In The Public Eye: Economic Factors and How They are Impacting Property Insurance Renewals
Environmental factors have resulted in record losses across the globe. Carleen Patterson and Jeff Moench, Alliant Real Estate, discuss economic factors impacting the property insurance market and what you should expect for future renewals.
Welcome to the Alliant In The Public Eye Podcast, a show dedicated to exploring risk management topics and challenges faced by today's public sector leaders. Here is your host Carleen Patterson.
Carleen Patterson (00:18):
Welcome back everyone, to another episode of In The Public Eye. For the past couple of years, our public entity clients and commercial clients everywhere have been facing a very difficult property market. Environmental factors have resulted in record losses across the globe. And today I really want to move away from what's driving pricing from an environmental aspect and talk about some of the economic factors and how they're impacting the property insurance market. I've invited Jeff Moench, an executive vice president in our public entity education and pooling practice to our podcast. So welcome Jeff, and please tell our listeners a little bit about yourself.
Jeff Moench (00:58):
Well, thanks, Carleen. Thanks for having me. Great topic and excited to be here. You know I started my career about 30 years ago as an engineer at FM Global back then it was called Factory Mutual Engineering as a loss prevention engineer. Over that time, I transitioned over to a property broker and really haven't looked back. So I'm going on my 17th year at Alliant and I place some of the more complex and large property placements out there. And definitely, this topic is something that we're dealing with on a daily basis.
Carleen Patterson (01:29):
Well, I'm glad to know I invited the right person from Alliant to be here, to talk about this, but I want to back up a little bit. Over the years, the whole way we handle property risks has changed. After 9/11, there was a big focus on making sure we had detailed construction, occupancy protection, and exposure information or cope. before 9/11, we didn't even necessarily have street addresses for all of the locations. And so it really stepped up the way we were presenting to the property market. After super storm Sandy, secondary cope became a real issue, especially when you're in wind-exposed areas. And last year, we really noticed that underwriters were zeroing in on the individual entries on the statement of values and whether those valuations are accurate. What do you generally see for your clients that you work with as to how they're trying to keep their schedules up to date?
Jeff Moench (02:24):
Yeah, great question. We have that word: no quote, no hope. And of course, cope means construction, occupancy protection exposure, and what's happened is over time, property insurance has become more sophisticated than relying on models and those models require a lot of detail. And so that's why all those events that you just mentioned before, there's been an increasing emphasis on getting the construction type and the number of stories and year built, put into that. And a lot of that's model-driven because if you don't have that information in there correctly, you know, whether it's windstorm or really now the big one is convective storm and flood, even wildfires being modeled now. So, all that data is really important, but even if you get all that right, if you don't have the valuations correct, the model can't do anything. So if you've missed the valuation piece, the dollars, then the markets are not going to be. And the insureds, frankly, aren't going really know what their true exposure is.
Carleen Patterson (03:27):
Yeah, that's a really good point. And back when it was a soft market and there were blanket limits, even having individual scheduled values, correct, was less important because you had that blanket limit to fall back on. So that's a really good point. Well, you and I work with a lot of public entities and as with any public entity, budgets are a big issue for them. And so I've struggled and my clients have struggled with being able to afford valuations on a regular basis. And so I know there's been times where they've just taken their entire schedule of values and said, well, let's just increase it by 3% or let's just increase it by 5%. What do you see as the biggest downside to adjusting a schedule that way?
Jeff Moench (04:12):
Yeah, it's a great question. And we've been in this environment, and I think I said, I've been doing this 30 years and at least in that period, we haven't seen inflation like this, I think maybe what I hear in 40 years and I think there's some new numbers out again from the government about seven and a half percent inflation. Because this is the number that they came out with. You know, our clients just haven't had to change their valuation in that kind of manner in a long time if ever. And so you're right, it's a big deal. And then you talk about the cost and expense of doing valuations at all the properties. That's a tough one. So, it depends on the client and the insured and what their ability is to do that. But we like to have rotated onsite appraisals for buildings and property over a certain value on a rotating basis.
And then you supplement that with an inflation factory each year. And, you know, that's what most people do. The tough thing is you never want to take an ablation factor and then just apply it randomly to a statement of values that you're not too sure about to start with. Because then you're just kind of adjusting something that maybe didn't have a lot of bases, to begin with. So, one of the practical things that we really recommend that you do is take your SOV statement of values and look at your dollar per square foot and just maybe create a new column and go down your list and take a look and compare the different type of occupancies you have versus that and see what kind of consistency you have. Get out there early, maybe talk if you've done any new construction, talk to those people, talk to your facilities, people to see what, what they're seeing on, one dollar per square foot. And then maybe the last thing to do is talk to your broker or your peers that are in a similar type of occupancies and what they're doing. So those are all things that you can look at besides just applying the latest marshall and swift or adjustment factor on any given year.
