Premium financing for cooperatives and condominiums gaining momentum

November 3, 2022

Worse squeeze. In today’s so-called “hard” insurance market, premiums continue to rise while coverage limits continue to shrink. To add economic pressure, premiums are usually paid in lump sums. Today, however, some boards utilize funding tools that divide the cost of these premiums over the course of a year.

Keep it simple. it is called insurance premium financing, And it’s offered by a niche group of national and local lenders.The board typically asks insurance brokers to contact lenders to apply for loans. “Basically, the only information you need is the name of the insurance company, the name of the co-op or condominium, the amount insured for the building, and the effective date,” he explains. Jordan SternRegional Sales Manager and Vice President of Imperial PFS, insurance lenders. Financing is virtually guaranteed because lenders do not look into the financial status of buildings and buildings with underlying mortgages do not require approval from banks.

reach agreement. The lender then draws up a loan agreement signed by the board of directors and the broker. The board usually pays a down payment. Ten% Of the total loan amount, the lender advances the remaining 90% to the insurance company. The building repays the lender its balance plus interest in monthly installments, usually divided into 10 months.

“At the current rate of inflation, monetary rates may be in the neighborhood. 11%say Thomas Suswell,president Goldin’s Choice Management“But that 11% is only used for outstanding principal, and over a 10-month repayment period, the principal shrinks very quickly. $100,000 loanthe total interest paid over the life of the loan is approximately $4,200That’s what makes premium financing affordable and profitable for the building. “

Cancellations are rare. As for lenders, loans are risk-free. The financing contract gives the lender a power of attorney for the building insurance contract. This means that if the co-op or condo fails to pay, the lender can cancel the building insurance. The lender will send a cancellation notice to the carrier and the carrier will return the unused portion of the loan to the lender. “But it’s very rare for a policy to be revoked,” says Stern. “The only time I’ve seen this happen is when the board intentionally defaulted because they wanted to get new insurance policies.”

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Suppression of interest payments. With premiums higher than in years past, Mr. Stern sees an increase in premium financing by co-ops and condominiums. But boards need to prepare for higher costs. “In the current inflationary environment, we expect interest rates to rise in line with the pace,” he said. Chimdi Ebna,controller CNYM risk managementis a Goldin Choice subsidiary that specializes in providing insurance premium financing. Still, there are ways to save.addition Jason Schicianoco-president Levitt Furst Associates Insurance Broker: “If possible, the board should consider increasing the amount of the down payment. A higher down payment will reduce the amount of interest paid over the life of the loan.”

Smoothing out spending. Sussewell says there are downsides to this type of financing, whether the building is short on cash to pay a lump sum insurance claim or wants to keep money on hand for unexpected expenses. very few. “The benefit of smaller payments is that the cash flow is evened out, which makes the building appear stronger on the financial statements,” he explains. “Your spending has no peaks and troughs like those questioned by apartment buyers and their lenders, or banks if you’re seeking a building loan. There’s just a smooth line.”

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