Property Insurance for Public Housing Agencies

Property insurance has become increasingly relevant in recent years, as Public Housing Agencies (PHAs) across the country face rapidly increasing premiums. Property insurance costs are the fastest rising expense for multifamily properties in the U.S., rising 129% since 2018 and having a 27.7% year-over-year increase in 2023.ⁱ These cost increases are particularly hard for PHAs since they generally pass those costs onto tenants by charging higher rents.ⁱⁱ In response to these increased costs, the U.S. Department of Housing and Urban Development (HUD) held an Insurance Summit in July 2024. The Summit featured panelists from the insurance industry, academia, nonprofits, government, and PHAs. Given the importance of this issue, this article looks at the potential causes of increased insurance costs, best practices for PHAs to address rising insurance costs, and possible statutory and regulatory solutions.  

Causes 

At the HUD Insurance Summit, panelists representing the insurance industry claimed rising insurance premiums are because of record-breaking losses from natural disasters, large liability claims, increasing replacement costs for properties, and rising reinsurance costs. The following section seeks to evaluate the causes presented at the Summit and their potential impact on the insurance industry.  

Natural Disasters 

The number of weather and climate disaster events has been increasing for decades,ⁱⁱⁱ reaching record levels in recent years. 2023 had a record-high of 28 events with more than a billion dollars in damages (referred to as “billion-dollar disaster events”).^iv The four-year period beginning in 2020 and ending in 2023 saw a combined 88 “billion-dollar disaster events,” which is the highest for any four-year period.^v During that period, U.S. insurers paid out $375.4 billion in natural disaster losses.^vi Due to the increase in disaster events and resulting losses, some major insurance companies have either completely stopped offering coverage or stopped offering certain kinds of coverage — like hurricane, wind, and hail damage — in certain areas along the coasts.^vii  

Liability Claims 

Another possible explanation for the rise in insurance costs is inflated jury settlements in liability cases against PHAs and other property owners. In 2023, there were 89 “nuclear” jury verdicts (which is when awards are more than $10 million).^viii This was a 27% increase from the previous year and a 15-year high.^ix A survey of multifamily property owners identified liability claims as the second most common type of claim, behind only water damage.^x  

Research on liability claims is either less accessible than information on natural disaster claims or has not been published, as the author was unable to find data on trends or total amounts related to the frequency of liability claims or insurance company payouts. 

Replacement Costs

Another possible reason for rising insurance premiums is that the cost of replacing properties lost in natural disasters has gone up. Therefore, insurance companies must charge higher premiums to cover those increased costs. As the adjacent chart shows, the costs of new construction materials spiked during the COVID-19 pandemic and have remained high in its aftermath.^xi Additionally, labor costs in the construction industry rose 20% between 2021 and 2023, primarily due to inflation and increased demand.^xii 

Reinsurance 

Some major insurance companies have blamed rising reinsurance costs for their decisions to raise premiums or exit certain markets.^xiii According to the National Association of Insurance Commissioners (NAIC), reinsurance is essentially “insurance for insurance companies.”^xiv Reinsurance companies can pay all or part of a claim for an insurance company.^xv Using reinsurance is beneficial to insurance companies since they can spread their risk, on account of many reinsurance companies not being based in the U.S., and limit losses, thus keeping insurance costs down for buyers in certain areas.^xvi The chart below is the Guy Carpenter US Property Catastrophe Rate on Line (ROL) Index, which captures the total amount insurance companies paid for reinsurance property coverage for natural catastrophes in a given year. Since the beginning of 2017, the ROL Index has increased by just over 100%, meaning insurance companies are now paying more than double what they did then for property catastrophe reinsurance.^xvii 

Best Practices for PHAs 

Unfortunately, PHAs cannot address many of the causes behind rising insurance costs. However, this section outlines actions PHAs can take to address those costs, including adjusting their insurance plans, raising deductibles, and joining or applying for a State Insurance Risk Pool (SIRP).  

Recommendation #1: Adjust Insurance Plan 

Many of the panelists at the HUD Insurance Summit recommended PHAs and other affordable housing providers reexamine their insurance plans to ensure they are not overinsured. Overinsurance occurs when an insurance plan covers more than what’s needed.^xviii A property can be overinsured for many reasons, including its plan covering more than the property is worth, duplicative coverage, or redundant policies.^xix If a property is overinsured, then reducing coverage may lead to lower premiums.^xx An additional adjustment that could be made is reducing your insurance plan to cover the replacement cost of a building, rather than the market value.^xxi Overall, reevaluating and possibly adjusting insurance plans is an easy way for PHAs to lower their insurance premiums.  

