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.
Key Takeaways
-
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:
-
United States
- 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
-
Australia
- 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
-
Europe
- 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
-
Asia Pacific
- 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
General Disclaimer
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.
Terms of Use
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.
Aon's Better Being Podcast
Our Better Being podcast series, hosted by Aon Chief Wellbeing Officer Rachel Fellowes, explores wellbeing strategies and resilience. This season we cover human sustainability, kindness in the workplace, how to measure wellbeing, managing grief and more.
Aon Insights Series Asia
Expert Views on Today's Risk Capital and Human Capital Issues
Aon Insights Series Pacific
Expert Views on Today's Risk Capital and Human Capital Issues
Aon Insights Series UK
Expert Views on Today's Risk Capital and Human Capital Issues
Construction and Infrastructure
The construction industry is under pressure from interconnected risks and notable macroeconomic developments. Learn how your organization can benefit from construction insurance and risk management.
Cyber Labs
Stay in the loop on today's most pressing cyber security matters.
Cyber Resilience
Our Cyber Resilience collection gives you access to Aon’s latest insights on the evolving landscape of cyber threats and risk mitigation measures. Reach out to our experts to discuss how to make the right decisions to strengthen your organization’s cyber resilience.
Employee Wellbeing
Our Employee Wellbeing collection gives you access to the latest insights from Aon's human capital team. You can also reach out to the team at any time for assistance with your employee wellbeing needs.
Environmental, Social and Governance Insights
Explore Aon's latest environmental social and governance (ESG) insights.
Q4 2023 Global Insurance Market Insights
Our Global Insurance Market Insights highlight insurance market trends across pricing, capacity, underwriting, limits, deductibles and coverages.
Regional Results
How do the top risks on business leaders’ minds differ by region and how can these risks be mitigated? Explore the regional results to learn more.
Human Capital Analytics
Our Human Capital Analytics collection gives you access to the latest insights from Aon's human capital team. Contact us to learn how Aon’s analytics capabilities helps organizations make better workforce decisions.
Insights for HR
Explore our hand-picked insights for human resources professionals.
Workforce
Our Workforce Collection provides access to the latest insights from Aon’s Human Capital team on topics ranging from health and benefits, retirement and talent practices. You can reach out to our team at any time to learn how we can help address emerging workforce challenges.
Mergers and Acquisitions
Our Mergers and Acquisitions (M&A) collection gives you access to the latest insights from Aon's thought leaders to help dealmakers make better decisions. Explore our latest insights and reach out to the team at any time for assistance with transaction challenges and opportunities.
Navigating Volatility
How do businesses navigate their way through new forms of volatility and make decisions that protect and grow their organizations?
Parametric Insurance
Our Parametric Insurance Collection provides ways your organization can benefit from this simple, straightforward and fast-paying risk transfer solution. Reach out to learn how we can help you make better decisions to manage your catastrophe exposures and near-term volatility.
Pay Transparency and Equity
Our Pay Transparency and Equity collection gives you access to the latest insights from Aon's human capital team on topics ranging from pay equity to diversity, equity and inclusion. Contact us to learn how we can help your organization address these issues.
Property Risk Management
Forecasters are predicting an extremely active 2024 Atlantic hurricane season. Take measures to build resilience to mitigate risk for hurricane-prone properties.
Technology
Our Technology Collection provides access to the latest insights from Aon's thought leaders on navigating the evolving risks and opportunities of technology. Reach out to the team to learn how we can help you use technology to make better decisions for the future.
Top 10 Global Risks
Trade, technology, weather and workforce stability are the central forces in today’s risk landscape.
Trade
Our Trade Collection gives you access to the latest insights from Aon's thought leaders on navigating the evolving risks and opportunities for international business. Reach out to our team to understand how to make better decisions around macro trends and why they matter to businesses.
Weather
With a changing climate, organizations in all sectors will need to protect their people and physical assets, reduce their carbon footprint, and invest in new solutions to thrive. Our Weather Collection provides you with critical insights to be prepared.