After a year characterized by low catastrophe losses and soft market conditions, insurance agents and brokers can expect a continuation of competitive property-catastrophe pricing. This trend, combined with new, emerging risks and the ever-present risk of storms, earthquakes, and terrorism, will characterize the market in 2015.
Even in this soft market, insurers are reserving the more competitive prices for new accounts and attempting to hold the line on renewals. This may tempt brokers to re-market programs.
But figuring out when to re-market can be challenging; expertise matters here. Brokers must be able to read the market to know when to re-market or restructure, since that approach may not generate enough of the sought-after cost savings. Account loss experience and previous rate history certainly play a factor. It also may damage long-term relationships with insurers for short term gain. Relationships can be particularly important with the catastrophe-exposed account.
The best strategy for securing rate reductions is attention to detail. To understand and price risks, underwriters rely on catastrophe models. These models, in turn, rely on detailed engineering and construction data to provide a detailed portrait of a risk. By providing detailed information about a risk, brokers can strengthen their relationship with underwriters and improve their bargaining positions.
The insurance industry always has its gaze fixed on the horizon, and we are watching a few risks for the year ahead, including the ebola virus, terror and a more active Atlantic hurricane season.
At the time of writing, the Terrorism Risk Insurance Act renewal is in Congressional limbo. At this point, brokers have likely addressed this issue with their clients. But in light of the growing threat posed by groups such as ISIS and Boko Haram, brokers may want to consider standalone terror coverage, especially for clients that truly need such coverage due to lender or investor requirements or locale.
For more on what to expect in 2015, download our State of the Market: Property Catastrophe Insights Report. You can also read my interview with Insurance Business America, where I discuss the above topics, plus the insurance industry’s response to the ebola virus’s spread.
Have questions? Suggested additions? Chat with us on Twitter (@napcollc).
This guest post is by Alda Joffe, Executive Vice President for Operations at NAPCO.
Following the economic downturn resulting from the September 11 terrorist attacks, Congress passed the Terrorism Risk Insurance Act of 2002 (TRIA). The Act was reauthorized by Congress in 2005 and 2007. This last renewal is scheduled to expire on December 31, 2014.
At this point, it’s been reported that passage of this bill has been pushed into a lame-duck session that will follow November’s elections. The House of Representatives has yet to move on an extension bill passed by the House Financial Services Committee in June. The Senate already has passed its own extension bill, but there are differences which will need to be reconciled before the program reaches its current expiration date. Below, we take a close look at the differences that need to be reconciled between the House Committee and Senate Bill:
- Current: Expires on December 31, 2014.
- Senate bill: Renew for seven years (December 31, 2021)
- House bill: Renew for five years (December 31, 2019)
At last week’s NAPSLO Annual Meeting in Atlanta, NAPCO CEO David Pagoumian spoke to WRIN.tv about how the calm year for natural catastrophes is affecting the property E&S insurance market. View the full video for his take on the implications of abundant capital in the reinsurance space and innovations ahead in natural catastrophe modeling.
This guest post is by Craig Hagan, Placement Associate at NAPCO.
I broker several commercial earthquake accounts in my role with NAPCO, but had never experienced an earthquake—that is, until two weeks ago.
On August 24, I was in Napa, California, enjoying wine country and visiting friends. Like the rest of the region, we were awakened at 3:20 a.m. by a 6.0 earthquake that looked and felt more like a wave or sway than the violent shaking you imagine.
Perhaps it was the shock of waking up from a dead sleep, but as soon as I got up I felt almost seasick. There were aftershocks throughout the night, though I think I only felt one or two. They were, however, unnerving.
After the initial quake subsided, we gathered in my friends’ living room and found everything knocked down and damaged—even the refrigerator fell over. Soon the power went out. In the pitch black, all we could hear were emergency vehicle sirens and people shouting.
Within a few hours, most of the residents in the neighborhood gathered outside. There was a sense of community, people sharing food and drinks. In the immediate aftermath, I didn’t think about the insurance perspective. My thoughts were about safety and the real people affected by the quake, like my friend and his neighbors.
But when we went back inside, I put my insurance hat on and considered the implications of the earthquake. I first took a look at my friends’ renters’ insurance policy. As I suspected, earthquake coverage was excluded.
In fact, for 80 to 90 percent of standard homeowners’ policies, earthquake coverage is excluded. If you do have earthquake coverage, there’s likely going to be a 10 to 15 percent deductible based on the replacement value of the home. A home owner could pay tens of thousands out of pocket before coverage triggers. This retention, coupled with the cost of the coverage itself, is likely why many owners don’t carry the coverage – relying on “good luck” instead.
I do think the take-up rate may increase, as more people start to purchase earthquake coverage, after Mother Nature’s reminder. However, given the deductible range, many people may feel like they are not truly obtaining the coverage they want.
