To differentiate Rouse's hurricane exposures in Florida and Louisiana, Sachs has shown underwriters "secondary building characteristics." This includes things like the quality of roof construction and the presence of protective layers behind exterior walls. By going deeper into the details, "we dropped our probable maximum loss by tens of millions of dollars," Sachs claims. "That positions us to do somewhat better in terms of [insurance] capacity."
Sachs is also considering parlaying safety investments into lower deductibles for Rouse. Among the four or five structures he's considering for renewal, one carrier's coverage separates windstorm damage from other property insurance. Not long ago, Sachs says, carriers offered windstorm deductibles of 2 percent of a property's total insured value.
Now, he's pondering an offer of deductibles that are the higher of either 5 percent of total insured value or the expected maximum loss. (Expected maximum loss is an estimate used by insurers that's often based on the effects of the most devastating hurricane in 250-year or 500-year periods, assuming breakdowns in safety systems.)
On the surface, that deal doesn't look so hot. If, for instance, an underwriter calculates an expected maximum loss of $10 million on a $50 million building, the deductible would be too high to justify buying insurance. But if the Columbia, Maryland-based Rouse Company could lower its expected maximum loss to $3 million by spending $300,000 on structural improvements (and amortizing the cost), Sachs says, buying the policy may make sense.
Running for Covers
Risk managers are having to resort to these machinations because of a shrinking insurance capacity touched off by the attacks of September 11. For instance, Industrial Risk Insurers (IRI), a major property-insurance player in the Fortune 3000 market, has slashed the maximum amount of coverage it offers from $1 billion to $10 million. Dan Eudy, president of IRI, says that while the decision to lower its limits was made before 9/11, the attacks "certainly accelerated our move."
As a result, Rouse, which had all its property insurance with IRI for 10 years, has had to scramble to replace the bulk of its expiring coverage. Three years ago, in the throes of a soft insurance market, the developer was able to ink a $2 billion property insurance program, including windstorm coverage. In fact, IRI once provided the company with limits as high as $5 billion.
Of course, coverage withdrawals are not unheard of in the insurance game. In the late 1980s, in the most extreme market hardening in recent memory, many forms of liability coverage dried up. Generally, such seller's markets spur growth in the use of captive insurance companies. While the current market hardening may have been too swift for captives to come into play any time soon, Risk International's Davis thinks they can still help hold down premiums.
Maybe. Davis recently tried to use one his client's captives to retain a 40 percent premium hike on the company's quota-share property program quoted before 9/11. (In a quota-share program, several insurers each agree to pay for a percentage of total losses.)
Davis' strategy was to get the captive to cover about 25 percent of the risk at the originally quoted price. That presumed that the company's brokers could persuade insurers to stay onboard for the other 75 percent. Rather than raise the rates and reduce coverage on the whole program to accommodate the holdouts, he says the idea was to "have the captive take the line, accept the premium, and buy reinsurance to cover some of its exposure."
In the end, the captive strategy fell through because the client couldn't get insurers to sign on for a high enough percentage of the program. "We couldn't get 50 percent done at that price," Davis says. The client ended up agreeing to a 110 percent premium hike.
Nevertheless, some consultants believe the captive strategy could still be effective if buyers can convince carriers to cover 70 percent to 80 percent of the risk at the quoted price. Then again, if premiums get too high, corporate risk managers can think the unthinkable: going without property insurance. A company with good banking relationships, for instance, could put together a pre-arranged loan agreement that would go into effect if there's severe property damage to a factory, using the factory as collateral, says Davis. "You wouldn't need the loan until you have the loss," he explains.
Still, buying property insurance has its virtues. Borrowing money won't protect a company from a hit against earnings the way insurance will. And with a loan, the commitment would be long-term. Says Davis, "You would be paying 'insurance premiums' for 20 years in the form of interest payments to the bank."
The current market for property insurance may be bad for buyers, but it probably won't take two decades to return to normal.
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