The IRMI Hard Market Survival Guide 2002
September 2002
IRMI Research Analysts provide 20 tips on
how to survive the current hard property and casualty insurance market.
by IRMI Research Analysts
IRMI
The U.S. property-casualty insurance marketplace began firming in 2001 and
can now be considered a truly "hard market"—the first in nearly 20 years. We
expect a generally tight insurance market to continue well into 2003. Thus,
risk professionals should prepare for higher premiums, higher deductibles, reduced
coverage, and less available policy limits.
Risk managers and their agents and brokers need to get back to risk management
basics. It is time to reinvigorate safety and risk control programs and to retain
more risk through deductibles, retentions, or alternative market mechanisms.
Insurance purchasing must also be very proactive. The process should begin early
and include a comprehensive and extremely well-prepared underwriting submission.
Additionally, a contingency plan should be prepared in case the terms quoted
are unacceptable.
With this in mind, the IRMI Research Analysts developed the following action
list to help risk professionals navigate the hard market's turbulent waters.1 Best wishes for smooth sailing!
- If you have a great safety and loss control program, document it succinctly
and clearly for your underwriters. If you don't have a great safety and
loss control program, get senior management commitment to put one in place.
- Develop a comprehensive database for the past 5 years. Include claims,
payroll, sales, and other needed underwriting data.
- Review your claims information to assure it is correct and up to date.
If there have been frequency or severity problems, describe steps taken
(e.g., loss control program) to address the problem.
- Pay particular attention to reserves on open claims. Meet with adjusters
to review any that appear questionable. If there has been substantial development
on open claims during the past 12 months, consider commissioning a claims
audit.
- Check your experience modifier calculation to make sure it is correct.
Prepare a test modifier well in advance of your renewal.
- Analyze your concentrations of risk by location, and be prepared to
show underwriters plans for dealing with catastrophic events that can affect
major locations. If a small piece of the company is causing underwriters
a lot of concern, consider carving out that particular operation and securing
separate coverage or lower limits.
- Prepare a high quality, thorough underwriting submission using the data
and information discussed above. Include a great deal of detail, using it
to distinguish your account from others.
- Begin the renewal process early—at least 4 months prior to the anniversary
date.
- Carefully evaluate the marketplace and approach only those insurers
that are most likely to be interested in your risk profile. If you decide
to seek quotes from more than one agent, assign markets (insurers) to the
agents based on their volume of business with each insurer and the profitability
of their book for the insurer (to the extent possible).
- Even though you prepare and submit your renewal submission several months
out, be prepared for last-minute quotes. Make sure that you are in a position
to quickly analyze the alternatives offered, have a contingency plan in
place in case the terms are unacceptable, and be able to access all necessary
decision makers as soon as you receive the renewal quotes.
- Analyze your risk retention capability and prepare to assume higher
deductibles or move into a loss-sensitive insurance program.
- Determine your minimum liability limits requirements in case you need
to reduce limits because of lack of capacity or unacceptable pricing. Don't
forget to consider your contractual commitments.
- Review your property insurance values to make sure that they would be
adequate even if the insurer insists on scheduled per-location limits. Remember
to factor in debris removal costs when selecting limits.
- Communicate, communicate, communicate! Work closely and carefully with
your agent. Meet personally with the underwriters and review your company's
risk management program, financial position, and business plans for the
coming year.
- Proactively demonstrate the reliability of your company's financial
statements to underwriters, particularly for directors and officers liability
insurance. Consider involving your CFO in these discussions.
- Explore the feasibility of using a single parent, group, or protected
cell captive insurance company to cover your liability exposures.
- Develop a strategy for dealing with terrorism exclusions. Be sure to
determine if contracts with lenders, customers, or other business partners
require you to purchase terrorism coverage.
- Carefully review the financial position of your insurers to assure that
they are likely to be around when you need them. At a minimum review the
3-year trends in A.M. Best's Ratings and Standard
& Poor's Ratings.
- Be diligent about obtaining certificates of insurance from all contractors,
subcontractors, suppliers, vendors, and other business partners.
- Prepare senior management for higher premiums and deductibles. They
don’t like surprises.
For additional help controlling insurance costs, consider the IRMI book, 101 Ways To Cut Your
Insurance Costs, which was just updated in 2002.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.