A balancing act: Property rates and weather risks

Record date: 09/19/24
Air date: 10/16/24

Please note that this episode was recorded prior to Hurricanes Helene and Milton.

Recent moderation in property insurance rates, after 26 consecutive quarters of increases, coincided with increased severe convective storm activity through last spring and predictions of a hyperactive hurricane season. In the second episode of the “Market in Transition” podcast miniseries, guests Joffre Mishall, Head of Large Property for U.S. National Accounts; Grace Ries, Head of Middle Market Property; and Adam Hurley, VP of Property Risk Engineering for Zurich Resilience Solutions, discuss the delicate balance between rate moderation and extreme weather risks. Listen as they provide guidance on how businesses can build resilience for the long term. They discuss key strategies for investing in risk management, maintaining updated valuations, engaging with underwriters and leveraging risk engineering support.

This episode was recorded prior to Hurricanes Helene and Milton. In the days since those hurricanes, Joffre Mishall has shared additional insights on the interplay of hurricanes and the rate environment, adding: “The 2024 hurricane season is living up to predictions, as we had Helene and Milton impact Florida and beyond just a couple of weeks apart, with Milton also causing spinoff tornadoes that inflicted heavy damage. Are these market-changing events? It’s too soon to tell. We will have a better idea at the start of January, a key renewal date. We also still have several weeks to go in hurricane season. But these storms prove one thing: The commercial property insurance market is fragile, and the risks are increasingly volatile.”

Guests:

Joffre Mishall
Head of Large Property
Zurich North America

Joffre Mishall joined Zurich North America in 2007 and held several leadership positions in U.S. Commercial Insurance before becoming Head of Large Property for U.S. National Accounts. With more than 36 years of experience in the insurance industry, Mishall previously worked for nearly two decades at FM Global, where he held a variety of roles in property account management, claims and risk engineering. He has a Bachelor of Science in Electrical and Electronics Engineering from Western Michigan University. He is based at Zurich’s North American headquarters in Schaumburg, Illinois.

Grace Ries
Head of Middle Market Property
Zurich North America

Grace Ries joined Zurich in 2021 as a Vice President in Large Property and was promoted to Middle Market Head of Property in 2023. With more than 17 years of experience in loss prevention engineering, risk management and insurance, Ries also has worked in large property and middle market segments, cyber underwriting and risk mitigation for global companies in the chemical industry, pharmaceuticals, complex manufacturing, health care, higher education, food and beverage segments. She has a Bachelor of Science in Chemical Engineering and Materials Science Engineering from the University of California, Davis.

Adam Hurley
VP – Head of Property Risk Engineering
Zurich Resilience Solutions

Adam Hurley joined Zurich in 2012 as a Property Risk Engineering Manager and advanced through roles of increasing responsibility to become Head of Property Risk Engineering in 2020. Before joining Zurich, he spent six years at FM Global as a Loss Prevention Consultant and Account Engineer. Earlier in his career he was a designer of custom tooling for the automotive industry and, before that, an Offshore Oilfield Engineer in the Gulf of Mexico.

Host:

Al Orendorff
Chief Communications Officer
Zurich North America

Al Orendorff is Chief Communications Officer at Zurich North America, where he is a member of Chief Executive Officer Kristof Terryn’s senior leadership team. He previously held communications leadership positions at Allstate Insurance, Aon Corp., Genworth Financial and Choose Chicago. Orendorff began his career as a journalist working in television and radio news, including stints at NBC-TV in Peoria, Illinois, Black Entertainment Television, and WBEZ and WGN radio in Chicago. He is based in Chicago.

(PLEASE NOTE: This is an edited podcast transcript, capturing speakers with natural speech patterns that may include incomplete sentences and/or asides, grammatical errors, verbal shorthand and some statements that may be less clear in print.)

Episode transcript:

AL ORENDORFF: In the second quarter of 2024, according to some reports, for the first time in over six years, property insurance rates dipped into negative territory for many businesses. That's big news after 26 consecutive quarters of rate increases. At the same time weather experts predicted a hyperactive hurricane season. How can these two seemingly oppositional forces coexist?

