With an expanding population and more emerging businesses, property exposure to wind and hail-exposed areas is increasing. As a result of an aggregation of values and increases in losses from natural disasters, we’re seeing more property carriers adding high wind and hail deductibles on their commercial line policies. Many insureds decide to “buy down” deductibles into something more manageable in the event of a storm.
Wind buyback insurance is designed to help property owners avoid big out of pocket expenses following a loss. It’s beneficial in areas across the country where carriers are forced to offset a hardening insurance market by increasing rates and deductibles.
What is a wind deductible buyback?
A wind buyback is a separate policy that reduces an insured’s deductible in the event of a wind or hail loss. A buyback functions as an add-on to an existing insurance policy and does not operate independently of the overlying insurance carrier. It “buys down” the deductible of the property insurance carrier that an insured selects. It requires the overlying carrier to adjust the loss and accept it before it is activated. Once the overlying carrier accepts and approves the wind loss, the buyback comes into play and functions as a deductible reduction policy.
How do wind buyback deductibles work?
Wind buybacks significantly soften the cost of a wind deductible for business owners following the wind event. For example, a policy owner that has a $10 million property with a 5% wind deductible of $500,000 could purchase a separate wind buydown policy to cover $450,000 of their deductible and reduce the out-of-pocket exposure to $50,000.
What are the benefits?
- Helps property owners avoid severe out-of-pocket expenses.
- Helpful for insurance carriers to offset challenges of a hardening insurance market.
- Property owners who are subject to restriction caps on loans or mortgages will find it useful. Lenders will sometimes require property owners to reduce their insurance deductible before granting loans, and a wind buyback deductible helps property owners meet these loan requirements.
Standard terms heard when discussing wind deductible buybacks
Line – The line is the exposure to the insurance company. This is the limit, which is the difference between the overlying carrier’s deductible and the deductible the insured buys down to.
Example: Wind deductible is $1,000,000, and the insured is buying down to $50,000 deductible. The line would be $950,000
Rate on line (ROL) –This is a different rate than what is normally considered rate on property. The ROL is the rate that is charged on the line of insurance that is covered. This is calculated by dividing the premium by the line.
Example: the premium of $50,000 and the line is $500,000, the ROL would be .10 or 10 cents. The premium is $50,000 and the line is $1,000,000, the ROL would be .05 or 5 cents.
Overlying — This is the property insurance carrier that the wind buydown policy is pairing with and buying down. The overlying carrier dictates the amount of exposure a buydown would need to pick up.
Attachment — This is the retention/deductible the insured wishes to retain.
Example: The attachment at $50,000 is a deductible of $50,000.
Payback period — A term that calculates the number of years the premium would be paid to match the line of exposure to the insurance company. This is a valuable tool for asset managers, sophisticated property owners, real estate investment trusts, & property-focused hedge funds can use to evaluate their budget risk for the year and consider which properties they want to buydown.
Example: For instance, a line of $1,000,000 and a premium of $60,000 would have a payback period of 16.66. If there was a loss to the property in the next 16 years where the buydown was activated, this was a positive purchase for the insured.
Per occurrence vs. annual aggregate — Some policies have an annual aggregate meaning the policy will only pay out a specific amount for the year and after that, it is exhausted. It will either be stated in a numerical amount or a 2x / 3x. This means it would pay out the full line two times or three times.
Other policies are a per occurrence policy meaning they will pay the full line of insurance resulting from an occurrence and would pay again if there were to be a separate occurrence within the same policy period. Many times master policies will be written with an annual aggregate where individual locations will be written as per occurrence.
Per occurrence/per building/per location — Each policy is written a certain way to match the overlying carrier’s deductible and identify the retention of the insured. The insured could choose to retain a per-occurrence deductible, a per building deductible, or per location deductible. Each of these is important to review to make sure you understand your true balance sheet risk.
Min per occurrence — This is a term used by the overlying carrier and is very important in evaluating a wind deductible buydown. The min per occurrence dictates the true per location/building deductible in a multi-location account as it supersedes the % amount listed on the dec page.
Example: If a policy has a 2%/ $100,000 min per occurrence and has 25 locations, let’s say one location has a TIV of $3,000,000, and there is a wind event at that one location only. 2% of $3,000,000 is $60,000; however, the min per occurrence will apply, and the true deductible is $100,000.
If two locations were hit in the same occurrence, and their TIV totaled $6,000,000, then the 2% would apply as 120,000 exceeds the min per occurrence of $100,000. The deductible buyback policy must take this into account.
In demand: The wind buyback insurance market
Over the past few years, the U.S. has endured an increased number of wind-related catastrophes, many resulting from hurricanes and hail events. In conjunction with other property damage increases from floods and wildfires, these weather events have significantly impacted the insurance industry.
Insurers are working hard to rebalance their portfolios. Part of that process has been reducing their capacity in loss-stricken areas, tightening underwriting guidelines, and increasing both premiums and deductibles. Property owners in severe wind exposure areas still need insurance despite the rising costs and need to explore their deductible options.
Leaving their property exposed to high deductibles is not the best solution as many insureds see the massive losses following hurricane and hail events. Many do not have the reserves necessary to fund their current deductible and therefore would not fully repair their properties.
Lastly, lenders should keep a close eye on the reserves an insured has versus the equity they have in the property. Severe wind damage to property could result in a cash flow crunch for the insured and a decrease in the property's marketability if it is left unrepaired.
McGowan’s CAT & Specialty Property Divisions offers Wind Deductible Buy-Down Insurance designed for hard to place, wind-exposed risks of all sizes.