Master Insurance Programs

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Commercial Insurance

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Business Insurance

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Real Estate Insurance

•	Condominium Association
•	Apartment Building
•	Office, Industrial, & Retail Buildings
•	Shopping Centers

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Environmental Insurance

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Commercial Forms

White Paper on Master Insurance Programs

Master programs can provide cost savings over individual buildings purchasing insurance, but they can also become white elephants for the members without ongoing due diligence, management and accountability.

Experience and Resources

Draper and Kramer Insurance Agency and Draper and Kramer’s Risk Management Department focus on real estate. We have operated workers compensation master programs since 1970 and property and liability master programs since 1995. We procure the insurance and provide claims management and loss control services for clients, such as Draper and Kramer, Slough Estates USA, Amberjack (State Farm), Royal Properties, and TRP Development. We also act solely as risk management consultants for other clients such as M&J Wilkow, Chicago Graystone and Castlebar Construction. In this capacity we audit procedures, analyze claims trends, manage the competitive bid process for insurance procurement, make recommendations and design and implement processes for improvement.

Analysis of a Master Insurance Program

The key components of concern to each condominium association board of directors are driven by the fiduciary responsibility to its owners.

•Cost Insurance Coverage and Premiums, Administrative Overhead, Claims
•Conflicts of Interest of Program Administrator vs. Member Condominiums
•Accountability – Premium Allocations, Dividend Returns, Claims Information
•Annual Independent Audit – Analysis of Program Risk, Competitive Premiums ,Claims, Premium Allocations and Program Profits

Cost

Every condo association board compares the coverage and premiums of a Master Program against their current insurance program when making the decision to join the Master Program. Most do not follow through with the more critical comparison. The same comparison process should be completed no less than every three years (and in volatile markets, every year) against the coverage and premiums that would be available to you in the open marketplace. Many Program Administrators will provide you with their analysis of the competitiveness of the program each year, but they have a vested interest in selling you on staying in the program. Open market bids are the true test of competitiveness.

When your property manager is also the insurance program administrator, there should be an accounting of the administrative costs related to the insurance program that is separate from their property management fee and other service costs. A Master Program cannot operate without administrative expenses, but often these costs are mixed in with other service costs. Unless you look at the total amount being paid to your property manager, and consider the insurance cost as part of that bigger picture, it would appear you are getting very inexpensive insurance when only the premium is compared to open market bids. Administrative Overhead costs should be disclosed for both the overall program administration and for the services provided to your condominium association separately.

Detailed Claims information should be provided to each condominium association on a quarterly basis. At the end of the 3rd quarter of the policy anniversary date, they should provide a detail claims report for the past five years along with a cause and trend analysis for that association. In addition an annual report should be provided to all association members showing the claims costs for the program as a whole for the past five years. When the Master Program administrator does not compile loss data separately for each building, they are effectively denying you the opportunity to compare your year-to-year insurance costs against the open market. Insurance companies will not provide quotations without five years of loss runs issued directly by the insurance company and/or program administrators that have provided you with insurance in the past.

Conflicts of Interest

How does a program administrator make money? Conflicts of Interest arise when the profits diminish as the services and needs of the members are met. This can be particularly true when claims occur and the administrator participates in the overall profitability of the program (premium – administrative costs – claims costs). Most associations rely on their property manager to handle claims with the insurance provider. It is important that the property management company’s interest is aligned only with the association when they represent you in a claim settlement.

Accountability

Accountability and transparency, the buzzwords of 2004 are the tools that the members of a master program must require to meet their fiduciary responsibility to their owners. The methodology and calculations of all premium allocations between the member associations should be fully disclosed to all members. If the program is loss sensitive and provides a premium return in the form of a dividend when total program loss ratios are below a set threshold, the members should ask to participate in those returns or at the very least have those amounts that will be paid to the program administrator disclosed. Any revenue the program administrator earns from managing claims should be fully disclosed. Also review the importance of providing claims reports to members in the section titled “Claims”.

When your condominium association joins a master program, you are partners with all of the other member associations in that program and it is in your best interest to share information on premiums, administrative costs, claims and loss control recommendations and needs with each other. Your interests are aligned in setting a minimum standard of performance for all members that will protect your group buying power.

Annual Independent Audit

It is common and expected practice to use Independent Auditors to provide opinions of whether acceptable practices have been used and the information provided in financial statements is not misleading. That same approach is the tool members need to support their decisions in not only entering a master program, but also making the decision to stay in it over time.

Summary

Master Programs can be an effective tool for transferring the financial burden of risk, particularly in times when insurance prices are rising. Without the proper disclosures of related costs, and the ability to leave the program if it is no longer the best option for an association, they can also become a costly mistake.