This is the first time in a long time that the word ‘uninsurable’ is being commonly used related to business property insurance renewals. It’s not so much that insurance coverage isn’t available, but too often the cost, particularly in wildfire areas, is making it unaffordable. Premiums are much higher than most insurance buyers are willing to pay.
To achieve affordable property insurance in a “wildfire” area, buyers must evaluate their risk tolerance for increased deductibles and for sharing risk with insurance carriers and others.
Think of a building’s wildfire risk as a tower where losses are paid from the bottom up. The deductible lies at the base of the tower. It is the amount that is paid first in the event of a loss. Layers of insurance are then stacked up around the tower. The layer after the deductible pays next followed by the additional layers in order of priority from the bottom up.
Buyers will also see individual layers split between several different insurance companies. Underwriters can typically get comfortable with a risk as long as they are sharing it with others. No one carrier may be willing to offer up more than about $5,000,000 in limits on a single property.
Premium rates are highest for the layers just after the deductible towards the bottom of the tower. A “probable maximum loss (PML)” study will be important since layered pricing drops once the limits exceed the PML.
To make sure the coverage responds appropriately in the event of a loss, it will be important that the real estate is insured-to-value including at least 24 months of rental income.
It’s also important to disclose vacancy rates to underwriters and explain how any unused premises are locked, protected, and monitored.
Most importantly in today’s limited property insurance market is Insurance broker experience. For best results, work with a broker who has a solid track record and longtime relationships with the underwriters. Seasoned brokers who know how to negotiate and structure insurance placements within wildfire areas, will be key.
VANTREO has deep expertise in wildfire risk placement. We’re here to help. Have a question about insurance or the strategy for an upcoming renewal? Just reply here. We look forward to talking with you.