Welcome to Future of Risk presented by Zurich North America, where we explore the changing risk and resilience landscape and share insights on the challenges that face businesses to help you meet tomorrow prepared. This is the second episode in our "Market in Transition" miniseries. Today we're diving into the changing dynamics in the property rate and risk environment and how you can navigate through them.

I'm Al Orendorff and with me is Joffre Mishall, Head of Large Property; Grace Ries, Head of Middle Market Property; and Adam Hurley, Vice President of Property for Zurich Resilience Solutions. Joffre, Grace and Adam, welcome to the podcast.

JOFFRE MISHALL: Thank you, Al.

ADAM HURLEY: Thank you, Al.

GRACE RIES: Thank you for having me.

Property rate moderation: justification and long-term viability

ORENDORFF: Let's get right to it. Joffre, we first saw rate increases start to moderate around March, right around the time when Colorado State hurricane forecasters predicted a hyperactive windstorm season.

Then, a report came out recently that in Q2 property rates actually decreased a bit on average. What's prompting the rate moderation in property and is it justified and is it sustainable?

MISHALL: When we saw this rate correction in the market the past few years here, usually something like this, when it happens… it's like 12 to 18 months. This is the first time in my 36 years in the industry that it went 26 straight quarters.

That's very unusual for this kind of market. But remember, why did this start to begin with? It started because we weren't even collecting enough premium to cover a traditional loss, let alone large loss or CAT loss. So, what were the factors in this prolonged period?

First, you had Covid shutdown and then on top of that you had Russia attack in Ukraine. This put heavy pressure on our supply chains that were causing business interruption values to increase. We saw the reinsurance markets — although they lagged— they had to do a corrective market action themselves.

Then we saw our new CAT perils and I call these the severe convective storm perils that kick off tornado, hail and flash flooding. These are becoming more severe, more frequent. And on top of all that values fell behind… valuation itself.

So, I think, again, during covid, everybody was worried about a lot of things. I think values kind of took a backseat and we started having these large losses, started seeing these valuations are way below what was being reported.

So, we had to basically make a correction in values at the same time. So again, with all these factors, I'm sure I missed a couple here and there, but with all these factors, it just prolonged this market to be the 26 quarters that we saw. I think this past quarter was the first time we actually see a level off or a rate decrease in that period of time.

Are rates in a good spot?

You know, I have to say that we're still seeing these new CAT perils. The severe convective storm that is still becoming more severe, more frequent. We're also seeing a loss inflation of 5%. I know overall inflation's down, but in losses we're still seeing this inflationary issue.

So, are they in the right spot? I can't say, but I can tell you that we still have to worry about these things. But they are attracting people to bring capacity in the market. And that's what I was going to say, commercial rates are very attractive now.

We see a lot of people being aggressive in this market now because of the attractiveness of the rates. And it's not new capacity coming in it's the same capacity we've seen. But a lot of those capacity markets pulled out during the hard market because they were having a hard time with their loss ratios.

So, we're seeing them coming [and] clawing their way back into the market. And we're seeing London being very aggressive in these markets as well. I'd say the other factors here is the brokers are advocating rate cuts for their customers because they've been so long of rate increases and we're seeing the CFO and Treasurers get more involved with risk management. They've been seeing these big invoices come in at them for the last 26 quarters. [It’s] like I said, they're looking for relief.

So, they're starting to get more involved and they might look past relationship or past losses paid. They might just say, “You know what, I'm just looking for a cheaper solution.”

So, these are all the things that I would say is in the market right now. What we're seeing and we, you we're just adjusting and making sure that we're Zurich's providing what we need to in this marketplace.

ORENDORFF: Wow, that's a lot to keep track of. Grace or Adam, anything to add to that?

RIES: Yes, Al, Joffre is very on point of the list of all the worries and concerns that the property market is experiencing. Unfortunately, the mid-market landscape is seeing exactly the same perils.

