Over the past few years, businesses in the Southeast have learned the value of having proper commercial property insurance and what it does and doesn’t cover. Increased deductibles and premiums have made it tough to continue that coverage.
Gary Reshefsky, an attorney and director of risk management services for USI Southeast, says the solution could be Alternative Risk Transfer, where premiums are set based on the probability of loss, not by supply and demand in the marketplace.
Smart Business spoke with Reshefsky about what Alternative Risk Transfer involves and what other alternatives businesses can pursue to insure themselves in a property insurance market that has changed drastically.
Why has the property insurance market in Florida become so bad?
It’s no secret that Florida is experiencing a windstorm property insurance crisis as the result of two very active hurricane seasons. Before this crisis, property owners had some choice of insurance companies. Today, the choice is between buying windstorm property insurance versus going bare. For many businesses, increased deductibles and premiums have caused them to self-insure their windstorm exposure. At this time, it’s more important than ever to work with a sophisticated insurance broker that can present the property owner with alternative methods of transferring risk.
What is alternative risk transfer and how might it help those businesses faced with a daunting property insurance market in Florida?
Alternative Risk Transfer, or ART, is a method of transferring risk to another entity. Insurance is the traditional and most common form of risk transfer. An insured pays a premium to an insurance company, which assumes most or all of the insured’s risk. When the insurance market begins to charge a premium that’s very close to the amount of risk being transferred, insureds are less likely to purchase the policy and instead are more likely to seek alternative methods to fund the risk. For many years, large corporations have used ART to cover exposures that are difficult to insure in the commercial marketplace.
A common form of ART is the captive insurance company. Under the captive concept, the insured transfers risk to an insurance company owned by the insured. The captive insurance company charges a premium that’s set by the actuarial probability of a loss. This is unlike the commercial marketplace that sets prices based on supply and demand in the marketplace as well as actuarial projections. A captive is not a panacea nor is it a solution for an entire property portfolio. However, it is a viable option for the most expensive portion of property exposures like windstorm deductibles.
How might this strategy affect employee benefits?
Alternative Risk Transfer theories apply to all forms of business risks. The captive mechanism can be used to transfer risks including health insurance, disability and long term care. There are also other insurance coverages that a business needs such as workers’ compensation and professional liability that should be considered for alternative risk transfer.
Are there any other alternative strategies for dealing with this tough market? What else can a business do?
There are other alternatives for property insurance that businesses should be considering when the commercial marketplace isn’t offering adequate terms and conditions to meet exposures. This is a situation where geographic spread and quality of construction really matter. Some of the insurance companies are offering credits for hardened buildings, and many property owners are taking steps to install impact glass, shutters and other improvements to make buildings compliant with current building code.
Second, our clients with property portfolios spread around the state are insuring property for less than 100 percent of the total value of all their property combined. We work with our clients to create a computer model that predicts the probable maximum loss that could be sustained in one policy year. Our clients present these studies to lenders and seek approval to insure for less than the total value.
It’s important that business owners work with an insurance broker that is consultative and identifies alternatives to traditional insurance. At the end of the day in this insurance market, the business owner needs the best advice before making a difficult decision.
GARY RESHEFSKY is an attorney and director of risk management services for USI Southeast. Reach him at (305) 357-2219.