Marsh’s analysis of property renewals in May and June indicates that pricing for insureds with losses and heavily catastrophe (CAT)-exposed portfolios have increased in the 15 percent range, on average. Reductions are still available for insureds with excellent loss histories and limited CAT exposure, but the level of rate reductions has slowed dramatically.

Insurance markets have proven cyclical over time; however, no one can pinpoint when a soft market will give way to a hard one. But with signs of a market transition now present, organizations are well-advised to consider options and strategies to keep their property insurance costs as low as possible, while still receiving the balance sheet protection they need.

For property renewals in the second half of 2011 and in anticipation of a similar market in 2012, emphasis should be on data quality, analytics, and program design.

Data Quality and Analytics

Because insurers rely on catastrophe models to gauge their property CAT exposure and determine pricing, it is imperative—especially in today’s environment—that organizations provide underwriters with complete, accurate, and thorough data in order to differentiate their risk profile. CAT models today are sophisticated, with dozens of primary and secondary modifiers being considered when analyzing potential losses to physical structures, contents, and resulting business interruption. Incomplete data supplied to insurers introduces volatility to modeling results, underwriting decisions, and ultimately to pricing. More information about data quality for catastrophe modeling can be found here and here.

In addition to a more accurate engineering profile of insured properties, organizations 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 to their true needs. Such an analysis should include:

• Stratification of values analysis: quantifies how total insurable values are distributed among locations, which assists in determining appropriate attachment points for deductibles and layer structures;
• Aggregate catastrophe mapping: Identifies the number of locations and aggregate values in high-hazard windstorm and earthquake zones;
• Natural hazards analysis: Generates expected loss costs at various return periods for named windstorm and earthquake events, which assist in determining appropriate limits and average annual loss (AAL) figures, which is a premium component used in technical rating;
• Risk bearing capacity analysis: Evaluates the additional amount of risk an organization’s balance sheet can assume without impairing the performance of the stock or key performance indicators;
• Loss retention analysis: Examines paid loss experience at various deductible levels to optimize an organization’s ability to retain loss;
• Loss analysis by peril: Examines paid loss experience by peril, which assists in achieving flexibility in deductible options; and
• Probable maximum loss (PML) and maximum foreseeable loss (MFL) assessment: Quantifies maximum loss figures, which assists in selecting appropriate limits.

Program Design Options

Program design changes also should be assessed and options considered. A number of risk managers are exploring alternatives to traditional risk transfer in advance of any significant change in property market conditions affecting capacity and pricing.

Such solutions include:

captive utilization to manage domestic and international deductibles, to insure terrorism risk, to access reinsurance markets, and to manage costs as clients assume risks in their property program; 

• multi-year single limits (MYSL), which entails buying a single limit over multiple years helps to control price of layers;
• index-based and parametric capacity for named windstorm and earthquake catastrophe perils;
• integrated programs that combine lines of coverage, limits purchased, and retentions to leverage risk transfer and reduce costs; and
• risk incentive sharing programs (RISP), which link an insured’s premium to the property program’s loss performance or profitability.

 

Organizations also should source property capacity in the global marketplace to create competition. This would include key worldwide insurance centers in the United States, Bermuda, London, Zurich, and Asian markets.

Tips for Reducing Property Insurance Costs

Taking the following actions can help to reduce property insurance costs:

• Highlight your supply chain analysis and business continuation plan. Underwriters are focused on direct and contingent business interruption, extended business interruption, interdependency, and service interruption exposures.
• Without complete primary and secondary construction, occupancy, protection, and exposure (COPE) data, underwriters and loss models will default to the least favorable modeling outcomes, resulting in higher expected loss calculations, which generates higher rates. Invest in data quality.
• Good loss control is a strong selling point. It is important to show recent progress, future plans, and capital expenditures for physical improvements.
• Specifications should include five-year loss history at proposed deductible levels for continuing operations only. In addition, identify corrective actions taken to mitigate the reoccurrence of past losses.
• Base the policy limit on the maximum foreseeable loss (MFL) with some cushion for values, exchange rate, and MFL fluctuations. A lower policy limit reduces cost by purchasing required coverage and creating more competition as less capacity is needed.
• Introduce competitive tension via a focused and deliberate marketing effort. Changing the structure of a property program (i.e., relayering) can create premium efficiency—matching underwriter’s appetite for premium and preference for participation by layer, while forcing them to re-price their capacity. Being flexible with structures and underwriters allows more room to negotiate lower costs.

Conclusion

A $25 billion to $50 billion hurricane or earthquake event in the United States this year would likely create an even more dramatic market fluctuation. Organizations seeking to protect themselves from a potential market dislocation should mind the GAPS:

• Globalize—access the worldwide market
• Analyze—complete a full technical review of your exposures
• Personalize—differentiate your risk
• Specialize—utilize a team of experts