How the insurance markets for 2011 may impact your business Featured

5:02pm EDT March 1, 2011
How the insurance markets for 2011 may impact your business

The 2011 insurance market seems fraught with both potential land mines and great opportunities. Brian Andrews, senior property broker at Aon Risk Solutions’ Pittsburgh office, advises that although insurance companies did well in 2010, there are some factors that are making them cautious entering 2011.

“More than ever, quality data is a key to your renewal, whether it’s a property or excess casualty account,” says Andrews.

Smart Business spoke with Andrews and Al Tobin, managing principal at Aon Risk Solutions, about what to expect in 2011.

What does 2011 hold for property, casualty and liability markets?

In 2011, non-catastrophic general property risks, general liability, and excess casualty will be competitive. Most insurance companies don’t see a change in the marketplace coming from anywhere other than the catastrophe-prone property side of the business. That means earthquake, terrorism event, or significant wind storm event.

The financial results from insurance companies were decent for 2010 for two reasons.  First, there were no catastrophic property losses in the U.S., outside of the BP oil disaster — no big hurricanes or earthquakes. The second is that there were many reserve releases — the surplus an insurance company keeps in order to pay previously reported claims or Incurred But Not Reported (IBNR) claims.

Insurance companies are conservative; they must make sure they have funds set aside for unexpected or growing losses, predominantly caused by casualty-related losses. Last year, many insurance companies came to the conclusion that their loss reserves were higher than necessary. Their actuaries allowed them to release some of those reserves, which helped boost profits for 2010. This shifting of funds is not something the industry can expect to occur again in 2011, which is why some insurers are taking the position that they can’t continue with rate reductions.

Most property insurance policies are placed for a one-year term. For risks subject to natural catastrophe exposures, insurance companies review hurricane forecasts with great detail. If an active hurricane season is predicted, insurance companies tend to become cautious. If it is supposed to be a mild hurricane season, insurers can take an aggressive approach to write more business. The 2011 forecasts are for a very active U.S. hurricane season, which will cause some concern for many insurers.

For natural catastrophe-prone risks, there is an additional factor influencing 2011: new predictive loss modeling programs. Many insurers use a model called RMS, which is updated on a regular basis. It is anticipated that the 2011 RMS model will drive the loss expectancies of insurers’ risk portfolios up. The damage hurricanes do to coastal properties is generally severe, but the damage that hurricanes can do from significant winds further inland has not been fully considered in the past. The new RMS model increases the loss expectancies for hurricanes that penetrate deeper inland.

How will insurance companies react?

Insurance company senior executives will review the 2011 storm season forecasts. They will instruct their underwriters to be prudent in knowing the risks they insure and protecting insurance company surplus with the appropriate protective reinsurance programs. This will drive a conservative approach from insurers for 2011 from a catastrophic risk perspective specific to hurricanes. From the insurance company perspective, if the new RMS model increases loss expectancies from a Category 3 storm from $1 billion to $1.2 billion, how will it respond? Will it write less business? Will it increase prices?

Most likely one aspect of the answer is that it will be more selective in the risks written in catastrophe-prone areas. This drives the need to be able to provide good data, or you are going to pay more for your insurance in 2011.

What can companies do to make sure their data is accurate?

For natural catastrophe-prone facilities, you need to know your secondary construction characteristics — year built, type of roof, number of stories, etc. If you have 20 properties in your portfolio, in the past you may have had good construction information on your largest five facilities, but you may not have had detailed information on the smaller facilities. For 2011, you should gather the secondary construction characteristics for all of the catastrophe-prone facilities. This can be done by a one-time loss control engineer visit to facilities to accurately collect the data. If you don’t provide the information to the insurers, the RMS model will default to worst case characteristics, resulting in higher loss expectancies and higher premiums charged.

What steps should companies take to prepare for 2011 insurance renewals?

Make sure you understand the global insurance marketplace. There are more choices than ever for customers, so getting good advice from your broker is critical. Look for a broker or agent who uses peer group benchmarking. Perhaps you are buying unnecessarily high limits? The use of sound peer group benchmarking and catastrophe modeling loss expectancy results to make decisions that enable the insured to properly set the amount of insurance purchased is very important to risk managers in this market. Considering reducing limits is a decision that should not be taken lightly, however in this economy there is considerable pressure on risk managers to buy the most cost-effective insurance product without giving up important coverage. Still, don’t trade a few dollars for inadequate limits. Good data can help one make this decision.

Brian Andrews is a senior property broker for Aon Risk Solutions. Reach him at brian.andrews@aon.com or (412) 594-7511.

Al Tobin is managing principal and national property leader with Aon Risk Solutions. Reach him at alfred.tobin@aon.com.