High-risk property is a location that is inherently dangerous due to the nature of its operations or that is exposed to powerful forces of nature such as hurricanes, earthquakes, and floods. Insuring against these exposures requires a different approach from standard commercial property insurance and necessitates a higher-level of coordination between risk managers, retail agents, wholesale brokers and excess and surplus (E&S) insurers.
E&S vs. Admitted Insurers
E&S underwriters are uniquely situated to cover high-risk property because, as a non-admitted insurer, they have the flexibility to customize forms, terms and conditions and make them immediately available. Also, non-admitted carriers are used to using the individual circumstances of each account to assign applicable terms and conditions. They have the flexibility to consider important pieces of information that exist outside a proscribed “box” of risk attributes.
For example, some admitted carriers may have as a condition that they will not consider any property built prior to 1985 regardless of any updates. An E&S carrier will look at that same property and take those updates into consideration rather than rejecting the submission outright. E&S underwriters analyze and evaluate each account based on its unique and distinct risk characteristics versus underwriting accounts based on the class of business.
A Layered Program
E&S insurers typically underwrite only a portion of an account, which requires an insurance program layered with multiple carriers. While the work involved in layering programs may make it seem like a “con” rather than a “pro,” it is this layering that helps agents avoid long-term pricing fluctuations and possible coverage gaps for their customers. Layered coverage also eliminates the need to replace the entire insurance program following a loss and gives high-risk properties the ability to restructure only the affected portion of the policy.
With a layered program, there are two approaches that promote policy language concurrency and help avoid policy gaps:
- All E&S insurers use the primary carrier’s policy, or
- E&S insurers use their own policies but recognize all the endorsements in the primary policy.
When placing high-risk property business with an E&S carrier, the quality and accuracy of the data provided are critical to determining the insurability and final pricing for an account. Accounts located in catastrophe (CAT)-prone areas exposed to hurricanes and earthquakes are modeled utilizing industry or proprietary CAT models to determine the CAT pricing load. Accurate and quality data, in most cases, significantly improves the pricing a carrier is able to offer a high-risk property.
The three most critical pieces of information to provide are: the year built; the dates and details regarding any updates made to the property, construction, or occupancy; and an up-to-date building valuation.
- Year Built: Studies have shown that the year built is a significant driver for reducing the severity of a loss as the result of hurricanes and earthquakes. For example, California — which is highly susceptible to earthquakes — updated its building codes in 1974, 1989, and 2000. Therefore, a property built in 1974 adheres to a different set of codes than a property built in 2000 — something that an underwriter will take into account when evaluating a submission.
- Updates to Property: The coastal regions in the Southeast U.S. updated construction building codes after Hurricane Andrew in 1992 to require the use of standards and materials proven to respond well during hurricanes. However, there are certain areas in the coastal region that have been more stringent than others in enforcing these new building codes — again, this is something that an underwriter takes into consideration during the submission process. Updates to property, construction or occupancy, and which building codes, the updates follow will also impact a property’s evaluation.
- Up-to-Date Building Value: For customers with numerous locations, it is impractical to do a building valuation more frequently than every three years. This is another situation where working with an E&S insurer makes sense. An E&S insurer can add a margin clause to a customer’s property policy that will automatically bump up coverage limits following a loss if a property is determined to be undervalued. This margin clause can help reduce the gap between the insured value and the actual value of a property, while keeping building valuation inspections on a manageable three-year rotation. However, even with this margin clause, property owners should adhere to the three-year evaluation process to avoid letting the gap between insured and actual value get too large. For example, assuming a three percent annual inflation rate, an insured site that had not been revalued for three years would be undervalued at a little more than nine percent — an amount that could be covered under an insurance policy with a margin clause. But if the property had not been revalued for five years, replacement costs would be 16 percent higher than the scheduled value, leaving the property owners with a considerable gap that they would need to cover out of pocket.
So as you can see, the approach to securing insurance coverage for high-risk properties is best handled by an E&S insurer. Although a high-risk property owner may be swayed to cut corners to obtain insurance, studies have shown that a large percentage of companies that sustain a significant loss that is not covered never reopen for business. Securing an enduring, long-term insurance program that gives property owners the security to operate their business while reducing pricing volatility is key to helping protect customers from this fate.
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