Global insurance broker Marsh held a webcast on Sept. 21, where the firm’s analysts shared their views on the current business environment including the effects of Hurricane Irene and other catastrophes.
The broker also offered an array of advice for corporate risk managers and companies on choosing their insurance coverage.
Here are main points of Marsh’s webcast presentation titled, The New Reality Of Risk: Budgeting Strategically In 2012:
Executives Are Expecting More From Risk Managers
When senior management officers are asked whether their expectation for the risk management department grew over the past three years, 80 percent said yes. Generally, more “C-Suite” chief-level executives heightened their expectations of risk managers.
Areas where C-Suites’ expectations for risk managers grew include: efficiently executing day-to-day RM activities; improving quantification/analysis; understanding of non-insurable risks; increasing involvement in corporate strategic planning; and leading ERM activities.
Above-Average Hurricane Season Underway
The Atlantic hurricane season is predicted to be above average. Hurricane Irene’s effect on the commercial insurance community is actually much less than first anticipated.
There were pockets of significant losses, however, in public entity, retail and health care. Aggregation of losses is not as bad as expected. But it added to the continuing losses in 2011 and compounded an already bad year for property insurers.
The takeaway lesson from Irene is the validation that such storms do get far north and cause significant damages. Irene justified for many modelers and underwriters that such events can happen and thus need to be underwritten.
Irene’s flood implications include commercial insurance treatment of wind versus flood damage, and the application of deductibles, coverage applicable, and sublimits. Flood is often sub limited but that’s not so on wind. And wind, or ‘named storm,’ often carries a percentage deducible, but that’s not always the case on flood.
Another area of confusion is storm surge, the water pushed by a storm. (Water typically causes more damage than wind.) Storm surge may be handled as wind in one policy and flood in another, so it should be reviewed and understood beforehand. In Marsh’s case, its new manuscript form specifically refers to storm surge as a named windstorm event.
Marsh strongly recommends buying commercial coverage from the National Flood Insurance Program as an inexpensive way to cover deductibles under commercial all risk coverage. Irene has reinforced the idea that these storms do happen in unexpected areas and that flooding is the major cause of loss.
Property Rates Transition Up
Currently, property insurance rates are transitioning up, and this is specially true for loss-prone and catastrophe-driven business. However, capacity remains readily available.
Marsh recommends that insureds generally should not budget for flat or lower priced renewals — unless risk is highly desirable and the insured is willing to make adjustments to limits, coverage, deductibles, or lead carriers. Insureds with losses and CAT exposures are generally looking at modest rate increases. But insureds with major losses and huge CAT exposures face greater challenges.
Marsh recommends that insureds discuss account specifics with their broker. Insureds should put together the best information possible and say why it is best in class. Insureds should talk with lead capacity providers and be flexible around terms. The days of rate decreases are not gone, especially for desirable risks.
Marsh states analytics is important regardless of the state of the insurance market. Insureds need to be able to make substantiated, proactive decisions, and analytics can help.
Quantifying risk and relating that quantification to an individual company’s risk tolerance leads to an actionable strategic plan for optimization of the risk management investment. Marsh states insurance program optimization quantifies the risk and allows for evaluation of risk transfer and risk mitigation strategies.
‘Extraordinarily High’ CAT Losses This Year
The level of CAT losses this year is extraordinarily high, Marsh observed. During the prolonged soft market of the past several years, prices declined and coverage expanded year-over-year. Sublimits for critical coverage crept upward, and carriers increased coverage to offset larger premium decreases. The result: most clients find themselves with very broad ‘all risks” coverage, often with blanket limits and very broad sublimits.
Risk managers need to think ahead. And if coverage becomes more restrictive, they need to reevaluate such basic questions as: “Why do we purchase property insurance? What are we looking to accomplish via our property program? What are the potential loss scenarios that are most concerning to the company? What kind of data and analysis can we bring to bear to make sure we are making the best use of our capital when it comes to risk management?”
Underwriters are now beginning to look for more information on each risk. Insureds need to evaluate what coverage is ‘necessary to have’ versus ‘nice to have.’ ‘Nice-to-have’ coverage does not necessarily have a meaningful impact on risk transfer cost. It may be time for insureds to again tailor property programs based upon: the organization’s unique risk profile; the risks within their industry and geography; and TCOR budget.
Marsh Advises Optimal Risk Management
Optimal risk management programs will combine: self insurance; risk transfer insurance; and risk mitigation. Developing a complete risk profile involves a deep dive into overall program and researching which services and solutions can really have an affect on lowering a firm’s cost drivers.
Property can be a more tangible risk modeling exercise and the timing of losses is generally straightforward. When evaluating the range of outcomes, Monte Carlo simulation allows evaluation of a vast array of outcomes. One needs to apply the right assumptions and need to reflect the risk profiles, loss drivers, engineering, etc.
When applying modeling assumptions on a per location and per peril basis, make collaboration of resources and data elements imperative, including: risk managers; site-specific engineers; cat modeling experts; property exposure experts; and industry/business experts. And compare imputed value versus insurance quotes.
For the insureds, forensic accounting — with a consideration for the entire supply chain — can help develop risk-adjusted business interruption values. Underwriters at times are willing to use the revised numbers, often resulting in lower TCOR.
Casualty Rates Still Soft, Renewals Took Longer
Marsh observed that casualty rates are still generally soft and renewals took longer to complete. Workers’ compensation line continues to see pressures. Marsh sees in workers’ comp a number of issues, including: unclear regulatory issues; continued medical inflation; poor pricing; and decreased investment income.
No matter the market direction, it’s important to adopt a strategic approach to reviewing casualty programs, and overall approach to TCOR, Marsh stated. Marsh’s casualty practice division has created a workers’ compensation council, to monitor, analyze, and send information to clients about workers’ comp changes.
Marsh states the key area to drive down costs is within workers’ compensation programs. One useful tool is a workers’ compensation loss profile, which uses client-specific data to benchmark an organization’s loss information against industry.