Sharing the burden Featured

8:00pm EDT April 25, 2007
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