Recommendation #2: Raise Deductibles 

Raising deductibles is a common way of lowering insurance premiums, with one survey finding that 61% of multifamily business policyholders raised their deductibles in the last three years (at the time of the survey in 2023).^xxii Generally, higher deductibles mean lower insurance premiums.^xxiii However, panelists at the HUD Insurance Summit did note that PHAs should only raise their deductibles to what they can afford and to maintain cash reserves sufficient to pay their deductibles. 

Recommendation #3: Join or Start a State Insurance Risk Pool 

State Insurance Risk Pools (SIRPs) offer an alternative to commercial insurance for PHAs. SIRPs are nonprofit insurance entities owned and controlled by PHAs that are approved by HUD.^xxiv SIRPs can save costs since they do not have profit margins, may not need to pay certain regulatory costs or taxes that commercial insurers do, spend less on advertising since they have a limited number of consumers, and generally have lower overhead costs than commercial insurers.^xxv Overall, SIRPs can reduce insurance costs for PHAs by about 15-25% over time.^xxvi Additionally, they claim to offer stability since they do not have to worry about short-term profits or showing results to investors.^xxvii  

There are two major downsides to SIRPs. First, they are not available for all PHAs; only 21 have been approved and most states do not have one. While submissions to start SIRPs can still be submitted to HUD, only one has been approved in the past 25 years. It is unclear whether this is due to a lack of proposals or a high number of rejections. Second, given their more long-term view of risk management, they may not be the cheapest insurance option in certain years.^xxviii  

Statutory and Regulatory Solutions 

The following section presents ideas for statutory and regulatory changes that could be enacted to address rising insurance costs, including: revising the operating fund formula, increasing appropriations for the operating fund, increasing appropriations for the capital fund, tort reform, and creating a National Insurance Risk Pool (NIRP). None of these changes would “solve” all the issues with rising insurance costs, nor are they exhaustive. Ultimately, it will take numerous actions at multiple levels of government to address the issue. 

Revising the Operating Fund Formula 

For public housing developments, revising the operating fund formula and increasing the operating fund appropriation would better enable them to afford rising insurance premiums. The operating fund formula used by HUD has a few shortcomings. The formula estimates the costs of running public housing and the revenue a PHA receives through rent. In calculating this estimate of revenue from rent, HUD uses a flawed metric. It uses rents charged rather than rents received, which results in many PHAs receiving estimates of more revenue through rent by HUD than the actual amount received by the PHA.^xxix Additionally, the formula has not been able to keep pace with inflation in recent years—increasing by 15% between 2022 and 2023, while the average monthly spending for PHAs operating public housing developments rose 23%.^xxx Since 2020, the operating fund shortfall has grown by nearly $500 million and the average shortfall amount for PHAs in 2023 was $199,683.^xxxi The operating formula must be revised to better reflect the reality of lower revenues and increased costs for PHAs. 

Increasing the Appropriations for the Operating Fund 

If HUD further adjusts its operating fund formula, it must still rely on Congress to appropriate an adequate amount of funding. However, they have historically failed to do so. The years 2020 and 2022 were the only years where the operating fund appropriation exceeded the formula amount, though the latter case was related to additional COVID-19 pandemic funding.^xxxii As of the writing of this paper (Summer 2024), both the Fiscal Year 2025 appropriations bills in the House of Representatives^xxxiii and the Senate^xxxiv have proposed a decrease in operating fund appropriations compared to Fiscal Year 2024 ($379 million and $110 million decrease respectively). Both bills also provide shortfall funding, with the House bill containing $25 million (same as FY24)^xxxv and the Senate bill containing $107 million ($82 million more than FY24).^xxxvi However, neither of these amounts would come close to covering the total shortfall amount. To enable PHAs to afford rising insurance premiums, Congress should increase its appropriations for the operating and shortfall funds.  

Increasing the Appropriations for the Capital Fund 

Improving public housing infrastructure through increased capital funding may be one way to lower insurance premiums since stronger, more resilient public housing may present less risk for insurance companies. The capital fund enables PHAs to improve and modernize public housing properties. However, much like the operating fund, it has historically been underfunded. In 2010, the firm Abt Associates—hired by HUD—published a report that provided an analysis of capital needs in the Public Housing program. This report, titled “Capital Needs in the Public Housing Program,” noted that $3.4 billion in funding would be required each year just to address ongoing needs.^xxxvii Accounting for inflation, this number would be approximately $4.9 billion in 2024.^xxxviii  Importantly, this number assumes all existing capital needs have been met. This is far from reality, with the Capital Fund backlog currently being approximately $90 billion.^xxxix However, Congress has never provided an appropriation at or above the original amount of $3.4 billion for the Capital Fund. As capital needs go unaddressed and public housing infrastructure ages, PHAs may see higher insurance premiums due to their properties continually weakening.  

