At the start of 2012, some insurance market segments show signs of firming, driven by loss experience, including more than $100 billion in catastrophe (CAT) losses in 2011; revisions to CAT loss models; reinsurance treaties; and other events.

Not every market segment is being impacted, but organizations with loss-prone or CAT-exposed property accounts and excess casualty accounts should prepare for more challenging 2012 renewals.

Property

On the property front, rates for insureds with recent and historically challenging loss records are typically increasing in excess of 15 percent. For 2012, organizations are advised to consider the following in their property renewals:

• Become more familiar with insurer’s cost of capital and pricing strategy. Property insurers are making underwriting decisions based on their cost of capital. Insurers expect a reasonable return, taking into account attritional losses and CAT losses. Insurers are actually now looking at the profitability of their book versus gross written premium levels and applying higher rates to those accounts that have attritional losses or high exposures to CAT risk.
  
  Furthermore, CAT portfolio reinsurance and per-risk treaties are a fixed and rising cost to underwriters—a cost underwriters are starting to take into consideration when pricing their product. As buyers of insurance, organizations should become more familiar with how insurers are pricing their insurance programs to better explain to management why pricing is moving. Also, a better understanding of pricing will allow for a more detailed focus on what is driving cost.

• Consider alternative risk financing products to create competitive tension and redesign of programs. Insurers are willing to discuss a wide range of conventional and alternative solutions to property programs. In some cases they are creating facilities bespoke to a single client or industry sector. As such, insureds should remain open to exploring all viable options to create a new look to their program and possibly different retention and funding mechanisms.

• Provide quality data. In today’s environment, it is imperative that organizations provide underwriters with complete, accurate, and thorough data in order to differentiate their risk profile. CAT models today are very sophisticated, with dozens of primary and secondary modifiers considered in analyzing potential loss to physical structures, contents, and resulting business interruption.
  
  Supplying incomplete data to insurers introduces volatility to modeling results, underwriting decisions, and ultimately to pricing. Insureds also should conduct a technical analysis of their operational risk exposures in order to properly align and optimize terms, conditions, limits, and sublimits of their property insurance programs. Underwriters are placing greater emphasis on supply chain and business continuity planning, so the more detailed information an organization has the better.

• Review coverage, limits, and values. Over the past four years of soft market conditions, it is not uncommon to have seen more favorable insurance terms, conditions, and sublimits applied to property accounts. Insurers most likely added “nice-to-have” coverages and additional limits at little to no extra cost. That is no longer necessarily the case today. Therefore insureds should objectively review their property programs and consider what they are buying and why.
  
  In some cases, they might just find that freeing up some of that “nice-to-have” capacity improves the program from a cost and carrier interest point of view. A review of replacement cost valuations also should be done to ensure that insured properties are properly valued.

Excess Casualty

The excess casualty market also is in a state of transition. Increasing pressure is building, especially in the lead umbrella market where the limited number of participating insurers are aggressively seeking mid- to high-single-digit rate increases across a wide range of industry groups. Certain classes of business, including energy, chemical, and life sciences, are experiencing more severe rate increases at renewal and, in some cases, restrictions in capacity as a result of a number of unprecedented losses in 2010.

For 2012 excess casualty renewals, organizations are advised to consider the following:

• Start the renewal process even earlier. Rather than the standard 90 days prior to renewal, insureds should start the renewal process at least 120 days in advance in order to prepare for these changing market conditions. Developing a communication strategy and presentation tactics around all key risk exposures, performing various modeling and risk analytics to provide decision support, and exploring a variety of program alternatives are all critical to a successful renewal.

• Know your exposure base. Carriers are aggressively looking for rate adjustment and correction – particularly in the lead umbrella. Organizations are well-served to identify and explore various exposure bases. Converting exposures to unit count or another similar measures from revenue or other inflation- or commodity-sensitive rating bases will allow for negotiation with the carriers on the true exposure. Typical alternative measures include unit count, radius traveled, growth in exposures in the dominant hazard group of products, and growth in U.S. versus international exposures.

• Explore nontraditional alternatives. When early planning, additional analytics, and repositioning of the exposure scenario reaches a stalemate, organizations should contemplate nontraditional alternatives. Such alternatives include buffer and structured solutions, non-traditional layering of the risk, access to the wholesale market, and the strategic use of captives and dynamic retentions.

• Explore the global marketplace. When evaluating the optimal program and coverage solution, insureds should explore the global marketplace. In some cases, the best solution or alternative may come from a global carrier. Understanding insurers’ global risk appetites and having an effective strategy to access those markets is key to a successful renewal.

Conclusion

After years of soft market conditions, the commercial insurance market is in a state of transition. Although not every line of business or industry is showing signs of change, 2012 will likely be a challenging year for organizations renewing property CAT and excess casualty accounts. Starting the renewal process early, exploring alternative solutions, and differentiating your risk profile are a few strategies that organizations should consider for 2012.

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