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Dealing with a tight property market is difficult, but being the risk manager of one of the largest property owners in Florida after years of major windstorms is especially challenging.
Although Miami-Dade County Public Schools sustained relatively small losses during the 2004-05 hurricane seasons, last year's renewal of the district's property program was even more difficult than expected as property insurers retreated from Florida, said Scott B. Clark, the district's risk and benefits officer.
The school district's property is valued at about $7.5 billion, but the most windstorm coverage Mr. Clark could secure last year was $200 million vs. $700 million in 2005.
Before last year's renewal, Mr. Clark and his brokers at Arthur J. Gallagher & Co. met with the school board to lay out their property program renewal strategy, what limits they thought they could obtain and the projected cost. The plan was to purchase $500 million in coverage for a premium not to exceed $30 million, but the property insurance market had tightened and it was a struggle to get to $200 million, he said.
To even get that $200 million in coverage, the district took a prorata-based coinsurance arrangement for the program's first two $50 million layers and boosted its deductible from $1 million to $25 million. That means the district is self-insuring a Category 1, 2 and possibly most of a Category 3 hurricane, Mr. Clark said. "I'm really buying excess coverage for a really bad storm, a Category 4 or 5."
A few markets are willing to make significant capacity available, but it is unaffordable, Mr. Clark said. "You have the Berkshire Hathaways that have plenty of capacity, but it goes for top dollar and I'm already spending $30 million on premiums for my property insurance program."
Balancing affordable capacity with the district's contractual responsibilities to banks that lend money for school construction and federal requirements of disaster relief grants is a key consideration. "It's a balancing act to bind the coverage you think you can buy, but not overpay for it," Mr. Clark said.
David Marcus, vp, southeast regional manager at Gallagher and a managing director of Gallagher Public Entity and Scholastic Division, based in Boca Raton, gives Mr. Clark enormous credit for securing coverage in one of the most difficult insurance markets he has ever seen.
Mr. Marcus, who has worked more than 20 years with Mr. Clark as the district's broker, credits Mr. Clark's reputation as a strategic thinker who places tremendous value in long-term relationships with insurers for his ability to maintain a strong, consistent property program.
When the district experienced its one significant windstorm loss during Mr. Clark's tenure, from Hurricane Andrew in 1992, the district's two insurersAppalachian Insurance Co. and Hartford Insurance Co.provided essentially first-dollar coverage. Both canceled the district's coverage after paying a $96 million loss caused by Hurricane Andrew.
Mr. Clark seized the opportunity to create a multitier pro-rata-sharing property program to minimize disruption should an insurer leave the program. Today, the district works with about 25 insurers and most have been on the program since it was restructured, with Lexington Insurance Co. as the largest participant.
During renewals, Mr. Clark reminds underwriters of the rules and responsibilities of the client-insurer relationship: that the school district has steadfastly purchased coverage from insurers and should be the first risk they consider if they write windstorm coverage in Florida.
While Mr. Clark understands that the hurricanes in 2004 and 2005 undercut the insurer profits, he emphasizes that the district has paid substantial premiums in 15 years without a major insurance loss. "I need them to give something back and that has to be in the form of capacity," he said.
After 2004 and 2005, some insurers curtailed their participation or quit the program because they could not get proper reinsurance. Others decided they did not want to write this class of risk. "When things like that happen, I understand it, but there has to be an exit strategy," Mr. Clark said. "They can't just walk away. It's absolutely inappropriate."
The Miami-Dade district is the best risk in South Florida because it has invested significant dollars in its infrastructure and schools are built to exceed building codes, Messrs. Clark and Marcus said. Under Mr. Clark's leadership, the school district has received about $6 million in loss mitigation grants from the Federal Emergency Management Agency to buy hurricane-resistant screens for windows and securing equipment on rooftops to keep it from blowing off during a storm.
Building new facilities has been complicated by the hard property market. Previously, the district required builders to purchase insurance themselves, but builders were forced to pay high rates for coverage and passed the costs on to the district. In response, Mr. Clark created a district-provided builder's risk property insurance program, leveraging the district's size and long-term relationship with Lexington to negotiate a program with reasonable coverage at an affordable price. As a result, he secured $50 million in limits to cover new facility construction exposures. The program is expected to save the district about $85 million over the next three years.
One positive result of property insurance market difficulties was that Mr. Clark engaged board members in a discussion of adding depth to the district's disaster recovery and emergency management programs.
"It's a matter of fact that we now have a $25 million deductible," he said. "We can do nothing about that, but we can start to reinvest internally to make sure that the next time the wind blows that we have a much more efficient and strategic operation so that we can more effectively get the dollars that we're going to need to put our schools back together."
Ensuring that the district is ready for the next big storm (see story, page 57) is critical because modeling shows its probable maximum loss from a Category 5 storm striking downtown Miami would be $800 million to $1 billion, he said.
Mr. Clark had three key goals when he met recently with domestic and foreign underwriters to discuss his May 1 renewal: filling layers of the existing $200 million in coverage so the board is not a coinsurer, securing an additional $50 million in coverage and not paying more than $30 million in premiums.
"Last year's renewal really took the wind out of the program, so we're hopefully going to continueÖ rebuilding it again," Mr. Clark said. "But it's going to be a little different now. I'm not going to go back off that $25 million deductible. I would much rather, moving forward, try to build larger limits on top of that as opposed to going back to a more first-dollar approach."