Best Practices for Property Insurance Renewal Preparation: Part I - Introduction & The Importance of Competitive Pressure

​John Nixon, a former underwriter and an expert on property insurance, joins us for a three-part discussion on how companies can better prepare for going through property insurance renewals. Part I focuses on the importance of competitive pressure during the renewal process.

John Nixon, former underwriter and an expert on property insurance

This three-part article provides some practical suggestions for preparing for your property insurance renewal negotiations.

For the past several quarters, “state of the market” articles have been warning that property insurance renewal prices are increasing while policy terms continue to deteriorate, and that these trends are not expected to end anytime soon. Your concern about your upcoming renewal is justified.

You should anticipate some combination of the following with your property renewal:

• Material increase in premium, with percentages varying based on many factors.
• Expect your boss to be unhappy, more so if they get surprised: set expectations early.
• Increases in deductibles, either mandated, or necessary to manage premium increases. 
• If percentage deductibles are introduced for Wind/Hail/Flood, these could adversely impact your total cost of risk far more than the premium increase.
• Changes in policy terms to reduce or remove “forgiveness” for under-reported or unreported assets (loss of blanket limits, reduced margin clauses, coinsurance, etc.).
• Changes in policy wording which may have material impact on claims.  Careful review of all proposed changes in wording is needed.
• Quotes from incumbent markets may be delivered too late to allow for remarketing the account if renewal terms are unacceptable.

Even policyholders with high quality risks, limited catastrophe exposures, favorable loss history, and friendly relationships with their underwriters will need to be proactive to mitigate material premium increases and loss of favorable policy terms. 

Indicators that your submission package and/or renewal process needs improvement:

• Your incumbent broker/carrier assure you that your submission is “just fine”. There’s always room for improvement.
• You’ve made a good faith effort to prepare your property schedule, but you lack confidence in the data and values you’ve reported. Trust your instincts, get help. Policy terms are changing, just “close enough” can now have serious consequences.
• There’s been no change in your program layering or CAT limits for many years.  CAT models have been updated, and your exposures and values have changed. You should have seen adjustments to optimize layers and limit requirements. 
• No responses (other than incumbents’) to your most recent submissions.  You need to find out why. Without change, your next renewal won’t generate competitive pressure.

TIP: Rather than guess at what’s needed to get more quotes for your upcoming renewal, contact a few brokers that didn’t quote your last renewal. They should be willing to pull up your file in their system and tell you why. It’s in their best interest to give you honest and constructive feedback.

What do you need to achieve the best pricing and terms available in today’s market?
In my experience, three elements need to be addressed: competitive pressure, submission format, and quality data (including defensible values). The remainder of Part I of this article focuses on competitive pressure. I placed this first because it needs to be addressed earliest in the renewal process. 

Competitive Pressure

1. Absent a perceived credible threat of competition, you can’t reasonably expect a best-case outcome, even with the best submission format and data quality.
2. You’ll need multiple quotes to show that you’ve found the best deal possible. If changes in pricing and terms were expected to be relatively minor, you might have made a case for not seeking competitive quotes as a long-term strategy to help maintain market relationships. In the near term, facing the clear expectation of material deterioration of pricing and terms, I believe it would be a challenge to make that case.
3. Options for marketing your property insurance:
   1. ​The Melee: Many brokers simultaneously rushing out to secure markets.
      • This is inefficient; the best markets can easily be split between brokers.
      • When market options and capacity are abundant, this may not have had much adverse impact, but during a hard market this may not be feasible, especially for large and/or CAT exposed accounts.
      • Incumbent brokers may try to spoil your effort to generate competition by reserving all available markets before you release the submission.  This can be managed with an additional “assignment of markets” step, but inefficiencies will still exist.
   2. Broker First: One broker is selected to approach all the markets.
      • This should remove the inefficiencies of fractured market access.
      • You should take the time to set clear expectations relating to transparency and strategy for the broker to execute.  Ask to see the correspondence with markets to make sure all questions are being answered, and that undue favoritism isn’t being shown to the incumbent markets.
   3. Hybrid: Narrow the broker field to 2 or 3, and possibly some direct markets.
      • Assign markets to each aligned with their strategic approach: maybe one will advocate for single carrier options, another for shared and layered.
      • Again, set clear expectations.
4. Try to avoid coverage specifications that unnecessarily reduce competition. Specifications should differentiate     true requirements from “nice-to-haves.”
   
   1. Bloated Limits: Review your maximum foreseeable exposures from fire, tornado, hurricane, and earthquake. Some cushion is appropriate but demanding too high a limit can severely limit the number of markets that can respond. 
      
      • Replicating exceedingly high limits in a layered program is extremely inefficient (no bang for your buck).
        
      • High excess layer premium can be re-allocated to deductible buy-downs.
        
   2. Low Deductibles: If your specified deductible is too low, it may drive away potential markets. You might consider a high deductible designed to attract best pricing and capacity for your main program.
      
      • Get quotes for deductible buydown options (from other markets) to be treated as a discretionary purchase. 
        
      • Deductible buydowns can help stabilize pricing for the main program by protecting its loss ratio.
        
   3. Consider new approaches: this is an appropriate time to think “out-of-the-box.”
      
      • Captives for deductible buydowns, especially if you already have one established for other lines of coverage (lowering start-up costs).  Make sure your broker is on-board with exploring a captive option.  Conflict of interest can occur with commissions tied to the high rates associated with this layer of coverage.
        
      • Parametric options for CAT deductible buydowns and difficult to place coverages.
        
      • Separating policies by occupancy or other criteria.  Bigger is not always better.
        
      • Allow (even encourage) brokers and underwriters to fix obvious errors they find in your submission, and quote on that basis.

Tip: If your carrier “helped” you prepare your values, consider having a third party conduct an objective review of at least a representative sample of your values. I have seen instances of highly inflated values being used to create the illusion of low rates. This tactic creates an artificial, but effective, barrier to competition. If your carrier provided you the spreadsheet to be submitted to their competitors for quotes, it’s likely incomplete and not formatted for efficient processing. This tactic also creates an artificial, but effective, barrier to competition.

If you have questions or would like a complete copy of this article, please contact [email protected].

---

---