3 reinsurance negotiation strategies for insurance carriers

The 2017 natural disaster season was the worst on record. Hurricanes Harvey, Irma and Maria cost an incredible $265 billion in combined destruction and affected vast swaths of Florida, Texas and the rest of the Gulf Coast. The particularly catastrophic year kickstarted conversations about reinsurance premiums and their ability to accurately reflect risk.

While reinsurance premiums have remained relatively flat, assuming the reinsurance market’s future stability could in and of itself be catastrophic, there’s no guarantee that prices will remain static. 

Given that past pricing pressures have dictated premium rates for about a decade, it’s time for insurance carriers to more effectively drive reinsurance negotiations using accurate data sets that can better reflect risk and lead to more favorable terms.

Here are three strategies carriers should consider to aid them in reinsurance negotiations.

Related: Swiss Re says adding anchor shareholder would be ‘attractive’

Account for remodeling activity

While reinsurance and remodels seemingly have little in common, this market trend can directly impact a property’s risk of loss. Many homeowners are investing in major updates, including new roofs, plumbing, electrical improvements and more — all of which have the benefit of mitigating carrier risk.

According to a recent report by BuildFax, home remodeling is at an all-time high and has increased by nearly 30% in the last six years. This seemingly unimportant housing trend has a major impact on reshaping the entire housing stock to better withstand storms.

In hurricane-prone areas like Florida, these improvements often include massive risk-reducing features like impact glass, cladding or other protections against high winds. By understanding trends and accounting for property improvements over time, carriers can more effectively assess risk and hedge overpaying for reinsurance.

Related: What to know about homeowners’ insurance if property value spikes

Beware of default settings

In many cases, carriers who aren’t privy to property changes across their book will default to “year built” as a proxy for property condition. However, this can lead to artificially high reinsurance premiums because it does not account for home improvements that reduce property risks.

For example, roof condition is highly predictive of loss; however, roof age is difficult to capture through traditional means like homeowner reporting. In the last 10 years, Florida experienced a 110.6% surge in new roof installations, representing an average annual increase of 8.9%, according to a new BuildFax study. That’s a significant amount of properties with the untapped potential to reduce exposure — and reinsurance premium costs by extension — across portfolios.

Ignorance of roof updates and other major structural improvements represents a missed opportunity during reinsurance negotiations, potentially leading to inaccurate PML calculations. By leveraging roof data and other data sets to more accurately calculate year built, carriers can gain portfolio-wide insight into property conditions and be well-prepared for reinsurance negotiations.

Related: Understanding debris removal coverage, costs and settlements

Leverage trusted third-party data

Following several relatively quiet years for Florida carriers, the violent 2017 season for natural disasters forced the industry to acknowledge that its catastrophe models were subject to much greater degrees of uncertainty than previously anticipated.

Now more than ever, carriers have an opportunity to drive reinsurance negotiations by utilizing advanced data services, in addition to catastrophe models. However, validating property condition and history information can be arduous and expensive. By leveraging a trusted third-party data provider, carriers can better understand when and how properties are changing to obtain more favorable reinsurance terms.

Beyond reinsurance, utilizing property improvement insights empowers carriers to price more competitively, underwrite more efficiently and lower loss ratios across the board.

As the dust settles following 2017’s hurricanes and other natural disasters, the industry is asking itself: Are we receiving an adequate return on our risks? With increased insights around property changes, carriers can take a strategic approach to reinsurance conversations and secure more accurate, favorable premiums.

Related: Global insured losses from disasters in 2017 were highest ever, Swiss Re finds

Holly Tachovsky is the CEO and co-founder of BuildFax, the leading provider of property condition and history insights. She can be reached at holly@buildfax.com.