Last week there were multiple named tropical systems in the Atlantic Ocean in addition to four others in the Pacific Ocean. Florence of course generated most of the attention here in the United States and will continue to be in the news as the true destruction is sorted out.
We will most likely see losses in the billions for Florence with the amount of insured losses also in the billions. Insured losses are the dollars paid by insurance companies for covered claims, whereas the headline loss number will be the total loss which is not all insured. Insured losses will often not include indirect losses such as lost wages and delays, but some of these losses can be covered by insurance. What will this mean for the insurance market?
If the past is any indication we will most likely see carriers try to increase rates and the insured that are renewing coverage within the next 45-90 days will see the largest impacts of this increase. This is what we saw last year when multiple hurricanes hit the United States. These rate increases ended up not holding up over time. Insurance companies were saying to investors and analysts that the hurricane losses were “earnings events” and would not have a material impact over the long term. On the other hand, they were telling insureds and brokers they needed to increase the premium or rate because of these same losses. Insurance companies essentially used the storms to increase rates but told the analysts that cover their stocks that the losses were just a blip on the radar. I remember underwriters asking for rate increases up to 40% in the immediate aftermath of these storms.
Rates returned to normal because there is so much surplus money in the insurance market and competition is fierce. After the 2008 recession a lot of money flowed into the reinsurance sector where investors could secure a better return on money compared to US Bonds and this continues to be the case. Couple the money that flowed into reinsurance with the stellar returns in the equity markets during this time and you now find insurance industry surplus near all-time highs despite pretty hefty losses the past few years (think hurricanes, earthquakes, CA wildfires, etc.). That is why if your policy renewed in April you probably saw no increase or at worst a minimal increase.
Over time these losses add up and could weaken the market and lower total surplus. My personal belief is that as interest rates continue to increase you will also see some of the money move back into US Bonds. Investors that traditionally did not invest in insurance but only started after 2008 will begin to exit the insurance market and invest in US Bonds where they can get a similar return with less risk. If we see move money move out of insurance and into bonds, with losses continuing to mount, the property insurance market will at some point be impacted but that could still be a long way away. If your property insurance renews in the next 45-90 days I suggest you ask your broker why insurance company CFOs and CEOs are saying these storms are just “earnings events” but then increasing your rates.
As always, fee free to reach out with any questions or comments. You can reach me at firstname.lastname@example.org or email@example.com.
Hopefully Hurricane Florence weakens and has a minimal impact on the East Coast of the United States, but if we are not so lucky I wanted to share some coverages that you might have available in your property policy that will help mitigate the financial loss.
- Debris Removal – often this has a sub-limit but it can help with cleanup costs
- Catastrophe Allowance – not standard in all policies, but can give you some additional coverage if your limit is not sufficient to replace your property
- Denial of Access – Can pay Business Income in the event you cannot access your premise because of damage to a nearby property
- Expediting Expense – an additional coverage that responds when you make temporary repairs to get back into business
- Equipment Breakdown – can be especially important if your HVAC system gets damaged and you have temperature sensitive product
- Claims Expense – Can pay for a third party to help you work through the claim, especially important in business income claims
- Ordinance or Law – Can help pay for demolition, increased cost of construction, loss to undamaged portion of the building
- Preservation of Property – the safeguards you put in place to protect against loss can be covered
- Business Income and Contingent Business Income – provides coverage for income lost while your premise is down from a covered cause of loss or a key supplier/customer
- Civil Authority – provides coverage for loss of income because the government deemed a road or bridge unsafe or closed it due to a covered peril
- Extra Expense – added cost to relocate
These are just a few examples of where coverage can be found. You do want to be aware that not all policies will have these coverages, but most of them should be found in even the most basic of policies.
A couple of things to be aware of that can work against insureds.
