The Perfect Storm: It’s A Hard Insurance Climate For Business Owners

Natural disasters and other factors are beginning to take their toll on business owners who are renewing their commercial insurance policies this year. According to some industry estimates, commercial property insurance renewals are generating rate increases from five percent up to more than 50 percent across various product lines.

This “hard insurance market” is primarily resulting from enormous claims in recent years that have added to insurance companies’ expenses and severely reduced profits.

In certain geographic areas, the property insurance markets have tightened significantly. Natural catastrophe and extreme weather exposed states like California and Florida have witnessed major increases, but hard market conditions are starting to spread between the two coasts as carriers come to terms with their balance sheets.

The 2017 Atlantic hurricane season was one of the costliest periods on record with combined insured losses of more than $200 billion from Hurricanes Harvey, Irma, and Maria, according to Insurance Journal. California suffered through its most destructive wildfire season in 2018 with insurance claims of more than $12 billion.

A hard market tends to mean higher premium rates, but business owners are also finding higher deductibles, more restrictions, and stricter underwriting when renewing their policies. Even the highest quality properties that have gone years without experiencing claims are subject to these restrictions.

For businesses in areas with significant risk exposures or adverse losses, the rate hikes are in the double digits for the first time in several years, according to Insurance Journal.

This contrasts with the last six or seven years which saw a steady decline in pricing, according to Insurance Business America. Clients saw a rate reduction every year with companies competing for their business, and now property insurance pricing is rising for the first time in about a decade.

Perfect Storm Drives Rise
While hurricanes, tornados, and other natural disasters are blamed for the hard market, some industry experts identify several other factors coming together to conspire against insurance companies and their clients. A perfect storm, if you will.

“It’s not one thing driving it,” says Brian Wood, vice president of Data Products Group, IVANS Insurance Solutions. “It’s a multitude of factors that are driving the increase in premiums. Not only the increasing severity and occurrences, but you also have building materials that are becoming more and more expensive. Replacement values move up so there are a lot of factors going in.”

Ella Tayrien, vice president of claims for Phoenix-based MiniCo Insurance Agency, sees aging self-storage structures as another culprit contributing to the hard market. “There are many older facilities that don’t meet code and building ordinance upgrades, and the costs to repair and replace those are significant,” she says.

A claim made against an aging facility may become more severe when rebuilding requires code upgrades. “That requires underwriters to tighten up, make better inspections, and tougher underwriting guidelines so we can keep claim costs in check,” says Tayrien.

While catastrophic events in recent years are on the rise, so are lawsuits against businesses. “Litigation and frivolous lawsuits always cost an industry a significant amount of money whether anyone has paid in the end or not. We see that on the increase from year to year,” Tayrien reports.

Carriers Leaving Risky Regions
Some of the most challenging commercial properties are in California, where wildfire claims have nearly doubled the rates in some regions considered high risk for fire. Many insurance agents report their clients are getting non-renewal notices on their properties, which lie in danger areas considered too close to brush or to water.

Carriers are writing property accounts with more restrictions, and some are pulling out of certain geographies altogether.

“You have carriers who move into a geography or a type of business, and when their experience becomes negative, meaning they have a lot of losses or it could be one event that creates losses for them, you definitely see carriers contracting out of those areas to minimize exposure they have while they weather the storm of those losses,” Wood says.

Despite the re-evaluations and restrictions, even in the most challenging classes of business, some carriers are still willing to write the property coverage. “Typically, when that happens, there will be a time when there are not a lot of options in that market and others move back in and try to help with some of the challenges in that space,” Wood says.

Some carriers will cover higher risk properties; however, they may place certain restrictions on the coverage. If the risk is large enough, an underwriter can evaluate the riskier exposures and conclude that coverage will be granted for the property with specific exceptions.

“Sometimes you can have property coverage, but it explicitly excludes floods or some other risk,” Wood says. “The property owner needs to be aware of those exclusions and make sure they are comfortable about taking on that risk.”

How Owners Can Mitigate Risk
To cope with the hard market, more owners are taking more supervision over their properties because most risks are viewed as controllable. Today’s hardening commercial property market puts more emphasis on the loss prevention and the risk management services an agency provides to clients.

“The important thing for owners is to do their own risk management and be able to help reduce losses from occurring, whether they’re from outside sources or natural disaster,” Tayrien says.

Most small to mid-size companies typically don’t have in-house risk management and must rely on insurers and their agents for the help. Agents may advise clients to not only set aside reserves for the rising cost of premiums but also to consider making property improvements and funding higher deductibles for the long term.

Regular maintenance is a critical component of risk management. In addition, owners in wildfire prone areas should monitor overgrown brush and trees near buildings that could provide fuel for a fire.

“They need to be vigilant about their property’s upkeep and also their customers while they’re on their property,” Tayrien says. “They need to do regular checks of their property, and when they see something that is broken or out of order, they should take action and get it taken care of right away and not wait for the incident to happen and then repair it. I would recommend regular maintenance on their buildings and keep up with codes, making sure their fire safety systems are operational and functional.”

In addition to considering higher deductibles on policies, owners can find other ways to reduce the financial burden of a loss. “Look at other ways of insurance such as deductible buy-back programs, especially in heavy weather areas,” Tayrien advises. “It’s mostly wind and hail events that’s where the costs really add up.”

Wind/Hail Deductible Buy-Back
Wind and hail deductibles for commercial property are on the rise in many areas of the United States. Deductibles of up to five percent are becoming more common in the most challenging locations. That really adds up for a multimillion-dollar facility.

Several insurance companies have introduced wind/hail deductible buy-back programs for commercial property. This offering allows property owners to buy down the deductible, say from five percent of a building’s value to two percent, by paying an added premium.

