Ways to Help Your Organization Stand Out in a Hard Market
JULY 6, 2021
USI’s 2021 Commercial Property & Casualty Market Outlook, Mid-Year Update reports continued hard market conditions for most insurance lines in 2021, spurred by increasing frequency and severity of claims and further complicated by the COVID-19 pandemic. Insurance companies looking to remain profitable have responded with increased underwriter scrutiny, higher premiums and retention (in the form of higher deductibles or self-insured risk), and reduced capacity or appetite for risk.
However, unlike previous hard market cycles, capacity is not being driven by capital. The capital is there, but insurance companies have become much more discerning in how that capital is deployed. Insureds with average or below average risk profiles will continue to face policy limitations, exclusions and higher premium and retention. But insureds that define and differentiate their risk and present thoughtful risk mitigation strategies can help their organization stand out and experience much more favorable outcomes at renewal.
Understanding Risk Through Analytics
The first step of defining risk is understanding it. At a very basic level, analytics helps the insurance company assess an insured’s exposures to risk and determine the cost to cover it. Insurance companies use their own claims data, along with industry stats, established rates and ranges, and their company’s directives to set limits, terms and conditions, and to determine premium and retention. The insurance company’s assessment of risk is usually surface-level and does not take a deep-dive look at what is driving the insured’s specific cost of risk.
Fortunately, analytics can also be used by the insured, with the help of its broker, to more thoroughly quantify and qualify the impact of risk on the organization, and to determine appropriate risk management strategies and insurance solutions (or risk financing).
Take, for example, catastrophe risk modeling. Insurance companies use this type of modeling to examine an insured’s exposures to natural disaster events and determine appropriate capacity and pricing. While this may be an acceptable practice, USI Insurance Services goes further by taking a closer look at the individual locations that may be driving most of the estimated loss. USI then runs the modeling again, taking more specific information about the properties into account, such as building design and resiliency measures.
This approach supports a more favorable loss projection, gives the client credit for existing risk mitigation efforts and provides leverage for USI to negotiate better pricing and terms on the overall property program with the insurance carrier. This is just one example of using analytics to create a better and more nuanced picture of an organization’s risk profile.
Program design allows the insured to make an informed decision about how to cover its risk and to determine which risk financing options to consider. With a clear understanding of its risk profile, an insured can work with its broker to determine program design or risk financing methods that align with its unique exposures, risk tolerance, risk management philosophy, financial position and organizational goals.
For example, the insured could evaluate an alternative risk financing option, such as a deductible program. Depending on the insured, optimizing the level of risk retained (through the deductible) can result in significant cost savings and greater control of its risk management program. USI works with clients to determine the ideal risk financing option and program design given the client’s specific loss profile and risk tolerance.