In today’s insurance marketplace, catastrophe (CAT) modeling has impacted
how much capacity a carrier can put up, its attachment point and what it must
charge for that capacity. As a result, many
carriers are putting up relatively small lines
of coverage. In order to achieve the
required limits of CAT coverage, numerous
carriers are needed. Brokers have had to
adopt layered and quota-share programs.
Under this environment, close attention
to detail is imperative, says Charlotte
Stone, area executive vice president and
Worldwide Property Practice leader for
Arthur J. Gallagher & Co. “Detailed review
and negotiations of coverage terms
become even more important when limits
are being shared,” she explains. “Otherwise
a number of potential nonconcurrencies
could occur between carriers within the
same layer or among a number of different
layers.”
Smart Business spoke with Stone about
coverage terms with respect to property
insurance.
How have property insurance placements
changed over the years?
In the past, property insurance for commercial business owners could be placed
with a single carrier putting up the entire
all-risk limit. Sublimits would be imposed
on certain coverages including catastrophic perils such as earthquake and flood.
Coastal wind and terrorism were included
in the all-risk limit on a per-occurrence
basis. The sublimited CAT perils were
aggregated on an annual basis, meaning
that the single limit would apply during the
policy term, and were subject to higher
deductibles. If additional catastrophic limits were required, one could access additional capacity in the difference-in-conditions (DIC) marketplace for excess layers.
This structure was effective because the
all-risk carriers would provide coverage for
very low rates on noncatastrophic perils.
The DIC marketplace had an abundance of
capacity, which created downward pressure on pricing due to competition. After
the hurricanes of 2005, insurance companies were forced to reduce the capacity
they could offer due to scrutiny and restrictions being imposed by reinsurers and rating agencies.
After the events of Sept. 11, not only was
terrorism excluded by insurers from all-risk policies, but fire following terrorism
also became an issue. Many states passed
legislation prohibiting carriers from
excluding coverage for losses from fires
resulting from terrorist acts. This further
placed limitations on the amount of all-risk
limits that carriers could provide.
What types of considerations should be taken
in regard to nonconcurrencies?
With a larger number of carriers participating in a single program, certain issues
become critical to the placement. For
example, in the event of a loss, is the limit
blanket coverage over all of the properties,
or do some carriers limit the recovery
under the policy to the replacement cost
that the company reported? How do carriers define catastrophic perils? Is earthquake sprinkler leakage part of the peroccurrence all-risk limit or of the aggregated earthquake limit?
How do insurance carriers define CAT perils?
It depends. Some carriers may define
earthquakes as a shaking or trembling of
the earth that is tectonic in origin. Other
carriers may expand that definition to
include such things as landslides, sinkholes, mud flow and rock fall. Some carriers may look at flood as simply the rising
and overflowing of a body of water onto
normally dry land. Others will expand that
to include surface water, rainfall and the
resulting runoff.
The carrier excluding coverage for earthquake and flood may use the expanded definition while the DIC may only be picking
up the more limited definition creating a
potential gap in coverage.
How should a quality broker help a company
with its insurance needs?
A quality broker should explore new and
improved program structures. In this market, having an all-risk excluding CAT perils
tower and a separate DIC placement is not
the best and most effective structure. A layered and quota-shared all-risk program
including the perils of earthquake, flood
and wind, opens up the marketplace to
greater capacity and improved terms.
Higher limits can be achieved and at a
much more competitive price.
Carriers should be required to agree to a
single form, preferably a manuscript form
that addresses all of the insurance as a single contract. Your broker should have the
carriers agree to an assigned adjustor for
each of those policies. This is important in
the event of a loss that affects multiple layers and carriers. You would then have a single adjuster facilitating and handling the
claims process. Finally, a broker should
perform a detailed review of each of the
carriers’ endorsements or changes to the
contract and analyze the impact of those
changes. If the changes are too onerous
then other options should be considered
and additional negotiation should take
place.
CHARLOTTE STONE is area executive vice president and
worldwide property practice leader for Arthur J. Gallagher & Co.
Reach her at (818) 539-1241 or
[email protected].
