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Agenda 03/23/2021 Item #11D (Real & Personal Property Insurance Purchase)03/23/2021 EXECUTIVE SUMMARY Recommendation to approve the purchase of Property, Terrorism and Equipment Breakdown Insurance effective April 1, 2021 in the estimated amount of $4,612,483. OBJECTIVE: To protect the County’s real and personal property assets against losses caused by natural and man-made perils and to comply with the Stafford Act. CONSIDERATIONS: The Board of Commissioners maintains a property insurance program in accordance with Section 311 (42 U.S.C. 5154) of the Stafford Act which requires that an applicant for FEMA assistance “shall comply with regulations prescribed by the President to assure that, with respect to any property to be replaced, restored, repaired, or constructed with such assistance, such types and extent of insurance will be obtained and maintained as may be reasonably available, adequate, and necessary, to protect against future loss to such property.” Staff submits the program to the Florida Department of Insurance for approval on an annual basis to assure compliance with the Act. The current property insurance program expires on April 1, 2021 and contains the following provisions: • Total insured values are $1,003,970,388. The total limit of coverage purchased (a/k/a the Loss Limit) is $75,000,000. • The named storm wind deductible is 3% per building and contents with a minimum named storm deductible of $250,000. Retained losses are capped at $5,000,000 per named storm. For all other perils, the deductible is $50,000 per occurrence. • Primary flood coverage is purchased through the National Flood Insurance Program (NFIP) on properties in special flood hazard zones. The property insurance program provides an additional $75,000,000 of flood coverage in excess of the NFIP coverage of $500,000 per building maximum. For FY 21, these major coverage provisions remain unchanged except for the following. • The Real Property Division identified additional properties to be added to the Schedule of Values in the amount of $46,424,880 (4.6%). This increases total insured values to $1,050,395,268. Although total insured values are $1,050,395,268, it is unlikely that the county will suffer a total loss. Therefore, the county purchases what is known as a “loss limit” that is commensurate with the probable maximum loss (PML) for a 100-year wind event. A PML study is completed for the underwriters by Risk Management Solutions, Inc. to determine the appropriate loss limit to purchase. For FY 20, the PML is $83,975,502 for a 100-year wind event. Staff recommends that the County continue to purchase a $75,000,000 loss limit. The FY 21 renewal was expected to result in an increase in the premium rate per $100 due to hardened conditions in the property insurance market affecting Florida public entities. In the years 2017 - 2020, many insurance carriers were operating at loss ratios of 100% or greater due to catastrophe events that include Hurricanes Harvey, Irma, Marie, Michael and Dorian; a record number of storms in 2020; California Wildfires; wind and hail claims in North Texas, Oklahoma, and Colorado; and riots in major cities. Further, underwriters have tightened underwriting guidelines for accounts in catastrophe exposed areas such as Florida and the Caribbean. Reinsurance treaties are negotiated primarily in January, April and July each year. Reinsurance pricing as of the end of 2020 was in the 10 -15% increase range. Thus, renewals after January 1, 2021 are reflecting the effects of the recent catastrophes on the reinsurance markets. 11.D Packet Pg. 376 03/23/2021 To market the program, the County’s broker, Insurance and Risk Management Services, approached thirty-seven (37) carriers for proposals. Twenty-eight (28) carriers declined to quote. Nine (9) carriers submitted quotes. Of those that declined to quote, the most common reasons were 1) they could not off er terms at the requested pricing; 2) they could not meet current policy terms; and 3) they are not willing to participate in a program that includes a named storm deductible cap. Based upon the responses received from the market, the cost to maintain the current program at the updated replacement values, current loss limit and at the existing terms is $4,539,937. This represents an increase of 5.28% in the rate per $100 and a gross premium increase of 10.1% or $418,150 compared to the FY 20 renewal. Of thi s figure, $217,502 is due to an increase in the rate and $200,648 is due to the addition of new properties to the Schedule of Values. The renewal comparison over a three-year period is illustrated below: Renewal Date Deductible Terms Annual Premium Composite Rate per $100 % Change in Rate per $100 $ Change in Gross Premium % Change in Gross Premium FY 19 Renewal 3% Named Storm Deductible with $5,000,000 Cap $3,486,642 .354 +13.8% +495,787 +16.3% FY 20 Renewal 3% Named Storm Deductible with $5,000,000 Cap $4,121,787 .4105 +16.4% +635,145 +18.4% FY 21 Renewal 3% Named Storm Deductible with $5,000,000 Cap $4,539,937 .4322 +5.28% +418,150 +10.1% Finally, the following property-related programs are submitted for approval for the April 1, 2021 renewal. Coverage Deductible FY 21 Premium FY 20 Premium Percent Increase/Decrease Dollar Increase Equipment Breakdown $25,000/$50,000 for Generating Equipment $37,090 $38,469 -3.6% -$1,379 Terrorism $10,000 $27,500 $28,300 -2.9% -$800 Watercraft Hull $1,000 $7,956 $7,131 10.3% $825 In terms of financial stability, each of the carriers possess a minimum Best’s rating of A- or higher. Covered perils are written on an “All Risk of Loss” basis. Loss valuation is on a replacement cost basis. There are no other substantial changes to the program. FISCAL IMPACT: The final premium is subject to the Statement of Values submitted to the carriers as well as additions and deletions of property from the Statement of Values as they occur. The estimated annual cost for all programs in the Executive Summary is $4,612,483. As of the agenda submission date, the rate per $100 and annual premium are guaranteed not to exceed pricing. The broker and staff will continue to pursue options to lower the cost of the program prior to