Mother nature doesn't really know if she's hitting a large property location or a mid-size market location. So, we are certainly also seeing the same level or higher even pressure on mid-market companies and seeing the moderation in property rates.

Then you take a layer deeper. You might see certain types of industry practices too, the different levels of moderation, even making certain occupancies and industries even more attractive in the marketplace. Like the financial institutions, professional services and tech accounts. Those are highly sought after occupancies in the mid-market world.

ORENDORFF: Adam, any thoughts?

HURLEY: Yes and just reiterating, I think we're also seeing population centers move, which certainly puts some more population in areas prone to some of the severe convective storms things like that that Joff mentioned as well. We continue to see those sorts of losses drive outcomes. But as Joff said, it's been 26 quarters of increases and it is starting to moderate. The importance of accurate valuations and risk improvement in rate moderation

Why accurate valuations are important

ORENDORFF: So, it sounds like some concern is warranted over the rate moderation. But over the past few years, I know we weren't relying on rate increases alone to deal with the challenges in property. Were some actions taken that could maybe give you a little cautious optimism, Joff?

MISHALL: Yes, I would say it took a concerted effort by the customer, our distribution partners and the broker community as well as ourselves to really get the values to where we needed to put them. Because the hardest thing about insurance is understanding the exposure and if we don't have good values, then that exposure just becomes much, much more unknown. And when you're unknown on exposure, you're very conservative in your capacity outlay as well as your pricing.

So, to me, the optimism is people know that they have to keep an eye on their values and make sure that this doesn't get out of hand again, because on top of a rate increase, then you throw a value increase on top of that.

This was really causing some pain for our customers in their financial areas. I would also say that I had a lot of risk managers ask me, "Joff, if I get these risk improvement actions done, will that help me with my rate?" And I was like, "Of course it will, but you have to do it now. You know, I can't give you credit ahead of time because the exposure still exists.”

I can tell you over these past few quarters that the rates were increasing the customers who invested in their risk improvement, who made the changes that needed to be made so that they could keep themselves in a very good spot. [They] saw a much better rate environment than those who put things off or just decided they weren't going to do the risk improvement. And they saw really heavy double-digit rate increases throughout this period.

ORENDORFF: Grace or Adam, your perspective?

RIES: Yes, that's what we are seeing too in the middle market universe, where our broker community has really stepped up and strengthened the valuation effort. We are seeing high single-digit inflationary increase. And when you get adequate values, like Joffre was mentioning, you also ensure you're purchasing the adequate amount of insurance that is reflection in your property risk transfer solution.

So, adequate values yields a lot of different positive results. Not only does it allow us to calculate the exposure correctly for you, for Adam's team, but also ensure you're purchasing the right amount of, whether it's NAT/CAT insurance or fire insurance. It comes a long way with adequate values.

And last but not least too, it really increases the contract certainty when our buyers are purchasing a product from a carrier. As we all know, percent deductibles are in play for a lot of the NAT/CAT perils that Joffre was mentioning before. So, what does that percentage really mean and how is that defined? It all comes down to adequate values. Adam, I'm going to punt that over to you to add some other insights.

HURLEY: Yes. As both, you know, Grace and Joffre mentioned the key to understanding what your risk is understanding what your values are. So, keeping those values current, certainly influence decision making. When we work with customers on risk improvement, one of the key elements we're looking at is how much can it reduce the, the potential for loss?

And risks that a company or an organization might have been comfortable with four years ago, that same loss scenario might be 40% more now just based on the valuation shift and the replacement cost shifts. That can certainly put an exposure outside the comfort zone of an organization and it really starts with making sure you have the right exposure information, the right values.

ORENDORFF:  So, Joff, what's your forecast through the end of the year in terms of rate trends?

MISHALL:  I'd say right now, as you mentioned earlier, Al, we are in a higher, more hyperactive hurricane season no major CATS have hit yet. There have been some hurricane hits, but just nothing in a major population center as Grace had talked about earlier.

