Coastal property coverage: Where is it going, will it be available, how much will it cost, and who will write it? These are the major challenges facing insurers and consumers as the state prepares for the 2006 hurricane season.
Insurers are faced with how to provide ongoing aggregate coverage in coastal areas after two very active storm seasons, which saw eight major hurricanes cause extensive damage in the state. As a result, the coming storm season will see a far different reinsurance market than 2004 and the trickle down effect of higher rates will certainly be felt in early 2006. Some companies have already implemented moderate rate increases and no doubt property rates in high-risk coastal areas will continue to increase and there will be changes in current underwriting guidelines.
Therefore, companies are going to place an emphasis on several areas, including the following:
The effectiveness of building codes.
Older buildings that have not been properly maintained or retrofitted to withstand wind damage.
New housing developments with high value homes, which represent too much aggregate exposure in one location.
Proper roof tile and window installation.
The distance of the property from water.
The necessity of flood coverage to supplement wind coverage.
The good news is that property coverage will be available for the right price, but supply and demand will be the mantra of 2006. Prices will be high and strict underwriting guidelines will be followed. The guidelines will include factors addressing building codes, code enforcement, maintenance, the value of the property, and its loss history. Companies will also take into account the property's proximity to any body of water. The reality is that if you live in any coastal area whether it's in the Carolinas, Florida, or Texas, aggregate coverage will be a precious commodity and consumers should expect to pay more.
Your clients should understand that if they are currently written by a financially secure and stable carrier and have adequate coverage now, it might be in their interest to accept a carrier's offer to renew the coverage, even if the premium increase is higher than usual. Insurers place a value on continuity of coverage, and they are much more likely to give consideration in terms of pricing and continued coverage to a long term insured than to a risk that seems to search for coverage every year.
Underwriters look at the agent and the quality of the submission in addition to the risk itself. As an agent, if you haven't already cultivated productive relationships based on mutual trust with your underwriters and brokers, you need to start now. Given the last two storm seasons and the dire weather predictions for the upcoming year, it is likely that that there will be fewer "willing underwriters," and those underwriters will be closely guarding whatever capacity they have available.
If more accounts must be marketed than normal, underwriters and their support staff will be pressed for time. It only makes sense that an underwriter who receives a regular flow of quality business from an agent whose submissions are generally both timely and completed will give priority to that agent's submissions. Likewise, underwriters will probably give less attention to agents whose submissions require a lot of back and forth for clarification and information. Therefore, it's in an agent's interest to be upfront with an underwriter or broker. Let the underwriter know who else is working on your submission and, to the extent that you can predict, how long it will take to complete the application. Like it or not, for now, coastal property underwriting is king and the burden is on agents to be proactive when it comes to securing coverage.
If Hurricane Katrina taught us anything it is to ensure that adequate flood coverage must be in place. Whether your risk is a renewal with an existing carrier or securing coverage with a new carrier, if a potential exists for storm surge the underwriter will need to know that adequate flood coverage is in place. Agents need to be aware of the potential for excess flood coverage depending upon the risk or values for a given property. The failure to recommend adequate flood coverage results in more E&O claims.
The real crunch on coastal properties will be large risks. Properties with values in excess of $1 million are going to find a more difficult market — even when the risk is layered among two or more carriers. A recent survey of excess and surplus lines brokers showed a significant decline in the availability of higher value capacity. When trying to place higher value risks, be sure to give underwriters the adequate lead time necessary to deal with additional companies and markets.
Most admitted carriers that are continuing to write in coastal areas likely will make available some capacity for new business. The better risks (in terms of age, occupancy, construction, claims history) should still be able to find coverage. However, if the risk has any downsides (older structures not constructed to recent building codes, risks with losses, risks that have bounced around between insurers year after year) it will be all but impossible for the risk to find new coverage. For these risks, the agent will likely want to work with a wholesale broker.
Wholesale brokers have access to additional markets, including surplus lines carriers, which may be able to offer coverage that is not available in the private market. Depending on the individual risk characteristics and the appetites of the market available to brokers, some risks may need to be layered between several carriers. Some risks may need to be written on a wind exclusion basis, necessitating a separate policy to cover the wind risk. Brokers typically have access to wind-only carriers that agents cannot directly access. For these harder to place risks and to improve your broker's chances of landing the best available deal for your client, consider including a cover letter with your submission. Emphasize the positives, such as the attitude of the owner and building upgrades, and the overall maintenance of the property. It can only help.
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