the April 1, 2021 effective date. Sufficient funds have been budgeted within Fund 516, Property and Casualty Insurance for this purchase. The premium is net of commission. GROWTH MANAGEMENT IMPACT: There is no growth management impact associated with this item. 11.D Packet Pg. 377 03/23/2021 LEGAL CONSIDERATIONS: This item has been reviewed by the County Attorney, is approved as to form and legality, and requires majority vote for approval. -JAK RECOMMENDATION: To approve the purchase of property insurance as outlined in the Exec utive Summary and authorize the County Manager or designee to complete any applications or other documents necessary to bind coverage and services for a one-year period effective April 1, 2021. Prepared by: Jeffrey A. Walker, CPCU, ARM, Division Director, Risk Management ATTACHMENT(S) 1. IRMS Renewal Summary Letter (PDF) 2. Market Reponses (PDF) 3. Woodruff Sawyer Property Outlook 2021 (PDF) 4. RPS Market Outlook 2021 (PDF) 5. RMS Collier Modeling 2021 (PDF) 6. 2021 Property Insurance Program Structure (PDF) 11.D Packet Pg. 378 03/23/2021 COLLIER COUNTY Board of County Commissioners Item Number: 11.D Doc ID: 15171 Item Summary: Recommendation to approve the purchase of Property, Terrorism and Equipment Breakdown Insurance effective April 1, 2021 in the estimated amount of $4,612,483. (Jeff Walker, Risk Management Director) Meeting Date: 03/23/2021 Prepared by: Title: – Risk Management Name: Carleton Case 03/02/2021 3:18 PM Submitted by: Title: Division Director - Risk Management – Risk Management Name: Jeff Walker 03/02/2021 3:18 PM Approved By: Review: Risk Management Jeff Walker Additional Reviewer Completed 03/03/2021 8:26 AM Administrative Services Department Paula Brethauer Level 1 Department Reviewer Completed 03/05/2021 10:25 AM Administrative Services Department Len Price Level 2 Department Head Review Completed 03/08/2021 9:52 AM Office of Management and Budget Debra Windsor Level 3 OMB Gatekeeper Review Completed 03/08/2021 10:03 AM County Attorney's Office Jeffrey A. Klatzkow Additional Reviewer Completed 03/10/2021 8:25 AM Office of Management and Budget Laura Wells Additional Reviewer Completed 03/10/2021 3:37 PM County Manager's Office Dan Rodriguez Level 4 County Manager Review Completed 03/11/2021 1:58 PM Board of County Commissioners MaryJo Brock Meeting Pending 03/23/2021 9:00 AM 11.D Packet Pg. 379 11.D.1 Packet Pg. 380 Attachment: IRMS Renewal Summary Letter (15171 : Approve the purchase of Property and Property-related Insurance) 11.D.1 Packet Pg. 381 Attachment: IRMS Renewal Summary Letter (15171 : Approve the purchase of Property and Property-related Insurance) 11.D.1 Packet Pg. 382 Attachment: IRMS Renewal Summary Letter (15171 : Approve the purchase of Property and Property-related Insurance) Market Response ACE USA Declined - not able to include the 5M cap on named storm based on the TIV AmRisc Companies Declined - could not compete with target pricing Allied World Declined due to deductible cap and target pricing based on modeling Arch Insurance Group, Inc.30% increase on primary; quoted the 50M x 25M Arrowhead General Insurance Agency Declined - would need to be well in excess of $75M attachment point Aspen Insurance US Quoted 9% of the 25 x 50 layer but needed 1,038,333 for the layer Ategrity Specialty Insurance Company Declined - could not compete with target pricing Axis Declined - could not compete with target pricing Beazley USA Insurance Group Declined - was on it in London Berkshire Hathaway Specialty Insurance Quoted Catalytic Risk Managers & Insurance Agency, LLC Declined - can not do the form and the cap on the named storm Colony Specialty Declined - can not get close to your pricing based on the modeling results on this Crum & Forster Insurance Group Declined - After reviewing this year’s submission, unfortunately it seems that again we are not able to compete with that pricing. Multiples of your target Endurance Specialty Insurance Ltd (Sompo International)Quoted Everest Indemnity Insurance Company I can offer 10%, $2.5MM p/o $25MM at a layer premium of $2.9MM / $290K excluding EB. Needed several changes to the form and added endorsements General Star Management Company Declined - would not be able to provide the flood or quake coverage or the form Hallmark Financial Services, Inc.Declined - modeling results use up too much FL aggregate HDI Global SE Declined - too much consentration TIV for us Hudson Specialty Insurance Company I'm going to have to pass on this one as we're not writing water treatment plants or any other utilities. Ironshore Decline - Way higher than targets James River Insurance Given the concentration of values and the inclusion of Flood we won't be able to offer terms on this one. They only by $75M in limits, which does not allow us to attach high enough. JEM Underwriting Managers LLC Decliend - would not be able to get close to target pricing due to the concentration of values Kemah Capital Holdings, LLC Can not get to the pricing on 25M; maybe able to look at small participation of a 5 or 10M primary if capacity is needed Kinsale Insurance Company Declined - 1B max TIV Lexington Insurance Company Declined - needs more than double the pricing for the 25M or 50M London Quoted London (terrorism)Quoted Markel Corporation Quoted but at reduced capacity due to pricing Maxum Declined TIV exceeds their max of 1B Mitsui Sumitomo Insurance Group (MSIG) I will need to pass on this one due the amount of lesser construction buildings being all in one county alone in FL. Munich Reinsurance America, Inc. Due to the Large CAT footprint being mainly in one area and no spread of risk, we will have to decline. Nationwide E&S Declined 25 x/s 50 layer, pricing came back way higher than your target. Board of Collier County - 2021 - Marketing Summary 11.D.2 Packet Pg. 383 Attachment: Market Reponses (15171 : Approve the purchase of Property and Property-related Insurance) Rivington Partners, LLC Decline: Have a TIV cap of $500M RLI Corporation Declined - TIV to large RSUI Group, Inc.Quoted but could only do 8.5% not 10% due to loss of reinsurance Starr Companies Declined - could not compete with target pricing StarStone Quoted Swiss Re Declined - could not compete with target pricing XL (equipment breakdown)Quoted Zurich North America I am going to pass as we cannot entertain a maximum deductible for NWS with this much concentration of values. 