Underwriting Strategies in a Firming Marketplace

Featuring Brian Ruane and Steve Sachs, Real Estate Practice Leaders, Willis

In this confusing rate environment – where carrier loss ratios are rising after a catastrophic 2011 while capacity remains strong – we turned to our Real Estate Practice leaders for advice. Real estate insurance costs on the whole may be rising more than those of other sectors. Why? For one, our population centers, and hence our real estate activities, tend to concentrate in CAT-exposed coastal areas. While underwriters are still hungry in many lines, the tide is turning, and risk professionals in the real estate world will have to respond.

So what can be done? A lot, actually, and risk managers and insurance buyers will need to speak up and take action. Start by telling management that rates may be rising. That will definitely get their attention.

Our experts’ advice is simple: get back to underwriting basics. Embrace the turn toward a seller’s market. That means understanding your risks, measuring your losses, mitigating your exposures and getting ready to communicate everything to underwriters in a way that differentiates you in the insurance marketplace. There’s a lot of work involved, and, yes, that can entail added expense. As a risk buyer in a firming marketplace, you will be competing for a greater portion of your company’s capital and you may hesitate before recommending even more spend for something as unglamorous as “underwriting basics.” Yet here’s where the opportunity arises.

The risk management steps outlined above will be your best defense against rising rates. These steps are also likely to lower your loss costs. Every dollar invested is likely to yield a significant return in lowering your total cost of risk.

It’s not necessarily an easy case to make, but it’s a compelling one. And now may be the right time to get ready to make it to your colleagues.

So let’s get to the basics.

The Basics

1: Communication

Let your internal stakeholders know what’s happening. Then get in touch – and stay in touch – with your broker and your underwriters. Your broker and underwriters may be able to give a good indication of what’s coming, and if they do, you can turn around and let your team know. When rates begin to rise, tensions sometimes follow; remind your side that over the last five years, rates are down considerably – a rough average of 30% according to Willis’ Marketplace Realities spring update. Explain that RMS 11, the influential CAT modeling tool, widened the areas considered CAT-prone in response to hurricanes inflicting damage 40-50 miles further inland in recent years. RMS 11 may also necessitate another look secondary risk characteristics. You have a story to tell. Start telling it.

2: Good data, well presented

To get the best market treatment, you’ll need to present your risks in the best possible light. That means gathering the right data and the making the right presentation. This includes information that explains loss trends; engineering reports; details on such construction techniques as roofing and window specifications; and more. If you are a real estate owner, you will want to document who is visiting your property and for what purpose. Resources may be required to do this job well. Such an investment usually begins paying off as soon as your renewal talks get serious.

3: Loss control documentation

The name of the game is differentiation, and you will want to be able to explain what your organization has done in the way of risk mitigation and loss control. Investments in safety, safety training, operational protocols designed to protect the people on your property – your people or your customers – will change the reality and the perception of your risk profile. In addressing Workers’ Compensation costs, your tools include utilization review, case management, smart return-to-work policies, steps to prevent accidents and policies for hiring the right people in the first place. Are effort and expense required? Effort for sure, expense probably. The return on this investment extends far beyond the insurance transaction and in the end will likely boost morale and enhance your organization’s reputation .

4: Strategic alternatives

Soft markets are easy. Hard markets not so much. In a soft market you can show up late and still come out ahead. In hardening markets, you will want to start by setting objectives so that if your plans go awry, you have a basis on which to consider alternatives. These options might be as simple as alternative markets but should also include self-insurance through various means, such as a captive.  There are many ways to reach a goal; know what your goals are and be ready to react strategically and not defensively.

5: Communication

Yes, we’re back where we started, but here we emphasize the most important reason that you must communicate in all directions. Communication is the only way to avoid surprises. In business, no one likes surprises. A changing marketplace may mean that some surprise is inevitable. But the worst can be avoided..

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All of the items above share one requirement: time. That leaves us offering one last piece of advice that is probably the most crucial of all. Start early.

 To start early, Call:  Paul Cohen, VP Real Estate 305.793.4019 or email Paul.cohen@willis.com

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