We will see rates continue to moderate, as there's no activity in the Atlantic Coast. However, it only takes one major hurricane to stabilize rates. And if we do see two major hurricanes, which is predicted to happen, we could see the rates spike up again.

Really the heavy-duty hurricane season to me happens right around now. It's right toward the end of September. October's probably the most active month you're going to see and even leaks in a couple weeks into November. So really right now is when we're going to see what's going to happen in this hurricane season.

Evolving property risks: Insights and solutions for Middle Market customers

ORENDORFF: And of course, hurricanes aren't the only risks in property. Grace, what else is shifting insofar as property risks are concerned and especially any considerations specific to the Middle Market customers that you focus on in your role?

RIES: Yes, Al as mentioned before, you know, unfortunately mother nature when it comes to hurricanes, they don't know if a property is a large national or commercial risk or a middle market risk.

So, besides hurricane, we are absolutely seeing an uptick in both frequency and severity on hail and tornado perils. And some of these secondary perils really start to behave like primary perils as well. They're larger in size, a little bit more frequent.

As many of you might be seeing, the hail footprint is expanding in the U.S. and on top of that you also have winter storms that can impact half of the country at the same time as we learn from winter Storm Elliott. So that's the reality of Middle Market customers. Not only do they need a robust risk transfer solution, but we also need to help them prepare and be harnessed with their facility. Like understand, their water damage exposures. Water always flows from top floor to the bottom. How to strengthen their “domestic water emergency” plan. So that can continue to be a challenge for deductible's adequacy.

So, there's really no easy occupancy anymore. Every customer comes with some level of risk they need to pay attention to. The broker's job today, it is very tough. 26 consecutive, quarters of rate increase. And so, what our responsibility is to make sure we arm our broker partners with analysis and tools so they can help communicate the risk to their customers.

And a lot of times we in the Middle Market universe, we really don't have a Risk Manager. A lot of the companies have a multi-hat, responsibility where they're the buyer, they're the Risk Manager, the CFO.

So oftentimes… Zurich, we serve as a risk management extension in the arm for our customers. And so really proud of the work that the property team that our risk engineers from Zurich Resilient Solutions that Adam and Julie leads, have done to help our customers how to strengthen and harness their facilities in, to mitigate the exposures against tornado, hurricane, winter storms, flood and you name it.

So, when our customers like Joffre said put capital to improve their facilities, we often see the greatest differentiation in rate and in their insurance offering to stabilize these renewals in a really volatile world.

ORENDORFF: Grace just mentioned that we have to be risk managers with Middle Market customers. Adam, I'm sure that larger companies also value the support, the tools and the data and analysis that enable them to get in front of their risks. Can you share a little more about what some of that support might look like in terms of helping them address their property risks?

HURLEY: Yes, thanks Al. So, a few years back, we really started to take a deep dive at the data and I think you're seeing more and more data available to both insurance carriers, but also our customers as well. It started to identify many locations, experience flood losses outside of FEMA flood zones.

Zurich has developed some proprietary mapping tools that really help customers understand what their exposure is to flood, even when FEMA is not saying they're in a flood zone. When you look at areas like the, the Northeast where you have infrastructure that's aging, a hundred years plus they just weren't designed to handle the storms, that we're seeing now.

We've recently seen flooding in North Carolina that, again, the systems are just not meant to handle that level of water coming down at once.

The tool can really help our customers really understand what that exposure is at those facilities, how much water depth we expect in those facilities, if they are exposed to flooding. The nice thing is in many cases the water depths not expected to be all that deep.

There are preventative measures that our customers can take and we can really work with them, to make sure that they don't end up in a spot where two inches of water flowing across the parking lot ends up in their facility.

Little things like elevating equipment out in the yard and protecting individual openings that might allow water to flow in can really be the difference between a very disruptive loss and simply waiting it out and opening the doors back up when the storm has passed.

