Mastering Insurance Compliance In A Hardening Marketplace
Insurance is never static, especially in today’s hardening marketplace. In fact, it is more important than ever to continuously monitor your risk management program. No one can escape the need to make sure coverage limits, terms and conditions are consistent with objectives, and the requirements of lenders and landlords are 100% met. As insurance premiums are going up, deductibles are increasing, and carriers are pulling back on the previously generous conditions insureds have enjoyed for years. During the recent period of excess capacity and soft markets conditions, carriers were providing more ample coverage in a bid to win business, or just retain market share. Unfortunately, however, those days are over for the foreseeable future. The relationship between lenders and insureds is now in the crosshairs in this new landscape.
The Immediate Impact on Renewals
In the past 6-12 months premium pricing has dramatically reversed, due not only to a string of catastrophic losses, but also greater than expected claims related to poor and aggressive underwriting. Everyday losses such as fire, wind, floods and business interruption have eroded carrier profitability. When you add in poor investment income due to a low interest rate environment, you have a perfect storm for a hardening marketplace.
Since purchasers bake insurance premiums into their budgets and business plans, today’s volatile landscape requires immediate, proactive planning.
It is not only premiums that are increasing either. Deductibles are growing by orders of magnitude, and carriers are pushing more risk onto the insured. It is common to see a $10,000 deductible turn into a $25,000 or $50,000 deductible now. Larger insureds are seeing even more dramatic increases. This means some are having to consider options for self-insured retentions just to tread water where total cost of risk is concerned.
This trend is not limited to the big players. Almost no one can expect to be exempt as renewals come due. Where just a few months ago favorable endorsements were taken for granted, now they are being removed – and carriers can be expected to continue this approach for the foreseeable future. They are eager to rapidly regain what they were “forced” to give away over the last decade in order to stay competitive.
Some of the changes to policy terms and conditions can be quite dramatic, and equally impact the insureds, lenders and landlords. For example, many blanket policies provided full limit coverage to all locations, while turning a “blind eye” to the values reported to the carriers. This requires extreme care and attention. A policy might now be invoking a harmful occurrence limit of liability endorsement, and a claim could be limited to the value reported to the carrier in the schedule of values. This once loose practice of under reporting values to lower premiums is now being taken with utmost seriousness. In the event of a major loss, it could the lender or insured everything if not properly managed.
As these, and other radical changes are being put into effect; purchasers, lenders and landlords are left scrambling to address them. They can find themselves at a loss on how to properly adjust to the new reality. These new policies are demanding that everyone assume more risk, and are adversely impacting lender insurance requirements at alarming rates.
There is no way to avoid these changes. That’s the bad news.
The good news is, even so, there are ways to manage the process to minimize the impact.
Four Ways to Manage Your Risk and Premiums Right Now
- Look at blanket coverage – and realistically assess your exposure
Reevaluate your blanket coverage limits. For example, if you have a $100 million blanket limit, you might actually need less. Through careful analysis of your values and your concentration of risk, you can discover ways to lower your limits and still maintain the coverage you need. Through the use of a “loss limit,” in lieu of a broader blanket limit, you may very well protect yourself while also managing premiums to a level that meets your budget.
- Leverage lower rated insurance carriers the right way
The A.M. BEST rating system ranks every insurance carrier, and every financial institution has minimum allowed ratings. In order to save on premiums, or fill capacity needs, borrowers may need to use lower rated carriers. This practice, if done indiscriminately, can destroy harm relationships with lenders who are unwilling to take on the risk. Still, there are ways to effectively leverage lower cost carriers without setting off alarm bells. By keeping them out of your primary limits, and judiciously allocating overall usage to higher/excess layers of coverage, premiums and capacity issues can be managed while meeting lender standards. This is an effective way of saving money without incurring unnecessary risk to either party.
- Get ahead of your renewal date
Plan to get any upcoming insurance renewals in process well in advance of the renewal date, and avoid nasty surprises. Lenders have ingrained expectations on how premiums impact their loan-to-value calculations and escrow balances. Additionally, premiums are usually the 2nd or 3rd largest operational expense, and are baked into the valuation of the property. A sudden and unexpected premium increase of 30% in the middle of a loan being underwritten or refinanced can be devastating. Every additional dollar of premium impacts value by over 10:1. Likewise, lenders generally have extensive lists of insurance requirements, each of which has a premium impact, or can’t be ignored. However, if properly managed, a renewal can give you many levers to pull to manage those premium impacts. In today’s market, everyone, is shopping their insurance. Plan on a 90-day process to get organized, go to market, assess your options, and get your lender or landlord comfortable with any material changes or waiver requests.
- Fine tune your exposures
Obviously, what you report as replacement cost and business income is the principal driver that carriers use to determine their premiums. Now, ask yourself, how closely are you monitoring those values, and are you ensuring their accuracy? Overvaluing can lead to unnecessary coverage and premium charges. Undervaluing can result in claim payments being insufficient to restore the property after a major claim – especially with tightened terms and conditions. Today, more than ever before, there is no margin of error in either direction. The best and only solution is to know with perfect precision your replacement cost and business income.
The time to prepare for this new reality is now for both insureds, and lenders – because it is here. Even if you renewed within the last 6 months, your next renewal could be materially worse. And while most lenders are well aware of the hard market conditions, and are trying to work with their borrowers, not all changes can be accommodated. Few insureds are escaping unscathed from the hardening landscape. Not only is this trend not improving, it is likely to even get worse.
The best approach requires that all parties plan ahead, determine how the changing market place will impact renewals, and the impact this will have on the relationship between insured and their lenders and landlords. There is a fine balance between how much risk any one party can absorb, and where it makes sense to request and grant waivers or changes to lender or landlord requirements. Fortress Risk Consultants can help borrowers and lenders interpret these changing conditions, and help either party make sound and practical risk management decisions without taking on too much risk. Ask us how.