Carleen Patterson (06:12):
Yeah, you mentioned this record level inflation factor and, you know, I've had clients that are really surprised by that, but what is really driving that inflation factor and why is it so crazy this year?
Jeff Moench (06:25):
Yeah. So, we could spend a long time talking about that and I'm not sure. There are probably economists and people that can talk about whether it's been government policy or coming out of COVID. And I think it's just a combination of all of those things, but certainly the environment we've been in with COVID pressure on the supply chain and then this big wave of people kind of coming back out of hibernation, so to speak, and out there building and goods and services. So, we've seen just a tremendous spike and just a need for resources. And then I think we've all seen labor costs are up tremendously, and obviously, a big part of replacement cost factors is the labor that's required to repair or rebuild something. So, all those things that we've been reading about in the newspaper for the last six months and that we're experiencing, when we go to Home Depot, that's all filtering through to increase on replacement cost values.
Carleen Patterson (07:26):
So, you're basically saying that the added value to the home that I'm enjoying here in Texas is great for me personally, but not great when it comes to our clients and they schedule the values.
Jeff Moench (07:39):
Yeah, I guess that's one way. And definitely Texas with your neighboring state Louisiana with the big storm last year, you're also seeing just demand surge and a record amount of supplies required regionally. And so that even impacts certain areas of the country even more so than general, just because of particular weather events that happened in any given geography. I mean the other thing that's impacting things is that carriers are looking at the historical losses that we're providing and they're kind of applying inflation factors to those claims to put them in today's values. So, we're also up against that a little bit.
Carleen Patterson (08:22):
Right. Yeah, I recently read an article in the risk management magazine where a senior executive at Liberty mutual actually said that he estimates about 75% of the commercial properties are undervalued. And it didn't really divide those commercial properties out by types of industry. And I thought it was kind of unique to public entities, but it doesn't sound like it is just a public entity problem. And I know you work on a few other industries as well.
Jeff Moench (08:53):
It's a perception in the market that values are underreported. Would I say 75%? I'm not sure I would go that high, but you've definitely seen a challenge to keep up with values and markets see that one of the things the markets have or you know, when we see real claims occur is that thing I call like demand surge or code upgrades or other things that impact or rebuild that aren't necessarily supposed to be in the statement of values, but in a unique loss may drive up that costs. And I wouldn't put that in a bucket that something is undervalued. It's just a unique characteristic of events that happened after a storm or to a unique property or something.
Carleen Patterson (09:38):
So, if a client has taken some time or spent some money to try and keep their schedule of values updated, or at least some of the largest locations on their schedule updated, the impact of applying inflation factors will be easier on them, do you think? Or how do you think that our clients can avoid getting hit like this?
Jeff Moench (10:01):
Well, we're moving into something like our fifth year of increasing property rates. So, definitely be aware that when you increase values, you're putting pressure on higher premiums. So, I think it's really important to have a good story about your values. And so, it means really starting early, some of those things we talked about earlier of engaging your facilities people having command over how you've trained historically and just doing the hard work, leading up to your submission to make sure that you have a credible story. The reality is that values are going to be up, which are impacting premiums, but you want to mitigate that as much as possible by having a good command over the data.
Carleen Patterson (10:42):
You know, you did something interesting with one of our clients a few months ago, and really dove into the schedule of values. And we're looking at the wind-exposed locations and you just did a simple Google search on one of the locations and we discovered that it was listed on the property as being wood frame and something else on the schedule. And then when we looked at it, it was the same with a lot of glass, but the way an underwriter was rating, it was completely wrong because of a simple error on the schedule. And so, that's just a great example of when some of the work that you do with the schedules our clients turn in, but also having that correct data and how it can turn around and impact the renewals. So, we really appreciate the work that you do for our clients. But I think that this is a great conversation topic. And if anybody has any questions about it, please do reach out to us because it is something that's impacting all of our clients, but before I close down and you know, we close out, do you have any closing thoughts, Jeff, as far as what our clients can do to help avoid it? You did mention a few, but anything else before we close?
Jeff Moench (11:53):
No, I really appreciate Carleen. I think just really, like I said, starting early, reaching out to your broker, if there's anything that they can do to help you guide this process and probably it requires more effort and concentration on this topic than maybe we've had in the past, but starting early and doing the easy stuff first is definitely the way to go.
Carleen Patterson (12:15):
All right. Well, thank you very much Jeff for joining us today. It is a challenging time for public entity risk managers. And we want to continue focusing on providing information and resources as we navigate 2022 and beyond. So, thanks very much, Jeff.
Thanks for your message.
We’ll be in touch shortly.
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