The shifting dynamics of natural catastrophe coverage

SPEAKER: Welcome to the WTW Podcast Construction Blueprints where we discuss the latest risk management and insurance trends, as well as issues facing the construction industry. We'll speak with a variety of construction leaders and experts on global topics who can help provide you a blueprint for building your industry knowledge.

JOHN MARSICANO: Hi, my name is John Marsicano. I have the privilege of being the moderator for this episode of the WTW Construction Blueprint Podcast. I'm joined today by Kishan Dasan, Director of Strategic Growth Construction and Natural Resources in Melbourne and Todd MacDermott, Regional Construction Client Executive Claim Director Global Construction, Boston. In this episode, we would like to discuss the shifting dynamics of the natural catastrophe coverage globally and how we can learn from the more established cat markets in the US.

Kishan, we'll start with you. What are the current market conditions that you see in Australia versus here in the US?

KISHAN DASAN: Thanks, John. Thanks for that commentary. Australia has always had Nat-cats. And I'm going to just caveat that we do like to use acronyms in the industry. So I will short form natural catastrophe to Nat-cats. So Australia historically has had a fair few Nat-cats that go on every year-- bushfires, windstorm, hail storms. But in the last 24 months, the intensity and frequency of these events have really gone up. And that has caused insurers to really look at their books quite carefully over the last 24 months.

But in particular in the last 12 months, we've seen a number of events where insurers have taken a bit of a knee jerk approach. I'll give an example of a particular industry. So solar in particular, we've had a couple of large losses in solar where it has really triggered insurers to look at their limits that they're putting out, the capacity that they're putting out for such exposures. And they're actually paring back a fair bit and they're doing that in the manner of sub limits. And what they are starting to impose now similar to what I understand, John and Todd, that you see in the US-- annual aggregate sub limits for Nat-cat.

And that's something that we've not seen here. It's quite new to our market. So solar is really the first sector to see that imposed. So it's quite a big shift for us here. And understand that's something that you've been going through in the US for quite some time now. Would that be right, Todd?

TODD MACDERMOTT: It's been prevalent here for the last number of years in the United States. And Kishan, thanks for the kick off. The US has experienced a number of catastrophic event tied to the weather specifically named, storms, throughout the southern sector of the United States. So markets are a bit skittish on that front, obviously looking to share the risk with a number of their carrier partners out there in seeking, looking for the insurers to take a greater risk, a greater retention levels, especially with the cat losses.

JOHN MARSICANO: So Kishan, with that being said and the changing and the policy limits and the aggregate limits, how does it work from a deductible structure? Is it similar to that here of the US-- as it relates to Nat-cat coverage?

KISHAN DASAN: Yeah. We're starting to see-- I'll stick with the solar example, John. We're starting to see, especially on construction policies, values at risk at time of loss deductibles, so vital deductibles imposed now. And usually, anywhere between 2 and 1/2 to 5% vital with a minimum and a maximum. That's something that we've seen insurers starting to impose now. That can be challenging as well. Challenging in the sense that we need to explain to clients how a veto works.

And in simplistic terms, if you have 100 million exposed on site on a particular day, you have a giant cyclone come through, if you've got a 5% veto deductible. Essentially, you've got a $5 million excess potentially. So that's something that we need to explain to clients, we need to explain how those deductible works. We're seeing that being imposed. The maximum is something that we're pushing hard for our clients to bring in. Because the last thing you want is a 5% veto on $1 billion project with no maximum. And that's a significant amount of self-insured retention that the client needs to carry.

JOHN MARSICANO: And I think, Todd, I think maybe one of the things Kishan that I think you guys will see over time and learning is that BI valuations to create the correct aggregate limits. We still struggle here with clients developing the right limit on the aggregate side to ensure that they have coverage for the losses that they incur other than complete policy limit losses or catastrophic losses. The aggregate limit plays a big part. And I think, Todd, tell me-- correct me if I'm wrong, but I do believe we still have a lot of clients and businesses that don't look at it that way.