One major counterpoint to the idea that increasing development resiliency will lower insurance premiums is an idea articulated by some panelists at the HUD Insurance Summit: PHAs saw higher insurance premiums after improving their properties due to increased property values. Given that most commercial insurance companies do not make their premium formulas publicly available, it is unclear how they balance the decrease in premiums associated with improved resiliency with the increase in premiums associated with higher property values. Whether premiums increase or decrease will depend on the magnitude of each effect. Further research should be conducted on the topic so PHAs can make more informed decisions.  

Tort Reform 

At the HUD Insurance Summit, panelists from both insurance companies and PHAs endorsed tort reform as a method of lowering insurance premiums. Tort reform has also become popular with lawmakers recently, as some states have either recently enacted tort reforms^xl or are seeing calls for tort reform.^xli Tort reform involves changing the laws in court cases related to injury to people or their property and it can be done on either the state or federal levels.^xlii For our purposes, tort reform would mean changing laws to reduce liability and award amounts for property owners. Tort reform can take many forms, including caps on punitive or non-economic damages (either fixed caps or set ratios),^xliii presumption of non-negligence, implementing or reducing the statute of limitations,^xliv and limiting the number of defendants that can be tried in a case.^xlv 

Despite the support for tort reform at the HUD Insurance Summit and its recent popularity among state lawmakers, it is unclear to what extent tort reform affects property insurance premiums. A report from the Congressional Budget Office that analyzed various studies conducted on tort reform claimed the most consistent finding was that damage award caps led to reductions in the number of lawsuits filed, award values, and insurance costs.^xlvi However, the same report notes these findings are complicated and not conclusive due to small sample sizes, difficulty comparing states with and without tort reform, and limited ability to evaluate the effects of single changes since many reforms are passed at once.^xlvii Additionally, the report was published nearly 20 years ago and the tort reforms it was evaluating were primarily focused on the medical field, so, it may not be entirely applicable to the current context. A more relevant case may be found in Florida’s recent tort reforms. In 2023, Florida enacted a variety of reforms, including multiple designed specifically for multifamily properties.^xlviii Between 2009 and 2023, there was an average of $2.37 billion in jury awards per year.^xlix After the law was enacted in late-March 2023, there was a total of $491 million in jury awards granted in the state.^l Some insurance companies in Florida decreased their rates in 2024,^li but it’s unclear how much of this was caused by the tort reforms and how much is due to a milder than expected hurricane season. Ultimately, more research is needed on the effectiveness of tort reform in lowering property insurance costs.  

Creating a National Insurance Risk Pool 

One way to reduce insurance premiums could be reduced would be the creation of a National Risk Insurance Pool (NIRP) for PHAs that operate public housing properties. It could operate much like current SIRPs, just on a larger scale. It could hypothetically provide the same benefits of lower and more stable rates to far more PHAs than the current system. Additionally, a NIRP may be able to offer lower rates than even SIRPs for some PHAs since risk would be spread more widely. More research should be done that analyzes the potential costs and benefits of creating a NIRP. 

While the benefits and structure of creating a NIRP are relatively simple, the legal framework is not. It is unclear whether HUD has the authority to allow for the creation of a NIRP or if Congressional authorization would be needed. Additionally, it is unclear whether PHAs could form a national insurance pool that functions like SIRPs but without HUD approval. Overall, it is beyond the scope of this article to provide the legal framework for the creation of a NIRP for PHAs.  

Footnotes

[i] Yardi Matrix, “Multifamily Expenses-March 2024,” Matrix Research Bulletin, Apr. 2024, https://www.yardimatrix.com/publications/download/file/5352-MatrixResearchBulletin-MultifamilyExpenses-March2024.

[ii] Department of Housing and Urban Development, “2024 Insurance Summit Fact Sheet: Challenges in the Property Insurance Market and HUD’s Actions,” July 2024, https://www.hud.gov/sites/dfiles/Main/documents/Insurance_Summit_Fact_Sheet.pdf.

[iii] NOAA National Centers for Environmental Information, “United States Summary,” Accessed July 2024, https://www.ncei.noaa.gov/access/billions/state-summary/US.

[iv] NOAA, “United States Summary,” https://www.ncei.noaa.gov/access/billions/state-summary/US.

[v] NOAA, “United States Summary,” https://www.ncei.noaa.gov/access/billions/state-summary/US.

