🍇 Is Your Cash Flow Getting Crushed?
Happy Monday!
Here is an Idea, an Action, and a Question to consider this week.
Idea
Reinsurance is affecting my business more than ever before, and if it may be affecting yours, too…
If you don’t already know, reinsurance is insurance for insurance companies. It's a practice used by insurers to mitigate risk by transferring a portion of it to another insurer, the reinsurer.
Example: say an insurance company has sold policies to many homeowners in a specific area. If a catastrophic event, like a large hurricane, affects this region, the insurance company could face enormous losses from many claims.
To protect itself against such a significant financial blow, the insurance company might decide to pass on some of this risk to a reinsurer. In this scenario, the original insurance company (called the ceding company) would pay a premium to the reinsurer, and in return, the reinsurer would agree to cover some or all of the losses above a certain amount.
While reinsurance is generally not something that individual policyholders have to worry about, it plays a vital role in the overall stability and health of the global insurance industry.
With the way interest rates are going, investors are pulling out of the reinsurance market (typically a low-risk investment) and buying up even lower-risk investments, like treasury bonds. With less money in the reinsurance market, the reinsurance companies have to charge more to the insurance companies. This means that the insurance companies have to charge more to the end-users.
What does that mean for investors? Well, let’s just say that your cash flow is getting crushed like the grapes in Lucy’s barrel.
For illustration, here’s what I’m up against currently:
We have a 200+ unit apartment complex. Our original price for insurance was $1,200/door, so our total was about $240K/year. Now, our price just went up to $3,000/door. That took us from $240K to over $600K! This was a huge increase and a huge impact on our cash flow.
For agents, this new landscape is just as tough. Deals are slipping away because the price for insurance is so high that a lot of investment numbers just don’t make sense.
But when things seem bleak, I look for opportunities elsewhere. Deals are always just around the corner. Here’s what I’m doing:
1.) I’m shifting. I’m looking at newer properties, because new properties are still able to get insured for a reasonable price.
2.) I’m educating. Any clients that are interested in flipping or buying distressed properties need to know about this increase in insurance. I’m aiming to make sure that no one gets blindsided, thinking they’ve got a great deal, and then find out that the insurance breaks the bank.
3.) I’m networking. I’m digging and looking for insurance companies that are offering the lowest rates.
4.) I’m mitigating. I’m looking into risk mitigation policies and master insurance policies. These are policies that cover multiple properties under a single contract. This is a great option for investor-agents who have a portfolio of properties.