11.D.2 Packet Pg. 384 Attachment: Market Reponses (15171 : Approve the purchase of Property and Property-related Insurance) il I a . -1Qtlr >.. . I -(ll tII t"f It \i , l,tL ;t 'i !| FI rtttllllflllll'rlllr - WS Looking Ahead to 2021 WOODRUFF SAWYER PROPERTY & CASUATTY CONSIDERATIONS FOR THE COMING YEAR 11.D.3 Packet Pg. 385 Attachment: Woodruff Sawyer Property Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) PROPERTY UPDATE A MARKET DRIVEN BY BIG LOSSES Doug Huntington CPCU, ARM Property Specialist 415.399.6328 I dhuntington@woodruffsawyer.com View Bio Linked ln 11.D.3 Packet Pg. 386 Attachment: Woodruff Sawyer Property Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) As we look to the year ahead, we see the property insurance market reacting to large and unexpected losses in 2020. COVID-19, damage caused by civil unrest, and natural catastrophes are three major factors contributing to the double-digit rate increases we anticipate in commercial property insurance in 2021. Rate lncreases Civil Unrest The civil unrest that swept the globe in 2020 resulted in significant property damage. Walgreens alone reported damage at $75 million. Several London syndicates now exclude strikes, riots, and civil commotion from their policies for certain industries. While not many US insurers have followed suit, deductibles for exposed retail accounts are increasing and the appetite of carriers is decreasing. covtD-19 There's still uncertainty as to how big losses will be. Lloyd's of London already reported losses up to $4.3 billion related to the pandemic. Add the costs for defending COVID-19 exclusions, and insurers will be more conservative in their underwriting. Property insurers are limited non-physical damage coverages and scrutinizing policy terms and conditions. Large global reinsurers have also reported large losses and as a result will be looking for increased rates during the 1/1 treaty renewals in addition to restricting coverage. Disasters Natural catastrophes wildfires, hurricanes, tornadoes, and hailstorms continue to add pressure on rates. June hailstorms in Alberta, Canada alone totaled more than $1 billion. Preliminary losses from the 2020 Atlantic hurricane season are already in the billions. And damages from the US wildfires are yet to be determined. 12 3 Contributing Factors to 11.D.3 Packet Pg. 387 Attachment: Woodruff Sawyer Property Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) The Result? Bigger Losses Many insurers won't achieve underwriting profit in 2020 as demonstrated by the combined ratio chart below. The combined ratio is the sum of incurred losses and expenses divided by the earned premium. (A ratio below 100026 means the insurer is making an underwriting profit, while a ratio over 100% means the company has an operating loss.) Rate Forecast for 2021 Rate increases will vary by industry, occupancy, risk quality, and catastrophe exposures. We anticipate rate increases between 10% and 20ok fot accounts with a good loss history, superior risk management practices, and strong carrier relationships. Companies deemed by be high-risk or have an unfavorable loss history could experience a rate increase in excess of 25% in addition to higher deductibles and tighter policy terms and conditions. Carriers will also continue to request more information regarding valuation, construction, exposures, and business continuity planning. As actuaries become more involved in the underwriting process, insurers will take a more data-driven underwriting approach. Below 100% 15 Sood CARRIERS WON'T ACHIEVE UNDERWRITING PROFIT IN 2020, WHICH MEANS HIGHER RATES TO INSUREDS Combined Ratios: Jan-Jun 2020 AIG Chubb CNA FM Global Harrford Hiscox Lloyd.s Travelers Source: lndividuol Coftier - P&C Results,lonuory tolune 2O2O P&C LOOKTNG AHEAD 2021 I WOODRUFF-SAWYER & CO 110.4% r03.8%100.7%104.8%107.39t tl 114.6% 11.D.3 Packet Pg. 388 Attachment: Woodruff Sawyer Property Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) How to lmprove Your Risk Profile in a Tough Property Market There are steps you can take to minimize challenges and create the best possible outcome given the challenging market conditions. Start four months ahead of a renewal. Remember, some capital improvements take time. A half-million- dollar investment in sprinklers, for example, requires planning and execution. Most insurers will accept that you're actively working towards mitigating a risk at the time of renewal, as long as there is a completion date. 2. Valuation and Business lnterruption Be prepared to discuss how real property values were derived and have been trended. Valuation has caused concern to insurers as losses from the catastrophes of the past few years continue to trend upward. ln addition, insurers are scrutinizing business interruption values in light of COVID-I9; however a well- documented business continuity plan can ease an insurer's concerns. ldentify Cost Saving Levers Meeting with lnsurers will help identify what issues each insurer is experiencing. While one insurer may struggle with deductibles, another may struggle with catastrophe loads. Also, the insurer may have dozens of recommendations on how to improve risk at your properties. But there may only be two or three areas that will really move the dial on your risk profile. Find out what those hot-button issues are. Understanding the levers to adjust to offset premium increases will help develop a strategy and identify cost savings measures. 14 1. Get a Head Start 11.D.3 Packet Pg. 389 Attachment: Woodruff Sawyer Property Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) 3. Highlight Risk lmprovements It's important to highlight to the insurer anything you've done to address the key areas of risk. You also want to discuss new buildings or upgrades that reduce risk, risk-improvement projects, improved fi re prevention programs, or other changes that will reduce risks in the future. Your broker can help you craft a message that will paint your company's risk profile in the best possible light. 