[vi] AON, “United States Insured Losses,” Accessed July 2024, https://www.aon.com/reinsurance/catastropheinsight/global-regional-losses.html?region=United%20States&type=insured.

[vii] Jacob Bogage, “Home insurers cut natural disasters from policies as climate risks grow,” The Washington Post, Sept. 3, 2023, https://www.washingtonpost.com/business/2023/09/03/natural-disaster-climate-insurance/.

[viii] Marathon Strategies, Corporate Verdicts Go Thermonuclear 2024 Edition, 2024, https://marathonstrategies.com/wp-content/uploads/2024/05/Marathon-Strategies_Corporate-Verdicts-Go-Thermonuclear-2024.pdf.

[ix] Marathon Strategies, Corporate Verdicts Go Thermonuclear 2024 Edition, 2024, https://marathonstrategies.com/wp-content/uploads/2024/05/Marathon-Strategies_Corporate-Verdicts-Go-Thermonuclear-2024.pdf.

[x] NMHC, 2023 State of Multifamily Risk Survey, and Report with analysis by FHS, June 2023, https://www.nmhc.org/research-insight/research-report/2023-nmhc-state-of-multifamily-risk-survey-report/.

[xi] U.S. Bureau of Labor Statistics, Producer Price Indexes, Accessed June 2024, https://www.bls.gov/ppi/input-indexes/.

[xii] Sam Griffin, Michael Guckes, “The Great Adaptation: Navigating the New Construction Labor Pool,” Gordian, 2023, https://www.gordian.com/resources/navigating-new-construction-labor-pool-report/.

[xiii] Emily Flitter, “How a Small Group of Firms Changed the Math for Insuring Against Natural Disasters,” The New York Times, Aug. 16, 2023, https://www.nytimes.com/2023/08/16/business/reinsurance-global-crises.html.

[xiv] NAIC, “Reinsurance,” Accessed Aug. 1, 2024, https://content.naic.org/insurance-topics/reinsurance.

[xv] NAIC, “Reinsurance,” https://content.naic.org/insurance-topics/reinsurance.

[xvi] Jean Eaglesham, “The Hidden Driver of Soaring Home Insurance Costs,” The Wall Street Journal, May 24, 2024, https://www.wsj.com/finance/home-insurance-costs-rising-reinsurers-2024-c43397bd.

[xvii] Guy Carpenter, “Renewal Resource Center: mid-year renewal release and insights,” Accessed on Jul. 29, 2024, https://www.guycarp.com/insights/renewal-hub.html.

[xviii] Merriam-Webster Dictionary, “overinsurance,” https://www.merriam-webster.com/legal/overinsurance.

[xix] Karen Axelton, “Can You Be Over-Insured?”, Experian, Jul. 12, 2022, https://www.experian.com/blogs/ask-experian/can-you-be-over-insured/.

[xx] Axelton, “Can You Be Over-Insured?”, Experian, https://www.experian.com/blogs/ask-experian/can-you-be-over-insured/.

[xxi] Axelton, “Can You Be Over-Insured?”, Experian, https://www.experian.com/blogs/ask-experian/can-you-be-over-insured/.

[xxii] Colin Dunn, “NMHC Releases 2023 State of Multifamily Risk Survey and Report,” Jun. 5, 2023, https://www.nmhc.org/news/press-release/2023/nmhc-releases-2023-state-of-multifamily-risk-survey-and-report/.

[xxiii] Insurance Information Institute, “12 Ways to Lower Your Homeowners Insurance Costs,” Accessed on Aug. 2, 2024, https://www.iii.org/article/12-ways-to-lower-your-homeowners-insurance-costs.

[xxiv] 24 CFR § 965.205.

[xxv] Tom Judy, “FYI August 2022 – The Port in the Storm,” Risky Business, Miami Valley Risk Management Association, Aug. 2022, https://www.mvrma.com/documents/risky-business-newsletter-august-2022/.

[xxvi] Liz Smith, “Why Should Public Entities Choose Risk Pooling?”, Golden State Risk Management Authority, Sept. 6, 2022, https://gsrma.org/news-and-information/why-should-public-entities-choose-risk-pooling/.

[xxvii] Smith, “Why Should Public Entities Choose Risk Pooling?”, GSRMA, https://gsrma.org/news-and-information/why-should-public-entities-choose-risk-pooling/.

[xxviii] Judy, “Port in the Storm,” MVRMA, Aug. 2022, https://www.mvrma.com/documents/risky-business-newsletter-august-2022/.

