Water Marks Navigating the Challenges of Modern Marine DesignPublished on March 1, 2018
The Role of Insurance in Marina Risk Management
A Conversation with Tim Lucas, Markel Corporation
Natural disasters caused $306 billion in U.S. damage in 2017, the largest total ever for one year. Much of this stemmed from a historically destructive hurricane season. David Lantz, waterfront practice manager for SmithGroupJJR, interviewed Tim Lucas, a director of the ocean marine division for Markel Assurance, to explore what this means for the insurance industry and marina owners, and how they can best manage the risks they are facing.
Q: What impact has the 2017 hurricane season had on the marine insurance industry?
Overall the industry has proven it’s equipped to handle extreme situations like this better than it ever has. You’re not seeing dramatic rate increases across the board. It’s completely different than what we’ve seen in the past, and completely different than most insiders projected it would be. Twenty years ago, there would have been a sweeping 25 percent rate increase for every policyholder, regardless of location. Now, thanks to improved technology and data management systems, we can be much more sophisticated in how we respond and adjust.
For some time now the industry has known that weather patterns are changing and severity is worsening. We realize that is something we cannot change in the immediate future, but we can change how we respond to these events. Markel views catastrophic events like these hurricanes as an opportunity to live up to our promises and help our clients get back on their feet as quickly as possible. Events like the ones we just experienced also allow us to discover where we might improve in areas such as forecast modeling, underwriting or the claims process.
Q: In terms of forecast modeling, should public agencies, private firms and insurers all be sharing their modeling data and risk assessments moving forward?
It is not so much a question of sharing as it is determining which models provide the most accurate data for your particular need. For example, one may be more accurate with wind and others may be more accurate with flood. But each time a carrier experiences a catastrophic event like a hurricane, it provides an opportunity to examine the models we have been using to determine just what level of accuracy they provide.
Q: To what extent would the open sourcing of modeling data represent a shift in how the insurance industry currently operates?
That has been the practice for a very long time in the insurance industry. Carriers are always working with reinsurers, located all over the world, who do very sophisticated modeling work. We’ve always had access to the modeling systems that reinsurers use, and are able to compare them to each other. Every time there’s a storm, it provides an opportunity to evaluate the performance of the model you were using.
Q: How are marine insurance companies recalculating risks and rates based on revised assumptions about storm frequencies and severity?
I don’t believe you will see a general reaction like we may have seen in past years. I think what you will see is a reaction by individual carriers that will vary widely. We have been in a soft market for some time, and that encourages carriers looking to grow to enter markets where they have no historical data or expertise. Their results from these storms may have been poor, and if so, their reaction could be to exit the market altogether.
Fortunately, there are several established marine insurance carriers like Markel that provide a sense of stability in the marketplace. For the clients of these marine specialists, the reaction may be more of a rate correction based on individual results, location or construction class.
Q: Is the industry coalescing around any risk reduction standards that would lower rates, such as Clean and Resilient Marinas program certification?
Markel rewards marina operators who utilize best practices, such as properly written slip and storage agreements, certified marina managers and Clean Marina designations. I would like to encourage every marina owner reading this to initiate a meeting with their agent to discuss how they can work together, as well as with their carrier, to continually improve their risk management program. It is not rocket science. Better risk management means better results, which mean the best possible insurance premiums.
Q: Do these risk management conversations also need to take place with marina designers/engineers and contractors?
Yes, they do. In my experience the engineers, builders and suppliers in our industry have been very responsive. Every time we communicate we get an immediate response, and we communicate often. A recent example is when I was talking with the manufacturer of a popular lift truck about the nuisance claims we see when a lift truck enters a building, with the staging so high it hits the entrance. They responded: “No problem, we can install an alarm that will warn the driver if the staging is too high within a certain distance of the entry.”
Q: FEMA frequently states that every $1 spent on mitigation saves $4 in rebuilding costs. Does the marine insurance industry utilize cost/benefit data for risk management in its calculation of premiums?
We do in fact try to share the cost/benefit data that may be available and pertinent to a client and their business. The information Markel shares can also be looked at in terms other than dollars and cents. The benefits of reducing your losses are far broader than that. A good risk manager will sit with the client and discuss things like the client’s standing in the community and the occupancy rate in their slips. Losses can also affect a marina’s unemployment rate. If a marina is constantly dealing with work comp. injuries, it will cycle through more employees than a facility that manages that risk. A good risk manager will help marina owners consider how to meet their larger business goals.
