(*Chip Merlin’s Note: This guest blog is by John Nixon, President and founder of Asperta, Ltd., an independent consulting firm focused on improving the quality of property insurance decisions by policy holders, agents, brokers, underwriters, reinsurers and investors.)
If you follow the insurance press, you’ve probably seen articles describing the favorable results of year-end treaty reinsurance renewals and consequential expectations of reduced pricing and improved terms for account renewals in 2014. The good news for condominium association boards is that it shouldn’t be difficult for most accounts to get improved property renewal terms.
However, marginal improvement is not the same as achieving the best terms available. Without clear direction, brokers may relax their marketing efforts for renewals if they perceive their clients will be happy with easily obtained improvements. Board members should proactively and clearly communicate renewal expectations of a marketing effort designed to achieve the best renewal terms available, rather than simply improved terms.
Too many times in my career I’ve seen accounts fall into a cycle of “renew as is with X% decrease,” and then finding significant consequences with claims due to data quality issues, and/or inability to react to a sharp turn in the market following a major loss (theirs or an industry CAT event). The risks of these issues are relatively easy to minimize with a consistent renewal preparation strategy.
Submission format, content, and data quality are critical factors in obtaining optimal terms and pricing (and minimizing potential issues with claims), regardless of market conditions. You want the underwriters to be in the best position to advocate internally for their maximum available capacity, highest levels of discretionary credit, and most favorable policy wording (removal of coinsurance/margin clauses, better sublimits, etc.).
Some tips to help you prepare for a successful renewal:
- Start the renewal process well in advance of the effective date (120 days or more).
- Provide high-quality data (addresses with coordinates, COPE, and defensible values), submitted in import-ready spreadsheet format.
- Report buildings individually, not grouped. This reduces the perceived fire exposure and helps with Flood analysis and catastrophe modeling.
- Use Google Earth to verify coordinates (use 6-digit lat/long format).
- Check Flood zones using the coordinates, not the street addresses. Commonly Flood exclusions/limits trigger based on zone presence anywhere on the parcel, not a particular point, so Flood zone overlay maps are helpful.
- Year of Roof Replacement is critical in coastal areas, and ask your broker to review all the variables that go into the hurricane models (or earthquake models if that’s more applicable). These variables can make a material difference in pricing.
- Replacement Cost estimates should be calculated on “reconstruction” rather than “new construction” basis.
- Appropriate cost guides include Marshall & Swift/Boeckh BVS, e2Value, and 360-Value.
- Avoid appraisals with undisclosed data sources or based Marshall & Swift MVS books or SwiftEstimator or Commercial Estimator, these are for real estate and tax purposes and are commonly used by real estate appraisers.
- Values should be updated annually. It’s not difficult or expensive, you don’t have to rely on arbitrary percentage increases.
- If you have defensible values, you’ll be in the best position to negotiate for removal of coinsurance provisions; and if coinsurance can’t be removed cost-effectively, you’ll have minimized the risk anyway.
- If your broker is recommending a policy with a sublimit for Named Storm (or Earthquake), they should also have catastrophe model results to review with you. These should be updated annually.
- Be very cautious about participation in any “shared limit” policy. You need to evaluate if the shared limits are adequate (at the time you join and when others join). If there’s a lack of transparency in how the policy managers monitor data quality and aggregate exposures/limits, you should be concerned.
Please call if you have questions.
John Nixon
President and Principal Consultant
Asperta, Ltd.