How to Manage Insurance Hikes

But Katrina was not alone. Last year, there were 25 other named Atlantic storms—storms with a wind speed of at least 39 miles per hour. That broke the previous record of 21 named storms in 1933. In fact, last year's storms generated three mil-lion insurance claims and caused an estimated $46 billion in insured losses.

These losses--as well as other geographic threats--are having a dramatic effect on the cost of insurance. Portfolios that have catastrophic exposure are seeing price increases of up to 400% for some layers of insurance. These areas include Florida and the Gulf Coast/Houston area (due to the risk of wind storms); California (due to the risk of earthquakes); and certain central business districts (due to the risk of terrorism). Portfolios that have no coastal properties and no catastro-phic exposure are reporting flat pricing or smaller increases up to 15%.

Insurance brokers report that the rating agencies are another contributing factor. They are, in effect, a new regulator for the insurance industry. For example, in the past, if an insurance firm had a $1-billion surplus, it could cover $1 billion in catastrophic risk without risking a ratings downgrade. Today, the rating agencies are threatening to downgrade an insur-ance firm if it writes more than $250 million to $350 million in such coverage.

Risk managers and insurance brokers share some advice on what to do if your firm is facing a renewal later this year. First, start the renewal process early. This is the most consistent advice that both risk managers and insurance brokers share—one company we spoke to reported beginning the process in June of 2005 for a March 2006 renewal. Also, bring your company's CEO, president, CFO and other stakeholders into the process as early as possible. It's important for them to understand that the current insurance pricing and capacity conditions are causing significant cost increases and that your firm may not be able to buy all the insurance you want. Your firm's stakeholders need to be involved in making the decisions about how much risk your firm wants to internalize.

Next, challenge conventional thinking. In the past your firm may have been able to count on placing the same insurance program each year, but that is no longer possible. Look to your premiums, claims, past-year loss history and cash-flow impact to determine your firm's alternatives on a total cost-of-risk approach. Assess your tolerance for risk, look to move up aggregate and deductibles and consider buying insurance for CAT losses only. It's very helpful to meet with your in-surance broker early and get them to help you map out a strategy, calculate your total cost of risk and identify available alternatives.

Review your probable maximum losses. You may need to update your PML studies with new portfolio information and new valuations to determine how much capacity you actually need. Underwriters will want to discuss not only your valuations but also about how you arrived at them, and they want to know that the information is accurate. One company reported that it avoided coinsurance and margin clauses by showing carriers that its PMLs were based on a variety of sources and varied them by market. Also look at your construction data. If you have better construction, make sure your broker knows that so your PML studies reflect that.

Meet with your underwriters in person. You have to differentiate yourself with them and give them a reason to allocate some of the limited capacity they have to your firm rather than another. Remember, data is critical to underwriters. Make sure you have your construction data, pre- and post-loss control and claims-management data.

Brokers report that the importance of securing global underwriting access cannot be overstated. Where firms previously had purely domestic placements, they now have to reach out to Bermuda, Europe and London to fill the gaps.

Finally, try to lock in pricing 30 days out, but be prepared to bind coverage early. Rates are changing daily. If you want early pricing, though, you must be prepared to move quickly. Underwriters will not respond if they think you are not pre-pared to commit. One broker reports that Bermuda firms will give quotes 30 days in advance, but that they have only seven days to bind or the quote dies.

The Atlantic Hurricane season of 2006 officially began June 1, and hurricane experts are forecasting 17 named storms this season. Insurance experts expect the current high insurance rates to continue for at least 24 more months. But if your firm follows the advice of risk-management experts and negotiates your insurance renewal carefully, you will be prepared for both.

Jeanne McGlynn Delgado is vice president of property man-agement at the Washington, DC-based National Multi Housing Council. The views expressed in this article are the author's own.