4. lnvest in Relationships lnsurance buyers who have spent time developing relationships with insurers have experienced better than average renewal results. Providing additional information and participating in underwriting meetings can be time consuming but there is a financialbenefit. TABLE OF CONTENTS P&C LOOk|NG AHEAD 2021 I WooDRUFF,SAWYER & CO 15 11.D.3 Packet Pg. 390 Attachment: Woodruff Sawyer Property Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) 2021 U.S. Property Market Outlook Helping you come through for your clients 11.D.4 Packet Pg. 391 Attachment: RPS Market Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) 2 The rate increases and capacity restrictions that distinguished the U.S. property market throughout 2020 were a harbinger of things to come. Price increases on property insurance will continue in 2021 as we bid adieu to a year marked by a pandemic and its economic fallout, coupled with record-setting catastrophe losses. Global insured losses attributable to natural catastrophes and man-made disasters totaled $83 billion in 2020, making it the fifth-costliest year for the industry since 1970, according to the Swiss Re Institute. For 2021, the reinsurance industry is applying more rate pressure and terms/conditions restrictions than in previous treaty renewals. That market has been pressured by social inflation—rising costs of insurance claims due to plaintiff- friendly legal decisions and larger jury awards—growing wildfire exposures, seemingly more frequent and severe catastrophe losses, and diminishing returns on investment. Reinsurers are passing these costs on to insurers, which were paying rate hikes upwards of 10% to 15% to renew their treaties at year-end 2020. They also are requiring that insurers exercise more underwriting discipline and have exerted a good amount of energy getting specific language locked down to eliminate any gray areas, like what has emanated from the recent COVID-19 claims. “Though the reinsurance industry was disappointed in the amount of rate they received at this year-end renewal season relative to expectations, they will still play a larger role in rates, capacity and terms as carriers continue to improve their book composition and move toward the use of ‘technical pricing’. Although the rate environment has much improved for them, the losses have not let up, so many carriers are still not making money,” observed Wes Robinson, president of National Property Brokerage at Risk Placement Services (RPS). 11.D.4 Packet Pg. 392 Attachment: RPS Market Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) 3 For example, while the Midwest has historically experienced very low property rates compared to the coasts, recent losses from tornadoes and convective windstorms have exceeded underwriters’ expectations, leading to double-digit rate increases and restrictions on capacity. Because regulators limit rate hike requests submitted by admitted property insurers, many are withdrawing from our nation’s midsection as their reinsurers decline to renew their treaties after being hammered by losses. While the excess and surplus (E&S) market is here to step in and cover most of these risks, pricing is significantly higher than admitted insurance buyers may be used to. Fortunately, more ILS capacity is trickling into the E&S market as investors see profit potential in the higher premiums that are charged. But even E&S insurers are limiting their deployment of this new capacity, requiring many buyers to stack multiple layers to obtain adequate coverage. In some cases, these buyers are electing to buy less coverage overall to stay within their budgets. WHAT TO EXPECT IN THE PROPERTY MARKET IN THE FIRST HALF OF 2021 • Every commercial property insurance buyer will feel the effect of a firming market • Reinsurance will play a larger part in pricing and terms than in years past • Rate increases in the high-single digits to 15% range on clean accounts, higher on accounts with losses • Catastrophe deductibles converted from flat dollar amounts to percentages, and percentages increasing from 2% to as high as 5% in some areas • Multiple insurers needed to assemble higher excess coverage limits • New communicable disease and riot exclusions being introduced • More restrictions on time element, ingress/egress business interruption (BI) cover • Builder’s risk extensions moving into E&S market • Enhanced scrutiny of hospitality industry accounts U.S. SURPLUS LINES DIRECT PREMIUMS WRITTEN ($ MILLIONS) Total P/C Industry Total Surplus Lines Year DPW Annual % Change DPW Annual % Change 2013 545,760 4.3 37,719 8.4 2014 570,187 4.5 40,243 6.7 2015 591,186 3.7 41,259 2.5 2016 612,906 3.7 42,425 2.8 2017 642,127 4.8 44,879 5.8 2018 678,029 5.6 49,890 11.2 2019 712,194 5 55,485 11.2 © A.M. Best—used with permission. 11.D.4 Packet Pg. 393 Attachment: RPS Market Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) Reinsurers imposed rate increases averaging 25% to 35% on insurers’ midyear treaty renewals. TOP 20 GLOBAL REINSURERS’ COMBINED RATIO AND ROE PERFORMANCE (%)2015 2016 2017 2018 2019 2020F 2021F Combined ratio 90.7 95.1 109.0 101.0 101.0 103-108 97-101 (Favorable)/unfavorable reserve developments (6.5)(6.0)(4.6)(4.7)(1.0)(2)-(3)(2)-(3) Natural catastrophe losses impact on the combined ratio 2.8 5.7 17.1 9.3 7.2 8-10 8-10 Accident-year combined ratio excluding natural catastrophe losses, COVID-19 losses, and reserve developments 94.5 95.4 96.6 96.3 94.8 92.0 91.0 COVID-19 losses impact on the combined ratio N.A.N.A.N.A.N.A.N.A.6-8 1-2 Return on equity 10.2 8.3 1.6 3.0 9.2 0-3 5-8 F-Forecast. N.A.-Not applicable. The top 20 global reinsurers are: Alleghany, Arch, Aspen, AXIS, China Re, Everest Re, Fairfax, Fidelis, Hannover Re, Hiscox, Lancashire, Lloyd’s, Markel, Munich Re, PartnerRe, Qatar Ins., RenaissanceRe, SCOR, Sirius, and Swiss Re. Source: S&P Global—used with permission. 