I urge business owners and homeowners in earthquake-prone areas to make sure they understand their policies, and have the coverage they expect, before another “big one” strikes. And of course, think ahead—make sure your home and business are prepared for a natural disaster.
Photo credit: Hitchster / Foter / Creative Commons Attribution 2.0 Generic (CC BY 2.0)
Undoubtedly, you’re familiar with many ways that insurers seek to limit their exposures to loss. But how well do you know OLLE?
Sometimes referred to as a Scheduled Limit of Liability Endorsement, an Occurrence Limit of Liability Endorsement (OLLE) has become commonplace on property insurance policies. The endorsement clarifies the amount of insurance that is available in any one occurrence for each location or for each subject of insurance (i.e. buildings, contents, inventory, business income, etc.). Oftentimes, in addition to defining their maximum loss potential, underwriters will impose this endorsement as a reaction to their perceived under-valuation of reported assets.
If a policy contains this endorsement, it is considered a “scheduled policy” rather than a blanket policy. In the case of property insurance, a blanket policy would allocate a maximum limit of liability which is typically based on the declared value of the total asset schedule (even inclusive of time element exposure). This maximum limit would be available for any occurrence, subject to the policy’s coverage sublimits and valuation clauses, regardless of the number of locations or subjects of insurance involved.
Instead, an OLLE limits the insurers’ liability to 100 percent of the total value of each individual location or 100 percent of each location’s individual subject of insurance – depending on the language of the endorsement – as declared on the Statement of Values presented and on file with the underwriter.
In some cases, underwriters may further provide, as a maximum limit of liability per location, an additional 10 to 20 percent “margin” over those values on file for each location. This is also called a margin clause (in some cases the term “Margin Clause” can be used to refer to the OLLE in general, such as with Lloyd’s of London).
Underwriters will typically allow for this margin flexibility when they feel comfortable the values represent the approximate replacement cost of the assets. It can provide the insured a cushion in the event of unknowingly under reporting their values. However, to better assure that enough coverage be available to make the insured whole when a loss occurs, definitive appraisals are recommended when there is doubt of the accuracy of insured values.
Sound a bit confusing? It can be. Endorsements vary from insurance company to insurance company. That’s why brokers must carefully evaluate each endorsement and review it with the insured so there are no surprises in the event of a major claim.
Here’s a question we hear all too often: why would a company seeking insurance want to work with a small, specialty broker rather than a large firm? It boils down to that word “specialty.” But what does that look like in practice?
You work with the A-team every day. As with many professional services, larger firms often bring out senior specialists (or the A-team) for new business presentations. However, a less experienced B-team delivers day-to-day services. Smaller firms specializing in one niche provide the expertise of a team of specialists led by an executive who directly manages the client’s business. Plus, many small firms offer direct access to upper management and CEOs that larger firms cannot offer. That is, rather than getting funneled through call centers and administrative assistants, you can get the person you need on the phone directly.
Smaller companies answer to clients first. Because they specialize and handle a more manageable volume of accounts, smaller, specialty firms can concentrate on details and customer service. These companies are usually privately held, which means they are accountable to clients, not shareholders. Placement teams are afforded the ability to focus on the needs of the client and answer only to them.
You’re more likely to have a long-term relationship. Boutique firms tend to provide a more personalized touch with their clients. It’s natural to create long-term relationships, through mutual trust and respect, with customers. Important to note is that customers tend to more readily respond to the direct face-to-face interaction a smaller firm cultivates rather than trying to maneuver through the compartmentalization of the larger firm.
Unbiased professional options for loss control, TPAs and other ancillary services. Large firms often have these services in house. But small firms often have a pool of third-party service providers who specialize in the same niche they do. Plus, there are marketing benefits to working with independent third-party providers. For example, consider the value of engineering reports from an independent contractor versus information from large broker’s in-house loss control—underwriters are far more inclined to use the independent’s report when considering capacity availability and pricing.
Albert Einstein once said, “Try not to become a man of success, but rather try to become a man of value.” In that same sense, specialty, wholesale brokers are primarily focused on creating value for their clients. Success is a happy side effect of a job well done.
As detailed in our previous post, we’ve entered a softer market for catastrophe-exposed property insurance, as companies are reducing prices due to an abundance of capital to be deployed and recent profitability. But brokers may be able to secure even greater price reductions for their clients. To do so, you should consider potential ways to restructure the programs, drive carrier competition, and obtain the most complete and accurate data possible for underwriters. Becoming more granular with construction detail can often reduce “modeled expected loss” and drive down prices even further.
