In part 1 of this two part article we discussed the issue behind the false sense of risk mitigation within the multifamily housing industry. In this article we will cover two important items that can assist anyone to better understand and manage their mandated insurance program:
- Master Policy and Force-placed Coverage
- Effective Monitors and Controls
Master Policy and Force-placed Coverage
A huge risk management trend in the multifamily housing industry is the transition from traditional HO4 insurance programs to a HO4/Force-place or Property Manager-Placed hybrid or a Master Policy (tenant liability auto-enroll).
Under a traditional HO4 program a resident simply provides their renters policy proof of coverage. Compliance with the program is you either have insurance or you don’t. With a hybrid program a resident has the option to provide their own proof of coverage and if they don’t coverage is placed on their unit—per the lease agreement—and the resident is billed with their rent.
A Master Policy Program would remove the need for a resident to acquire a standard HO4 for their liability (they still can get personal contents at their discretion). Every resident would, with their lease, be opted into the tenant liability administered by the property through their rent. (It is important to note that for master policies and property manager-placed policies, the property management company would be the policy holder.)
The rationale for both master policy and property manager-placed coverage lies in the increased risk mitigation. As mentioned in False Security: Part I, average participation in a mandated insurance program is 10%. With a fully functioning Master Policy or hybrid program your participation should always be 100%. Either all residents are enrolled automatically or any resident who allows their coverage to lapse is enrolled.
In summary, it is easy to determine why this is an up and coming trend. I would be as bold to say that it is the future of renters insurance risk mitigation in multifamily housing.
Effective Monitors and Controls
One of the most vital yet most frequently overlooked best practices surrounds a company’s insurance program monitors and controls, or the methods they use to track and enforce the insurance clause. Obviously, there can be many monitors and controls such as collection of proof of coverage, or audit of resident’s coverage. I want to focus more on the analysis of the program and suggest some monitoring techniques and two program KPI’s that could enhance your risk management.
Insurance Program Savings Ratio: First, every company needs to always remember that the program exists for one primary purpose, to prevent out-of-pocket expense from resident-caused damage. If that is the primary goal of the program then it stands to reason that the primary KPI should be insurance program savings ratio:
Insurance Program Savings Ratio%=Claims Paid OutTotal Resident Caused Damage
Total Resident Caused Damage=Claims Paid Out+Out of Pocket Resident Caused Damages
Tracking this allows the company to track the cost benefit for the program and provides the company with a benchmark for goal setting so they can track improvement i.e. Insurance Program Savings Ratio increased from 50% to 60%. This also facilitates the natural thought flow into other areas such as claims filing. Are you filing all claims that could potentially be covered, etc?
Leasing Agent Conversion Ratio: I have heard this from every company I have ever worked with, “Well our residents cannot move in without providing proof of coverage….we won’t even give them the keys.” While showing great conviction to one of the fundamental best practices and great trust in the property staff, it is not realistic. If it were true then the average participation in the industry would be greater than 10%. It is inevitable that at least some residents will slip through the cracks. The leasing agent conversion KPI helps identify potential detractors from your program and to minimize the leaks.
Leasing Agent Conversion Ratio=Total proof of coverage collectedTotal leases closed during X period
Obviously the goal is to have each leasing agent at 100%. If you find that one of your leasing agents conversion ratio is 25%, for example, you know where the leak in your start of lease participation is.