We also have some tools available now that can help us look into the future a bit. Zurich's developed models that can help our customers understand, what does your hail exposure look like in 50 or a hundred years, what does flood look like, that far out.

And obviously that depends on climate change and how we respond here in the coming years. But at the end of the day, customers make decisions that last a long time. Where to put a new facility, how it's built, what elevation to be built at, how robust it should all be really planned for what is coming in the future and not necessarily what's here today.

The crucial role of detailed communication in risk management

ORENDORFF: Got it. Adam, can you talk more about additional areas of investment and risk mitigation that more customers are embracing for their properties or need to embrace for their properties in this time of rapid change?

HURLEY: Yes, I mean certainly it's hardening facilities. We've seen much more investment in hail resistant roofs and protecting rooftop equipment in the severe convective storm areas.

But at the end of the day, some of this comes back to good old fashioned human element programs. Preventing losses on the front end really can make for a much better outcome. Emergency response planning, hot work management, business continuity planning are all areas we've seen much more investment.

I would also add technologies come into play. Grace mentioned, water flows downhill, things like water leak detection, temperature monitoring, are now very inexpensive solutions to try to prevent the most common losses that we're seeing out there.

And we do see that investment starting, once a location has had a water damage loss, they're much more likely to have another in the future.

Having tools like water leak detection, temperature monitoring, automatic shutoffs, can really mitigate those exposures as well. We've also seen a really substantial increase in interest in business continuity planning and also business continuity testing. We've recently done some work with a customer.

They had a really robust, business continuity plan, but hadn't really been tested in recent years. They thought they had a lot of redundancy in the system and quite frankly they did. But what they found in that study was they had a single piece of equipment that really had become critical of the operations.

It had moved from one facility to another and that meant that they had very little backup, for that specific piece of equipment. They weren't really aware until they literally walked through the business continuity plan and said, “All right, this piece of equipment is down.”

And they've quickly been able to reorganize and restructure, but that was a simple process change that was made at one facility could have impacted about 50% of their revenue.

And so, I think customers taking the time to understand how their products and services are deployed and developed, change management becomes really critical. And I think we've seen much customer interaction on the risk engineering side with we are about to make this change.

What future impact could it have? And let's work through that before we end up in a situation, where we've eliminated redundancy.

ORENDORFF: Speaks to the value of the extreme attention to detail that we need to be a part of. Joff, any thoughts?

MISHALL: Yes, I would say a key thing here is communication. It is key that the insured works with your carrier, especially if they've got a Risk Engineering Department to make sure that the improvements, they're doing are the right ones.

We've seen a lot of capital expenditure going toward improvement or just going toward other projects.

And I'll bring one example up. When people started putting solar panels on their roofs, not realizing that, okay, you've got this greatly protected building. You got a great rate on it because everything you've done is making sure that you're protected, it's mitigated.

You put solar panels on it because you want to save on energy, it's the right thing to do. That's what we're doing, shrinking our carbon footprint. But you've just created a major exposure to that building because if a fire starts in that roof, it's not easily put out if it's not installed properly.

And now you've taken this really good, protected building and turned it into a very large exposure. These are things that, again, communication with your carrier. Adam went through a list of things that they could do. Let's just make sure we're talking to your carriers, especially if they have risk engineering departments to make sure we're doing the right things at the right times.

Leveraging data for enhanced customer protection

ORENDORFF: Alright, taking into account the weather dynamics at play and the evaluation issues. How are we leveraging and sharing data on these issues to help the customer? Grace, let's start with you.

RIES: Yes. At Zurich, being data driven, just like others, is very important. Data is power. And so, like Adam has alluded before, we kind of have the crystal ball to help you predict losses and to calculate probable maximum loss called the PML. So, with all this is data, we can do a better job now to evaluate actual losses for our customers. So, then they're staying ahead of these emerging trends.

And we are proud to say that we have a global project that was developed to make sure all of our engineered and calculated PMLs estimates are consistent throughout the globe. And we are also being mindful of the new emerging trends that are coming onto the market.

