Property Perspective: Surviving my first 'hard' insurance market
Anthony Forester has nearly 15 years of insurance industry experience under his belt. This is the first time, however, that he’s found himself on the frontline of a firming insurance market. That’s because Tony spent his first dozen years as a property risk engineer, both providing unbundled loss prevention services to all sorts of business and industry as well as supporting AXA XL’s underwriting team with onsite evaluations to help them make informed underwriting decisions. Two years ago, when he was looking for a new career challenge, Tony joined AXA XL’s property underwriting team. And now he finds himself in the middle of the firmest property insurance market seen in close to a decade. Here he shares his perspective on what he’s finding.
Why the switch to underwriting from risk engineering?
Forester: I was looking for a new career challenge and saw growth opportunities for me in underwriting.
And how was the transition from engineer to underwriter?
Forester: Good. This is actually the third set of renewals that I’ve seen as an underwriter. When I first started underwriting in 2018, we were trying to hold on to business but looking to stop the freefall in pricing. In 2018, Nat Cat losses were estimated to have totaled $52 billion which was down from $78 billion total for 2017. Wildfires, heat waves and droughts, some of the events we see in California, attributed to about $18 billion in losses and accounted for 34 percent of U.S. insured losses in 2018. But we were still seeing commercial property insurance rates decreasing. We weren’t asking for big rate increases but brokers and clients weren’t receptive to any. It was a tough situation to be in.
And now, how is it going, especially given the current commercial property market?
Forester: In 2019, we really began to see some of the market sticking to their rate requirement stance a bit more. We did and while we lost some accounts, we were not terribly disappointed to lose them, especially if they could not understand the reason for our increased rates. Now, in 2020, we are asking for some significant rate increases and we are not seeing the hard pushback we’ve seen in the past. Brokers and clients understand why increasing property rates is a must.
Why the shift in thinking?
Forester: I think it took some time for the message to get out into the market, for everyone to be on the same page. Clients are a little more accepting of rate increases and a lot of that is thanks to their brokers. Like me, many brokers today haven’t worked through a hard market either. While some might not have been equipped to prepare and educate clients as to why they were seeing significant rate increases, others were. Many brokers have done a great job in preparing risk managers on what to expect in today’s property insurance market. By doing so, risk managers are also prepared to educate their leadership on why they were seeing rate increases. While seeing double-digit rate increases is not easy to take, the whole renewal process is much easier when we can work together and communicate with our clients as early as possible.
How has this market affected available property capacity?
Forester: Many carriers have cut back on capacity and are watching their line size. In some instance, brokers need every scrap of capacity they can get to build a property program. While there might have been five carriers on a property program, we could be seeing 10 on the same program.
And what about terms and conditions?
Forester: We’re very cognizant that terms and conditions had to change. Our leadership has been very clear in communicating what we need to be successful in terms of rates and conditions. And we’re empowered to stick to our guns. That’s a really good feeling.
In Southern California, for instance, we see a lot of real estate and other soft occupancies. We do not see a lot of manufacturing which might be used to seeing more increases. On the real estate side, they have been used to seeing very low deductibles but now may be seeing them in the range of USD 100,000 or more. We are also insisting on margin clauses.
What’s a margin clause?
Forester: A margin clause -- also referred to as Occurrence Limit of Liability -- limits the insurance coverage limits to the reported value of a property. Underreporting values of property can have a big impact on coverage. Risk managers may see it as a way to control insurance costs, but it could very well mean that their properties are not insured to their full value if a margin clause is included in their policy. We’ve seen situations where a property policy is in place for a USD 3 million office but when something happens, they are submitting a USD 10 million loss. If a business is reporting that their property is valued at USD 3 million, but really valued much higher, they are not paying for that risk, we are. And that’s definitely something that this current market is trying to correct. We’re looking to get appropriately paid for the risks that we are assuming. (Read more about the importance of valuation in Michele Sansone’s Property Perspective: Don’t underestimate your value.)
What are the most valuable lessons you’ve learned in the current market?
Forester: Certainly, the value of partnership. Up until now, our rate pricing concerns seemed to fall on deaf ears. Now it is evident that there is greater understanding for the why property rates needed a correction.
I’ve also learned to think differently about what success is in this business. We’ve viewed top line growth as a measure of success. Top line growth is great to see but given with what we are contending with, especially more severe and frequent storms, we’ve got to measure our performance on the bottom line, our profitability. I’m very conscious now that I’m not going to be the guy to take a loss. If I am not comfortable with a risk, I’m going to think twice about writing the account, no matter what the terms and conditions are.
Another thing that I’ve learned is that it’s a great time to be a new underwriter. Timing is everything. And I chose an interesting time to switch career paths.