4 ROLE OF REINSURANCE In the first half of 2020, reinsurers were hit by $12 billion in insurance and investment losses stemming from COVID-19. In addition to the pandemic, U.S. catastrophe losses in 2020 were on track to surpass those of 2017, the last record year with over $105.7 billion in insured CAT losses. As a result, the top 20 reinsurers’ aggregate catastrophe budget and earnings buffer dropped from approximately $32 billion to $14 billion, according to Standard & Poor’s (S&P), which revised its 2020 P/C combined ratio expectation for the top 20 global reinsurers to 103%–108%. Faced with higher-than-expected losses, constraints on capital and higher retrocession costs, reinsurers imposed rate increases averaging 25% to 35% on insurers’ midyear treaty renewals. As mentioned, this tapered off down to 10%-15% range for year end treaty renewals. Reinsurers also are pressuring insurers to improve their book compositions by limiting their exposures and raising premiums. 11.D.4 Packet Pg. 394 Attachment: RPS Market Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) 5 Because insurance regulators place constraints on the level of rate increases imposed by admitted carriers, some insurers, unable to get rate hikes or more restrictive terms approved by regulators, have pulled out of markets hard- hit by catastrophic losses. • S&P predicts overall reinsurance pricing will continue to firm in 2021 in response to past CAT losses and COVID-19. • A.M. Best & Co. estimates it will take at least two years for reinsurers to recover from the combined impact of past catastrophe losses and COVID-19. THE COVID-19 CONUNDRUM Government-ordered business closures due to COVID-19 triggered a wave of business interruption claims and related coverage lawsuits filed by affected businesses. Though most insurers are denying these claims, maintaining that such losses are not covered unless the business sustained direct physical property damage, these legal battles continue to wend their way through the U.S. court system. In some cases, coverage may be granted under “civil authority” clauses that provide coverage for loss of business income due to an “action of civil authority” that “prohibits access” to the insured’s property. Because these clauses generally require damage to property occurring within a certain proximity, insurers have begun limiting the applicable distance on new commercial property and business owner’s policies. Insurers also are reducing the time element coverage period after a triggering event. COVID-19-related claims paid in other lines of business will affect the capital that both insurers and their reinsurers have available. 11.D.4 Packet Pg. 395 Attachment: RPS Market Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) 6 Meanwhile, COVID-19-related claims paid in other lines of business, such as event cancellation and workers’ compensation, will affect the capital that both insurers and their reinsurers have available to deploy in other lines, including property. CIVIL UNREST Civil unrest and damage from riots protesting police brutality also heavily impacted the commercial property insurance market during 2020. Many of the impacted businesses that were closed because of government-ordered COVID-19 lockdowns experienced physical property damage—broken windows, fire damage, looting—on top of their income losses. Because many of these losses occurred in cities where insurers did not expect rioting to occur, such as Kenosha, Wisconsin and Minneapolis, insurers are adding exclusions for riots and civil unrest to commercial property and business owner’s policies, especially on risks that include storefronts. In some cases, insurers have been reluctant to insure properties being rebuilt after they were destroyed in the riots, labeling cities where the unrest occurred as potential “hot spots.” Some insurers have started adding coverage for riots and civil commotion to stand-alone terrorism policies, which are also being expanded to cover active shooter situations as well as nuclear, chemical, radiological and biological risks. IMPACT OF CLIMATE CHANGE The property/casualty insurance industry’s third-quarter 2020 natural catastrophe losses will be the largest since the third quarter of 2017, a year in which over $105.7 billion in insured CAT losses occurred, according to a report by Fitch Ratings. From January through the end of September of 2020, the United States experienced 16 weather and climate disasters with losses exceeding $1 billion each, according to the National Oceanic and Atmospheric Administration (NOAA). More than 800 wildfires in the states of California, Oregon and Washington burned close to 6 million acres, and destroyed thousands of structures, causing billions of dollars in insured claims. These losses, though still below the record levels of 2018 and 2017, make 2020 “one of the costliest for fires,” according to the Swiss Re Institute. A map of the U.S. plotted with all 16 billion-dollar disasters experienced in 2020 through September. Map by NOAA NCEI; Climate.gov. U.S. 2020 BILLION-DOLLAR WEATHER AND CLIMATE DISASTERS 11.D.4 Packet Pg. 396 Attachment: RPS Market Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) 7 In response, the standard property markets have pulled out of wide swaths of California, where over 4 million acres were burned, costing the insurance industry up to $8 billion, according to catastrophe modeler RMS. The E&S market is available to cover many of these losses, although premiums are much higher than most insurance buyers are willing to pay. “This is the first time in a long time where I’ve actually used the word ‘uninsurable’,” said James Rozzi, executive vice president of Property at RPS. That’s not to say insurance coverage isn’t available, but it’s at a cost that may make it unaffordable. He said that one of his California accounts is “going bare because they’re not going to spend $1 million to insure a $3 million building.” Insurers also experienced significant losses in states where wildfires are less common, like Oregon and Washington. Last year’s record fires additionally destroyed properties in populous parts of Colorado and Idaho, racking up huge claims. Many of these fires are attributable to climate change, which has been blamed for drought conditions intensifying throughout the Western U.S. An estimated 42.6% of the U.S. suffered from drought conditions during 2020, according to NOAA. In addition to record fire losses, last year’s hurricane season was especially active, forcing the World Meteorological Organization to adopt letters of the Greek alphabet to label storms after using up the names that had been reserved for 2020. Of the 30 named storms, 12 made landfall in the contiguous United States, breaking the record of nine set in 1916. Hurricane Laura represented the largest single loss event, with insured losses estimated at $11 billion to $15 billion. Climate change also has been blamed for the shifting of the so-called “Tornado Alley,” contributing to an increase in the number of tornadoes occurring in the mid-South region. April 2020 was the second-most active April for tornadoes on record, with the National Weather Service logging 351 tornadoes that month alone. An outbreak of over 150 twisters that began on Easter Sunday ravaged parts of the South and Southeast. 