How a Changing Property Insurance Market Can Impact Coverage, Premium and Deductibles
SEPTEMBER 6, 2022
Losses, scrutiny on data, reduction in capacity, changes in risk appetite — these familiar issues continue to complicate the property insurance market, especially for organizations with catastrophic (CAT) exposures.
Even some insureds with non-CAT exposures and a good loss history are having trouble building out capacity for their insurance programs. Many underwriters are in a defensive position, not willing to go outside underwriting guidelines.
For these reasons, organizations should take advantage of risk control strategies to place their accounts in the best light with insurance carriers, and use all available tools to ensure asset values are in line with industry expectations. Opportunities exist to make positive impacts on insurance costs, coverage and risk quality.
As we discussed in our 2022 Property & Casualty Market Outlook Mid-Year Addendum, the rate and deductible environment from 2019 to 2021 resulted in a relative stabilization of the property market. Rates and changes in terms or capacity are moderating for many insureds that have minimal loss activity and above-average risk controls. All insureds can take advantage of the following strategies to positively impact their bottom lines.
Understanding COPE. The main areas an insurance underwriter evaluates when writing an insurance policy are construction, occupancy, protection, and exposure (COPE). All insureds can review these factors based on the actual characteristics of their individual properties, and pursue maximum coverage at the time of loss.
Establishing adequate property valuations. Property carriers carefully evaluate the adequacy of valuations in their insureds’ statements of values, which could result in claim recovery shortfalls if values are not accurate. Understanding the current value of a critical asset is of utmost importance whether it is a building, its contents, or business interruption. Improving the accuracy of values can allow for improved coverage and higher recoveries in the event of a loss.
A multilocation company with many owned buildings did not have the capacity to perform or fund individual insurance valuation surveys of each location. The portfolio was also spread over several major metropolitan areas. Ownership was concerned that its values by location were dated, and the original source of those values was unknown. Additionally, the COPE information by property was incomplete and, in some cases, inadequate for proper valuation.
Using our various tools, street and satellite imagery, as well as property appraiser details, USI was able to value the entire portfolio and obtain carrier agreement on the price-per-square foot values.
This allowed USI tonegotiate the removal of the margin clause, eliminating the potential coverage gap in the property policy wording.
Maintaining favorable terms and conditions. A thorough review of exposures can help determine the optimal carrier(s) for the insured’s portfolio while developing and driving coverage terms and conditions. Leveraging market influence and knowledge, insureds can create a competitive situation, resulting in coverage that is capital-efficient and comprehensive. With improved terms and conditions, USI Insurance Services helped a client fill coverage gaps for uncovered loss exposures over $1,000,000.
CAT modeling. This is critical for driving capital efficiency in structuring property coverage. For example, flood losses that exceed the flood limits purchased will result in significant underinsured claims. Insureds must maintain adequate protection for their unique exposures.
Leveraging COPE data. A deep dive into COPE data can provide more accuracy in underwriting and create a premium impact. Because carriers use third-party data sources and modeling tools to capture and evaluate property exposures, insureds can receive negative results unnecessarily. By verifying source data and output results, USI has helped insureds reduce premium costs by 5% to 20%.
Running CAT models to impact premium. USI modeled a client’s property location schedule for earthquake and determined that five locations were driving 80% of the loss estimate. After requesting and receiving additional information about the earthquake design of these five buildings, we ran the model again. The additional building characteristics reduced the loss estimate and corresponding premium by 40%. After negotiating with carriers, the client’s earthquake premium was reduced by $80,000.
Leveraging the market. Insureds can overpay for property insurance due to lack of market access and influence. Many brokers rely heavily on intermediaries to place property programs, whereas USI can secure improved terms, lower deductibles and improved pricing by accessing the market directly. USI can identify markets that have not been approached in previous marketing efforts and select the best access points (including London and Bermuda). By placing much of a program direct instead of accessing the market through intermediaries, USI recently reduced a client’s total program cost by $300,000 (18%).
Clarifying catastrophe deductible wording. Policy wording is crucial to determine the potential financial impact of high deductibles. It should not be assumed that all parties involved interpret wording the same way. Lack of clarity over how the deductible applies and poorly worded deductible language can create unexpected losses. To prevent this, insureds should confirm that only the values affected by the loss will be included in the deductible calculation, and that the percentage deductible applies to values declared to underwriters at the inception of the policy, not at the time of loss.
Improving terms and conditions. An effective deductible analysis report provides insureds with the decision-making power to select the right deductible based on their loss history and risk appetite, which can then be incorporated into the terms and conditions. In the event of a catastrophe, commercial property owners often face extremely high deductibles. A stand-alone deductible buydown policy enables an insured to make up the difference between the lender’s requirements and the most cost-effective deductible.
How USI Can Help
USI works closely with carriers and our clients to determine fair and equitable values as we navigate through the property market. We suggest insurance buyers:
Know their key underwriting data and update the data for both valuation accuracy and to reflect when improvements are made
Take advantage of the risk control services provided by their broker to put their account in the best light for carriers
Send carriers to key locations to better understand exposures and risk improvement qualities
Start the renewal process as early as possible to drive the expected renewal timing and results
Use all available tools to ensure asset values are in line with industry expectations