Highly Protected Risk (HPR) at one time was the standard ofdifferentiation for property risks. If you were able to achievethis classification, a limited number of insurance companies wereable to provide significantly greater policy limits with a muchlower rating structure than the other standard insurers.

Limits on many occasions were equivalent to the insured's totalinsurable values (TIV) at risk for the entire insured's company.Rates used to underwrite the risk could be anywhere from 10 to 15cents per hundred dollars of replacement cost value for variousclasses of business. In addition, acceptable classes of businessranged across a large spectrum of occupancies. These includedhospitals, saw mills, furniture manufacturers, energy risks, andpulp and paper manufacturers. The key driver for HPR considerationregarding occupancy was whether the occupancy could be viewed assome form of manufacturing risk by the insurance company.

If the industry requirement was met, carriers would then requirethose companies to:

• Meet an automatic sprinkler requirement;
• Conduct surveillance with an alarm system or security team, orhave a continuously occupied facility;
• Have facilities of superior construction that would reduce firerisk;
• Have an adequate water supply in the event of a fire; and
• Partner with the insurance carrier on loss controls.

Related: New FM Global fire protection guidelines could savewarehouse owners millions

(Photo: iStock)

What does the HPR market look liketoday?

The events of 9/11 and Hurricane Katrina permanently moved themarket to a less discriminating view of HPR. While some carriersthat had written traditional HPR faded into the sunset, newcarriers entered the market. Several of these new entrantsparticipate in multi-carrier property programs as well as offeringan HPR product.

Insurance carriers offering their own single carrier HPRcapacity and policy form usually offer it to accounts requiringlimits of no more than $500 million. Depending on the account riskexposure, some of these HPR markets may be able to offer greaterlimits.

In contrast to earlier HPR carriers, these markets canoffer:

• coverage using their own filed policy,
• required loss prevention engineering services (either throughits own loss prevention division or through contracted providers),and
• coverage for non-manufacturing account portfolios, such as realestate, stadiums and high-tech risks.

These types of accounts need to have risk profiles that arerelatively stable year to year, and they require an insured'swillingness to adhere to loss prevention engineering services andguidelines offered by these HPR markets.

In recent years, the overall property marketplace has furtherevolved into a market of seemingly endless underwriting capacity,major capital market participation and influence, and the greaterdevelopment and reliance upon analytical underwriting techniques.This evolution in underwriting has allowed property underwriterswho don't invest in loss-prevention development within theircompany to embrace the concept of well-protected risks in lieu ofthe HPR underwriting standards.

Related: Global catastrophe management lessons fromHurricane Katrina [Report]

(Photo: iStock)

HPR single carrier program or layered propertyprogram?

Due to this abundance of non-HPR capacity within themarketplace, it's regularly possible to structure a layeredprogram, using a variety of markets to construct a property programthat provides the insured with an HPR-style policy program. Theseprograms have similar advantages of the traditional HPR singlecarrier program but with much greater control of the program placedwithin the insured's requirements versus those of the HPR insurancecarrier.

These non-HPR markets authorize participation lines of capacityon layered programs with or without third-party loss-preventionsurvey requirements at account pricing equivalent to or in manycases better than an HPR carrier. This approach to underwritingfocuses on:

• client retentions,
• the insurance company's cost of capital to write the risk,
• the ability to quote a line of capacity within a program atpricing terms different from its competitors,
• the broker's ability to structure a quota shared/layeredprogram in such a way as to “fit” markets into a mutuallybeneficial position on the account,
• the ability of the underwriters to “pick” the layer or positionthey wish to participate on the risk, and
• the ability of the underwriters to use their “pick” position asa means of risk avoidance on a particular account.

The combined result of such an approach is a structured programthat is HPR priced without all the HPR requirements associated witha single carrier HPR program.

(Photo: iStock)

Advantages of structured programs

Structured programs today regularly provide the insured in manyinstances with greater advantages than single carrier HPRunderwriting, for example:

• HPR level rate and premium;
• a broadly written manuscript policy form specifically designedto address the requirements of the insured's exposures;
• broad terms and conditions, such as third-party loss-preventionengineering provided directly to the insured and not subject to theunderwriting or engineering guidelines of any single insurancecarrier;
• a designated claims adjuster written into the policy form andpaid for by the participating underwriting companies;
• account property limits including catastrophe (CAT) perillimits equivalent to or exceeding individual HPR markets;
• greater flexibility for CAT perils deductible wording;
• the ability to incorporate Equipment Breakdown coverage intothe policy form as done by the HPR markets; and
• the ability to write the account on a global basis.

Over the years, the insurance marketplace has seen the term HPRevolve to mean a risk of superior construction with acceptablesprinkler protection that can be written by either an individualinsurance carrier or through a multi-carrier participation program.Loss-prevention engineering is provided through the insurancecarrier resources or by an independent third party contracted bythe insured. The methods in which HPR insurance and services aresecured for a client are fully dependent on:

• the buying appetite of the insured,
• the insured's preference of loss prevention service providers,and
• the insured's preference of single carrier simplicity vs.multi-carrier control.

Although each option for securing HPR coverage is viable, it'sthe ability to create competition and play the options off eachother that provides the client with the best available choice forsecuring property insurance coverage for the insured'sexposures.

Greg DiPrato is a senior vice president in Lockton's globalproperty practice. This article first appeared on Lockton.com and is reprinted here withpermission. Visit Lockton Insights & Publications for the originalpost.

Related: 4 ways to increase risk protection and savings for industrialcompanies