By Anne Freedman and Cyril Tuohy
In the wake of national and international catastrophes of just about every sort and magnitude, and new modeling software that hugely increased exposure values, Power Brokers and their competitors and colleagues needed to be both innovative and tenacious when dealing with property renewals in 2012.
Last year, for its March 1 renewal, the Florida College System Risk Management Consortium paid $13.4 million for $90 million of capacity on the consortium's $6.6 billion program, said Chauncey Fagler, executive director of the risk pooling group.
"We paid more premium for a lot less insurance," he said, noting that carriers blamed the loss of capacity on the substantial increase in the consortium's model results under RMS 11 versus RMS 10.
"The loss of capacity provided us the opportunity to make some changes," Fagler said.
He expects a different situation this year, because the consortium's 27 colleges agreed to their broker's suggestion to have every significant building on every campus from Pensacola to Key West appraised to make sure the RMS 11 model had the correct primary and secondary construction data characteristics.
"What has happened through this," Fagler said, "is we are now able to take this new [appraisal] data and we will be able to push our capacity back up 10 percent to 30 percent, either at no additional premium or at a minimal cost increase."
By using the appraisal data in the model, the consortium's annual average loss was reduced by 47 percent, said David Marcus, area president at Arthur J. Gallagher & Co. South Florida in Boca Raton and a 2013 Power BrokerŽ in the Public Sector category.
"If you can improve modeling and get better data to improve your model results, it's going to do nothing but help you," he said.
If renewals had only been that straightforward ...
For property renewals in 2012, brokers and their big, multinational clients had more to deal with than the widespread adoption of RMS 11. Global destruction and massive losses abounded in 2011, with Australian and Thailand flooding, the earthquake in New Zealand, the Japanese tsunami and earthquake, and damaging wildfires, spring tornadoes and Hurricane Irene in the United States.
So, it's no surprise underwriters were looking for rate hikes when 2012 began.
Overall, property pricing in 2012 was an up, down and then up again kind of year, said Duncan Ellis, U.S. property practice leader at Marsh in New York.
Rates climbed in the first and second quarters, started to flatten or decline in the third quarter, and then "the rate decreases came to a fairly abrupt halt," when Superstorm Sandy hit, he said.
Fitch Ratings projects losses of $20 billion or more from Sandy. Property Claims Services on Jan. 22, upped its loss estimates from Sandy to $18.75 billion, as overworked adjusters poured in from around the country to try and tag accurate values to losses ranging from warehouses and taxi fleets to public infrastructure and fine arts inventory.
Carriers are already starting to report big hits from the storm. Alllianz in mid-January said it expected to lose nearly $600 million due to the storm. Travelers' fourth-quarter net income of $304 million was sliced in half, the company reported in late January.
AXA, the world's biggest art insurer, expects to pay out $40 million, said Colin Quinn, director of claims at AXA Art Insurance, and brokers and underwriters said the total loss could reach $500 million, according to a Reuters report published in December.
For 2013, depending on location, companies will see property renewals anywhere from a 5-percent decrease to a 15-percent increase -- and that's with no loss experience, Ellis said. In addition, underwriters may seek changes in terms and conditions around perils, and there is a lot of talk about changing flood deductibles from a flat amount to a percentage, he said.
Eric Schake, executive vice president at Willis in Dallas and a 2013 Power BrokerŽin the Real Estate category, expects underwriters this year once again "to be pushing rate increases, but when it's all said and done, depending upon the loss history, rates should be flat."
It all depends, he said, on the geographic location and quality of the assets, the mix of the portfolio and the loss experience.
For manufacturing companies, insurance carriers pressed hard to increase rates in 2012 wherever possible in the wake of the devastating tsunami that hit Japan in March 2011, and the subsequent flooding that swamped low-lying areas of Thailand.
Underwriters were surprised by those events, as it became clear that many Tier 1 suppliers to original equipment manufacturers (OEMs) and suppliers to the suppliers didn't know exactly who was supplying whom and the extent to which these exposures may have been aggregated.
The blind spots came back to haunt underwriters of all stripes as claims flooded in and insureds looked to their insurance carriers for recovery of lost sales and battered profit margins, even though there may have been little or no loss to their physical property.
Risk managers at large companies, those with the most complex property programs, found their jobs even more challenging as underwriters insisted on yet more documentation, requiring insureds to drill down into their supplier base further than they ever had before.
Even with the voluminous dossiers, the thousands of emails, and the terabytes worth of graphics and PDF files, discussions between underwriters, brokers and insureds went every which way in trying to assess the exposure values of fixed property assets and the value attached to complex, global supply chains.
Underwriters weren't going to be twice fooled, and if contingent business interruption limits weren't disappearing entirely, many risk managers took a "haircut," as underwriters retrenched with respect to sublimits.
Some companies such as General Motors Corp. had their property programs in place before the cataclysms, so 2012 was its first property renewal in the wake of the destruction wrought in 2011.
"Our property program renewal was very challenging" said Al Gier, director of risk management for General Motors Corp. "For most OEMs, renewing existing contingent business interruption limits for Tier-1 and Tier-2 suppliers were the most difficult."
It was left to veteran brokers such as Marsh's client executive Mike Kowalski, a 2103 Power BrokerŽ in the Automotive category, and skilled placement broker Susan Buhl to slog through marathon sessions to hammer out the details of coverage terms and limits, before finally inking a deal at premium levels acceptable to risk managers like Gier.
