VideoReality check No. 128:
Take a walk around one of your company's facilities. Check out the state of the sprinkler systems. Examine the thickness of the walls, the strength of the foundations. Run a few worst-case scenarios through your computer, simulating the effects of a fire, an earthquake, or bomb. Finally, decide how much uninsured property risk your company can handle.
Then, double it.
Welcome to the wonderful world of risk management, post 9/11. With reinsurance backing vanishing after the calamitous events of mid-September, commercial property insurers have raised premiums through the roof. What's more, brokers are asking corporate clients to do more self-insuring — a whole lot more. Says Bob Howe, a managing director at insurance brokerage Marsh: "Almost all treasurers and CFOs are being faced with having to retain more risk in terms of deductibles."
They don't have much choice. With the premiums charged commonly rising 150 percent to 200 percent in recent renewals of property insurance polices, the surest way to keep rates down — without actually foregoing insurance — is to agree to pay higher deductibles. In fact, Howe says many of Marsh's clients have increased their property insurance deductibles by 50 percent. A number of clients have gone even further — in some cases, boosting property deductibles of $500,000 to $10 million.
Not surprisingly, the rise of the jumbo deductible has some managers taking a long hard look at the risks they're actually shouldering. Sellers of insurance say in-house evaluations often help a company prevent the kinds of accidents and disasters that tend to produce big losses — things like high-rise fires and plant explosions. At the same time, buyers of insurance say internally generated data can help a company sell itself as a reasonable risk.
And make no mistake, a good sales job is crucial to getting adequate property coverage these days. Indeed, risk managers fresh from recent renewals say it takes a strong marketing effort to get insurers to judge a company on its own merits. They claim property underwriters are no longer interested in tailoring policies to individual customers, and have instead reverted to the hard-market practice of "line underwriting." In line underwriting, insureds with good loss records are typically charged high premiums just because they happen to be in a high-risk industry.
Carriers have slashed coverage limits across wide industry swaths, including manufacturing, health care, and real estate, says Marsh's Howe. "It's a very broad brush that's painting the market," the broker adds.
Visions of Vapor Clouds Dance in Their Heads
The broad brush is making for a very bleak picture. To line up any kind of property insurance, companies in high-risk sectors are having to distance themselves from the industries they operate in.
Take the recent case of a corporation that turns feedstock into plastics, adhesives, and sealants. Sounds like a chemical company, right? But Michael Davis, CEO at risk management outsourcer Risk International Services, says otherwise. "We were determined to convince the market they were not a chemical company," notes Davis, who advised the plastics maker in its pursuit of property insurance. "When underwriters see a chemical company, they think 'vapor-cloud explosions.' "
Keen to dispel that notion, Risk International amassed white papers detailing the processing temperatures and pressures for each raw material the company processes. Every plant function was assigned a risk factor on a scale of 1 to 10, with 10 representing the risk posed by an extremely volatile process (such as burning ethylene in a furnace). Zero represented the risk for filtering water.
Davis says the scale enabled him to persuade an insurer that the company's risks tilted more toward zero than toward 10. The underwriter transferred responsibility for the insured from the carrier's chemical division to its less stringent general manufacturing unit.
Such tactics might not help companies combat premium hikes in the current renewal season. "It doesn't matter if you're good, bad, or indifferent," Davis conceded in a mid-December interview. "Negotiations are so tight right now."
Maybe so. But Steve Sachs, a consultant who handles the risk management for shopping-center developer the Rouse Company, thinks tarting up a company's risk profile is still a good strategy in the current market environment. Sachs notes that he's using Rouse's estimates of its own probable maximum loss (PML) from windstorms as bargaining chips in negotiating the company's February 1 property renewal. (PML is a variously defined estimate of the financial loss that could occur when a destructive storm or earthquake hits a building. It usually assumes most safety measures are working properly.)
"We put in our own information and our own modeling to have high-quality information…to possibly refute [insurers'] projections," says Sachs, a senior vice president with the Hobbs Group, an insurance brokerage and consulting firm. Sachs claims underwriters are now routinely basing pricing and coverage decisions on such broad categories as a company's zip code.
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