Four Steps to Help Reduce Property Market Volatility

The past several years have presented formidable challenges for risk managers. The COVID-19 pandemic and the subsequent global drop in GDP are challenging on their own, but at the same time the insurance market has significantly hardened to a great degree. Many risk managers are now seeing their 15th consecutive quarter of rising rates for property insurance, with the past two to three renewals bringing double-digit increases.

In response to this volatility, companies are exploring strategies to bring premiums under control. To put their organization in a competitive position, risk managers should understand the utility of all available risk products and follow a four-step process to design fit-for-purpose property coverage. 

Controlling Costs: A Four-Step Process

Companies looking to reestablish control over their risk costs can follow a four-step process that takes a long-term — rather than transactional — approach to coverage. This process can enable risk managers to tailor solutions to their organization’s individual risk profile. 

Develop a long-term vision

In our experience, too many companies take a reactive posture, adjusting their buying behavior in response to the market’s short-term moves. A broader perspective, which would include assessing general inflationary factors over the past 10 to 20 years, can give companies a more accurate view of risk transfer costs. 

Alternative risk solutions could be part of the answer, but companies can’t accurately assess the utility of those solutions without a comprehensive, long-term vision for how much risk they are willing to take on and how these options could complement traditional products. In addition, alternative solutions take time and capital to set up. Risk managers can develop an overarching vision by determining the cost to carry their risk and the level of risk that is acceptable to their organization.

Gather the necessary data

To engineer an accurate risk profile, companies must gain insights from across the organization: historical loss experience, benchmarking, premiums, loss retention, supply chain mapping and contingent time element exposures, among others. Conducting a detailed risk management exercise is a time-consuming process that requires the cooperation of functions and business units. As a result, many risk managers have difficulty getting the data they need to engage in this exercise. A best-in-class broker should be well-positioned to help collect the metrics risk managers need to drive risk insights.

A positive outcome of the pandemic is that it has given executives and managers more time to engage in information gathering. At the same time, executive leadership teams have begun to focus more on risk and on steps to control insurance costs. Risk managers are now in a better position to aggregate data to support decision making.

Run models and forecasts

With these data in hand, companies can perform modeling to determine their optimal risk retention levels. To do this, they could explore areas such as interdependencies of risk or the costs associated with continued business disruption and mitigation strategies. These insights are critical, because they enable teams to accurately evaluate options and make trade-offs. For example, a company may determine that buying the maximum foreseeable loss for a one-in-500-years event is not a worthwhile investment and scale back to a coverage level more aligned with its overall risk profile.

Engage in data-driven decision making

Achieving fit-for-purpose property coverage requires informed dialogue and a thorough understanding of the trade-offs. Once risk managers have completed their models and forecasts, they should present their findings to the C-suite.

Many companies have used this process to significantly increase their retention by modeling catastrophe (CAT) risk, analyzing the total cost of risk, and quantifying updated and verified business interruption values. The output can pinpoint the break point between the amount of capacity in the marketplace and risk retention. This fact based analysis can help executives engage in data-driven decision making to determine the level of risk retention.

Consider Alternative Risk Solutions Carefully

Alternative risk transfer products include a range of products that can be used in specific, strategic ways to manage risk, including single-parent and protected-cell captives, structured risk solutions and parametric insurance.¹  Many of these solutions have been around for quite some time.

Some of the companies that have explored these alternatives are in stressed industry subsectors that have suffered historic losses over the past several years and seen their risk profile swing significantly. For example, some large corporations have endured many millions of dollars of losses from natural catastrophes such as windstorms, flooding and wildfires. 

Other companies have turned to alternative risk transfer products because of their size and global risk footprint. Once they have bought coverage in the traditional marketplace, some companies turn to specialty markets for additional coverage layers or to solve specific, pressing problems. Some forward-thinking organizations have pursued alternatives because they realize their existing property policies won’t enable them to get their business back up and running after a natural catastrophe or loss. 

Despite these use cases, risk managers shouldn’t view alternative solutions as a cure-all for rising rates. And as the market begins to moderate, interest in some of these concepts will likely wane. However, the quality of the underlying data is just as important in traditional risk transfer solutions as in alternative risk transfer. Improving data solves for both options.

Ongoing Benefits

Risk managers can put themselves in an advantageous position by applying data and analytics to assess risk in the face of market volatility. The process enhances visibility into risk and retention while improving resilience and informing risk managers about coverage levels and costs in the market. 

We believe this approach will become more widespread in the coming years. Companies that take these proactive steps — basing their buying decisions on data, analysis and a deep understanding of their options — will be better able to build a best-in-class portfolio of property insurance products.

^{1 “How Parametric Insurance Helps Risk Managers Take Control of Risk,” Aon}