- Coverage can be impacted by deductible, particularly wind deductibles that might differ from your regular deductible. In wind prone areas you might incur a percentage deductible instead of a flat dollar amount. For example, your deductible might be 5% of total insured values subject to a minimum of $50,000
- Wind deductibles could also impact Business Income and Contingent Business Income
- Flood is often excluded
- If you have National Flood Insurance Program (NFIP) coverage they adjust the loss on an “actual cash value” basis, meaning it is replacement cost minus depreciation.
- NFIP coverage is limited in total limits available
- If you are in a flood zone but have no NFIP coverage but have flood coverage through your insurance carrier it could be subject to a deductible equivalent to what NFIP would have covered.
I hope this is help that is ultimately not needed. For those in the states that could be impacted, I wish you the best and hope there is little or no impact to you, your business and your families.
When designing an insurance program should we think about adding coverage or eliminating risk? Most brokers think about adding coverage while clients think about how they can curtail risk. You might think these opposing approaches would get you to the same place in the end but that is not necessarily true.
The problem I have encountered with new clients is that they were never aware of all of the different type of insurance coverages that are available in the marketplace. Couple that with brokers inclined to present only programs that they understand or are aware of and the result is an insured that is left vulnerable to having uninsured risks that otherwise could and should be insured. The conversation around risk management should first start with figuring out the risks that a client has and what their most valuable assets are. The risks should not be limited to what we think are “insurable” risks but all risks a company has.
Once we have identified what keeps a company CEO or CFO up at night we can then begin strategizing on the role insurance can play in reducing a client’s risk. I hear on a regular basis that a company’s patent portfolio is one of their most important assets but they have never had a discussion about insuring the portfolio despite the fact that commercial insurance is available to protect patents. Nowadays every broker and client wants to talk about cyber insurance, and everyone has that risk to some extent, but would a cyber breach or a patent infringement do more damage to your company? If you are a manufacturer is your broker talking to you about Manufacturer’s Errors & Omissions coverage? Is your company looking at acquisitions and if so how deep have the conversations gone in regards to tax liability and reps and warranties coverage? These are just a few examples and coverages that are not very innocuous but yet are still rarely talked about.
The point is, most brokers talk about coverage that is available and try to fit a client’s risks into the insurance box instead of designing the insurance program around the risks. Remember, an insurance broker represents you the client, and our job is to figure out your risks and then negotiate with insurance companies to get as much covered as we can. A broker’s job is not to take what an insurance company offers and make your risk fit into their product, but not negotiate with them to get the broadest coverage that is customized for what your risks are as a company.
Almost every day I read about a company receiving a milestone or grant payment, but sometimes milestones aren’t met and it is not for lack of science. I often wonder how a company would be affected if the milestone or grant were not received because of a fire or some other natural event rather than the science simply not working? Even worse, how would a company and its shareholders feel if they knew this financial loss could be covered by insurance?
For many life science companies these payments allow them to continue operations or avoid having to raise additional money that will dilute shareholders. The financial loss of a missed milestone due to an event that is insurable but not covered by your insurance policy is inexcusable. For R&D companies where there is no cash flow, a missed milestone could put you out of business or significantly impact operations. Sadly, many clients never have the conversation with their broker regarding this important coverage. As you look through the chart below, how deep of a dive have you and your broker done?
Typically when I speak to new clients they have rarely gone deeper than the second question, “has your broker discussed what limit is appropriate?” Milestones and their applicable payment are usually well-known in advance so this is actually a rather straightforward coverage to determine the correct limit of insurance if the right questions are being asked. However, if you don’t know the coverage is available and your broker is not asking the correct questions it can turn into a costly coverage gap that is either uninsured or under-insured (limit is not adequate for the loss exposure).
If this is as deep as you have gone, what other coverage are you missing in your policy? If you think this is the only aspect of business income insurance commonly overlooked I am sorry to say you are mistaken. In future posts I will discuss other business income issues that are not often not covered properly or not covered at all.
If you have questions on whether your policy is correct, feel free to shoot me a message and I would happy to discuss.