When High Risk is NOT High Risk

I once worked for a E&S brokerage firm that had binding authority for general property insurance. As is often the case with E&S business, I received an “urgent” application for property coverage, which in this case, happened to be for a 3 family non-owner occupied building. The application was followed up immediately with a phone call from the agent. She was desperate. The policy was set to expire at 11:59 pm that evening and there was no replacement in place. Perhaps frantic was a better word.

So I put my underwriter cap on and began asking questions:

1. Why is this policy being non-renewed?
Her answer was that there was a large claim due to a fire.

2. What was the size of the claim? What caused the fire?
Her answer was ~$80,000 and that a mentally disturbed child on the second floor was playing with matches.

3. Has the property been repaired? Is this child still living at the home?
Her answer was that the home was completely repaired, including upgrading to the roof and wiring and that the child and his family were no longer living at the home.

That’s pretty much all I needed to hear. The risk of future loss to this house was likely no different and was perhaps lower than any other triple-decker in that neighborhood (the new roof and wiring lowered the risk somewhat in my eyes).

I was willing to offer coverage. My only issue was with price. The prior policy expired at $2,500. What if I was dealing with moral hazard here? What if the fire claim was a harbinger of things to come for this landlord?

I asked the agent if the owner would accept coverage for $5,000. She immediately said yes. This made me excited and nervous at the same time. Did I just step into something I should have avoided like every other underwriter did? I kept telling myself that I was being more than properly compensated for the risk I was taking. I did great analysis, I thought, and should feel valiant for not shying away from a great opportunity.

In hindsight, it WAS a great opportunity. It was also a great learning experience. That single event taught me a lot about risk and reward and how the perceptions of risk is often more important. Insurance is a lot like poker in that while much of the game is strategically reading your opponents, a bigger part is figuring out what advantage you may or may not have and whether the pot compensates you enough for the risk you are about to take. It was from that point on that the idea of creating portfolios with undesirable exposure characteristics really seemed attractive to me. Don’t compete for what everyone else wants and is willing to undercut on…compete for the risk nobody wants, create elbow room and price it to win.

And that property? While I left the brokerage firm I worked at many years ago, I still keep track of that address in Nashua, NH every once in a while, and at least on the fire side…no claims!

#underwriting #insurance


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