Four Steps to Develop Strong Property Risk Coverage in a Hardening Market
With the property market remaining volatile, risk buyers need a solid strategy to stabilize their risk portfolio.
Rate increases and shrinking capacity continue to drive the global property market and pressure risk managers.
Buyers are challenged to adequately address their property risks, especially in nat-cat-exposed locations.
Data and analytics can help buyers make informed property risk decisions and shape conversations with their business leaders.
A hard commercial property insurance global market, with rates rising and capacity shrinking, leaves many risk buyers challenged to make the best decisions that impact their property portfolios, especially in natural catastrophe (nat-cat) exposure areas. Rates are being driven by:
- Losses from nat-cat perils, including wildfires, convective storms, floods and hail — all contributing to an erosion of reinsurer returns and an 11 percent estimated decline in global reinsurer capital.
- 40-year record inflation, which has driven unrealized carrier investment losses from rising interest rates and a decline in equity markets.
Property clients are seeing rate increases of 20 to 30 percent in Q3 2023 and potentially through year-end. Rates differ globally:
- 10-30+% increases for desirable occupancies
- 20-40+% increases for loss-challenged or less desirable occupancies
- 50+% rate increases for extremely challenged and nat-cat exposed accounts
- 0-5% increases for benign occupancies
- 5-10% increases for loss-challenged or less desirable occupancies
- 15-20% increases for distressed and nat-cat exposed accounts
- Secondary perils are posing a greater risk in Europe, driven by recent climate events, such as floods, fires, devastating storms, and macroeconomic scenarios
- These correlated with up to 60% increases in primary insurance rates
- In the first half of 2022, floods in Asia Pacific and Australia, as well as earthquakes in Japan, accounted for $22 billion1 of overall natural disaster losses
The volatile property market has placed increased pressure on buyers, who are now having difficult conversations with the c-suite and board of directors amid double-digit premium increases and shrinking budgets.
As the market continues to harden through 2023, these four steps can help risk managers mitigate the total cost of risk in their property portfolios.
A Four-Step Process to Help Control Risk Costs
To design competitive property coverage, risk managers should understand all available risk products, including alternative risk solutions. These steps take a long-term — rather than transactional — approach that enables risk managers to tailor solutions to their organization’s individual risk profile.
1. Gather the necessary data and analytics
To create an accurate risk profile, companies must gain insights from across the organization on historical loss experience, benchmarking, premiums, loss retention, supply chain mapping and contingent time element exposures. Conducting a detailed risk management exercise requires strong data and the cooperation of all functions and business units in the company.
2. Develop a long-term vision
Many companies act reactively, adjusting their buying behavior in response to the market’s short-term moves. A broader perspective, which includes assessing general inflationary factors of the past 10 to 20 years, can give companies a more accurate view of risk transfer costs.
Alternative risk solutions, including parametric insurance, could be part of the answer. However, companies can’t accurately assess the utility of those solutions without a comprehensive, long-term vision for how much risk they are willing to take on and how these options could complement traditional products.
Alternative solutions, such as captives, take time and capital to establish. Risk managers can develop an overarching vision by determining the cost to carry their risk and the level of acceptable risk to their organization.
Working with a best-in-class broker with a wide range of risk modeling solutions helps risk managers find the optimum balance between risk transfer and risk retention and improves a firm's understanding of material perils across its portfolio.
3. Run models and forecasts
With data in hand, companies can perform modeling to determine their optimal risk retention levels, explore interdependencies of risk, or the costs associated with continued business disruption and mitigation strategies.
These critical insights enable teams to accurately evaluate options and make trade-offs. For example, a company may determine that buying the maximum foreseeable loss for a one-in-500-years event is not a worthwhile investment and scale back to a coverage level more aligned with its overall risk profile.
4. Engage in data-driven decision making
Achieving fit-for-purpose property coverage requires informed dialogue and a thorough understanding of trade-offs. Once risk managers have completed their models and forecasts, they should present their findings to the c-suite.
Many companies use this process to increase their retention by modeling catastrophe risk and quantifying updated and verified business interruption values. The output can pinpoint the break point between capacity in the marketplace and risk retention. This fact-based analysis helps executives engage in data-driven decisions to determine levels of risk retention.
Ongoing Benefits for Risk Managers
Risk managers can stay ahead of the curve by applying data and analytics to assess risk in the face of market volatility. The process enhances visibility into risk and retention, while improving resilience and informing risk managers about coverage levels and costs in the market.
Companies that take these proactive steps — basing their buying decisions on data, analysis and a deep understanding of their risk transfer options — will be better positioned to articulate their retained risk and avoid any surprises down the road.
1 Asia Pacific nat cats: the year in review
This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.
The contents herein may not be reproduced, reused, reprinted or redistributed without the expressed written consent of Aon, unless otherwise authorized by Aon. To use information contained herein, please write to our team.
Stay in the loop on today's most pressing cyber security matters.
Article 8 Min ReadManaging Cyber Risk through Return on Security Investment
Article 27 Min ReadTop 5 Cyber Threats To Mergers and Acquisitions
Article 12 Min ReadMitigating Insider Threats: Your Worst Cyber Threats Could be Coming from Inside
Article 17 Min ReadWhy HR Leaders Must Help Drive Cyber Security Agenda
Article 14 Min ReadResisting Cyber Attacks Through Layered Security Systems
Environmental, Social and Governance Insights
Explore Aon's latest environmental social and governance (ESG) insights.
Article 9 Min ReadESG Data: How Businesses Can Use Data to Gain an Edge
Article 12 Min ReadWhy ESG Is Even More Important In A Crisis Like COVID-19
Insights for HR
Explore our hand-picked insights for human resources professionals.
Article 9 Min ReadCOVID-19 has Permanently Changed the Way We Think About Wellbeing
Article 11 Min ReadDE&I in Benefits Plans: A Global Perspective
Article 13 Min ReadHow Data and Analytics Can Optimize HR Programs
Article 17 Min ReadWhy HR Leaders Must Help Drive Cyber Security Agenda
Article 10 Min ReadCase Study: The LPGA Unlocks Talent Potential with Data
Article 16 Min ReadNavigating the New EU Directive on Pay Transparency
Article 14 Min ReadHow to Design Better Talent Assessment to Promote DE&I
Article 8 Min ReadTraining and Transforming Managers for the Future of Work
Article 10 Min ReadRethinking Your Total Rewards Programs During Mergers and Acquisitions
Article 21 Min ReadBuilding a Resilient Workforce That Steers Organizational Success | An Outlook Across Industries
How do businesses navigate their way through new forms of volatility and make decisions that protect and grow their organizations?
More Like This
Article 17 Min Read
How Academic Research Can Help Drive Climate Risk Resilience
By leveraging the advances made by academic research, companies can develop more robust climate risk resilience.
Article 19 Min Read
Pricing Platform: Avoiding Pricing Pitfalls
Pricing pitfalls are more common than you think, whether it's working with incomplete data or key man risk – but with the right pricing process, many of these issues can be mitigated. Read our article to learn about the most common pricing errors, and what insurers can do about it.
Article 18 Min Read
Pricing Platform: The Importance of Getting Pricing Right
In today's increasingly complex insurance landscape, an inadequate pricing system can not only impact insurers' view of risk, but also prevent them from making the right decisions at the right time. Read our article on why it's essential to get pricing right.