2020 also proved to be the deadliest year for tornadoes since 2011, with 73 fatalities. Forty of those deaths occurred in April. Because rebuilding costs are often higher due to increased demand for materials following a natural catastrophe, as well as increased use of technology in building properties, some claims have been piercing excess coverage layers, taking excess carriers by surprise. Map by National Integrated Drought Information System; Drought.gov. U.S. DROUGHT MONITOR 11.D.4 Packet Pg. 397 Attachment: RPS Market Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) 8 In most cases, CAT models indicated that excess layers shouldn’t have been hit. As a result, underwriters at many excess carriers are re-rating policies internally, pricing the risks as much as 40% higher than what is submitted or what their models estimate. “Insurance-to-value is a very, very hot topic, and it will be again for 2021. It has been challenging placing excess coverage without solid valuations,” said Stephen Adair, senior vice president at RPS. When preparing any property insurance submissions, agents and brokers should make sure their clients provide recent appraisals. Otherwise, underwriters may limit recovery amounts based on their models’ replacement cost projections. Documenting loss control measures to demonstrate that property owners are committed to protecting their assets could also improve their ability to secure coverage at a more reasonable price. IMPACT ON INDUSTRY SECTORS Habitational Real Estate Habitational real estate continues to be a difficult class of business to place, even in the E&S market. While some habitational accounts have created insurance programs for tenants as a revenue source to help offset their own property rate increases, most are still experiencing double-digit premium hikes. “I had a customer that experienced a $45 million Hurricane Laura loss in Louisiana in September. Mostly wind and roof damage. They are going to see a 35% rate increase with additional retention requests: higher deductibles, windstorm deductibles,” said David Novak, area president at RPS. Quality information continues to become more and more vital due to the fact that all carriers now rely heavily on model outputs to assist with their decision-making. Therefore, providing more detailed information, such as age of roofs, electrical/plumbing/HVAC updates and other secondary modifiers, can improve the results that RMS and AIR provide. 8 11.D.4 Packet Pg. 398 Attachment: RPS Market Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) 9 The best advice we can offer hospitality customers at this time is to convey as much information as possible about what operations have ceased at their respective properties and what operations are ongoing. Hospitality Property rates on hospitality accounts grew 20% last year and are likely to jump at least that much again in 2021, but COVID-19 is making it harder for these businesses to absorb this added cost. Underwriters also are asking a lot more questions about occupancy rates and other ways that hotels and motels are being used since the pandemic disrupted most American’s travel plans. When COVID-19 cases first spiked in the Spring of 2020, some hotel properties were converted into temporary housing for medical staff or COVID-19 patients requiring quarantine. But many other properties remained vacant, which changes the exposure. For example, if no one inhabits a hotel room for an extended period of time and a pipe bursts, considerable water damage could occur before it is discovered. Buyers should disclose how properties are being maintained, protected, or in some cases, improved, from risk quality standpoint, while hospitality occupancy rates are at historic lows. “The best advice we can offer hospitality customers at this time is to convey as much information as possible about what operations have ceased at their respective properties and what operations are ongoing. We continue to spend a lot of time working with clients on accurately measuring their business income for the last 12 months and projecting that forward as the COVID-19 pandemic evolves,” said Rozzi. “The key for hospitality clients is to make sure they aren’t overinsuring their business income and revenue figures as part of their insurance program renewals, because if they have not adjusted figures as a result of the pandemic, then they are probably overpaying for coverage they would never get in an actual loss-sustained claim scenario,” he advised. Schools and Public Entities With declines in sales tax revenue attributable to COVID- 19-related business closures, many public entities are grappling with budget cuts that will affect how much property insurance they can afford to buy. At the same time, rate increases are ranging from the high single digits to more than 15% depending on CAT exposure and loss experience. But as public entities’ coffers are depleted, their property exposures are increasing. For example, since many school districts’ bus fleets remain parked because of school closures, they are more vulnerable to hail damage, because they are concentrated in a single area. “I was on a call with a large municipality, and they made it clear that they needed an option for a flat-dollar spend. That will mean we’ll either have to increase the attachment point, or we’ll have to cut limits off the top or do a quota share program,” said Raul “Rep” Plasencia, executive vice president of Property Brokerage at RPS. 11.D.4 Packet Pg. 399 Attachment: RPS