How to Build a Better Property Insurance Program in a Tough Market

We're in the midst of a significant shift in the property insurance market. For many years, the vast majority of businesses have enjoyed reasonable property insurance premiums and relaxed underwriting standards. All of that is changing.

Over the past seven months, we've seen a hardening in the property insurance market, meaning that rates are increasing (the cost of insurance per exposure), premiums are increasing, and this is the first time in a long time that senior executives are getting involved in the process of placing insurance.

That's because we're seeing standard insurance program renewals come in at 5% to 10% more. In some cases, we're seeing 50% increases depending on the risk factors, for example, properties that are catastrophe-prone or don't have a demonstrated commitment to risk improvement.

These percentage increases can be alarming when we're talking about insurance programs that are already paying out in the millions of dollars.

So, how did we get here?

A Brief Background on the Changing Market

A couple of dynamics exist when pricing insurance programs: the technical analysis of the property that fuels the underwriting piece, and market dynamics like how many insurers are competing for business.

For the past 10 years, market dynamics have led the way when pricing out property insurance programs, and the underwriting piece has been a bit more relaxed because there haven't been sustained losses over multiple years.

Most businesses were getting pretty good deals on their property insurance programs in recent years. But the property insurance market is cyclical, and when natural catastrophes occur that cause large, compounding losses to insurers things can quickly change.

 The 2017 Atlantic hurricane season has been dubbed the costliest tropical cyclone season on record for the U.S. with total damages at more than $200 billion. Hurricanes Harvey, Irma, and Maria (HIM) collectively caused the most damage of the season.

According to the Swiss RE Institute, HIM resulted in combined insured losses of $92 billion, equal to 0.5% of US GDP.

The very next year, California had the most destructive wildfire season ever. Insurance claims related to the wildfires surpassed $12 billion. A lot of carriers saw unexpected losses from the wildfires because they're hard to forecast through data modeling due to their unpredictability.

As a result of these cumulative losses, it's been another unprofitable year for the property insurance market. Therefore, the market is hardening.

Because of this, several factors are converging that impact businesses when placing or renewing their property insurance:

• There's more scrutiny on the business interruption loss following a natural catastrophe.
• We're seeing higher deductibles for high-risk variables, for example, if you're in a wildfire or hail zone.
• Coverage gaps are becoming evident related to what property insurance will cover when it comes to cyber events causing business interruption. So more specialized insurance products come into play.
• Some carriers have stopped insuring certain types of properties that are more prone to natural catastrophe losses (or at least are moving away from being involved in the primary layers of insurance for these properties).
• Insurance buyers may need to take on larger retentions to counter the rising premiums.
• There's more scrutiny around catastrophe deductible percentages, particularly around deductible caps.
• Insurers' risk modeling is producing higher prediction of average annual and probable maximum losses. This has led to pricing increases mostly on standalone difference-in-condition insurance in certain catastrophic zones.
• Carriers are adding more catastrophic zones to their list––areas that they hadn't thought of before. For example, fault lines that weren't on the radar previously.
• For residential properties, insureds are seeing actual cash value reimbursements for damaged roofs older than 10 years versus total costs paid out to replace the roofs.

As a result of the cumulative losses, and the insurance market's reaction to it, we're seeing increased rates and degradation of terms for property insurance programs.

There are, however, steps we can take to get favorable rates and terms even in a hardened market, first starting with the use of emerging technology.

How Technology is Helping Insureds Take the Power Back

Catastrophe modeling came into widespread industry acceptance following Hurricane Andrew in 1992. Companies like Risk Management Solutions (RMS) and AIR Worldwide build software that simulates hundreds of thousands of events with varying probabilities across a portfolio. The output (Probable Maximum Loss figures or PMLs) has become a key component for pricing catastrophe-exposed insureds, though few understand its relevance to their business.

Discerning buyers challenge the status quo––after all, these models were originally built to model homogenous homeowners insurance portfolios. Commercial insureds are hardly that, and a software program could no more predict how a catastrophe produces losses felt by a retail chain versus manufacturing plant versus office high-rise, and so on. And yet, this software still drives carrier pricing models.

We find a better approach to catastrophe management is one driven by the individual insured. And we employ newer technology, like EigenRisk's EigenPrism, to provide a more transparent and visual analysis. We map our client’s location schedule and overlay a catalogue of historical and hypothetical events to examine levels of severity to protect against. We are equipped with sophisticated submissions illustrating loss scenarios and accompanying context for underwriters on how the client’s business would sustain and mitigate loss. Some organizations have seen millions of dollars in pure premium reductions as a result.

In a hardening market where increasing prices feel arbitrarily punitive to clients, customized negotiations supported by analytics help maintain the balance of power.

Other Strategies to Get Better Results in a Hard Market

In a hardening market where increasing prices feel arbitrarily punitive to clients, customized negotiations supported by analytics help.

Aside from using the technology at our fingertips to put the odds in our favor, there are other ways to build a better property insurance program even in a hard market.

Here are some proactive steps to take:

• Start early. You want to ensure your broker is working on an account somewhere between 150 and 120 days before renewal. There's a lot that goes into it: the information-gathering phase; the carrier's risk engineering, which could mean onsite visits; the time it takes to turn raw data into meaningful submission form information; the question-and-answer period; the negotiation phase; and so on. The last thing you want to do is feel rushed and get terrible terms as a result of starting, say, 60 days out.
• Make the market work for you. Under these challenging conditions, it is imperative that you and your broker explore alternatives. Work with your incumbent to provide choices for various coverage and pricing levels, and test the market with new carriers and program structures. Good outcomes are achievable but will look different, and thoughtful discussion weighing options is the only way to weather a hard market.

In conclusion, while market conditions have certainly changed for complex property risks since the start of 2019, insureds still control many aspects of their property renewals.

Using modeling and analytics to arm yourself with empirical data is key. Reviewing alternative carriers and program structures is also a best practice.

And finally, ensuring good project management of the renewal will pay dividends, including starting early with transparent and frequent communication among the stakeholders, including senior leadership at the carriers.