[xxix] NAHRO, Secure Homes, Strong Communities: A 360 Degree View Of America’s Housing and Community Development Programs 2024 Edition, 2024, https://www.nahro.org/wp-content/uploads/2024/07/NAHRO_360_report_2024.pdf.  

[xxx] NAHRO, 360 Report, 2024, https://www.nahro.org/wp-content/uploads/2024/07/NAHRO_360_report_2024.pdf.

[xxxi] NAHRO, 360 Report, 2024, https://www.nahro.org/wp-content/uploads/2024/07/NAHRO_360_report_2024.pdf.

[xxxii] NAHRO, 360 Report, 2024, https://www.nahro.org/wp-content/uploads/2024/07/NAHRO_360_report_2024.pdf.

[xxxiii] NAHRO, “In-Depth Analysis: House FY25 T-HUD Appropriations,” 2024, https://www.nahro.org/news/in-depth-analysis-house-fy25-t-hud-appropriations/.

[xxxiv] NAHRO, “Senate Appropriations Passes FY 25 Transportation-HUD Bill,” 2024, https://www.nahro.org/news/senate-appropriations-passes-fy-25-transportation-hud-bill/.

[xxxv] NAHRO, “In-Depth Analysis: House FY25 T-HUD Appropriations,” 2024, https://www.nahro.org/news/in-depth-analysis-house-fy25-t-hud-appropriations/.

[xxxvi] NAHRO, “Senate Appropriations Passes FY 25 Transportation-HUD Bill,” 2024, https://www.nahro.org/news/senate-appropriations-passes-fy-25-transportation-hud-bill/.

[xxxvii] Meryl Finkel, Ken Lam, Christopher Blaine, R.J. de la Cruz, Donna DeMarco, Melissa Vandawalker, Michelle Woodford, Craig Torres, David Kaiser, Capital Needs in the Public Housing Program, Nov. 2010, https://www.hud.gov/sites/documents/PH_CAPITAL_NEEDS.PDF.

[xxxviii] This number was calculated using the CPI Inflation Calculator from the Bureau of Labor Statistics, comparing Nov. 2010 and Jun. 2024, https://data.bls.gov/cgi-bin/cpicalc.pl.

[xxxix] NAHRO, 360 Report, 2024, https://www.nahro.org/wp-content/uploads/2024/07/NAHRO_360_report_2024.pdf.

[xl] Civil Remedies, H.B. 837, 2023 Session, Fl. 2023, https://www.flsenate.gov/Session/Bill/2023/837.

[xli] Ezra Amacher, “Louisiana’s Temple Seeks Reform in Response to State Farm’s California Cuts,” Insurance Journal, Mar. 28, 2024, https://www.insurancejournal.com/news/southcentral/2024/03/28/766936.htm.

[xlii] Congressional Budget Office, “The Effects of Tort Reform: Evidence from the States,” June 2004, https://www.cbo.gov/sites/default/files/108th-congress-2003-2004/reports/report_2.pdf.

[xliii] Christy Bieber, J.D., “What is Tort Reform? (2024 Guide),” Forbes Advisor, Accessed on Aug. 2, 2024, https://www.forbes.com/advisor/legal/personal-injury/tort-reform/.

[xliv] Civil Remedies, H.B. 837, 2023 Session, Fl. 2023, https://www.flsenate.gov/Session/Bill/2023/837.

[xlv] CBO, “Effects of Tort Reform,” 2004, https://www.cbo.gov/sites/default/files/108th-congress-2003-2004/reports/report_2.pdf.

[xlvi] CBO, “Effects of Tort Reform,” 2004, https://www.cbo.gov/sites/default/files/108th-congress-2003-2004/reports/report_2.pdf.

[xlvii] CBO, “Effects of Tort Reform,” 2004, https://www.cbo.gov/sites/default/files/108th-congress-2003-2004/reports/report_2.pdf.

[xlviii] Civil Remedies, H.B. 837, 2023 Session, Fl. 2023, https://www.flsenate.gov/Session/Bill/2023/837/?Tab=BillHistory.

[xlix] Andrew Powell, “Report indicates Florida tort reform reduced ‘nuclear verdicts,” The Center Square, May 16, 2024, https://www.thecentersquare.com/florida/article_4842d76c-13b9-11ef-94a0-037a7aac11d2.html.

[l] Powell, “Florida tort reform,” https://www.thecentersquare.com/florida/article_4842d76c-13b9-11ef-94a0-037a7aac11d2.html.

[li] Kellie Cowan, “Florida home insurance rates begin to fall after years of dramatic increases,” Fox 13 Tampa Bay, May 23, 2024, https://www.fox13news.com/news/florida-home-insurance-rates-begin-fall-after-years-dramatic-increases.