Successful negotiations Featured

7:00pm EDT February 23, 2010

Following a quiet loss year in 2009 and strong profits from most property insurance markets, 2010 presents a different property market from 2009. The trend toward higher property rates has largely disappeared and the immediate future is much brighter for most buyers of property insurance. Some insurers are looking to employ more capital and resources in the property sector over other lines of business that have been mired in a soft cycle for years. The limited hard property market of 2009 is largely behind most insurance buyers for the foreseeable future.

“People need to recognize what’s going on in the property insurance market and identify early a strategy to take advantage of the current competitive market for property insurance,” says Brian Andrews, senior property broker of the National Property Brokerage Group, Aon Risk Services Central, Inc.

Smart Business spoke with Andrews 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. 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). 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.

In the current environment, underwriters 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. The modeling programs used by insurers are periodically updated resulting in revisions in predicted losses from windstorms, earthquakes, etc. For 2010, the most recently released version of a common natural catastrophe modeling program is expected to moderate some of the loss estimates from previous versions. This should contribute to the downward pricing trends expected, and makes accurate information even more important.

Another area underwriters are closely evaluating is the quality (adequacy) of your property insurance values (property damage and time element) as the basis for providing a quotation. Since insurers determine premiums as a function of the risk of loss and the insurance values, this is a critical aspect.

In a changing market such as this, it is also critical for your broker to be able to analyze which insurers have been most competitive and have the strongest appetite for your risk. Real time industry pricing and benchmarking capabilities are crucial for use as a starting point for insurer pricing discussions.

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 at least 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 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 a renewal is to understand your options in advance and develop an appropriate strategy.

Brian Andrews is a senior property broker of the National Property Brokerage Group at Aon Risk Services Central, Inc., Pittsburgh, Pa. Reach him at (412) 594-7511 or Brian_Andrews