Due to the historic amount of catastrophe losses that have occurred over the past few years, the property insurance market has changed significantly. This is particularly true for businesses that have exposure to catastrophe perils such as wind, flood and earthquake.
“If you have property that has these exposures, you are going to see significant changes on your property renewal,” says Gloria D. Forbes, an executive vice president with ECBM Insurance Brokers and Consultants.
Smart Business spoke with Forbes about how to manage your property insurance through the storm.
How has the market changed?
Both insurance companies and reinsurance companies are using new catastrophe predictive models to determine their rates, as well as deductibles and capacity. Capacity is how much of their capital they can allocate for these ‘CAT’ exposures, or, more simply put, the amount of coverage that they will be able to offer in insurance limits. The latest version of the model was adopted by most insurance companies last spring and summer, so the market is still in the process of changing, with rates and deductibles increasing.
How do catastrophic losses affect the market?
Insurance companies purchase reinsurance to protect them from very large losses. We have seen some of the largest catastrophe losses in history each year since 2009. Because property reinsurance is a global market, what happens in Chile, Australia, Thailand and Europe has an impact on the American market.
So any client with property that is considered to be exposed to windstorm, flood or earthquake is going to see changes in both the rate being charged to insure those exposures and is also likely to see change in terms and conditions.
What other changes can businesses expect?
When we refer to windstorm, we are usually referencing named storms such as tropical storms and hurricanes. Traditionally, named windstorm issues were limited to coastal property, but with the new model, the area considered at risk has expanded.
Although they may not be used to seeing them, businesses may begin to see percentage deductibles for exposure to windstorms or named windstorms. Those percentage deductibles are not a percentage of the loss; they are percentages of the total value of the property. If you have a $10 million building with a 1 or 2 percent deductible, you would have a $100,000 or $200,000 deductible, respectively. In the past, you would see this in Florida and properties surrounding the Gulf of Mexico. These percentages are being used more frequently to put the insurance company further away from the loss.
We are starting to see separate named windstorm deductibles being applied for locations within a 25-mile radius of the coast, from Virginia through New England.
Also, with the rise in tornado activity, we are seeing insurance companies increase windstorm deductibles, so you might not see a percentage deductible for windstorm, but you might experience the insurance company putting a higher flat dollar deductible, say $50,000 for windstorm.
Insurance companies are also decreasing limits for wind, flood and earthquake, which is an adjustment. In the past insurance companies would ‘throw in’ a certain amount of coverage for flood or earthquakes. Last year’s east coast earthquake impacted that. There were numerous losses as a result of that quake.
Now insurance companies are more cautious about giving away earthquake coverage.
How has the way insurance companies determine rates, premiums and deductibles changed?
There have been great advances in modeling over the last few years. The insurance companies use analytics to predict storm frequency, severity and the probable maximum loss they are exposed to, given recent events. As these models become more sophisticated, they are tracking their exposures differently than they used to.
Here’s an example: A hurricane hit the gulf and did minor damage, but it continued to bring a huge rainstorm through the central part of the U.S. Most of the damage done was inland flooding from the rainstorm activity that took place for 48 hours after the hurricane hit the coast. Now when an insurance company underwrites that hurricane exposure, it is not just looking at how it hits the coast but also at the resulting rainstorm damage that takes place afterward. In the past, that tracking capability did not exist.
Also, many insurance companies are changing their coverage to include flooding related to a named storm or hurricane as part of the damage done by the storm. Consequently, the flooding is thus subject to the higher storm/wind deductibles that apply, as opposed to being considered a separate event.
What can businesses do to reduce the possibility of suffering catastrophic losses?
Obviously, you purchase insurance on property you own to protect your financial interest, but one of the best things you can do to reduce the possibility of loss is to properly plan for disasters ahead of time. It is important to have someone who can guide you through the changing policy terms and assist you in identifying your exposure to loss.
Additionally, it is typical to have resources become overloaded in a catastrophe. So one of the keys to disaster planning is to have in place the arrangements that you need. As a result, in the event of a large disaster, you will receive quick response from restoration companies and contractors to assure that cleanup happens as quickly as possible and your property is preserved. Moisture can create a mold exposure, which is often not covered by insurance companies. Working with an experienced broker that has these relationships and can assist you at the time of loss is critical.
Gloria D. Forbes is an executive vice president with ECBM Insurance Brokers and Consultants. Reach her at (610) 668-7100 or [email protected].