Market Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) 10 “There is no way to get coverage for CAT wind or all other perils without a rate increase. But we can get them a flat spend by giving up 20%–30% of wind limits or raising their deductibles by 10%–20%. We are all getting creative to get the insureds the coverage they need.” Builder’s Risk Because of COVID-19-related delays and shutdowns, many building project owners are seeking extensions on their builder’s risk insurance. While construction delays are common, government- ordered shutdowns have increased both the frequency and duration of many of these delays, requiring additional coverage extensions. Since many admitted insurers are unwilling to provide more than one extension, many of these risks are turning to the E&S market for coverage. “We have a current project where if any of the workers on a site are diagnosed with COVID-19, the whole construction site is shut down for three days, no matter what,” observed Chelsea Bergen, area assistant vice president at RPS. “That’s an unforeseen delay. Even when they ask for a coverage extension, it’s hard to know how long they will need it. But most builder’s risk carriers are only allowing one extension. As a result, the nice, new construction that we usually don’t see in the E&S market is coming to us for extensions.” Bergen also is advising agents to negotiate longer construction terms on builder’s risk policies than they may have in the past. “It’s better to overestimate than to underestimate the construction timeline and have a fixed cost than to try to extend it on the back end,” she said. Industrial & Processing Many accounts that fall into this category have historically safely and comfortably been insured by the standard market. As some standard carriers make decisions to line- down or outright non-renew specific accounts or classes of business, the E&S market has seen a deluge of these types of accounts come its way. From food processing, plastics, molten metal exposures and recycling, the E&S market has been doing double- time finding creative risk-transfer solutions. The key differences in this industry segment between the standard market and the E&S market is that the typical E&S carrier doesn’t have a robust loss control department to assess the risk; doesn’t have rate structures and reinsurance arrangements for this occupancy; and, generally has a very small capacity line for these occupancies. Moreover, many of these accounts have multinational exposures, which is a non-starter for many E&S carriers. For example, a recent food-related account had been enjoying $500 million in limits and a six-digit premium in the standard market. After receiving a non-renewal notice from the carrier, the account it was widely marketed, and the end result was about a fivefold increase in rate for $150 million in limits. It’s better to overestimate than to underestimate the construction timeline and have a fixed cost than to try to extend it on the back end. 11.D.4 Packet Pg. 400 Attachment: RPS Market Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) 11 A common thread for all industrial and processing accounts is that carriers are examining the degree to which they have complied with engineering/loss control recommendations. For years, the industry has allowed recommendations to be deferred. But, carriers are no longer letting them slide. “Those current with compliance and willing to partner with the carriers are seeing noticeably better treatment in their placements,” said Robinson. Bringing these and other manufacturing accounts to the E&S market could cause sticker shock for some buyers, as the rates are considerably higher than in the admitted market. There is capacity in the marketplace; it’s just a matter of whether buyers are willing to pay for it. But businesses that can demonstrate they are emphasizing loss control will get better pricing and terms from E&S underwriters. LOOKING FORWARD Since COVID-19 entered the picture, commercial insurance placements have been, to say the least, different. Instead of visiting underwriters in their high-rise office buildings, nearly everyone is working remotely using Zoom, Webex, or some other online networking platform. Documents are being sent via secure email and signed electronically. Even inspections are taking place using smartphones. Although a vaccine has been approved by the FDA and distribution has begun, it will take time for Americans to acquire the “herd immunity” infectious disease experts say is necessary for everyone to resume business as usual. That means the insurance business will very likely continue to operate this way for the foreseeable future. Buyers will become more accustomed to layering coverage purchased from several different insurers. 11 11.D.4 Packet Pg. 401 Attachment: RPS Market Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) 12 Given the economic constraints stemming from the pandemic, agents and brokers will have to put in extra time to identify creative solutions that match the sums their clients have available to spend. To obtain affordable property insurance, buyers will need to evaluate their risk tolerance for increased deductibles or reduced excess coverage limits. Some buyers are already assessing how much excess coverage they really need. This may also be a good time to assess coverages that clients do not need in their policies given the current economic situation. This effort could alleviate carriers’ concerns regarding their potential exposure to certain losses while also increasing competition from other carriers, especially if it eliminates a coverage that precluded certain carriers from insuring the risk. Valuations will be key as underwriters calculate replacement costs, often second-guessing their catastrophe models. Buyers also will become more accustomed to layering coverage purchased from several different insurers, as no one carrier is likely to offer up more than $25 million in limits on a single property. In some cases, agents and brokers might want to suggest their clients enter into quota share arrangements instead of increasing deductibles or retentions if they don’t feel comfortable self-insuring more of their risk. Insurers also may be willing to come down on premium if they are sharing some of the exposure with the buyer. “We’ve seen a lot of changes in appetite, in available capacity and in the property market in general,” said Christa Nadler, executive vice president of Property at RPS. “We’ve seen property accounts that last year took one or two carriers now needing four or five to get it done. Valuations will be key as underwriters calculate replacement costs, often second-guessing their catastrophe models. 