Highly protected risk: What does it mean today?
Highly Protected Risk (HPR) at one time was the standard of differentiation for property risks. If you were able to achieve this classification, a limited number of insurance companies were able to provide significantly greater policy limits with a much lower rating structure than the other standard insurers.
Limits on many occasions were equivalent to the insured's total insurable values (TIV) at risk for the entire insured's company. Rates used to underwrite the risk could be anywhere from 10 to 15 cents per hundred dollars of replacement cost value for various classes of business. In addition, acceptable classes of business ranged across a large spectrum of occupancies. These included hospitals, saw mills, furniture manufacturers, energy risks, and pulp and paper manufacturers. The key driver for HPR consideration regarding occupancy was whether the occupancy could be viewed as some form of manufacturing risk by the insurance company.
If the industry requirement was met, carriers would then require those companies to:
* Meet an automatic sprinkler requirement;
* Conduct surveillance with an alarm system or security team, or have a continuously occupied facility;
* Have facilities of superior construction that would reduce fire risk;
* Have an adequate water supply in the event of a fire; and
* Partner with the insurance carrier on loss controls.
Related: New FM Global fire protection guidelines could save warehouse owners millions (Photo: iStock)
What does the HPR market look like today?
The events of 9/11 and Hurricane Katrina permanently moved the market to a less discriminating view of HPR. While some carriers that had written traditional HPR faded into the sunset, new carriers entered the market. Several of these new entrants participate in multi-carrier property programs as well as offering an HPR product.
Insurance carriers offering their own single carrier HPR capacity and policy form usually offer it to accounts requiring limits of no more than $500 million. Depending on the account risk exposure, some of these HPR markets may be able to offer greater limits.
In contrast to earlier HPR carriers, these markets can offer:
* coverage using their own filed policy,
* required loss prevention engineering services (either through its own loss prevention division or through contracted providers), and
* coverage for non-manufacturing account portfolios, such as real estate, stadiums and high-tech risks.
These types of accounts need to have risk profiles that are relatively stable year to year, and they require an insured's willingness to adhere to loss prevention engineering services and guidelines offered by these HPR markets.
In recent years, the overall property marketplace has further evolved into a market of seemingly endless underwriting capacity, major capital market participation and influence, and the greater development and reliance upon analytical underwriting techniques. This evolution in underwriting has allowed property underwriters who don't invest in loss-prevention development within their company to embrace the concept of well-protected risks in lieu of the HPR underwriting standards.
Related: Global catastrophe management lessons from Hurricane Katrina [Report]
HPR single carrier program or layered property program?
Due to this abundance of non-HPR capacity within the marketplace, it's regularly possible to structure a layered program, using a variety of markets to construct a property program that provides the insured with an HPR-style policy program. These programs have similar advantages of the traditional HPR single carrier program but with much greater control of the program placed within the insured's requirements versus those of the HPR insurance carrier.
These non-HPR markets authorize participation lines of capacity on layered programs with or without third-party loss-prevention survey requirements at account pricing equivalent to or in many cases better than an HPR carrier. This approach to underwriting focuses on:
* client retentions,
* the insurance company's cost of capital to write the risk,
* the ability to quote a line of capacity within a program at pricing terms different from its competitors,
* the broker's ability to structure a quota shared/layered program in such a way as to "fit" markets into a mutually beneficial position on the account,
* the ability of the underwriters to "pick" the layer or position they wish to participate on the risk, and
* the ability of the underwriters to use their "pick" position as a means of risk avoidance on a particular account.
The combined result of such an approach is a structured program that is HPR priced without all the HPR requirements associated with a single carrier HPR program.
Advantages of structured programs
Structured programs today regularly provide the insured in many instances with greater advantages than single carrier HPR underwriting, for example:
* HPR level rate and premium;
* a broadly written manuscript policy form specifically designed to address the requirements of the insured's exposures;
* broad terms and conditions, such as third-party loss-prevention engineering provided directly to the insured and not subject to the underwriting or engineering guidelines of any single insurance carrier;
* a designated claims adjuster written into the policy form and paid for by the participating underwriting companies;
* account property limits including catastrophe (CAT) peril limits equivalent to or exceeding individual HPR markets;
* greater flexibility for CAT perils deductible wording;
* the ability to incorporate Equipment Breakdown coverage into the policy form as done by the HPR markets; and
* the ability to write the account on a global basis.
Over the years, the insurance marketplace has seen the term HPR evolve to mean a risk of superior construction with acceptable sprinkler protection that can be written by either an individual insurance carrier or through a multi-carrier participation program. Loss-prevention engineering is provided through the insurance carrier resources or by an independent third party contracted by the insured. The methods in which HPR insurance and services are secured for a client are fully dependent on:
* the buying appetite of the insured,
* the insured's preference of loss prevention service providers, and
* the insured's preference of single carrier simplicity vs. multi-carrier control.
Although each option for securing HPR coverage is viable, it's the ability to create competition and play the options off each other that provides the client with the best available choice for securing property insurance coverage for the insured's exposures.
Greg DiPrato is a senior vice president in Lockton's global property practice. This article first appeared on Lockton.com and is reprinted here with permission. Visit Lockton Insights & Publications for the original post.
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