And they don't think ahead as to the coverage that they need against the aggregate limits. It's a one-and-done look for the lower cost on that end.

TODD MACDERMOTT: I would agree 100% there. I think there's a tremendous need for education both on the contractor side as well as the owner development side as to how to properly insulate themselves for these potential for catastrophic type losses seeking the appropriate limits. And as Kishan alluded to-- I believe that the insureds, the contractors, they and owners, whoever's purchasing the property builder's risk policy has to be cognizant of their retention levels.

Because if you're at the 11th hour on a project, and you have a percentage of CD a time of loss deductible, those things I don't necessarily think are always being contemplated as to how they're being funded. Contracts are one thing. But the reality is, if you have a $5 million retention on a loss, that's a significant risk someone has to take on and how that's funded going forward is, I don't think always contemplated by the partners in a project.

KISHAN DASAN: It's a really good point. And I was just going to add that I think we're at a point here in Australia that insureds or clients are not looking at lower aggregate limits as an option. At this stage, they're just looking to buy as much as possible. But I think that will shift with the price going up for this aggregate limits. Like I'm assuming that's what happened in the US where there's a cost associated with it, and there's an increasing cost. I think that's where we're probably headed where insurers are going to have to consider options of taking lower aggregate limits for lower pricing.

But then they've got to work out, hey, what do they really need? That's going to be the key.

JOHN MARSICANO: And I think that is the, Kishan, right? I think they need to focus on what is most important to them from a coverage perspective? What are the largest loss items within the policy, within the types of coverages? And focus on that to maximize and decrease the amount of exposure that they ultimately will have. I would imagine there would be some challenges in the coming months and years as that transition from a policy limit-- policy to the aggregate limit that we will face.

So with that being said, let's move on to the next category of the carrier broker relationships and how they are integral working in cat claims. Kishan, is there a spirit of cooperation when you're working on a catastrophic claim? Do they work as a partner together with all parties involved?

KISHAN DASAN: I would say so on the few recent examples that we have seen. I think carriers have really done their best to get alignment. I think the key is having alignment between all stakeholders. And I think it is key for us as brokers to really drive that. And we've done that on a number of cases on our side to drive that alignment between the insured, the insurer, the loss adjuster and any specialist that they may have, and make sure everyone's aligned from day one.

And I think that's really the key focus. Especially where there's DSU or delay in start up, DI type covers involved. There's an interest from the insurer to really get the insurers back on their feet as quickly as possible to reduce that DI, DSU claim. So I think our experience with a few insurers on the recent losses has been good. But I think the complexity will get more difficult and more challenging when there are many insurers on a panel. And we're seeing that for some of these projects, because there's challenge with sub-limits. I'll give you an example.

We place a recent solar farm, $750 million Australian dollars in values. And we had 13 markets on it. So you can imagine the complexity there from adjusting a claim. And there's 13 different insurers. Understand that there is a lead insurer, but we do have a claim that would be challenging.

JOHN MARSICANO: Todd, and to you I mean, we're seeing the change here in the US based on recent years with the challenges of cat claims. Is there anything you could tell Kishan that he should be looking for as they move forward with these changes in aggregate limits and some of the challenges that you're seeing with the spirit of the cooperation and how important it is to work together as a team and a partnership between the carrier broker and the insurer?

TODD MACDERMOTT: I really think it's a delicate balance. And first off, I believe there is an intent by the parties, the carriers to do right by the insured at the end of the day. I think having a high level of transparency between the parties at the outset of any type of event is critical to creating an efficient process and maximizing recovery on behalf of the insured. Ideally, we coordinate a partnership between the parties.

When we've been successful in doing that, allowing the carrier to have input into the-- I'm going to use the term corrective actions that are required by a cat loss with a great deal of focus. We talked about DI and DSU, delaying startup, and potential interruption at the end of the project, creating that visibility for the carriers. As long as they feel as though they're being viewed as a partner, I find the process to go relatively smoothly. One of the problems-- I don't know if you're seeing this, Kishan-- and your knock of the woods, but the use of third party vendors is becoming extremely prevalent here in the US.

