Property Perspectives: Don’t underestimate your value
While there is a definite shift in businesses having a significant increase in intangible assets that need protection as opposed to tangible assets like real estate, facilities and equipment; the fact of the matter is, for many businesses, physical property is still a very valued possession and needs the right insurance protection. In fact, many couldn’t conduct business without a well-managed, safe facility with the right equipment.
That’s why it is so surprising how often business’ physical operations and properties are undervalued, according to Michele Sansone, President of AXA XL’s North America Property insurance team. An undervaluation can have a big effect on insurance protection. Here she shares her thoughts.
How’s the commercial property market overall? Are commercial property insurers getting the adequate rate for the risks they’re insuring?
Sansone: It’s still a very competitive market, although we’ve seen some rate correction. I think we can expect some more this year having just gone through another record-breaking year of Nat Cat losses. On the property side, many broker reports anticipate that non-catastrophe-exposed risks will see rates flat to 5% higher, while cat-exposed risks will likely see a projected increase in the range of 2.5% to 7.5% and cat-exposed properties with losses could experience rate increases of 10% or more.
Especially after the last two years of record-breaking losses, it’s clear that we cannot turn a blind eye to the long-term health of the industry. We need to get rate adequacy in line with the risks that we are assuming and the Nat Cat trends we are experiencing.
What has caused the greatest challenges to your book of property business over the past two years?
There are a couple of challenges. For one, not getting accurate Total Insurable Values (TIVs) across our clients’ enterprises is a challenge because it does not allow us to price the risk adequately. In commercial property insurance, TIV is the sum of the full value of a client’s covered property, business income values and any other insured property, like equipment. It’s the collective valuation of the business’ operation. Too often in the annual property underwriting process, TIVs get a passing glance. They are not updated regularly.
When businesses provide out-of-date or underestimated TIVs, pricing is based on faulty data. TIVs are more than just real estate values or replacement costs of a building. Here lies the second challenge -- assessing a business’ contingent risks. Getting a full understanding and gaining an appreciation of our client’s suppliers and others that touch their business is challenging, but important to accurately evaluate potential business interruption exposures.
Assessing pricing risks accurately for the long term is imperative to remain a financially strong carrier and be ready for the next “big one.” Undervaluing properties or the cost of potential business interruption can potentially leave insureds holding the bag if they exhaust the tower of coverages that they buy.
How and why would businesses undervalue their property?
In many real estate markets, property values have continued to tick upwards. Cost of replacing equipment and in general, the cost of doing business overall has not remained stagnant either. All this factors into how property is valued and assessed for insurance. Unfortunately, when insuring commercial properties, we haven’t seen TIVs tick up accordingly.
Consider a 10,000-square-foot building that today would cost about $1 million to replace. Unfortunately, a business may still be providing their insurers with older information that says the building is valued at $750,000. If TIV is not reevaluated, and a property underwriter bases coverage and premium on that $750,000 value, obvious issues will crop up if there is a loss. For one, this business may be buying insufficient insurance if they have a total loss and need to totally rebuild. Likewise, the providing insurer would not be receiving an appropriate rate of premium for the exposure it’s taking on.
Businesses may be hesitant to bump up their TIVs because they are reluctant to pay more insurance premium. Insurers, given the competitive market, aren’t pushing for more TIV accuracy either. However, in the long run, and especially in the event of a loss, both insurers and their clients run the risk of being left short because of under-reported TIVs.
" Especially in the event of a loss, both insurers and their clients run the risk of being left short because of under-reported TIVs."
While TIVs may not be keeping up with everything else, the commercial property market has made some significant advancements in the last decade or so. Where do you see the most improvement?
There has been an evolution in property coverage. Hurricane Katrina, for instance, exposed ambiguities in insurance policies – leading to claim disputes and litigation. After that, insurers began to review and clarify commercial property coverages and tighten policy wordings, particularly around the flood peril. After big events like Hurricane Katrina or Superstorm Sandy, there was piqued interest from businesses to understand what an insurance policy says and how it will respond to a claim. For instance, many businesses were surprised to learn that, despite having windstorm coverage, they weren’t covered for storm surge.
Also, storms like Katrina led to a whole new era of cat modeling. Rather than modeling portfolios of properties, individual account modeling became more the norm. Likewise, there is now more analysis of flooding and how it’s connected to wind. Up to this point, because of Hurricane Andrew, modeling was largely focused on wind.
In the last decade or so, we’ve seen a big improvement in disaster preparedness. Storms like Katrina, Sandy and now this year’s Florence and Michael, boost awareness of the risks associated with property locations.
That’s where I see a greater appreciation from our clients who tap into our property risk engineering expertise. Our clients see the significant contribution that property risk engineering can make to better protect their properties before they are faced with a storm and certainly as one is heading their way. Whether it’s advice on how to store supplies in a potential flood zone or taking precautions that can reduce potential wind damage, our property risk engineers are full of actionable advice that’s proven very valuable to our clients again and again.
What advice do you have for brokers and businesses navigating the commercial property market in 2019?
Don’t be complacent. That includes not actively evaluating a business’ TIV. Businesses change from year to year and it’s important to evaluate how these changes might affect an operation and obviously, its insurance coverage. Undervaluing does nothing to improve your property insurance protection.
There are resources – like access to property risk engineering resources – many businesses leave on the table, resources that are very helpful in boosting loss prevention efforts. Tapping into available information and data resources can really support your risk management efforts.
Also, there is no better time than now to achieve a better understanding of coverage. If you have questions about how your policy would respond if storm surge found its way to your front door or what kind of cyber risk protection to consider, start a conversation with your broker and insurer. It’s important to understand what coverages you have, how they will be triggered and what they actually cover.
Having a conversation about your coverage and determining what risk management services you can take advantage of before a loss occurs, is more important than ever.
Michele Sansone can talk about commercial property insurance all day long. For brokers and risk managers interested in having a conversation, contact her at firstname.lastname@example.org