By GEORGE STRATTS, vice president of AIU Holdings' Property Casualty Group and also an executive vice president of Lexington Insurance Co.
Today, unlike in the past when, after a significant catastrophe loss, capital rushed in from many sources, far fewer capital recapitalization options are available. Accordingly, capacity in the property insurance markets likely would be reduced to the extent that there even might be midterm withdrawals of coverage; there would also likely be renewal problems.
Given the current state of the capital markets, it's even more important to understand what kind of events could cripple your industry and to know your exposures and the probable maximum loss you could sustain in a catastrophe. Armed with that knowledge, it is critical to know whether your carrier has the track record to match the risks that it is writing with its risk appetite and capacity.Similarly, you need to be aware of your carrier's aggregate exposures to these kinds of events and what its plans are to manage these losses and replenish its capital.
While important, a financial-strength rating is only one of the considerations. You need to know whether your carrier has a track record that shows it can survive these kinds of CAT events. You should question how much treaty reinsurance stands behind the risk and determine whether it is adequate. Then examine the financial condition of the reinsurers as well. It is not unreasonable for you to subject the reinsurers to the same kind of hard-nosed financial analysis that you apply to your direct insurer(s).
You need to examine your carrier's record on severe claims and whether they are prepared to handle the different kinds of catastrophic events to which you are exposed, such as high-category hurricanes, terrorism attacks and earthquakes. Know how quickly they are able to respond. This is particularly important with respect to business-interruption losses. Find out whether, in the past, the carrier had adequate adjusting resources and claims personnel to handle these kinds of losses.Know what kind of planning and precautions your carrier suggests that you take to avoid or reduce catastrophic losses.
Further, you should achieve an acceptable level of comfort concerning the renewal capacity that your carrier currently offers and what an event of this nature would mean for your coverage going forward. A simple rule: You also should be confident that your carrier is prepared to handle two catastrophic losses in a single year.
April 15, 2009
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