Obtaining Optimal Catastrophe Coverage

In the midst of hurricane season, insurance agents and brokers are reminded of the need for forward-thinking solutions that will help them obtain the best-possible catastrophe coverage for their clients.

Following the 2005 hurricane season with Wilma, Katrina and Rita, catastrophe risks were re-evaluated and extensive structural changes made. Those changes continue to impact catastrophe capacity and pricing.

Throughout 2006-2007, many commercial clients faced steep prices, restricted availability in terms of limits, higher deductibles and an overall shortage in the amount of cat coverage available to purchase. With the softening market, cat premiums have declined, and capacity has increased. Coverage has expanded, and terms and conditions have loosened.

However, the softening market must be put into proper context. While cat risks may see double-digit decreases, this is only after prior increases of 100 percent to 300 percent.

Due to those influences, agents and brokers must develop plans to strategically market accounts and obtain competitive programs for their clients. The complexity of the cat market can make it difficult to keep pace with the coverage options and to effectively evaluate the quality of insurance carriers. Thus, many agents and brokers are partnering with specialized wholesale brokerage firms, which have in-depth knowledge of the cat market and can provide the following seven benefits.

1. In-Depth Expertise

Property catastrophe insurance is a complex, multi-dimensional product that uses sophisticated language to define terms and conditions. A wholesaler with expertise in handling cat risk will understand the types of coverage. Wholesalers are also knowledgeable about program structure; primary and secondary structural risk characteristics; how cat risk models work; major catastrophe regions and zones; terms and conditions; enhancements; program layering; and surplus lines carriers.

In most cases, an agent or broker has some understanding of cat coverage but also represents the client’s complete insurance needs and offers various other services, including risk analysis, loss control and claims management.

“Catastrophe coverage represents a significant portion of our business,” said Dennis Kristan, senior vice president in the commercial division of The Rule Group, an independent, regional insurance brokerage firm. “We consider wholesale brokers who specialize in this niche to be crucial business partners, and we carefully evaluate and select the wholesalers we work with.”

2. Access to E&S Market

Agents and brokers can obtain basic types of coverage for clients through the standard insurance market. For specialized or hard-to-place risks such as cat coverage, many agents rely on wholesale brokerage firms to access the excess and surplus lines market.

If an insured has a large portfolio of risks or property in cat-prone areas, the surplus lines industry may be the best, if not only, market to secure cost-effective coverage. The catastrophe-specialized wholesaler acts as the gatekeeper to that industry.

The admitted or standard markets are underwriting some cat risks. However, many standard insurers don’t have experience in this market. In fact, the standard market has had significant inconsistency in the availability of cat coverage and capacity. By contrast, surplus lines carriers often have steady, in-depth expertise, with specialized claims-handling services and a network of risk management professionals, consultants and attorneys that insureds can access.

As the authority on the non-admitted market, wholesalers can help to identify and secure coverage from stable, long-term players. The financial strength of surplus lines carriers, with worldwide reinsurance programs behind them, has historically been good, if not better, than the admitted market.

Most surplus lines insurers spread their cat risks over various lines so they don’t have an “unacceptable” aggregation in one area.

3. Minimizing Client Exposure

“Even though the current insurance market has softened, the cost of catastrophe coverage continues to be a major concern for property owners,” said Michael Isaacs, senior vice president of the real estate practice of Sullivan Curtis Monroe Insurance, a privately held insurance brokerage firm. “Determining the appropriate limits of coverage is one the biggest challenges our clients face.”

Sullivan Curtis Monroe Insurance partners with several wholesalers for various lines of business because they have enabled the company to provide clients with a spectrum of products. All the wholesalers have one thing in common — a proven track record in their areas of specialty.

“For my real estate clients, our specialized wholesale broker provides valuable expertise in evaluating property risks, and we have a very collaborative process,” Isaacs said. “What we’ve done especially on catastrophe business is to make the specialized wholesale broker a more integral part of our team.”

4. Expertly Marketing Catastrophe Risks

“Our firm provides wholesalers with the information they need to represent clients’ risks to the marketplace,” Isaacs added. “The quality of the submission, how they handle the presentation of the submission to the underwriter and the depth of knowledge they offer are all part of what creates the ‘value added’ benefit of working with experienced wholesalers. … In regard to placing coverage, the presentation of the account to the surplus lines market is crucial. Whether a wholesale broker gets the deal or not often depends on how well he or she presents and markets information.

“The wholesalers we work with are relationship-oriented,” Isaacs said. “They meet face-to-face with underwriters to tell the story of the insured. … They build a case of why an account should be priced at a certain level and handled in a certain way. Seasoned wholesalers present the insured in the best possible light to get the best results.”

5. Structuring Innovative Programs

When structuring programs, cat-specialized wholesalers may advise clients to place the account as one integrated program, or they may recommend splitting the account and underwriting it by separate risk components. It depends on the account and market conditions.

For large or complex risks, cat coverage may need to be spread out over several surplus lines insurers. In that type of deal, the wholesaler plays a “syndication” role, locating insurers willing to take on “layers” of the coverage.

Coordinating that type of program requires marketing and negotiation skills on the part of the wholesaler, who must be able to structure the program appropriately. In layering a program, the wholesaler maximizes the capacity any given insurer will offer with the broadest terms and conditions.

Whereas in the past some large accounts may have required five to seven insurers to obtain the necessary limits, today the same limits can be obtained from fewer markets or even a single market.

6. Obtaining Best Results

In a close partnership, the agent and wholesaler will present the competing proposals to the client and will help select the package that best meets the insured’s needs. The selection and negotiation process must take a number of factors into account. Price is only one criteria. The breadth of coverage, risk management services, and insurer’s financial rating and reputation for claims settlement also are important. In many cases, the account does not go to the lowest bidder, but rather to the insurer with the right combination of price, terms and conditions, services, and reputation.

After making the initial placement, the broker and wholesaler team may advise the client to periodically resubmit the risk to the market to determine whether better pricing, coverage or services can be obtained.

7. Benefits of a Team Effort

Joint presentations and strong alliances position independent agents and brokers as insurance professionals capable of bringing a wealth of resources to the insured. Cat coverage is complex, so it benefits both the broker and the insured to have a specialized wholesaler involved in packaging an account. Having the wholesaler at client meetings allows the agent and insured to delve into various program elements. The wholesaler may be able to provide a better understanding of a certain cat market, such as earthquake, wind or flood.

Topics Catastrophe Carriers Agencies Excess Surplus Risk Management