Navigating challenges, embracing trends and crafting solutions for large property portfolios

Authored by AXA XL

Insureds with large Property portfolios have faced quite a lot recently: ongoing changes in loss patterns, persistent inflation, and the expanding asset type and valuation have all presented new challenges to clients and their insurance carriers. As frequency and severity increase and new challenges emerge, the industry needs to take a fresh look at the issues and review potential solutions and how to structure them to ensure better risk management and mitigation.

AXA XL’s Property, Risk Consulting, Captive Programs, Structured Risk Solutions and Parametric experts shared their thoughts about market trends and how to build a sustainable mitigation strategy to meet evolving risks.

What are some of the changes in loss patterns that you are seeing?

Raymond Chiusano, Americas Property insurance team lead for the Northeast region: We’ve seen a significant uptick in natural catastrophe losses to the industry starting around 2017 and continuing today. Since 2017, the market has been averaging over $100 billion of insured natural catastrophe losses to the industry per year. For the prior five-year period (2012 through 2016), losses ran closer to an average of $50 billion per year. The CAT losses have increased significantly over the last six years. Not just for traditional primary perils, but also secondary CAT perils: winter freeze, severe convective storm, surface water types of flooding, wildfire and more.

Scott Ewing, AXA XL’s Risk Consulting Americas Engineering Leader: From a specific peril perspective, hurricane and flood are a much broader event than say, a hailstorm or tornado. So, the risk of ruin is in the hurricane and all the peripherals, such as spin-off tornadoes and the flooding that usually comes with hurricanes.

Raymond C.: With substantial increase in those types of losses, that is putting a lot more pressure on the property market and has put plenty of pressure on our clients. As a result, we’ve seen substantial rate increases and modifications to terms and conditions over the past several years. We’ve also seen certain carriers reduce capacity. Even the reinsurance market this past year has substantially increased pricing, pushed larger retentions on to the direct carriers and reduced the amount of CAT capacity they are willing to provide.

When it comes to the energy market, how are carriers viewing and mitigating those risks?

Scott Dalton, head of Energy Property Americas insurance business: The energy sector has suffered several large losses over the past few years that is causing carriers to reposition themselves and how they deploy their capacity. In general, the more upstream in the supply chain the lower capacity being utilized.

Insurers are spending more time evaluating risk quality and modeling worst case scenarios. Extended downtime and clash exposures continue to be a concern and monitored.

Raymond C.: Those insureds in the property market who do engage in loss control, make improvements, and put proper protections and plans in place will fare better in a loss scenario, but they will also likely get more stable capacity and less volatility in those programs because they are doing the right things. We as carriers will look to deploy more capacity to those types of insureds – the market would.

Scott E.: It never hurts to have a better modeled loss expectancy.

Stéphane Godier, Regional Head AXA Climate Americas: Combining efficiently parametric and traditional solutions is a good way to optimize budgets but moreover actionability of the insurance protections.

What kind of impact is being felt in the renewable energy space? How are the frequency/severity of today’s CAT events shaping the market? What are the challenges?

Scott D.: AXA XL is an insurance leader and expert through the transition to low carbonization. We are working with our clients to understand the new technologies being deployed and what risks and opportunities this brings to AXA XL.

As companies continue their efforts to produce wind and solar power, they are building in low-cost areas where the resources of wind or sunshine are plentiful. Since these areas are typically unpopulated (and have little loss history), it is easy to underestimate the potential exposures to Nat Cat events including severe convective storms and related damages.

Stéphane G.: Investments and exposure are increasing significantly; clients are becoming more and more aware about potential volatility in production due either to CAT losses (wind and hail, mainly), or to natural resource availability, increasing the number of requests in the parametric space. Challenges also include lack of rain and lack of wind basically for hydro plants and wind farms respectively, but also wind and hail protections for photovoltaic farms.

What are some ways that clients and carriers can address this ever-evolving market?

Scott E.: From a risk consulting standpoint, my team is all about identifying exposures, quantifying those exposures, helping our clients understand them, and then helping them address those exposures to try to mitigate with protections or improvements to buildings or materials. We also visit the clients and survey their properties to identify and quantify their level of risk.

