Winds of Change

In the wake of hurricanes, even insurers must reassess their risk exposures.

Many large corporations in the states of Louisiana, Mississippi, Florida, and Texas had prepared for the devastating hurricane season of 2005, assuring the continual flow of business through well-oiled disaster-recovery plans. But it’s the season’s aftermath that could take them by surprise: substantial increases in insurance-premium rates.

Property-insurance policies come up for renewal in January, and the word is out from insurers and brokers that companies with properties in disaster-prone areas should expect an average 45 percent rate hike over what they paid in premiums last year. Companies with major manufacturing facilities on the Gulf Coast, such as oil and gas concerns, are looking at much higher increases. “Some corporations may not be able to even get insurance, or at least affordably priced insurance,” says Karen Horvath, vice president of Oldwick, New Jersey–based A.M. Best Co., which rates insurer financial strength and debt.

The higher prices reflect the $40 billion to $50 billion in property losses absorbed by the insurance and reinsurance markets from hurricanes Katrina, Rita, and Wilma. Corporate buyers of property insurance in disaster-prone regions are left with few options: absorb more risk on the balance sheet, find alternative risk-transfer mechanisms such as captives, cede it to investors in a catastrophe bond (see “Ultimate Coverage,” at the end of this article), or simply plunk down more dollars in premiums paid to insurers.

Companies in this situation might take a page from the experts in risk management: insurance companies. Faced with their own property risks and business-interruption exposures, many insurers are — ironically — buying less insurance (or in their special case, reinsurance). Insurance companies are self-insuring, and applying balance-sheet management and disaster preparedness/recovery plans to reduce their exposure to hurricanes, earthquakes, and other natural disasters. So if it’s good for the goose, is it good for the gander? To find out, we spoke to CFOs and a top risk manager at four major insurers: FM Global, GE Insurance Solutions, Fireman’s Fund Insurance, and Wausau Insurance.

A $75 Million Bet

FM Global, one of the world’s largest commercial-property insurers, manages its property risk in three ways: loss prevention and control, business-continuity planning, and self-insurance. “We make sure our facilities — and we’ve got 55 offices around the world, 5 of which we own — are of the highest quality when it comes to risk,” says Jeff Burchill, senior vice president and CFO of the Johnston, Rhode Island–based company. “Our philosophy is that insurance alone isn’t enough; you have to do all you can to prevent loss.”

FM Global, with revenues of $4 billion last year, absorbs the first $75 million in property and business-interruption losses caused by a hurricane or earthquake, on a per-occurrence basis. “Above this risk retention, we buy excess of loss treaty reinsurance, which is layered among various top-rated reinsurers,” notes Burchill. “As far as I can recall, I don’t think we’ve ever had a claim reach into the reinsurance, which is a testament to the physical integrity of our facilities and the expertise of our loss-prevention engineers.”

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