Property Perspectives:  Why insure all your commercial property with one insurer?

2020 is almost here. As we look back, it’s been quite a year for AXA XL’s Michele Sansone and her North America Property Insurance team. For the first time in a long time, she and her team are helping clients manage a firming commercial property insurance market. In the face of increasing insurance costs, Michele and team are hoping to see more clients take advantage of property risk engineering expertise to implement effective loss prevention that can reinforce and protect properties.

As far as property insurance is concerned, what is the outlook?
There will be continued pressure on rate as the property market continues to firm. The key driver behind rate is quite simply the rate reductions over the previous five years. While it’s true that we’ve seen two consecutive years of high cat losses, the more than 11 quarters of rate decreases before those cats hit are the real impetus. Carriers simply cannot keep racing to the bottom with rate and remain profitable while adequately protecting their clients.

More and more insurers have been steadily realizing this and the answer has been two-fold: more underwriting discipline with tighter terms and conditions and getting more rate. We’ve heard of rate jumps as high as 25% to 40%, which is a clear illustration of both how far rates fell and the concern over increasingly more frequent and more severe Nat Cat events. Rate increases are, therefore, going to be especially true where cat exposures are concerned. With extremes in weather becoming the norm and bringing greater risk of wildfires, tornado, flood and wind losses, carriers that want to stay in business will have to get more rate to take on that increased risk.

What are going to be the most challenging issues for 2020?
We’ll continue to see more reductions in capacity for certain industries and risk categories: frame habitational is an obvious one, but also for high hazard industries like steel and pulp and paper.

From our perspective, we’ve been consistent in terms of capacity. Quota share programs are likely to be more widely used. With many insurers tightening up on capacity, there’s much greater syndication of risk as more insurers are needed to fill out and build a layered program.

In the case of a shared layered placement with 10 carriers on it presently, we might expect to see more like 15 to 20 carriers on renewal. That illustrates vividly how much capacity is being pulled back in the market.

On the contrary, however, an area where we see continued growth is in our Platinum Book of business. These are clients that buy 100% of their property coverage from AXA XL. In addition to offering capacity of up to USD 1 billion, clients benefit from streamlined claims and risk control processes, which are not the norm in a heavily layered placement. Although, I will say that when we have a lead position in a stack our teams have a well-earned industry reputation for taking ownership, working proactively and cooperatively with the other carriers to resolve issues fairly.

Is California on fire? For those of us who were either born or raised in California, it can seem that way. Wildfires in the West and South West are getting bigger, hotter, deadlier and more destructive every year. Fire season now starts sooner and lasts well beyond the traditional “season,” which typically ran from June to October, and the impact continues to grow.

Record breaking 2018 season

According to the California Department of Forestry and Fire Protection (Cal Fire) and the National Interagency Fire Center (NIFC), the 2018 wildfire season was the deadliest and most destructive on record in California. As a result, a national disaster was declared in Northern California. There were a total of 8,527 fires burning an area of 1,893,913 acres — the largest amount of burned acreage recorded in a fire season. The fires resulted in approximately 18,000 structures being lost, $3.5 billion in damages, including $1.792 billion in fire suppression costs and 104 fatalities.

What’s fueling the increase?

According to experts, a combination of numerous factors led to the California 2018 wildfire season becoming so devastating. First, an increased amount of natural fuel available, associated atmospheric conditions linked to global warming and more people living in fire-prone wildlands. Several studies have also indicated that climate change contributes to droughts, which means less water and drier conditions leading to more combustible vegetation. Add to the mix that there have been record-breaking heat waves and you’ve got a cocktail for disaster. Last but not least, the ignition source and unfortunately, we have plenty of those: humans. Humans have been the main cause of wildfires in California. Causes are various, both deliberate and unintentional, such as arson, fireworks both legal and illegal types, unattended campfires, cigarettes, cars, golf clubs (sparks created from metal clubs) and downed power lines.

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.