PAG E 3 PROTECTING YOUR PROPERTY ® 800.382.2468 | AdjustersInternational.com Sheila E. Salvatore, Editor | Editor@AdjustersInternational.com | 126 Business Park Drive | Utica, NY 13502 Copyright © 2020 Rising Phoenix Holdings Corporation. All Rights Reserved. E01-1021 Insights for Your Industry® is published as a public service by Adjusters International, Ltd. It is provided for general information and is not intended to replace professional insurance, legal and/or financial advice for specific cases. Limits Upon receiving their renewal premium invoice, organizations will typically look to reevaluate their limits as a way to reduce cost. Unfortunately, simply reducing limits is often not a wise decision without conducting a very thorough analysis. This could involve calculating the probable maximum loss, reassessing asset values and better understanding the organization’s long- and short-term strategies. Moreover, insureds will quickly learn that simply reducing their limits might not provide the financial relief they are seeking, but rather could actually put them in a situation where they are underinsured. In the following example, it is important to understand that the primary layers of insurance can be the costliest because the carrier(s) providing the limit is taking on the initial risk —which dramatically contributes to the majority of the premium cost. Scenario: Manufacturing Company ABC has $400 million in limits on their property portfolio with a Total Insured Value (TIV) of $1.5 billion. The TIV is comprised of five locations with multiple buildings at each location, plus other associated business property and business income. Each of the five locations has a Probable Maximum Loss (PML) of $100 million; so in a catastrophic event, if all five locations simultaneously experienced an event —where the PML for each location was reached — then there would not be enough insurance to bring the insured back to whole or pre-loss condition. There will most likely be multiple insurance carriers providing limits to make up the total of $400 million. The primary layer in this example is $100 million and makes up for 75 percent of the overall premium—with a quota share of four carriers each providing limits based on capacity they are willing to underwrite. The excess layer is $300 million and makes up the remaining 25 percent of the premium. After a quick analysis, if limits were reduced by 75 percent, there could be a cost savings of 25 percent. It should be noted, however, that the insured already does not insure to the organization’s total PML, so by reducing limits by 75 percent, the insured could leave themselves in a vulnerable situation. The flip side to the argument to reduce limits could be that the PML’s are higher than they need to be because the buildings are very old and would never be rebuilt to in-kind Replacement Cost Value (RCV). In this instance, the statement of values could be readdressed and the associated assets could be assessed based on their functionality and what it would cost to rebuild Navigating a Hardening Property Market Continued
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