added motivation to prevent these types of mishaps. “[By] taking higher deductibles, they are looking at how to manage risk,” says Jay Harris, vice president of property management and human resources for the National Multi Housing Council. “If owners manage risk well, they can save money.”
Though raising deductibles was the most popular way to deal with skyrocketing insurance costs, it certainly was not the most dramatic. Some companies started to use captives, essentially insurance companies specifically for a larger business, be it a manufacturer or an apartment firm. Companies who start these entities finance their own risk by sending premiums to a captive instead of paying an insurance company.
For instance, a company with a million dollar premium sends part of the money, around $400,000, to the insurance company that administers the captive. The other $600,000 is be placed in the captive, and the multifamily firm would get back what it did not use at the end of the year. While they have their advantages, Masters warns that captives carry a lot of risk and can be expensive to set up.
