Building Up Reserve Funds
In the past few issues of News & Notes, we have written about changing dynamics in the property insurance industry. In recent years, insurance companies have found themselves at the forefront of a complex and evolving challenge: the impact of changing weather patterns on property coverage. As the world grapples with more frequent and severe weather events, such as hurricanes, wildfires, and floods, insurance providers have found themselves at a crossroads, compelled to make difficult decisions regarding property coverage. These changes reflect the growing recognition that the traditional insurance models may no longer suffice in the face of a rapidly changing climate landscape.
Insurance companies are increasingly restricting coverage or raising premiums for property insurance as a response to the escalating risks associated with changing weather patterns. Rising temperatures, altered precipitation patterns, and the intensification of extreme weather events have significantly increased the likelihood of property damage. Consequently, insurance providers are left with the unenviable task of recalibrating their risk assessments and pricing models to maintain their financial stability while continuing to offer coverage to policyholders. This shift underscores the critical need for a proactive and comprehensive approach to managing risk, including building reserve funds for your chapter facilities.
We have asked our business partner, Blu & Co., to develop a resource for house corporations that will help House Corporations fund for the future:
Building Up Reserve Funds Building and Using Insurance Reserves for Sustainability
By: Annmarie Novotney, CPA
Audit Director / Owner Blu & Co.
National fraternities and sororities have been dealing with changing circumstances on many fronts over the last five years. Part of this changing landscape involves property management and adapting to significant increases in property claims across the nation. As a result, property owners must prepare for higher property deductibles, due to the increase in the frequency of claims and in the increase in the severity (cost) of claims than in years past.
It is critical to an organizationâs sustainability to have adequate short-term cash reserves and liquidity resources for operational flexibility and for ensuring that organizational commitments are met timely. Beyond short-term cash reserves, fraternities and sororities should also consider building reserves to fund insurance deductibles as claims are incurred. Such reserves (often designated by the Board of Directors) are funded so that intermittent claims can be managed without disrupting already tight operating budgets.
In considering building an insurance reserve fund, organizations should consider the following areas:
- Understanding the risk landscape (past, present, and future) – collaboration with an organizationâs current insurance provider and property managers or housing team members can aid in understanding what claims have been incurred, properties at risk for issues now, and what deferred maintenance issues might be present in the future. Understanding risks by geographic location as it relates to weather and catastrophic events is also helpful in determining how much to reserve and how sustainable that reserve will be over time. If you are unsure of your house corporationâs loss experience, contact your Client Executive at MJ Sorority.
- Starting a reserve fund â organizations can formally designate funds (through Board resolution) to function as an insurance reserve that cannot be spent on other purposes. This can formally separate these funds from operating cash and other financial assets and keep reporting and tracking of these funds segregated within the organizationâs financial statements. Organizations can also fund a new reserve by designating surplus dollars annually be deposited into an insurance reserve. Creating a one-time assessment charged to members, or charging a new annual fee are also options to establish a reserve fund or continue to fund reserves.
- Investing your reserve fund â organizations need to consider where reserve funds will be housed and how they will be invested. Organizations should consider a separate investment policy statement for reserve funds. Keeping reserves in short-term insured bank accounts allows for some return on those funds without taking on market risk. Certificates of deposit or sweep accounts can also be used if they do not lock up all funds for specified periods of time. Depending on the size of the reserve, it might make sense to invest in longer-term opportunities to increase investment return. In all cases, liquid cash will need to be accessible to some degree for those claim deductibles should they occur.
- Drawing from your reserve fund â organizations also need to consider how to spend from reserve funds. A policy on spending should be established and should include what constitutes an approved expense, how often reserves can be drawn upon, and what approvals are needed to draw (approvals usually involve Board or Finance Committee approval). Determining a minimum threshold that must be left in the reserve at all times should also be considered.
Blue & Co.âs Not-for-Profit Services Team advises organizations on ways to improve both the balances and the utilization of reserves and liquidity resources to enhance sustainability over time. Please reach out to your local Blue & Co. advisor with any questions regarding these recommendations.