Q: The National Flood Insurance Program (NFIP) is struggling to stay solvent and almost lapsed in December. What would it mean for the private insurance industry if this federal program were allowed to lapse? What changes are needed as part of a long-term reauthorization of the NFIP?
The level of transparency we are seeing from the NFIP should not be cause for alarm but rather one for support. Think of the NFIP not so much as a federal program but as a great example of a public/private partnership. Like any business, the NFIP may experience short-term events like the 2017 storms, or major challenges like climate change. And just like any business, the program’s survival depends on reacting appropriately, not overreacting, and being proactive for the future. Their approach to remap our national flood zones and incrementally increase the premiums related to that remapping over several years is a smart play.
I would encourage marina owners to talk with their insurance agents about the program’s history and the recent changes made that are necessary to ensure its future. You should also discuss the options you have like increasing your deductibles or obtaining an elevation certificate, which in some cases may be available to you at very little cost. That effort could possibly reduce your premium for many years to come.
Q: Flood zone remapping is typically a long process, and is based on historical data. Marina designers like SmithGroupJJR need to manage a client’s risk over the life of a facility, which requires forecasting potential risks over a longer period, say the next 50 years. How can our current regulatory tools and processes keep pace with the dynamic implications of climate change?
I think most underwriters would agree that any update to a tool like a flood map is a good thing. Modeling and forecasting still rely on accurate, long-term, historical data as their basis. That is equally true of the insurance industry. We tend to rely on historical data more than predictive modeling.
Insurance exists because we can’t foresee the future. The benefit we have with insurance is we’re only dealing with a one-year window. If you break a 50-year risk window into one-year increments, it becomes much easier to manage. Every year we get the opportunity to regroup and adjust. If we were to try to write a 15-, 10- or even a 5-year policy, we would likely err on the side of caution. Would the insured be paying a higher rate for their coverage in this scenario? Absolutely. Short-term, one-year increments keep our risk calculations as accurate as possible, and keep premiums as close as possible to where they need to be.
Q: The policy of “rebuilding in place to the same standards as before” is being questioned for potentially creating insurance payout loops. For example, unprotected oceanfront homes that are repeatedly destroyed and rebuilt after hurricanes. Do you foresee situations where rate corrections won’t be enough? Perhaps zones where rebuilding will essentially be deemed uninsurable by your underwriters?
Speaking specifically to the topic of marinas, I do not see any areas or zones that would be deemed uninsurable. There may be certain characteristics that carriers would need to avoid, such as aging infrastructure that has not been updated to meet the standards recommended or required to withstand the types of storms we are seeing today.
Regarding the requirements for rebuilding, this is a function of the language in an insurance contract. The industry has an effective way of making sure clients can meet every need they might have, including rebuilding to new standards or in different locations. But a basic contract, without being amended, will not always meet those needs. For example, if you opt to move to a different location, you may receive a lesser sum. If a municipality or other governmental body requires new building standards – for example, wind-rated building materials in Florida – the insurance company doesn’t automatically pay for the difference in cost.
However, we do provide our clients with the ability to insure for that, through additional coverages like Ordinance and Law. It’s typically available under dock and building coverages. Some of the agents we deal with ask for Ordinance and Law coverage for 95 percent of the risk they send to us. They might have clients on the west coast who know they can’t use creosol anymore, so the rebuild will require more expensive concrete. Or their clients have older facilities that don’t meet ADA requirements, so their replacement facilities will cost more.
However, we also see agents who go for years without requesting any amended coverage for their clients. This is why it’s so important for marina owners and insurance agents to sit down and review coverage together. When the agent understands that rebuilding to different standards may be a need, they’re trained to know how to offer that coverage.
But that’s probably the subject for another article.
Tim Lucas is a director of the ocean marine division for Markel Assurance. He can be contacted at tlucas@MarkelCorp.com. David Lantz is the Practice Manager for SmithGroupJJR’s Waterfront Practice. He can be contacted at David.Lantz@smithgroupjjr.com