It's not something new, but it's becoming a growing as carriers outsource a lot of their services and requirements to handle and mitigate these type of claims. Getting all parties involved and justifying existence is probably where the biggest challenge is presented to our insurers at the end of the day.

KISHAN DASAN: We're seeing that as well, Todd. Third parties coming in and that. I think you're absolutely right that partnership piece is so important. Say you do have a loss adjuster involved. And depending on the industries, getting the right adjuster out there for that industry. And I think that's becoming so important. If the right individual who has the experience as well. And that can be challenging when these adjusters are quite busy. It's hard to get the right individual with the right experience out for that particular case. I think we talk about alignment as well as I think one piece that I've started to focus on is even engaging the underwriters in these claims, heavy claim discussions, especially when you have a cat loss. Because there's-- again, I mentioned earlier, what is the intent? Or what was the intent to cover the project? Number one, our insurers, our contractor partners are finding themselves in a delicate position where terms and conditions of the policy require them to mitigate loss and take appropriate action timely.

TODD MACDERMOTT: But by the time the carrier representatives are out on site, you could have upwards of $1 million of incurred expense, and how we go about bucketing and capturing the coverage under the policy could become a debate between the parties. So early notice to the carriers, getting them involved, having transparency are instrumental to the successful outcome at the end of the day.

KISHAN DASAN: And I think, I was going to add as well, it's also preparedness before the claim happens to make sure we have manuals in place to explain to the client exactly what would occur in the event of a claim, who to contact, what's best practice, simple things like taking photos, making sure that document appropriately, as you said, Todd. So yeah, I think that's something that we try to do. And it is something that's quite important with full help.

TODD MACDERMOTT: Best practices are key. And you take a lessons learned approach on all of these things. And if you can develop consistency in how contractors manage the projects from the outset goes a long way to an efficient recovery process of a claim should happen and daily records, photographs, progress reports, those are all instrumental as to maintaining an accurate schedule in the event of a loss. So as if we get into a DSU or a delay in completion, those type of documents will be extremely helpful if they're current and accurate.

JOHN MARSICANO: And I think one of the things too, Kishan, I think one of the challenges that you all may face that you don't see now is with the policy limit laws and the use of consultants from the carriers. Insurers need to counter that with their own consultants. And here in the US, there are limits as to the expenditure of dollars for those consultants to offset the consultants from carriers. We basically tell people, look, you want to get them in early so that you establish the process and protocols.

And what we find is, the sooner you engage your own consultants to work alongside the consultants of that of the adjuster, you have a more seamless process. You have less questions, less responses. They know how to package, the claim itself. So the challenge, I think, is going to be or one of the challenges is going to be during this transition is, I don't know how consultants are paid for now in the open policies. It just whatever the cost is the cost is. Here, there's a set limit. And you need approval.

This is, hey, I'm using so and so, and then you go through the process of bringing those consultants in to help, level the playing field per se. So I think keep that in mind, too. I think that will be a challenge that you guys should start to see in the very near future unfortunately. So as we move forward and we talk about the consultants, and we talk about the adjusters and spirit of cooperation, one of the things that we really push hard for, and we think helps especially during a time of crisis is, get advanced payments on things that are easily identifiable, mostly that direct impact.

Do you see that, Kishan, a lot being used over in Australia, the use of advanced payments or from a cash flow perspective to get people back up and running? Or do you see as a challenge as you move this forward?

KISHAN DASAN: The recent large claims we've had, John, we've seen advance payments. And that's been fairly good. We've also seen when there is DSU or delay in start up, there's insurers are willing to offer mitigation costs to speed things up. So get clients back up and running as quickly as possible. So we've seen that on those cases. But I think the challenge is going to be that on those losses, the annual aggregate sub-limits weren't imposed just yet. These are policies written a couple of years ago.

