Many business owners are facing significant increases in property insurance costs when it comes time to renew this year.
Higher than normal property losses from fire, explosion, hurricanes and floods, in addition to the impact of the financial markets, have put pressure on insurance companies to improve their cash position in the short term and eventually improve their capital base. And that means increasing rates/premiums.
Insurance companies’ costs have been increasing, as well. Treaty reinsurance — the protection insurance companies buy to limit their portfolio exposure — has been increasing throughout 2009. Considering this, insurance company underwriters are becoming more conservative, which can add significant cost for business owners when it comes time to renew their property insurance policies.
“People need to recognize what’s going on in the property insurance market and identify early a strategy to contain costs on their insurance program,” says Bill Novak, assistant director of Aon’s National Property Brokerage Group (Aon Risk Services Central, Inc., Southfield, Mich).
Smart Business spoke with Novak about how to mitigate the potential for increased cost, the steps to effectively negotiate a property insurance renewal and how to leverage your options.
How can CEOs mitigate the potential for increased insurance costs when it comes time to renew their policies?
Negotiating property insurance is similar to negotiating a loan or line of credit. The better the information, the more confidence an underwriter has in your operations.
This means understanding your risk profile so that you can effectively represent your risk in the most positive light. Are your facilities constructed and protected appropriately for your particular operations? If they are, this is a tremendous negotiating point. If not, what other steps do you take to protect your property/business income? Interest in loss prevention is the No. 1 quality insurance companies look for in underwriting property insurance.
How can a business effectively negotiate a property insurance renewal?
Besides understanding your risk profile, start early. Develop a comprehensive submission to the market, just as you would for a loan, outlining the positive characteristics of your risk in a clear and concise manner.
The quality of information you provide is important because underwriters will use this to base their available insurance capacity and pricing. This is particularly important if you have property exposed to catastrophic losses such as coastal windstorm, flood or earthquake.
These exposures, if significant, are best underwritten with information not readily available and may require inspections by independent engineering services. People need to recognize that many underwriters must now rely on sophisticated computer models to evaluate these catastrophe exposures prior to quoting coverage.
If you do not have the information required to run these models, the quotes you receive can be adversely impacted through lower capacity/higher premium.
Historically, underwriters looked at COPE (Construction, Occupancy, Protection and External Exposure) information to underwrite property risks. Today, however, underwriters are being required to evaluate more information as part of the underwriting process, so you have to provide more information to get the best rates (premium).
For example, many underwriters now evaluate the quality (adequacy) of your values as the basis for providing a quotation.
If you understand what underwriters are looking for and provide complete risk profile information in your submission to the market, you will get a better result.
How early does a company need to begin the renewal process?
It depends. If you have good information, you should start discussing your marketing strategy 90 days before your renewal and provide a complete submission to the market about 60 days before renewal. This allows you time to implement a strategy rather than simply hoping for a good outcome.
The key is to understand and control the process to the extent possible rather than have the underwriting process control you. Anticipating problems, questions and possible site inspections minimizes the types of surprises that CEOs prefer to avoid.
If you don’t have good information about your risk, you should start as early as 120 days out to gather and understand all the required information. This puts you in a position to get quotes back in a reasonable amount of time before your renewal date so you can still have time to negotiate options.
Why is it important to be prepared going into the process and to evaluate your potential options?
You don’t want to be reacting to what the market is doing; you want to be anticipating and positioning yourself to get the best possible result. This requires understanding the options available to you that can have an impact on pricing, terms and conditions.
This can vary significantly depending on your unique risk profile, but deductibles, limits of liability and valuation are common areas where meaningful options can be developed.
Loss prevention improvements can also be an important consideration when negotiating pricing. You can’t implement options unless you’ve evaluated them.
The best way to position yourself for your renewal is to understand your options in advance and develop an appropriate renewal strategy.
Bill Novak is assistant director of Aon’s National Property Brokerage Group with Aon Risk Services Central, Inc., Southfield, Mich. Reach him at (248) 936-5257 or firstname.lastname@example.org.