As we enter the 4th quarter of 2020, there is no end in sight of increases in property and deductible prices. Extreme weather patterns are perhaps the only thing we can predict with accuracy. Combined with COVID-19, most of the property market continues to harden at an increasing rate, despite a strong capital position.
So far, in 2020, U.S. catastrophe losses are well above normal levels. The Atlantic hurricane season has been so active that the National Hurricane Center is already into the Greek alphabet for only the second time in history.
According to RMS, wildfires are predicted to cost the insurance industry up to $8 billion in the West. The losses include property damage, evacuation and smoke damage, additional living expenses, and business interruption.
Let’s take a closer look at solutions agents can present to clients who don’t want to assume more risk for their deductibles.
More exposure for insureds and investors
As more and more weather disasters increase, insurance companies re-evaluate their liabilities while trying to find the right instruments for clients in need. Insurance companies are raising rates, cutting coverage, and even closing up shop in areas around the country experiencing a steady increase in unpredictable weather patterns and losses. Like any industry, you have to be profitable to stay afloat. Insurance companies are getting hit hard and cannot operate in these markets without a new approach.
Underwriting scrutiny is at a peak as carriers struggle to deliver profitable results. E&S submission volume for real estate and habitational accounts is close to an all-time high. It is predicted to grow further as building vacancies increase from COVID-19.
Parametric insurance solutions
One growing solution for insured and insurance companies is parametric insurance. Parametric insurance is sophisticated coverage for key risks. It reduces administrative underwriting and the claims processes by clearly defining the risk.
For example, parametric hail insurance is designed to help with the billions of dollars in hail damage across the nation each year. As claims increase, carriers are forced to raise deductibles. Claims negotiations have become increasingly intense and payments have been delayed. Parametric Insurance coverage for hail peril provides insured a supplement to their current insurance program, specifically for hailstorms. The coverage includes cosmetic damage and other items excluded under a traditional insurance contract. It operates as a ground-up protection measure with no deductible.
Parametric insurance for hurricanes, hail, earthquakes, and other catastrophes does not require a payout from the overlying carrier or require the overlying carrier to adjust the loss. An insured’s carrier may even deny a claim, but parametric insurance will still pay when the event meets the pre-defined criteria. For example, as soon as a pre-defined hailstone size is detected in a hailstorm, the policy is activated. The insureds are free to purchase whatever limit they want and can pick and choose limits by location. The limit is chosen based on the insureds budget and risk tolerance, not the overlying deductible.
Wind deductibles
Wind buydown insurance allows policyholders with significant wind exposures to reduce their financial burden following a loss by lowering their deductibles. With a wind buydown insurance policy in place, policyholders can buy down an increment or two from their percentage deductible on their primary personal or commercial insurance policy.
Property deductibles in wind-prone areas range from one to five percent. Suppose a policyholder had a $20 million property, with a 5% wind deductible of $1,000,000. In that case, they could purchase a separate wind buydown policy to cover 950,000 of their deductible, reducing the out of pocket exposure to $50,000.
Wind buydown insurance helps property owners avoid severe out-of-pocket expenses after a loss. It’s incredibly helpful in areas where carriers are forced to offset a hardening insurance market by increasing rates and deductibles. Many lenders now require lower wind deductibles to protect their assets. And many times this requires the insured to purchase this coverage on a separate policy to satisfy bank requirements.
Deductible reduction experts
Do you need new solutions to help your clients with rising property and deductible prices?
Mcgowan’s CAT & Speciality Property Division specializes in all types of hard to place accounts and are extremely sophisticated in deductible reduction methods.
