Identifying a Collective Threat
In late 2001, the U.S. insurance industry experienced a hardening market, meaning premiums increased, coverage terms were restricted, and capacity decreased. Housing Partnership Network (HPN) member developers were experiencing significant escalations in premiums on property and casualty insurance, and declination of coverage for some of their affordable housing properties. In fact, some members had seen their insurance premiums double over the preceding three to four years.
The volatility of the insurance market put members’ business sustainability and property affordability at serious risk, resulting in program cuts, rent increases, or both. After this issue was first raised at a member meeting in December 2001, HPN convened a working group of member CEOs to explore various responses. An in-depth analysis of 16 members’ loss history showed that this group experienced significantly better loss rates than other habitational risks. Specifically, loss ratios (losses incurred/earned premiums) ranged from 25%-33% while the industry average for habitational risks was closer to 50%. Further examination revealed that the member loss levels were not a fluke.
Nearly all the properties were recently rehabilitated or developed, and owners took an active role in asset and property management. The study confirmed what members had suspected – their rising premiums were not a fair reflection of the low risk represented by their affordable properties.
A Responsive Solution
After exploring several options, the working group recommended to the HPN board that it form a captive insurance company to supply property and casualty coverage to interested members. Participation would be restricted to those who met strong loss performance and management standards and were willing to co-invest equity in the company. Importantly, members were willing to accept more risk in exchange for greater control and retained profits that would otherwise go to insurance companies, given members’ robust performance.
In 2004, the Housing Partnership Insurance Exchange (HPIEx) was formed. As part of its ongoing leadership role, HPN worked with Merrill Lynch to create and capitalize a lending facility – Housing Partnership Ventures – which provided $3 million in loans that members used as their initial equity in HPIEx (all since repaid). HPN also retains an equity stake in HPIEx.
"HPIEx has been a stable and long-time partner for MidPen. We find tremendous value in the transparency of pricing while being able to participate on the board, in essence managing and controlling the impact we have on maintaining stable insurance pricing."Janine Lind, Chief Operating Officer, MidPen Housing
Continuous Improvement, Ongoing Success
HPIEx has deeply engaged its members and leadership in all key aspects of the business. It has effectively employed HPN’s peer exchange, continually, to improve performance and business practices. HPIEx also continues to explore opportunities to provide added coverage to members, having expanded to include workers’ compensation in 2014 and currently exploring a health insurance product. It has also distributed back to the members more than $15 million on an initial equity investment of approximately $5 million, proof that the captive is delivering on its original financial goals and intended benefits to members.
After the captive launched with 14 members, representing 33,000 units, today HPIEx serves 24 members insuring over 100,000 affordable units. Janine Lind, MidPen Housing’s COO, notes, “HPN’s unique peer exchange model drives the HPIEx business, with members sharing challenges, best practices, and solutions to improve overall risk management. HPIEx staff is aligned with our mission to supply safe, stable housing for our residents, and we would not be able to secure the pricing we have today in the open market, which adds value to our properties by keeping the cost as low as feasible and stable year over year.”