Property insurance increases in 2021: How to reduce costs

Preparing for challenging property insurance renewals

Risk and insurance managers are asking, “What can I do to reduce the cost of my property insurances?”  

An escalation in extreme weather and natural disasters, local and international catastrophic property losses, and the increasing cost of reinsurance are just three factors driving property insurance increases and costs in 2021 - which was averaging 31% year-on-year (as at Q4 2020) across the Pacific region, including Australia. 

So how can you stand out from the crowd and obtain a better outcome? 

We’ll share with you a process for increasing your chances of obtaining a better property and asset insurance outcome and taking more control of your property renewal, but it's also important to remember that there isn’t a silver bullet solution. Although premium inceases are driven by a number of market factors outside of your direct control, you can certainly position your business and risk in an effort to obtain the broadest available cover and better-than-average pricing changes. 

The key elements to a successful renewal outcome is to have a deep understanding of your actual property risks, be open to redesigning your insurance program, and reducing uncertainty with insurers. We recommend starting your renewal process early and following these four key actions before beginning negotiations with insurers:

1. Provide quality data and information to the insurance market that reduces insurer uncertainty and differentiates your assets as a quality risk.
2. Don’t over or under-insure your insurance limits or declared values.
3. Maximise your own capital and retain risk where there is a strong return on investment.
4. Capitalise on Alternative Risk Solutions such as Captives or Discretionary Trusts when it’s strategically and economically feasible to do so.

1.     Provide quality data and information to the insurance market that reduces insurer uncertainty and differentiates your assets as a quality risk.

In the absence of quality data and information, insurers will often build into the price a premium to allow for any uncertainty of future losses. 

With quality data and information on assets, insurers gain increased certainty around asset construction, exposure data and risk mitigation measures. The end-result? Your price of risk will be more accurate, and you will likely be able to access better capacity and coverage. 

The key questions to consider: 

• Are you comfortable that all of the insurers you are marketing to have a detailed understanding of the property risks at all your locations, the risk mitigation measures in place and your approach to previous insurer’s recommendations? Property Risk Evaluation Surveys (collection of COPE data, the criteria an underwriter reviews when evaluating a submission for property insurance) and Property Risk Management Plans can help with this.  
  
• If you have assets in locations exposed to natural catastrophes such as cyclone, flood, earthquake, bushfire, are you giving insurers comfort on what these exposures are, and the resilience of each asset against these exposures? Marsh's Natural Catastrophe Loss Modelling can be an effective tool in this regard. 
  
• Do you have strong Business Continuity Plans in place that help insurers see that you can respond quickly to a loss and reduce business interruption? Consider working with an independent advisor to help you review or develop your Business Continuity Plan.
  
• Are you providing recent and accurate asset valuations and business interruption calculations so insurers don’t take an overly conservative approach when pricing? Asset Valuations and Business Interruption Calculations can help with this. 
  

2.     Don’t over or under-insure your insurance limits or declared values.

Much of the pricing calculations done by underwriters are based on your location, COPE data, declared values and limits of liability.  It is critical that the declared values and limits reflect the true risk exposure, and you are not paying for property insurance premiums you may never need, nor are you under-insuring. (You may be penalised for under-insurance in the event of a claim through the co-insurance clause, which will ultimately increase your total cost of risk.)

The key questions to consider: 

• Does your Total Limit of Liability and sub-limits for different perils accurately reflect your true aggregate risk exposure? When the Total Limit of Liability is greater than the aggregate risk exposure, it can be reduced. A Maximum Foreseeable Loss (MFL) study & Natural Catastrophe Loss Modelling may be needed to assess this. 
  
• Do your declared asset values represent the true cost of demolishing, removing debris and reinstating the asset? Asset insurance valuations can help you avoid overestimating your costs to reinstate assets and reduce your declared value.
  
• How will your business be disrupted following different loss scenarios and what will be the true business interruption loss? Is this reflected in your declared values? Business Interruption Reviews can help avoid over or under estimating business interruption and better help you understand your coverage.
  

3.     Maximise your own capital and retain risk where there is a strong return on investment.

When insurance markets increase pricing over consecutive periods, the cost of insurance may not accurately reflect the true underlying risk profile and represent value for money. In this case, it may be beneficial to consider transferring less to the insurance market and retaining more risk on your own balance sheet. 

The key question to consider: 

• What is your forecasted retained losses versus premium relief if you were to increase risk retention via increased deductibles or reduced limits? Is this approach financially viable for the business? Through our Risk Tolerance Analysis, Loss Modelling and Risk Finance Optimisation work with clients, we have found that increasing deductibles and/or reducing limits may result in strong value for money for some clients. There is no "one size fits all" solution, so it's important to review your options carefully with the guidance of an experienced independent advisor.  
  

4.     Capitalise on Alternative Risk Solutions such as Captives or Discretionary Trusts when it’s strategically and economically feasible to do so.

If you’re transferring less to the insurance market and retaining more risk has a strong value proposition, then organisations need to consider what the best strategy is to fund this retained risk over the long-term, both operationally and financially. 

Options such as retaining the risk in a separate fund on your balance sheet or utilising a Discretionary Trust, a Protected Cell Captive or a Single Parent Captive may all be viable options to consider. These alternatives have both positives and negatives to consider such as access to reinsurance markets, capital requirements, the ability to loan money back to the parent company, ring fencing the fund from the budget cycle, establishment costs, and ongoing costs - factors that all need to be carefully considered. 

The key questions to consider:

• Is traditional insurance the most economically viable and strategic risk financing approach? Can the utilisation of a Discretionary Trust or Captive result in a more favourable long-term outcome both financially and strategically? Marsh can help answer these questions with an Alternative Risk Solution Feasibility Study.
  

What will you do to reduce your increasing property insurance costs?

These are just four ways to help you achieve a better property insurance renewal outcome this year. From providing quality data to insurers and checking your insurance limits, to considering increasing your deductibles and exploring alternative ways of transferring and financing those risks, you now have options. 

Learn more from our experts

The Marsh Advisory team can help you prioritise and work through any of the above-mentioned strategies. We start by identifying your top priority areas that will make the most impact and have the greatest potential return on investment. Our team of dedicated asset valuers, forensic accountants, property risk engineers, natural catastrophe analysts, business continuity specialists, actuaries, captive and trust managers can assist you in executing strategies in your priority areas. 

If you would like to learn more, please contact your Marsh representative or contact us.   

Please note: This document and any recommendations, analysis, or advice provided by Marsh (collectively, the ‘Marsh Analysis’) are not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Any statements concerning legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as legal advice, for which you should consult your own professional advisors. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Except as may be set forth in an agreement between you and Marsh, Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any services provided by a third party to you or Marsh. LCPA: 21/045