Understanding the Impact of the Current Economy on Property/Casualty Risk

by Steve Clarke, Assistant Vice President, Commercial Multi-Line Division and Jeff De Turris, Assistant Vice President, Personal Lines Division

For more than two years, the U.S. economy has been in a recession, and the impact, on both individuals and business, continues to spread. All bands of the risk management spectrum — personal and commercial, property and casualty, large and small — are affected. As risk management professionals, it is critical that we understand how the current economic situation affects the risks we assume.

Several factors have arisen that can increase the loss potential for property owners. Whether an individual property has exposure to one such factor or some combination depends on the situation. But careful analysis can uncover hidden risk that can very well go unnoticed if unchecked — unnoticed, that is, until a loss occurs and an insured submits a claim.

Where Is Everybody?
Soaring foreclosure rates and the closing and consolidation of businesses have led to one of the biggest hazards that properties can face — vacancy. From empty houses in the suburbs to shuttered big box stores along our highways, vacancy rates are increasing.

National average vacancy rates

Rental units

10.6 percent

Homes

 2.7 percent

Malls

19.2 percent

Offices

19.7 percent

When people use a building for its intended purpose, they notice leaky roofs or plumbing, maintain trees and landscaping, and even smell smoke in the early stages of a fire. Vacant buildings attract vandals, squatters, and other transients who may take up temporary residence and cause further loss or damage.

A vacant unit in a strip mall — and the adjacent businesses that remain open — may be at risk if fire alarms or other protective devices are inoperable.

As buildings remain unoccupied, the building envelope can be compromised simply from lack of maintenance. If left unchecked, gutters, shingles, or flashing can become loose and be ripped from a building by high winds, damaging neighboring property or causing bodily injury. Broken windows can contribute to pressure buildup within a structure during a windstorm, increasing the possibility of roof failure. An unrepaired hole in the roof can allow rain to enter, leading to significant water damage and mold.

Mitigate potential losses during vacancies

Secure the premises so that doors, windows, and any other entrance points cannot be breached

Carry out visual inspections regularly to ensure the property remains secure

Maintain protective services during the period of vacancy to add a layer of protection

It’s Not Just a Job Anymore
Employment-related risks have also increased in the current economic environment. Faced with the prospect of losing their income, some ex-employees will pursue claims against a firm — whether legitimate or not — citing unfair discrimination, retaliation, defamation, or other wrongful termination or workplace practice. It is important that corporations have a detailed plan in place when contemplating workforce reductions to ensure compliance with any employee notifications required by statute or regulation and to protect against allegations of wrongful ­termination.

Employees might carry out sabotage in retaliation to layoffs. It is conceivable that a single line of malicious code, or the striking of a delete key, could be as catastrophic to a business as any structural fire.

Employee theft may also be on the rise as employees are desperate to make ends meet at home. Whether it involves the embezzlement of funds or theft of supplies and/or merchandise, employee theft accounts for almost one-half of all retail crime. Ensuring the company you underwrite puts in place simple procedures such as mandatory vacations, job rotation, closed-circuit monitoring, dual signatures, and separation of duties can go a long way toward minimizing the potential for employee theft losses.

The Fix Is In
As businesses and individuals reduce expenses, general maintenance all too often takes a hit. Do-it-yourself repairs may be the answer for some, or people may neglect repairs and maintenance altogether. Families may put off new tires or new brake pads for the car, or manufacturers may skip scheduled maintenance for production machinery and boilers. But deferring auto maintenance can increase the risk of auto accidents and resulting bodily injury and property damage. Deferring maintenance on machinery and boilers runs the risk of mechanical breakdown and increased business interruption.

Even something as simple as canceling a janitorial contract can have negative effects, as slip-and-fall, vermin, and other hazards associated with housekeeping begin to increase.

Do-it-yourself repairs save money but can increase risk

electrical work = fire and shock hazard

plumbing = risk of water damage

structural = collapse

machinery = equipment breakdown

Nothing Personal
Whether torching a home because of an upside-down loan or abandoning a vehicle because payments can no longer be afforded, insurance claims fraud may be on the rise. But fraud also entails providing false or misleading information during the application and underwriting process to avoid policy surcharges or higher rates, especially as businesses and families have fewer dollars to spend on insurance premiums.

The economic downturn may force certain skilled workers to take on activities not accounted for when classifying that risk and developing the policy premium. Consider the insured plumber who is also renovating entire bathrooms and kitchens on the side. Or the metal shop that takes on structural iron work. In either case, there is no intent to defraud an insurer but simply an attempt to remain in business.

Exposure bases rooted in variables such as sales or payroll have been shrinking. This could be intentional underreporting to save premium dollars. But to determine the impact on risk, it is important to understand what might be driving numbers down. Gross sales may be down on a dollar basis, but unit sales may be holding steady because of discounting, 2-for-1 deals, or other promotions. Barter sales are also making a comeback, although such ­trans­actions may not necessarily show up in gross receipt figures.

Companies are asking some employees to assume multiple tasks. Whether an outside salesperson is also performing clerical tasks, or an underwriting executive is doubling as the company’s corporate communications “expert,” it is important to understand the functions performed by individuals within a firm, since dual capacities and associated exposures are becoming more commonplace.

Underwriting: Now More Than Ever
One of the goals of insurance professionals is to collect premium commensurate with exposure. Given the variability of the exposure base in the current economy, insurers can use premium audits and questionnaires to understand fluctuations that may occur. Now more than ever, it is important to underwrite carefully and to recognize the potential exposure that each risk represents.