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14 Factors that Influence an Organization’s Property Total Cost of Risk

Reducing your organization’s property total cost of risk (TCOR) is fundamental to its operational resiliency and financial bottom line. By identifying and analyzing key property performance indicators, you can develop a stronger risk management program that helps improve your risk profile while also making your insurance policy work more effectively should you sustain a loss. Here are 14 indicators to focus on:

1. Better Technology

The ability to provide precise replacement cost values of properties to underwriters is critical. This not only helps achieve proper recovery in the event of a loss but helps optimize your property insurance purchase. Similarly, businesses need concise analysis of the critical functions and operations contributing to their revenue streams for accurate assessments of potential business interruption exposures. Regardless of the size or scope of your operations, you should make sure your property and business interruption values are accurate and current as well to distinguish replacement values from market values for your physical assets.

2. Loss History

Property insurance programs consider 5- and 10-year loss experience. Many property underwriters consider loss history, including both frequency and severity, to be the single most significant factor in rating a client’s insurance program. Thus, there is a direct correlation with an insured’s loss experience and its property TCOR. By analyzing geographic locations and vulnerability to natural hazards, industry-specific exposures, supply chain, construction and business continuity planning, businesses can help reduce their exposure to loss going forward.

3. Risk Profile

From an underwriter’s perspective, a client’s risk profile is a key consideration in determining pricing, terms and capacity. In addition to recent and historical loss experience and industry sector, a risk profile typically includes geographical situation, values, structure, and catastrophe risk exposure. The risk profile also considers a firm’s implementation of sound risk management practices, such as fire safety, updated and regularly exercised business continuity plans and supply chain resiliency. Measures aimed at strengthening your risk profile can lead to more effective negotiations with insurers and as a general matter a lower overall cost of risk.

4. Prevention and Engineering

There is no proven strategy to eliminate exposure to loss, but risk leaders can manage, mitigate and minimize the complex web of loss exposures, which can range from damage or destruction of owned physical assets and those of suppliers to business interruption or curtailment from a variety of perils. For businesses and suppliers that operate in catastrophe-prone regions or that have limited water supplies to address fire risks, fire protection and engineering services can elevate a company’s capabilities to meet global standards.

5. Business Continuity Management

One of the most devastating exposures for any business is the disruption or curtailment of critical operations. Besides the obvious loss of revenue is the potential for prolonged or permanent loss of, among other things, market share, reputational damage and flight of key employees. Effective business continuity management calls for identifying vulnerabilities, calculating maximum foreseeable loss, and developing plans that focus resources on critical operations.

6. Supply Chain

For many businesses, even a temporary outage of a critical supplier can have devastating consequences that can extend beyond short-term revenue loss to include reputational damage and deterioration of market share. Given the strategic significance of global supply networks, businesses should direct adequate resources to maintain their supply chains and protect the value they deliver. Solutions ranging from enterprise risk management to actuarial capabilities and exposure valuation analytics can help firms pinpoint how and where value is generated, quantify potential vulnerabilities, focus resources where they will deliver maximum protection, and assess or determine the adequacy of business interruption (BI) and contingent BI insurance coverages.

7. Insurance Recovery

Whenever a business sustains a loss – whether it involves damage to an individual facility or a major catastrophe that causes supply chain outages or destruction of multiple properties – effective insurance recovery requires a fast and often comprehensive response from claim professionals. Because the ability to achieve a timely and complete insurance recovery is a critical element of a company’s TCOR, businesses should take steps in advance of any loss events to review their protection and position themselves to maximize recoveries should a loss occur. 

8. Pricing

There are many variables that affect the pricing of your property program, including, among others, commercial insurance market conditions, the amount and type of coverage purchased, risk retained, program structure, and all the elements that make up a company’s risk profile (loss history, location and construction of properties, industry sector, and various loss control and prevention). Working with your broker to benchmark your program against similar types of exposures will help determine whether your program is priced competitively and in line with your risk appetite.

9. Policy Terms

Policy terms can change from year to year, depending on market conditions and loss experience, as well as changes in an insured firm’s risk profile and operations. As insurance market conditions evolve, policy terms and conditions can become more favorable or restrictive. For example, in response to the number of natural catastrophes in recent years, many insurers tightened coverage for business interruption (BI) and contingent BI exposures.  Communication within an organization to key stakeholders about the decisions made in purchasing insurance is key. 

10. Structure

An efficient program structure can go a long way to helping an insured business or entity control its premium outlay, address critical exposures, and manage property TCOR. In evaluating this element of risk costs, businesses should work with their broker to assess any potential coverage gaps and determine how consistently their various property policies will respond to a loss event.  Businesses should also consider how different first party policies tie together (or not) and how some coverages may overlap such as property and cyber, property and environmental or property and crime.  Consider all the options in the purchasing phase and as claims occur. 

11. Limits and Sublimits

Businesses need to assess the adequacy of their property insurance limits to address any maximum foreseeable loss and understand how sublimits for certain types of perils, such as flood or wind, might affect the financial consequences to their firms from various loss events.  Again, it is important to communicate to key stakeholders as to how these limits may change year over year. 

12. Insurer Stability

The challenging investment climate and the potential for property insurance companies to sustain large losses despite sophisticated tools and algorithms to manage their aggregated exposures have created an environment where insurance market security and claims-paying ability requires constant monitoring.

13. CAT Exposure and Natural Catastrophe Modeling

As businesses expand operations globally, they must be aware of potential vulnerabilities to natural disasters and catastrophic risks to ensure they confidently measure and manage their property TCOR. Natural catastrophe modeling data provides primary and secondary characteristics on potential exposures.  The data also uncovers seismic risks from which organizations can pinpoint areas where properties potentially require engineering or property control attention to determine whether they are properly prepared to mitigate effects of an event.

14. Retentions

With respect to managing property TCOR, more businesses are leveraging analytical methods to determine their optimal level of risk retention. Depending on how much risk they choose to retain, they might consider evaluating the effectiveness of single-parent or group captives or other alternative risk-financing approaches as strategic mechanisms that might provide the ability to raise retentions and reduce risk transfer.

Conclusion

Market volatility is driving more organizations to look for better ways to use data in more meaningful ways.  Diagnostic and analytical tools available today can quantify your property risk exposure, identify and prioritize risk mitigation opportunities, and uncover areas for program improvement.