So, among the trends we've identified, like what are the driving factors that are contributing to these PMLs? We are seeing a higher smoke damage and water damage.

Of course it depends on the occupancy, but historically have been quite understated. So, we're trying to stay ahead of some of these emerging trends, including new parking garages. We, highly recommend that to be sprinklered. We might even be ahead of the NFPA (National Fire Protection Association) requirement as well.

And that is really due to the evolving prior risk of the different types of electric cars and also the increase of plastic in cars that makes fire harder to put out. And in terms of these electric vehicles, the lithium-ion batteries charging stations are really presenting in higher fire risk to our insured.

And again, last but not least, as we alluded before, the adequate values are just so important. That's the basis and the foundation of good data that can be shared with our customers. And so, we're continuing to strive to increase the comfort level of valuation between the customers, the brokers and the insured.

Common risks in large and mid-sized commercial properties

ORENDORFF:  What are some of the most common risks associated with large and mid-sized commercial properties? Joff, let me start with you.

MISHALL: I would say right now it's the secondary CAT perils that we've been talking about is severe convective storms. We're seeing more severity and we're seeing a much more frequency in this and that's still going to be our loss leader going forward. The other one we can't forget about is winter storms, I think Grace brought this up earlier.

Winter storms is causing pipe breakage, which is causing escape liquid damage. Which again has been a loss leader for us the last few years when it comes to large CATs. So, these are two areas.

ORENDORFF: Grace, any thoughts?

RIES: I agree with Joff the same types of risks there are hitting our mid-size commercial properties as well. Seeing the same type of events causing larger severity events with more values at a single location.

And what makes it unique for a Middle Market customer is oftentimes, kind of what Adam alluded to. It is usually a single location, a single manufacturing facility, a single critical piece of equipment relying on a single warehouse, a single processing line, all supported by a single carrier.

So, all of these really need to line up quite right for the broker and the customer because the margin of having a large loss, it's really extremely limited.

Key tips for enhancing risk profiles with cost-effective solutions

ORENDORFF: Alright, as we wrap, what would each of you identify as perhaps one key effective strategy that a customer or broker should consider adopting to help build property resilience in this dynamic time? Joff?

MISHALL:Yes, I would say you need to be prepared and invest in your risk management and have a regular cadence for updating your valuation. Those are key areas, I think.

ORENDORFF: Grace, how about you?

RIES: I would recommend engage your Underwriter and your insurer early for all the renewal discussions and identify, key areas to mitigate the risk with the capital expenditure that is allowed.

A midsize company, when you want to add a new location into the portfolio, really think about the natural catastrophe footprint that it might coincide.

And engage the risk engineering team to help you develop some very low-cost effective risk mitigation options like winter storm or water emergency response plan to get a head start in your risk management strategies.

ORENDORFF: Adam?

HURLEY: Really, it's just going to come down to never stop preparing. Stay consistent in the effort to improve the risk regardless of what the market is doing. Work with your account engineers to have both short and long-term plans on what can be improved over time. It certainly will provide better outcomes. You'll be better prepared when something does happen.

Second, I would say don't underestimate the small things. The example Grace mentioned earlier around water damage. These things can be simple solutions, technology solutions now make preventing those losses or really mitigating them to small incidents.

Things like leak detection, temperature monitoring, and automatic shutoffs, can really prevent some significant headaches and pay for themselves overnight with one, one loss scenario. So again, never stop and continue to improve the profile over time.

ORENDORFF: Terrific conversation. Grace, Joff and Adam, thank you for joining us today and thanks to our listeners. If you like the show, leave a comment or review wherever you get your favorite podcast or you can drop us a note at media@zurichna.com.

Stay tuned, next week when our miniseries market and transition dives into auto casualty with Toby Cushing, Technical Director, Casualty at Zurich North America and David Strickland, Head of Casualty at Zurich Resilience Solutions. This has been future of risk presented by Zurich North America.