Our Risk Engineering and Analysis Advisory Services are involved throughout the client cycle. We can look at a prospective client’s operations prior to application if need be. We can also review third party data and we can score the protection of a risk. We can assist in the CAT modeling. On renewals, we get to work closer with the clients and do physical surveys and analyze trends. Plus, we present clients with trend analysis and then work with them to improve risk mitigation.

All of this is done with full transparency. We don’t capture information and do analysis behind the scenes. Everything we analyze and determine is shared with our clients. Physical risk and mitigation strategies must be transparent so that our clients can make good business decisions.

How are clients looking to their captives & non-traditional insurance to help with these strategies and decisions?

Steven Bauman, Global Programs & Captives Director, Americas: Captive utilization and formation growth has been off the charts for the last three years. That means that not only are there more new captives being formed, but existing captives are taking more risk, writing more premium, and more lines of business than they’ve ever written before.

A client, through their Captive, can take additional natural catastrophe exposure where their exposures have grown and/or where insurance markets may have retreated a bit. In a case where a client is particularly troubled by a lot of Nat Cat exposure, we can work with the client and their captive to amplify those retentions in a program and better utilize their assets to support themselves and deploy our capacity in a more strategic way. It’s a good strategic use of a captive that helps everybody: not just helps the client assume some of the risks and retain premium, but it also takes a little bit of weight off the carriers in that they don’t have to put out so much natural catastrophe cover.

A captive is like a multi-tool. It could be used for general capacity to bolster a client’s insurance program, or it can be specific to the client’s needs, such as for additional Nat Cat capacity. It brings much needed flexibility to a property program that may be having challenges now.

One note: Since Clients will be taking on more of their own risk with a captive, the first several years with a new captive is probably going to be more costly for the client – there is no immediate savings. But over time as the client assumes more of their own risk, it should pay off in the long run, particularly if you’re being measured and willing to accept market pricing and let it grow over time.

Stéphane G.: As climate volatility increases and traditional markets are hardening (driving to increased prices and deductibles), there is more and more demand for Nat Cat deductible buy down and/or carve out solutions in the parametric space. This is a clear trend for Tropical Cyclone, Earthquake and hail in particular.

Clients also appreciate the fast availability and the discretionary use of payouts in case of a claim, enabling immediate/emergency actions.

What are some other innovative options for clients to help improve their strategic risk management efforts?

Austin Su, head of AXA XL’s Structured Risk Solutions business in Americas: One solution is a structured insurance/reinsurance program. A structured (re)insurance program is an effective tool to help the clients manage their retained risk very efficiently. This type of program typically provides a multi-year protection with profit and risk sharing elements in place to help the insured avoid annual risk volatility from large, individual events or aggregate losses.

A multi-year program provides insureds with some insulation from the primary market’s pricing cycle and can lock in capacity from underwriters. A structured program provides greater certainty in premium budgeting and coverage over a multi-year period.

Another important feature of a structured program is the ability to reward the insured for favorable loss experience by essentially building up an experience balance over a period which can be commuted back to the client at the end of the term of the contract. For clients with a good loss history, it’s another way of managing their own destiny.

Stéphane G.: Beyond risk transfer solutions, AXA Climate is providing a full set of resources aimed at helping our clients better understand the impact of different climate scenarios on their business exposures, as to reduce the impact of their business on climate. Understanding at the asset or supply chain level, the potential impacts of these different scenarios, is a prerequisite to any sustainability policy.

How is AXA XL helping clients?

Austin S.: AXA XL has all the above products, solutions and services to offer. Most importantly, our teams work together without a ‘silo barrier’ to help our clients by providing the best in class, optimized insurance solutions to achieve their risk management goals.

As the market continues to change and evolve, our teams will continue to monitor the market, including emerging trends, to ensure that our clients have the most up-to-date information and analysis they need to keep their businesses protected. Having a vast team of experts working for your benefit is a powerful mitigation. That is why we’re here – to help clients mitigate their losses and protect what matters.