Improving Property Risk Profile Could Be Key to Maintaining Competitive Insurance Coverage

It had been a difficult year for the manufacturer. Longer supply lead times. Higher costs. Smaller margins. Oh, and a pandemic.

Now the company’s risk manager was recommending that they spend a lot of money to upgrade the sprinkler systems in their warehouses. Looking at the cost versus the potential property insurance premium savings over 10 years, the math just didn’t make sense to the management team. They declined the budget request.

A month later, a pile of rags left behind by a contracted maintenance technician caught fire. The blaze destroyed a recently enlarged section of one of the warehouses; the sprinkler system proved inadequate. The fire and the company made the local news, and an employee was hurt.

Now the company had a dilemma. Replacement of the old warehouse sprinkler systems was being mandated by both the local municipal building inspector and the insurance company. The upgrades would need to be completed prior to the next insurance renewal for the manufacturer to maintain its property coverage. Where would the money come from?

Why Risk Quality Is More Important Than Ever

Based on a simple financial analysis, the decision to keep the old sprinklers was understandable. However, other factors should have been considered, such as safety, operational resiliency … and how the company’s risk profile was perceived within the insurance marketplace. It takes just one loss—even a small one—to capture the attention of insurers.

As described in Hylant’s recent Market Update: Commercial Insurance reports, property insurance premiums are continuing to rise and, in some instances, capacity is being reduced. Loss control and risk improvement have become priorities for underwriters, and a company’s property risk profile will likely determine whether an insurer will write or decline the account.

Whenever a loss occurs, risk improvements that were previously optional and in the organization’s control —like upgrading or installing sprinklers—may become mandatory. Improvements that could have been planned and budgeted over a long-term schedule suddenly become high-priority projects that must be completed within the insurance company’s timeframe.

To maintain wide access to insurance markets and to retain control over planning and budgeting, companies would be wise to prioritize capital to continuously strengthen their property risk profile.

Elements of a Property Risk Profile

Today’s insurers want to know a lot more than how old a commercial property is and how far it is from town. Your property risk profile includes such elements as the following:

• Construction. What materials were used to construct the facility? Concrete? Metal framing? Is the building skinned with combustible insulation panels? What type of roofing material was used, and what technical standards were met?
• Protection. Does the building have adequate automatic sprinklers? If so, are they regularly maintained and evaluated against National Fire Protection Association codes and standards? Is your fire protection water supply reliable and well maintained?
• Operations. What mitigating procedures are in place for inherent hazards like flammable liquids or high-piled storage? Are automatic shutoffs and other safety devices provided on hazardous equipment that could contribute to a loss?
• Ignition source control. How are hazards like welding, smoking and other potential ignition sources controlled? Are formal procedures in place and are they regularly audited? Do you have a formalized program for managing on-site contractors? Has it been reviewed lately?
• Continuity planning. In case of catastrophic weather, fire or other disruption, do you have a formalized plan to continue operations with minimum disruption? Has the plan been tested and updated recently?
• Supply chain. If you rely on others for key products or services, what backup sourcing is available? Can you identify all of your single and sole-source vendors? By understanding, identifying and managing the key elements of your supply chain, you might gain more access and coverage for contingent business interruption exposure.
• Geography. Where is your property located in relationship to known perils, such as wildfire-prone terrain, hurricanes, fault lines and flood zones? This is something to consider when purchasing new property, too. If the price seems too good to be true, why is that (e.g., is it prone to flooding)?
• Neighboring exposures. Are neighboring properties well protected and a safe distance from your facility? Are buildings surrounded by combustible vegetation or landscape materials?

As you review your property, procedures and emergency plans, you will gain a deeper understanding of your risk profile. You may also discover issues you can address before they become problems or before an insurer mandates a resolution.

Your documented plans and actions provide valuable information that your broker can present to the insurance markets during your renewal process. A high-quality property risk profile sets you apart from others competing for the limited capacity that may be available and puts you and your broker in a stronger position to negotiate premium pricing.

For More Information

Your Hylant property risk management expert can assist you in reviewing your property risk profile and offer suggestions for improvement. If you aren’t already a Hylant client but you would like to speak with someone about your company’s property risks, contact us here.

Finally, catastrophic weather has partially fueled the rise in premium costs recently. With the onset of hurricane season just around the corner, you may find these related resources helpful:

• Business Continuity: Continuing Business After Catastrophic Weather
• Understanding Your Business Insurance Before the Storm Strikes
• How to Prepare for Natural Disasters and Manage Risk

The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.