MiniCo’s wind/hail deductible buy-back program is designed to decrease the potential out-of-pocket financial exposure for commercial property owners. The buy-back policy lowers the deductible to as little as one percent or a specific dollar amount when the owner pays a premium to reduce the existing deductible.

In Florida, for example, the owner of a building valued at $1.8 million with a five percent wind and hail deductible ($90,000) could “buy back” the deductible to two percent ($36,000) for a premium of $3,443. That represents a reduction of $54,000 in exposure.

An owner in a Texas coastal region with a $1.8 million building and a five percent deductible could reduce the company’s exposure by $54,000 for a $2,754 premium with a two percent deductible.

Newer facilities tend to be built larger, so operators have much higher exposures when a storm strikes. Because of extreme weather in many areas around the U.S., damage from natural disasters is not just limited to coastal areas but include states that have experienced severe hail activity.

Hard-hit areas of the United States and Canada can take advantage of MiniCo’s relationship with London-based Lloyd’s. This status allows MiniCo the authority to offer a specialty property program designed specifically for those self-storage risks that may be challenging to insure.

The Lloyd’s program provides a solution for facilities in higher-risk geographic areas as well as those with marginal underwriting characteristics. Now MiniCo can offer wind and hail coverage in coastal communities and areas that have heavier hail activity that previously were excluded from insurance coverage.

In certain coastal areas, insurance coverage was restricted to a designated distance from the shoreline. With the Lloyd’s program, MiniCo can offer property and wind coverage closer to the coast.

MiniCo also offers building and code ordinance coverage as a part of the business owner policy. The coverage is a necessity for older buildings.

“That comes into play in a catastrophe situation, so if they have an older facility—say 30 or 40 years old—and it gets destroyed by a hurricane or fire and they want to rebuild at that same location, without that coverage code upgrades would be an out-of-pocket expense,” says Tayrien.

The coverage is recommended for areas like in Florida and in any major city for single location catastrophic events or areas subject to major catastrophic events. An older building in California is subject to additional earthquake upgrades and codes that may include fire protective systems that would have to be included in a rebuild.

The Role Of Independent Agents
Independent insurance agents play an increasingly important role not only in procuring policies that fit the client’s business profile at competitive rates but also as advisors who can identify coverage gaps and loss scenarios that can leave them vulnerable.

Wood says there are over 35,000 independent agents in the U.S. who represent a variety of insurance companies. “The advantage when going to an independent agent is they can give you a set of options so you can evaluate the quality of policies and what the carrier is known for from a claims response perspective,” he says. (See sidebar article.)

Agents often advise facility owners about actual loss scenarios and discuss how those losses could affect them. Agents also can introduce loss prevention tactics that could save on premium costs as well as mitigate future claims.

Sometimes agents can take on accounts that previously had been turned down by the marketplace and find a willing carrier after evaluating their claims history and taking other measures.

There may be some good news emerging from all the hard market discussion. The trend of rate hardening and rising premiums may be a short-lived phenomenon, according to a report in November from New York-based Fitch Ratings Inc.

“Hard markets are fleeting as underwriting success attracts competition that leads to an erosion of favorable pricing conditions,” says Fitch.

Fitch says a broad-based hard market is an uncommon occurrence, adding, “Competitive forces and less favorable claims in some lines make it unlikely that recent rising premium rate trends will lead to enduring hard market profits.” However, Fitch expects price hardening is likely to continue in commercial lines through 2020.

Natural disasters and extreme weather are creating a potentially adverse insurance climate that could prove costly to self-storage operators in the years ahead. But with proper insurance coverage, preparation through risk management strategies, along with trusted advice, owners can be more confident in the face of perils with a sturdy umbrella to help weather the storm.

Questions To Ask Insurance Agents About Your Coverage
During this time of increasing premium rates and restrictions on insurance coverage, an independent agent becomes a source of valuable information and a trusted advisor. Self-storage owners should approach their agents with questions about how the hard market will affect their coverage and where they might be most vulnerable.

“At this time, you see agents doing a good job of identifying gaps in coverage,” says Brian Wood, vice president of IVANS Insurance Solutions. “For the insured, you should be taking an active role in your insurance procurement. Having the kind of questions like, am I covered in these scenarios, is critical.”

These are some of the critical questions to pose to an agent:

• Am I insured for full value? “The No. 1 thing is whether they insure their buildings for full value,” says Ella Tayrien, vice president of claims for MiniCo Insurance Agency. “Sometimes insureds seek to under insure their property to save on the premium. This can definitely be detrimental in the event of a catastrophic claim. In talking with their agent, give them enough information about the property so they get it insured for full value. It can save them a lot of money if a claim ever happens.”

• What are the gaps in my coverage that could be costliest if disaster strikes? Storage facilities may be located near flood plains, earthquake faults, or in the path of hurricanes or tornados. Owners can’t insure against every peril, but it’s sometimes advisable to pay extra for flood or earthquake insurance or specialty coverage that can reduce deductibles.

• What insurance carriers do you represent and what are their reputations for claims paying? “Ask questions about the markets the agent has access to,” Wood advises. “Different agencies have different partnerships and represent different carriers.” Try to determine if the agent understands your business and will be able to locate carriers who will adequately represent your interests.

• What kinds of risk management measures should be taken at my facility that could reduce my exposure and possibly the premiums I pay? “A lot of companies differentiate themselves with risk management support,” Wood says. “So, if I’m a self-storage owner in the hills in California, I would hope to contact my insurance company and say, what are the best practices I can be taking to mitigate a fire risk? There are many companies that invest heavily in helping their insureds avoid disasters.” The agent may recommend sprinkler systems as well as keeping combustible materials such as brush and trees away from the facility.

David Lucas is a freelance writer based in Phoenix, Arizona. He is a regular contributor to MiniCo’s publications.