With those annual sub-limits now imposed, it'll be interesting if we do have-- god forbid, another loss. It will be interesting to see how the market works through those limits. And these are limits across policy sections as well, single limits. So I think it'll be quite new to adjusters and also insurers. So it would be interesting. I mean, but as a whole, advance payments hasn't been an issue here.

JOHN MARSICANO: Todd, do you have anything to add to that as and maybe some points, focus on as they move through these transition from open policy limits to the aggregate policy limits?

TODD MACDERMOTT: I think, Kishan, you have a good grasp of it. I think we see similar approaches by the markets here creating that cash flow. Obviously, delays in ordering material and stuff is a challenge here. The sooner we can get funding for those, it goes a long way to mitigating the long-term risk and exposure potentially created by a cat event here.

But just paying attention to the various limits, aggregates, and single policy limits it's critical that's where bringing your broker resources or third party vendor who is familiar, intimately familiar with the policy terms and conditions, so that you can properly bucket and present to the carriers your view on incurred costs and where they should be funded from just helps manage the claim long-term.

KISHAN DASAN: That makes a lot of sense. So again, I think the other challenge is, I mentioned the number of carriers on policies now with everyone being quite cautious with capacity. And as I mentioned, you could have anywhere between 10 to 12 carriers. Then the challenge is, are you going to get everyone paying at the same time and the delays of getting those things approved? That's something that we haven't seen just yet, but I suspect that on some of these policies it could be a challenge. I'm not sure if you see that in the US with multiple carriers involved.

TODD MACDERMOTT: Definitely see it more regularly now. The way I've really tried to approach those things is obviously, there's a lead market. Lead market will take the control of a situation. But I would encourage in a practice that I've implemented and deployed on behalf of my clients is engaging all the markets, find out who the decision makers are, who controls the distribution of funds, making sure you make that connection, so that you can manage our client, the contractor, whoever our client is expectations on the delivery.

Because that is a concern. You may have agreement to fund X in advance but you know it's broken out over 10, 12. However, many carriers getting those funds distributed timely move forward whatever challenges that may be presented purchasing material and so forth. You want to have some level of guarantee that you can expect funding in an appropriate period of time. If other markets are all that's over in London, you never know how long it takes to get a check cut.

But I guess the point there is just establish connection with all participants in the who are on the risk at any time

JOHN MARSICANO: Todd, do you have any closing thoughts to wrap this whole piece up?

TODD MACDERMOTT: Biggest point of emphasis I have, John, is have that transparency, really get to try to create that partnership amongst all participants here. I mentioned earlier, there is an intent, there is a good faith effort put forth by most of the participants in these situations. And if you give them clear visibility on where the project was at a particular time, should a loss occur, what the proposed corrective actions are and allowing them to review and approve that. I think that helps streamline and create an efficient process.

It's easier said than done. Because people don't always necessarily contemplate worst case scenario. But everyone has a disaster plan, an emergency response plan within their organizations. It should really be transferred into all project activity as well. And it should be part of the orientation of the project management team in the event of a loss. What are we going to do? So I think intent is there by the markets, but it's our job to work with our clients to educate them on best practices proper steps to take and ultimately to get us involved as early as possible.

JOHN MARSICANO: Kishan, closing comments?

KISHAN DASAN: Conversations like this, John, with yourself and Todd, really helped because we can draw on experiences and us as a good example. It's a established market where, and you've seen this already. So it's drawing, from some of those experiences. I think we are going through a bit of a challenging time with a shift and getting everyone aligned is going to be a challenge. But I think as Todd said, there's an intent and there's good faith involved. I think we'll get through that period.

JOHN MARSICANO: Great. Well, I'd like to thank both Kishan and Todd for your participation in this episode of the WTW Construction Blueprint Podcast Series and what appears to be the ever changing market of global catastrophes.

KISHAN DASAN: Thank you, John.

TODD MACDERMOTT: Thanks, John.

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