As a passionate follower of global insurance innovation initiatives, Patrick Kelahan consults within the Insurtech, fintech and health tech industries as a co-founder of The Insurance Elephant Company, a startup industry consultancy. Of particular interest for Mr. Kelahan is advocating for development of insurance products for otherwise underserved markets, and in helping new entrants within the Indian, African, and Latin America markets. He has particular interest in Pay-U Technologies in the Nigerian market and in Meesra, an Indian groundbreaking digital insurance startup, and Health Mitra, a company entering and innovating in the Indian healthcare/discount card industry. In addition, and while serving as Building Consultant for H2M architects + engineering, a Long Island, NY firm, he is charged with observing and anticipating ‘what comes next’ in the insurance carrier world.
Well, the tables are turning on those experts at managing risk- property insurers.
Rising claim costs, lag time between rate requests and rate increase approvals, intellectual capital loss within claim and underwriting staff, regulators with seemingly tunnel vision regarding how residents need to be treated and reinsurance relationships that are in deep chill are factors that are contributing to less eagerness within property insurer ranks to hold the traditionally drawn product and rate lines.
Property owners cannot celebrate schadenfreude for the carriers; if carriers get the risk management sniffles then property owners will contract risk management flu.
If the current challenges in the Florida and California markets are taken as examples of the scenarios noted above then it is clear that macro changes are needed in the manner in which property insurance is designed and distributed.
Let’s focus on windstorm coverage in Florida as an example of the dysfunction property insurance is experiencing. Windstorm coverage is expensive, the percentage deductibles are tending to make recoveries unaffordable, coverage is difficult to find even at prohibitive rates, and reinsurers are increasingly protective in terms of available limits and peril coverage. The frequency of natural peril catastrophes is increasing, and adequate reserves are difficult to maintain. The presence of a backstopping state-sponsored carrier (Citizens Property Insurance) is a false economy for the growing number of policyholders in that fold as the state’s taxpayers must fund the loss cost payment wallet if claim costs exceed current reserves. The tens of thousands of condominium associations are encountering growing difficulties in obtaining insurance on the respective facilities’ common areas, a problem that cascades into unit owners then having problems obtaining insurance on their insurable interest property.
There are additional macro concerns problems within the once staid insurance industry, of particular concerns are two factors, 1) absent the availability of affordable, effective insurance lenders are unwilling to fund borrowing for property purchases, and 2) Florida’s problems become national issues as the region is an important economic contributor in terms of agriculture, tourism and as a population center for the south.
All is not lost as the market always finds a way to overcome economic diversity; in chaos there is always opportunity if innovative ideas are encouraged, if all stakeholders recognize the criticality of the challenges, and removal of barriers is not seen as allowing the actions to be seen as caving in to unique or special interests.
Consider if the indemnity model is allowed to evolve and the evolution is incentivized across the insurance and financial industries. The key principle for change is the acceptance that encouraging initiative is not to be seen as rewarding one constituency or another; if insurance is made more affordable then all will benefit. A rising tide in insurance will truly raise all boats.
It is clear that windstorm coverage within traditional indemnity policies has now been priced beyond practical access and affordability in markets where elevated exposure to wind perils exists, and it is just as clear that a solution for risk financing in the high risk, high severity areas must be agreed to.
Recent headlines within the property insurance press have had plenty to speak of regarding carriers backing off providing insurance where chronic (and increasing frequency) storms are making affected regions risks that either cannot be priced accurately or are risks for which regulators are unwilling to approve rates for.
The reality is NOT doing something is impractical, but continuing traditional programs is financially foolhardy. What to do?
- Data and sophisticated analysis methods exist that can separate non-Cat wind loss severity data from tropical storm wind; separate tropical storm coverage from non-storm, retain non-storm wind within the ‘traditional’ policy, tropical storm coverage becomes segregated to an endorsement or excess coverage.
- Establish ceiling coverage limits for higher frequency, lower severity wind damage.
- Tropical storm coverage retains the higher deductible and holds a trigger for coverage that is defined within a tropical storm scale.
- Make pooled captive access available; captive vehicles allow an option for self-retention of risk and financial flexibility. ILS programs can be accessed for pooled captives per risk appetites or can be aggregated and ‘risk-smoothed’ through market basket distribution of the backing costs.
- If the past history of recovery efforts is considered, then the acceptance of government backstopping could be front-loaded in terms of pre-qualified access to low-interest lending or grant systems. These loan options can be pre-screened per policyholders’ intentions. Why wait months for the inevitable involvement of government programs when getting money on the street is the urgent need?
- Leverage available data that can provide property by property risk factors from which dynamic underwriting can be driven.
- Allow carriers the option of ‘self-reinsurance’ through access to government subsidized capital set asides tied to exposure to tropical storm cat effects.
These are just some of the ideas that could be considered to mitigate the risk exposures carriers and insureds are encountering, and surely there will be many who will say these ideas are not practical, or not legal, or selective in benefits, or whatever. One thing is certain- the insurance model that is in place now has become Cat-astrophically untenable and radical action is not only to be encouraged but is required to keep these windstorm exposed markets viable for risk financing.