Possible program restructuring is a good strategy for securing price reductions in any market. However, a soft market offers different opportunities that can lead to lower costs and enhanced coverage because carriers generally have a broader risk appetite and, oftentimes, more capacity. For buyers, that means fewer program capacity layers and, thus, the potential for better pricing. Large accounts typically have an easier time restructuring and securing new capacity than smaller ones, because they have significant critical premium mass.
Understanding the growing and changing role of catastrophe models in property-cat placements is essential. Insurers depend on catastrophe models to help them understand and gauge the magnitude of risk and how to price it, but in order for their assessment to be accurate, they must have quality data. Provide insurers with detailed engineering and construction information to give them an accurate view of the risk. In the absence of complete information on a risk, the model will typically default to the worst scenario.
By providing detailed information, you put your accounts in a better bargaining position with underwriters. In addition to complete construction, occupancy, protection, and exposure (COPE) data, you can increase your negotiating and data credibility with accurate asset replacement values, in particular. In the end, model results based on thorough data can allow underwriters to justify more competitive pricing.
For more, download our full Spring 2014 Property Catastrophe Insights: State of the Market report.
Get ready to share some good news with your customers. As we discuss in our Spring 2014 State of the Market: Property Catastrophe Insights report, we’re entering a softer, more competitive phase of the insurance market, so insurers are reducing pricing for most accounts.
Why now? As always with the insurance market, the answer to that question is multi-faceted, but in short: 2013 was a good year for property-casualty insurers and the market began 2014 with ample capital. In 2013, policyholder surplus was up 11.8 percent to $670 billion.
At about $31 billion, 2013 global catastrophe losses were well below the 10-year average. Unlike 2012’s Superstorm Sandy, there was no single large loss event to affect pricing. In fact, the US had the quietest hurricane season since 1982. As a result of the sharply lower losses, the market reported much higher profits in 2013.
At the same time, the market was infused with about $50 billion in new capital from non-traditional sources, such as catastrophe bonds. Catastrophe bonds are being used in new ways to get around market resistance, as was the case with the New York Metro Transit Authority. After Sandy, they were unable to obtain insurance for storm surges from the traditional market and instead obtained $200 million worth of catastrophe bond protection.
Though the RMS 11.0 catastrophe model dramatically increased loss estimates when it was introduced in 2011, the latest update (RMS 13.0) has reduced some of the loss estimates. This, too, contributes to softer market conditions.
These, and other developments you can read about in the full State of the Market report, may begin to disrupt old business models, forcing insurers to rethink products and pricing. In our next post, we’ll discuss what’s ahead for the property catastrophe insurance market and how brokers should respond.
Guest post by Colin Morris, Analytics Coordinator at NAPCO
I recently visited risk modeling firm AIR Worldwide to learn about the latest updates to their severe thunderstorm model. This model covers straight line wind storms, tornadoes and hail storms and had last been updated five years ago. There was a lack of historical data on these types of storms. Until recently, we didn’t have the technology to properly document and use information about a tornado or severe thunderstorm outbreak. In the past ten years, science has been able to generate new ways to better track wind storms, including tornadoes.
After high-loss tornado and wind storm outbreaks in 2008, 2011 and 2013, damage engineers went to effected sites and inspected structures. In doing so they collected data on what went wrong and right—why certain structures were destroyed or not. As such, this effort severed to assist AIR in the latest revision of their severe thunderstorm model, giving them a solid foundation built on 10 years of data.
With these severe thunderstorm models, the risk analysis industry is getting closer to more accurate predictions of loss every time there’s an update, better gauging risk(s) and leading to more accurate pricing. The severe thunderstorm model gives you different damage functions for different types of storms, which should be a more accurate process with AIR’s new model.
Modeling tools allow you to input basic data to narrow down the risk, primarily construction, year built, occupancy. Those are basic. But you can also consider 20 to 30 other building components, such as building foundation and how it’s connected to walls, depending on the peril. Prior to this latest AIR update, we had not been able to input secondary characteristics into the severe thunderstorm model. Now, there are about 25.
The more you leave up to guesswork, the more you leave up to chance. The more data you input, the more finite results the model outputs, and the advantage to better negotiate rates with underwriters.
As detailed in our last State of the Market report, the end of 2013 brought downward pricing trends in the property catastrophe insurance market. Now that the calendar has turned to 2014, we’re looking closely at the year ahead.
Our executive vice president Bob Marsh shared his predictions with me:
- Some markets will resist the call for lower rates—especially on CAT-driven accounts
- By avoiding these markets or bringing in new capacity—especially primary— rate reductions of 5 to 25 percent might be realized.
- Reductions may be partially based on the rate magnitude and rate history in the current pricing.
Of course, we don’t have a crystal ball and many factors could affect rates and pricing in the months ahead. What do you think the property catastrophe market will look like for the remainder of 2014? Let us know in the comments or tweet us at @NAPCOLLC.