By Brian Dove
Given that experts are forecasting five to nine Atlantic hurricanes this year, companies with wind and flood exposures are advised to consult experts who can help them strengthen their catastrophe insurance programs.
The following short checklist will help minimize personal property losses and storm-related fatalities and injuries.
1) Using Modeling Tools to Reduce Exposures
Companies should make certain comprehensive property policies include such favorable terms as a reduced percentage deductible for named storm events, extended period of indemnity, and appropriate levels of coverage for business interruption/extra expenses (BI/EE).
To assess direct property damage, catastrophe modeling capabilities can be deployed to simulate hurricane events using actual location and building information. With the information generated from the model, appropriate limits can be established and stronger terms can be negotiated with carriers ensuring optimal structure and pricing.
Modeling capabilities and analytics are also particularly effective at helping midsize companies manage their business interruption exposure.
Natural catastrophe events, like Superstorm Sandy, revealed just how vulnerable companies are to business interruption losses. Of the $50 billion in estimated losses caused by Hurricane Sandy, an estimated $30 billion is attributed to lost business or profits due to closed offices and factories, and from the shutdown of transportation and power.
Businesses need to make sure they obtain appropriate time element (EE) coverage that would compensate for expenses incurred in excess of normal operating costs during the period of restoration following a hurricane. These expenses may include moving into a temporary office, paying overtime wages, and expediting the replacement of equipment or machinery.
Supply chain–related exposures need to be closely reviewed. This is particularly true for manufacturers and distributors who face significant impact to their income stream if a critical supplier or customer suffers a catastrophic loss due to a hurricane. Traditionally, insurers limit this coverage by offering low sub limits. To protect their income streams, businesses need to assess this specific exposure and obtain adequate contingent business income coverage if necessary.
2) Updating Secondary Property Characteristics
Relaying detailed and accurate information about all properties to the insurance carrier is another critical process. Obtaining detailed information on locations ensures they are accurately reflected in the loss output with the goal of directly reducing catastrophe premium.
This process also helps midsize companies better understand which property locations exposed to natural catastrophe risks are driving the loss estimate and potentially make appropriate risk mitigation changes.
3) Reviewing Hurricane Deductible Wording
Companies need to understand their hurricane deductibles and how the deductibles apply in the event of a hurricane. Off-the-shelf catastrophe deductibles, if structured incorrectly, can be very punitive in the event of a loss.
Take the case of a large real estate developer, with a $700-million insured property portfolio, more than half located in a hurricane prone area. The company’s profits were hit hard after a hurricane loss produced a deductible 25 percent larger than it had expected.
Soon after the loss, a careful review of catastrophe deductible wording was conducted. In addition, a few different loss scenarios were modeled that included multiple locations affected by a single event. After clarifying how the current wording would respond to actual loss, the developer used refined wordings at the next renewal to improve predictability of these loss scenarios. This process achieved several goals: It allowed the firm to replace the deductible wordings with clearer language as well as select a policy that would keep their deductible financially manageable even in an extreme loss.
4) Paying Attention to Flood Zone Changes
Midsize companies can achieve premium savings and reduce their exposure to uninsured risks by paying more attention to flood zone changes. Oftentimes many companies do not realize changes have been made to flood maps until there a loss event, an oversight that can lead to underinsured exposure.
Again, with the help of an experienced broker, businesses can negotiate policy language that eliminates the carrier’s ability to reduce coverage if flood zones change during the policy year.
These strategies listed above represent only a few catastrophe risk solutions available to businesses across many different industries. Since each company’s risk profile and needs are different, understanding your firm’s unique circumstances is crucial to identifying the right mix of solutions.
Brian Dove, USI national real estate practice leader, can be reached at 214.443.3280, email@example.com, or visit usi.com.
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