11.D.4 Packet Pg. 402 Attachment: RPS Market Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) 13 And they’re going to take a rate increase of 25%. I’m currently working on a recycling account. Last year, there were three carriers. By the time we’re done, there’s going to be eight.” While it remains to be seen whether COVID-19 will disrupt the supply chain for building products, surge pricing almost always follows a natural catastrophe. And if the past few years are any indication, hurricanes, tornadoes and wildfires will continue to plague the nation as climate change disrupts historic weather patterns. Although it’s pretty much a given that insurers will add communicable disease exclusions to property policies in the wake of COVID-19, it’s also important to watch out for riot exclusions and restrictions on time element and mileage distance for ingress/egress coverage, especially on classes of business vulnerable to business interruption losses like dine-in restaurants and those with storefronts. Also make sure hospitality customers disclose vacancy rates to underwriters, and ensure that any unused premises are locked, protected and monitored. In all renewal discussions with clients, agents and brokers should clearly explain how any changes in the amount and types of risk they assume will affect their attractiveness to underwriters as well as the premium they will be charged. Providing examples of potential claim scenarios may be especially useful in helping clients understand the financial impacts of coverage changes. Experience and relationships still matter in today’s market, maybe now more than ever. Independent agents and brokers should choose a wholesale broker with a solid track record and longtime relationships with underwriters. Seasoned wholesale brokers who have experienced the market’s historical ups and downs know how to negotiate and structure placements to make them more affordable. They also have a better understanding of how to assemble a layered or quota-share program, if necessary, to obtain desired coverage limits. “Maybe the worst is behind us,” said Rozzi. “The last quarter of 2020 showed some positive signs, with new capital coming in. But if insurers can’t make money, they will move their capacity.” 11.D.4 Packet Pg. 403 Attachment: RPS Market Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) 14 The information contained herein is offered as insurance Industry guidance and provided as an overview of current market risks and available coverages and is intended for discussion purposes only. This publication is not intended to offer legal advice or client-specific risk management advice. Any description of insurance coverages is not meant to interpret specific coverages that your company may already have in place or that may be generally available. General insurance descrip- tions contained herein do not include complete Insurance policy definitions, terms, and/or conditions, and should not be relied on for coverage interpretation. Actual insurance policies must always be consulted for full coverage details and analysis. Copyright 2021 Risk Placement Services, Inc. No copyright claimed in works of the U.S. Government. RPS39601 0121 ABOUT RISK PLACEMENT SERVICES Risk Placement Services (RPS) is one of the nation’s largest specialty insurance products distributors, offering solutions to independent agents and brokers in wholesale brokerage, binding authority, programs, standard lines and nonstandard auto. The RPS team, fueled by a culture of teamwork, creativity and responsiveness, works with top-rated admitted and non-admitted carriers to design robust coverage for clients through its more than 80 branch offices nationwide. For more information, visit RPSins.com. CONTRIBUTORS Wes Robinson, President, National Property Practice Stephen Adair, Senior Vice President Chelsea Bergen, Area Assistant Vice President Christa Nadler, Executive Vice President David Novak, Area President Raul “Rep” Plasencia, Executive Vice President James Rozzi, Executive Vice President 11.D.4 Packet Pg. 404 Attachment: RPS Market Outlook 2021 (15171 : Approve the purchase of Property and Property-related Insurance) 11.D.5 Packet Pg. 405 Attachment: RMS Collier Modeling 2021 (15171 : Approve the purchase of Property and Property-related 11.D.5 Packet Pg. 406 Attachment: RMS Collier Modeling 2021 (15171 : Approve the purchase of Property and Property-related 2021 Program Structure Layer 2021 Percentage Limits Carrier 2021 Quoted Policy Premium 2021 Quoted Layer Premium 25,000,000 primary 8.50%2,125,000 Landmark American ($75M)365,026$ 4,294,427$ 5.00%1,250,000 Lloyds ($75M)228,615$ 4,572,302$ 71.50%17,875,000 Lloyds ($50M)2,779,394$ 3,887,264$ 5.00%1,250,000 Starstone ($50M)176,829$ 3,536,587$ 10.00%2,500,000 Berkshire ($25M)277,875$ 2,778,747$ 100.00%25,000,000 Total 3,827,739 25,000,000 XS 25,000,000 8.50%2,125,000 Landmark American ($75M) 5.00%1,250,000 Lloyds ($75M) 71.50%17,875,000 Lloyds ($50M) 5.00%1,250,000 Starstone ($50M) 10.00%2,500,000 Arch ($50x$25)151,568$ 1,515,680$ 100.00%25,000,000 Total 151,568 25,000,000 XS 50,000,000 8.50%2,125,000 Landmark American ($75M) 5.00%1,250,000 Lloyds ($75M) 10.00%2,500,000 Arch ($50x$25) 12.0000%3,000,000 Lloyds ($25 x $50)81,483$ 679,025$ 42.5000%10,625,000 Lloyds ($25 x $50)322,082$ 757,840$ 10.0000%2,500,000 Endurance ($25 x $50)60,627$ 606,272$ 12.00%3,000,000 Essex ($25 x $50)96,397$ 803,311$ 100.00%25,000,000 Total 560,590$ EMPA Surcharge 40$ Total 75,000,000 4,539,937$ TIV:1,050,395,268$ 0.4322 2020 1,003,970,388 0.4105 4.60%5.29% EMPA - Emergency Management, Preparedness and Assitance Trust Fund 11.D.6 Packet Pg. 407 Attachment: 2021 Property Insurance Program Structure (15171 : Approve the purchase of Property and