By Neil Head ,
22/03/2022 · 4 minutes read
The COVID-19 pandemic has placed property damage and business interruption (PDBI) insurance under the microscope for many organisations. PDBI insurance coverage persistently remains one of the largest premium spends for insurance buyers. This, combined with the wider challenging PDBI insurance market conditions, has resulted in many organisations reflecting on how they buy the constituent parts of their PDBI cover.
Coverage for natural catastrophe (Nat Cat) perils is one component of PDBI coverage that is becoming more critical in the face of climate change – Nat Cat incidents are also unimpeded by the emergence of COVID-19. With such potential for severe financial impacts, how can organisations ensure that they remain sufficiently protected against Nat Cat perils while reviewing their wider PDBI insurance coverage?
There have always been layered considerations when purchasing PDBI insurance coverage, particularly across different industries. It is worth remembering that PD and BI coverage need not be purchased together at all.
Plenty of organisations do not purchase BI cover, for example, retailers with numerous locations. BI coverage for such organisations arguably becomes less a location-by-location consideration, and more an issue of aggregation.
Considering PD coverage, plenty of organisations operating in rented or leased premises, such as caterers or facilities managers, may reflect on their need to purchase PD coverage at all. If they do not own the physical premises, their potential PD losses become limited to the often lesser cost of contents, machinery, and stock. The more pressing concern once again becomes the risk of potential aggregation.
A pandemic would be one example of a potential aggregated event, yet insurers have almost universally excluded contagious disease cover from PDBI policies going forward. Nat Cat risk, however, remains one aggregated risk for which coverage is very much available, but few organisations are fully aware of the quantum of their potential Nat Cat losses or the sufficiency of their current Nat Cat insurance coverage limits.
Recent catastrophic events have brought Nat Cat cover into ever-sharper focus: 2020 was the fifth costliest year on record with regard to insured Nat Cat losses. What is more, 2021 was the fourth costliest – four of the six worst years for natural catastrophe-related insured losses in history have occurred in the years 2017-2021.
Recent trends concerning the occurrence of Nat Cat perils as a result of climate change strongly suggest a gradual increase in the likelihood of Nat Cat events going forward, particularly with regards to ‘secondary perils’ such as flash flood, hail, and wildfire — losses from such secondary perils contributed to more than 60% of the insured losses in 2020. Secondary perils were a key driver for 2021’s figures also. These factors culminate in organisations being more conscious than ever about their potential exposures to Nat Cat risk.
Additionally, advancements in insurers’ Nat Cat modelling capability means risk quantification is much more of a driver for insurance pricing than it might have otherwise have been in the past. Previously it may have been more of a guiding factor, such as when modelling software was less sophisticated than it is today, and subjective judgement around how risks are priced may have been an equally weighted factor in placement discussions.
Today’s models utilise more historical data than ever-before to assess underlying risk, and the software available to simulate potential future risk has never been as widely available and as accessible as it is now.
One of the main reasons for this level of model development is because insurers’ own reinsurance placements are becoming increasingly dictated by the outputs of third-party Nat Cat models run by their reinsurers: hence, the need for more scientific understanding of the underlying risks, in order to inform placement negotiations.
Amid any wider review of PDBI insurance purchasing, it is important to consider whether coverage for Nat Cat-related risks is now critical.
If yes, the following two points need to be addressed:
If you would benefit from, or even have a critical need for quantification of your Nat Cat risk, it is key that you engage your risk adviser and collect as much construction, occupancy, protection, and exposure (COPE) information about your individual key locations as possible. The insured arguably has the best chance of collecting and overlaying the most granular information about their own insured assets. Greater levels of COPE information lead to less uncertainty in modelled Nat Cat losses, enabling informed decisions around coverage and (potentially) driving more appropriate insurance pricing.