By Greg Mann, Managing Director, U.S. Property Practice
The current property insurance market is in a state of transition: Underwriters are requiring more improved account information and are increasing their standards regarding the types of accounts they will consider underwriting. Clients that understand the needs and knowledge requirements of underwriters—and that work to overlay such requirements with their corporate strategies, direction, and objectives—are best positioned to achieve successful renewals in 2012.
Most importantly, insureds need to understand their risk. The following are six key aspects all clients should know about their risk to ensure an appropriate property insurance coverage is secured at renewal.
Understand your Company’s Exposures
- Clients should be prepared with a complete statement of values including construction data, fire protection, wind mitigation measures, flood zone, and elevation data. While underwriters have requested this information for some time, the majority of insureds—including many Fortune 500 companies—have yet to develop a credible statement of values.
- Know your company’s process flow of operations, products, services, and revenue—including peak seasons of production/revenue—as well as the interdependency among owned locations and contingent locations of suppliers and customers. Understanding the worse case scenarios and the causes of loss that may contribute to a loss are key in determining limits to purchase.
- Perform catastrophic (CAT) modeling, preferably using both RMS and AIR if the exposure has any level of earthquake and/or named windstorm exposure. CAT modeling is a key driver of price, more so than any other factor within property insurance programs. Knowing and understanding the cost to cover risks, especially by layer (primary, excess), will assist in insureds’ buying decisions to potentially maximize cost versus coverage. Moreover, performing the modeling acts as a credible tool as to worse case scenarios and catastrophic limits required to address such scenarios. This same limit data is useful in combating restrictive loan requirements as regards catastrophic limit requirements.
- Insureds should have full knowledge of flood zone determinations for all locations. Flood is one of the hardest perils to obtain adequate coverage for, in part due to a lack of credible modeling as well as the historical flood events in the United States, Japan, Australia, and Thailand over the past 36 months. Coverage offered through the National Flood Insurance Program (NFIP) provides a base level of insurance at a cost well below market. Even if your company’s risk appetite is high, the NFIP should be considered due to its typically low cost.
Know Your Risk Tolerance
It is important to consider the minimum amount of loss that would impact your company, as well as the maximum amount of loss your company could retain and continue normal operations. To illustrate, a company determines that a loss of $2.5 million would be the minimum amount that would affect its operations and the maximum amount it could retain is $100 million.
In this scenario, the insured may elect a higher deductible as it can absorb a small loss, forgoing the extra expense to buy down its deductible. Instead, it may elect to purchase additional excess limits for less than the cost of buying down the deductible, saving premium dollars and achieving more appropriate insurance coverage to match its risk tolerance.
While aggregation of values, business interruption, and amount subject (i.e., largest values at one single location) factor into decisions, insureds often push to negotiate deductibles more aggressively than they do their high excess limits—even though the limit decision most likely will have the greatest influence on the company if a catastrophic event were to occur.
Be Aware of Your Loss History
A thorough understanding of your company’s loss history—based on current and existing exposures at the time of loss—is a key to a successful renewal. Questions risk managers should ask themselves include:
- What losses occurred?
- What property was damaged?
- Did outside influences increase or decrease the loss?
- Was the cause of loss operational, manmade, or natural?
- What were the lessons learned?
- What improvements/new procedures have been made to mitigate future losses and have they been shared with other locations?
Knowing little about your company’s historical loss picture is often viewed negatively by insurers, that may believe you are using insurance only as a preventive maintenance budgetary tool. This may ultimately increase both the program’s deductible and cost.
It is just as important for risk managers to understand the loss histories of both their peers/competitors and their industry sector. In most cases, insurers specialize in underwriting certain industries and often make decisions (e.g., appetite, capacity offering, etc.) based on an industry’s portfolio loss history versus on an account-specific basis. Insurers want to know why their clients’ specific loss history is above or below the industry norm.
Know the Insurance Marketplace
Understand which insurers write which coverage for specific risks and exposures. Even if long-term relationships exist, market conditions and insurers’ appetites change. It is imperative that insureds are aware of the other insurers that write their risks and develop and foster relationships with those underwriters.
Insureds that seek to understand declinations are best positioned to take advantage. Why was your company’s submission declined: was there not enough time?; were the underwriters’ production goals already met?; was the underwriter out of available capacity?; was it engineering related?; was it driven by a small percentage of the portfolio exposure? Understanding the “true” reason for declinations allows insureds to address the issues over time and/or consider operational/procedural changes in order to maximize the available market appetite.
One of the best ways to get to know the insurer community is through face-to-face meetings. For a more detailed discussion please read, “Maximize Your Market Meetings: Tips to Getting the Most out of Underwriter Meetings.”
Understand Your Risk Requirements and How They May Change
Insurance evolves—new products are introduced, risks and exposures change, and both insureds’ and insurers’ risk appetites adapt. Insureds may purchase more or less protection than they really need, and/or they may retain existing limits, deductibles, and coverages rather than researching and understanding their current exposures.
Likewise, insurers often base their terms, conditions, and pricing on historical exposures and existing products versus factoring in exposure and risk that are projected to exist in the near future. All of these can greatly influence the adequacy of existing coverage. An accurate assessment of your company’s insurance program should be undertaken to ensure risks are properly addressed.
Determine Your Corporate Risk Limits and Expectations
When purchasing insurance products, most risk managers must meet a set of parameters defined by their superiors and/or board of directors. While buyers have goals for a successful renewal, it is important to be aware of additional limitations and/or expectations that may affect the renewal process. These limitations and/or expectations may include: the elimination of certain insurers due to current or past experiences (i.e., claims, losses, or even a lawsuit) or the addition of certain unusual exposures within the portfolio due to a past corporate agreement/relationship, for example.
While some unexpected limitations may be trivial, these factors drive buying decisions in a significant amount of cases. Sometimes, it may negatively affect the competitiveness or coverage terms of the program; other times it may result in higher prices than anticipated. Thoroughly understanding the macro factors that may affect the renewal—and, more importantly being prepared for such issues—will benefit risk managers.
Your Marsh property broker is available to help every step of the way and is your advocate in the property insurance marketplace. We help you navigate this changing landscape and ensure you have customized, well designed property insurance programs that suit the unique needs and exposures of your organization.
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