The Property insurance marketplace has hardened and become more challenging following multiple years of natural catastrophe claims and a frequency of claims on specific classes of business. The importance of quality underwriting data has grown significantly to secure the best terms from carriers. Underwriters price risk on the basis of predictability and uncertainty; the more uncertainty, the higher the price. Most carriers are using science, technology, engineering, and data to better understand the risks they are assuming to accurately analyze rate adequacy.
Providing the best underwriting data available will reduce the underwriting uncertainty of any given risk. Carriers have become more dependent on a variety of exposure rating models and tools to develop loss projections. What is consistent in all of the models and tools is they depend on thorough and accurate data in order to produce the most absolute results. The adage of “Garbage in – garbage out” still rings true! The quality of exposure data has definitely been a concern for the industry, as the poor quality of data has been identified as a key component of the huge gaps between modeled losses and actual incurred losses in recent catastrophic events. Carriers can no longer avoid the detrimental effect of ignoring details in the underwriting data they have been collecting. Improving data quality in their portfolios has become a focal point for insurers, reinsurers and rating agencies. The exposure data quality is one element of uncertainty in modeling that can be controlled by the industry. The industry is practicing more underwriting discipline in this marketplace and has become diligent and cautious with the capacity they deploy.
So what are the key data items that carriers are looking for in an Excel spreadsheet - Statement of Values (SOV)?
The four Primary Physical Characteristics of every building:
- Construction type/coded properly
- Occupancy type
- Year built
- Building height/# of stories
Pertinent Secondary Physical Characteristics for the relevant CAT-exposed perils:
- For Hurricane-exposed risks: Opening protection, roof geometry, roof age, etc.
- For Earthquake-exposed risks: Engineered foundation, anchoring, soft story, etc.
Flood Risk
Flood is a very large area of concern for risks throughout the country. Many carriers are actively testing and working with new predictive models for flood. There are a few key data points that can make a large impact on modeling results that aren’t typically captured in SOVs we receive:
- Precise coordinate data
- Basement Y/N
- First Floor Elevation/Elevation Certificates
- Base Flood Elevation (BFE)
Having precise location data for flood risks is important. We recommend capturing coordinate data for all unique structures, particularly important where buildings are spread out across a large area that could have varying levels of flood exposure, but may otherwise share a single address. The presence of a basement has flood implications for obvious reasons, but First Floor Elevation is another critical piece of information in the event a structure is elevated high above the BFE (reducing its likelihood of flooding), or sits below the BFE (increasing likelihood of flooding).
Many carriers are inspecting locations to validate the reported data on the SOVs to protect themselves from making underwriting and pricing decisions on faulty data. When discrepancies are found in the reported information, they are acting swiftly to match what they quoted with the revised data. They rectify the issues by either changing terms, pricing, deductibles or even coming off risk in the most severe instances.
Replacement Cost Values
In addition to specific building characteristics, there has been a significant increase in underwriting questions relating to the reporting of proper replacement cost values. Quite often, businesses are inclined to use a tax or market valuation as their insurance limit when they seek coverage. However, insurance replacement costs have risen across most of the country and market values have not necessarily kept pace; this has created disparity. The insurance replacement cost is the value to rebuild the existing structure with a like and kind structure. If the building is older, and would require significant code or ordinance improvements if severely damaged or destroyed, those should be considered in addition to the like and kind replacement value.
The significant storm damage in recent years has highlighted valuation problems on numerous insured losses. There is a common concern over underreported values and the related claim issues that arise post-loss. Ultimate replacement cost claims have been coming in significantly higher than the reported values on the Statements of Values. Many excess carriers were shocked they were paying claims on assets that were valued under their attachment point on insured property programs. Some carriers thought they had eliminated their CAT exposure by attaching excess of the reported values in CAT zones, but then claims were incurred that eroded through the underlying layers. The result of this was carriers paying claims on exposures they thought they did not have.
Inflated values can cause an insured to pay excessive premiums and carriers to overvalue their exposures. Having accurate replacement cost values would secure adequate insurance limits and help to resolve potential claims.
There are a number of ways to accurately develop the appropriate replacement cost value of a structure. These include:
- Professional physical appraisals
- Using original cost figures and adjusting for market trends
- Desktop appraisal services that utilize building size, class and regional factors to estimate the RC
Business Interruption
Business interruption values and limits are another heightened discussion area in this hardened marketplace. Accurately determining how long it would take to get an insured back in business is not a simple task. Predicting what will happen to the revenue stream and what will happen to the expenses of an insured post-loss is a huge area of uncertainty. The preferred method to arrive at an appropriate valuation is to have an insured complete a business income worksheet. Although this can be quite detailed, it is worth the effort to make sure your insured is properly protected so the carriers understand the risk at the onset as well as assisting later in the resolving of claims post-loss.
Conclusion
It is expected that most markets will continue to secure rate rises through the rest of 2019 and into next year. The admitted marketplace will continue to carefully analyze their books of business and more accounts could end up moving into the Excess & Surplus Lines marketplace as they de-risk their portfolios. The best way to help your client is to help them stay within the admitted marketplace, or obtain the best terms from the E&S marketplace. This can be achieved by improving the format and underwriting data that is being presented in submissions sent to carriers. Best in class submissions and data will produce the best results. To quote Coach Nick Saban, “Eliminate the clutter and all the things that are going on outside, and focus on the things that you can control with how you sort of go about and take care of your business. That's something that's ongoing, and it can never change.”