What factors are affecting the market forecast?
As far as catastrophic property risks, the insurance companies review hurricane forecasts with great detail. If it is supposed to be an active hurricane season, insurance companies will become cautious. If it’s supposed to be an inactive hurricane season, they will be excited about potential profits. The forecasts are very active for 2011, which will concern them.
For catastrophic risks, there is one other potential change for 2011: new modeling. The insurance companies use a model called RMS, which changes every year. It is anticipated that the change in 2011’s model will drive insurance companies’ probabilities up.
The reason those model results are going to increase is because they will take into consideration storm damage from a hurricane that may penetrate the coastline. The damage hurricanes do to the coast is generally severe, but the damage that hurricanes can do with significant winds further inland wasn’t taken into consideration in the past.
How will insurance companies react?
On the board level, everyone will have the forecast. The boards will suggest the insurance companies be prudent in knowing the risks they underwrite and buying the right protective reinsurance program. This will just reinforce that.
The behavior it will drive is a conservative view for 2011 from a catastrophic risk perspective, specific to hurricanes. However, if the new RMS model increases an insurance company’s worst-case loss from a Category 3 storm from $1 billion to $1.2 billion, how will it respond? Will it write less business? Will it increase price?
I think the answer is that only the best risks will be written. If you don’t have really good data, you are going to pay more for your insurance in 2011.
What can companies do to make sure their data is more accurate?
You need to know your facilities’ secondary characteristics — year built, type of roof, number of stories, etc. If you have 20 properties in your portfolio, you probably know your top five really well. You may not know the middle ones as well.
In that case, I would highly recommend at least a single year program in which a fire engineer visits the facilities to provide the data so your modeling results are more accurate.
If you don’t provide the information, the computer model defaults to worst case. So by providing the information, you improve the results.
What steps should companies take to prepare for 2011?
Make sure you understand the global insurance marketplace. There are more choices than ever for customers, so getting good advice from your broker is critical.
Look for a broker or agent who uses peer group benchmarking. There are actually situations where your broker may recommend buying less limits. That’s a great thing for a customer to hear in this economy, ‘You’ve been buying too many limits; you should buy less and save some money.’
On the technical property, catastrophic, toughest risks in the world, we rely heavily on benchmarking and modeling to give advice to customers. So doing your homework can really pay off.
In these uncertain economic times, cost is very important. Still, don’t trade a couple bucks for inadequate limits. There is a lot of pressure on risk managers to make sure they are buying the most cost-effective product, but without giving up coverages.
You should not give up coverage. You might save a few dollars, but it’s short-sighted.
Al Tobin is managing principal and national property leader with Aon Risk Solutions. Reach him at [email protected]. Mary Pulley is managing director of health care, Aon Risk Solutions. Reach her at (317) 237-2405 or [email protected].