At Honda, Toyota and Nissan, the story was much the same, as brokers helped reshuffle the insurance coverage deck and tinker with deductible levels and limits in their fight to keep renewals as close to flat as possible in a property market under enormous pressure to raise rates.
Overall capacity remained plentiful for traditional property damage.
In fact, said Michael Power, senior vice president and real estate and hospitality practice leader at Willis in New York, and a Power BrokerŽ this year in Real Estate, "it was easier to get new capacity at our target pricing compared to incumbent capacity."
Some carriers who had directives for certain rate increases in the first half of 2012 "readjusted their position slightly midyear," he said. "They weren't as aggressive in their pursuit of rate on some accounts because of their fear of losing long-term good business."
Judy Ertel, director of risk insurance for Cummins Inc., the Columbus, Ind.-based maker of diesel and natural gas engines and power generation systems, said price increases over the past few years have been "substantial."
Despite the trend, the Aug. 1 renewals of Cummins' global property program came in flat, thanks to the resources of seasoned Aon veteran James English.
"In a year when many companies were losing contingent business interruption limits and interdependent business interruption limits, we maintained our current coverage level," Ertel said. "Post-tsunami and Thailand, contingent business interruption limits for many insureds are going away."
Insurers who, prior to 2011, might have been willing to offer significant contingent business interruption limits for Tier-1 and Tier-2 suppliers have cut back by double-digit percentages on OEMs until they can satisfy themselves that they better understand the risk and can properly price the exposure.
"These reductions were done pretty much across the board and most every OEM experienced that," Gier said. "We'll just have to work together to get the markets comfortable enough with the risk to where we will again see meaningful limits for contingent business interruption."
It was a combination of the insurance underwriters adopting RMS 11 risk modeling and of a property claim associated with Hurricane Irene that made property renewal so challenging for Dallas-based ClubCorp in 2012.
The late August 2011, storm resulted in downed trees and other mostly landscaping damage at 11 of its golf courses, said Patricia Jones, senior director of business risk and treasury for the network of more than 150 golf and country clubs, and business, sports and alumnae clubs.
"We had about $4.2 million of gross damage," she said. "Even if we hadn't had a loss, we would have been looking at an increase because of the underwriters' RMS 11 adoption."
With the help of Schake at Willis, ClubCorp structured a creative bifurcated property program in London and Bermuda that provided proper limits for tees, greens and bunkers, a relative rarity for golf courses.
The company, Jones said, was able to renew its $70 million tiered property program at "about 15 percent, which given that we have more of our exposure along the coastal cat areas and that we had a large loss, the premium increase was not bad. Not bad at all."
They were able to contain the increase, she said, by pointing out that only one club actually suffered a true physical loss in the storm -- the beach house roof at the Nags Head, N.C., golf club, which took the brunt of the storm's landfall. That club also saw its 18th fairway destroyed when a sea wall was taken out by the storm, she said.
"Physical buildings are the only type of risk we can actively manage, so our risk management program was quite successful in this catastrophic storm," Jones said, noting that the loss of trees and landscaping is not a risk that can be actively managed.
In addition, ClubCorp made sure underwriters knew that some of the buildings RMS 11 profiled as being in hazard zones should take into account that they are classified as highly protected risks.
On top of that, the company's sizeable property deductible helps insurance carriers manage their own exposures, Jones said.
Even without losses, many clients in 2012 ended up buying less limit than they had in years past to keep costs down and because "the perception of risk was increased among the underwriting community," said Chris Connelly, area vice president at Arthur J. Gallagher & Co. in Orlando, Fla. and a Power BrokerŽ this year in the Public Sector category.
For 2013, he said, there is capacity in the market, but it is "disciplined capacity." For the right price, there is "a ton of capacity available but if you present an account with a lot of loss experience or you had an account where the pricing seems too thin or inappropriate for the risk, you will see insurance companies walking away."
Most carriers are also re-evaluating their flood deductibles and limits this year because of Sandy, said Power at Willis. "We have seen some underwriters seek 2 percent to 5 percent high hazard flood deductibles specifically in areas that flooded during the storm," he said. "Flat dollar high hazard flood deductibles are still achievable, albeit at a much higher level for some markets than before Sandy."
That kind of percentage deduction -- or a very large flat deduction -- is fairly standard for named windstorm coverage in Florida and throughout Tier-1 zones in the Southeast, said Marcus of Arthur J. Gallagher.
"I think the Northeast is going to have a tremendous change," he said. "They will probably be looking at some price increases but more importantly, we think they will be looking at some pretty strong changes in terms and conditions, and especially deductibles for named windstorm and flood coverages."
Right now, said Marsh's Ellis, there's been "a lot of talk, not too much action" on setting a percentage versus a dollar deduction. "Underwriters felt there wasn't enough client participation in Superstorm Sandy, meaning the deductible levels weren't where they needed to be."
In general, he sees the pricing for organizations not exposed to catastrophes at plus/minus 5 percent, compared to largely catastrophe-exposed insureds (more than 30 percent of overall total value) at hikes of 5 percent to 15 percent.
And that's with no losses. For a loss-driven business, the premium hike on its own could range from flat to plus 15 percent, he said.
For many insureds, Power said, 2013 will remain a "firm" market, but not a hard one.
ANNE FREEDMAN is senior editor of Risk & InsuranceŽ. She can be reached at email@example.com. CYRIL
TUOHY is managing editor of Risk & InsuranceŽ. He can be reached at firstname.lastname@example.org.
February 19, 2013
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