Global insurance pricing is climbing, with all three major product lines (property, casualty, and financial and professional) reporting rate increases in Marsh’s latest Global Insurance Market Index. In fact, as of September 2019, the broker has reported eight quarters of global insurance price increases in a row.
The term “hard insurance market” is gaining popularity, particularly as some niche industries experience especially challenging conditions.
“There’s a disconnect between the supply and demand of competitively priced insurance products and there’s a shortage of limit capacity, and with forest products being viewed in the marketplace as a higher risk class of businesses, the disconnect is probably greater there,” said Bernie Kurtzweil, underwriting director at Continental Underwriters, Inc., which specializes in this industry.
That higher risk status means that when insurance companies go back to basics with their underwriting efforts in an attempt to de-risk their portfolios and bring losses back in balance with premium, forest product industries become a business that insurers will look to exit.
There are several reasons why this is a higher risk industry in the first place, explained Kurtzweil.
“From an auto perspective, there are bigger trucks on the road. They have loads that sometimes are hauling logs, another time they’re hauling pallets and other times they’re hauling bundles of lumber,” he said. “When something goes wrong, big trucks cause a lot of damage, certainly from a liability standpoint, and the cargo has value too so the dollars can add up very quickly.”
Property is another issue since this is an industry centred around stuff that burns. There are also tons of heavy machinery running at a good capacity when the economy is doing well and with that, there is the opportunity for electrical shorts to start fires. Equally importantly, there have been large weather-related losses from hurricanes and wildfires, as well as snowstorms, tornadoes, and flooding. Forest products as an industry is not safe from natural disasters and those losses have cut into the results of insurance companies, so the market is looking to adjust.
For agents working with clients in the forest products space, Kurtzweil recommends they try to bring the two parties – businesses and insurers – together since they’re both facing challenges.
“One way to bring them together is to accelerate the depth of understanding and expertise of the insurance buyer and the insurance carrier. In forest products…there is a benefit to helping insurance companies understand the risks that they’re taking on so they’re in a better position to make good judgment and good decisions on the risks that they’re adding to their portfolio,” he explained.
Kurtzweil added that if agents don’t have that expertise, because they might be working on many different types of businesses at once, “They can have tremendous benefit in finding an expert that deals with this every day. And I think that’s one thing that Continental Underwriters does well, is we not only are operating as a broker and an underwriting manager for programs that we have, but we’re also advising our clients from a standpoint of assessing their risk and coming up with strategies on how to reduce the risk to be more appealing to an insurance company.”
Other industries that brokers are helping to navigate this tough market is the mid-market commercial real estate space. In fact, Marsh recently added several coverage enhancements to ZMAX, the company’s commercial real estate insurance program, to help patch up any coverage gaps these firms might have. ZMAX Plus now has more than 30 property, casualty, environmental, management liability, and cyber liability coverage forms thanks to these enhancements.
“In partnership with Zurich North America, we’ve developed a solution that is tailormade for the middle market commercial real estate company,” said Marsh global real estate practice leader Jeffrey Alpaugh. “What middle market means is we’re targeting the sector with $100 million to a billion in total insured value, and we’ve written some accounts with $1.5 billion in total insured value. Those are the folks that are having challenges in the insurance market right now.”
One specific challenge impacting these firms is coastal demographic shifts in the US, with real estate moving further into higher risk areas that include California, Texas, Arizona, and Florida.
“That has changed the risk profile of many commercial real estate firms as they’re shifting their profitability to grow in the areas where there’s tenant demand. Those areas have catastrophic exposure – California with earthquakes and wildfires, and Florida and southeast Texas with windstorm and hurricane risk as well as hail risk and potential flooding,” said Alpaugh. “Those demographic shifts have created a change in the risk profile of many of these commercial real estate firms and we see those shifts are continuing.”
Since 70% of these firms’ total cost of risk lies in the property sector, they quickly become impacted by the hard insurance market and increasing premiums.
Though ZMAX Plus, the midsized commercial real estate insurance buyer doesn’t have to go into the market and negotiate coverage enhancements on each one of those coverage lines that need to be tailored for them, explained the Marsh leader. Instead, those enhancements are already baked into the coverage forms of each one of those lines of coverage.
Despite brokers doing their best to ease the strain of the tough market on insureds, these hard market conditions are unlikely to ease up anytime soon.
“The losses have come in beyond expectations, both in frequency and severity in property and auto in particular,” Kurtzweil told Insurance Business. “The insurance companies are currently being more selective and that has put insureds in a position of saying, ‘I don’t have as many people competing for my business as I used to.’ That has been taking place and accelerating over the last couple years, and I think 2020 is really going to be another extension of 2019.”