Winery Insurance Market Woes Continue

 

Special to Wine Industry Insight

 

By John Kempkey,
ARM, Sander, Jacobs Cassayre Insurance Service, jkempkey@sanderjacobs.com

From Buyer’s Market

Since the early 2000’s insurance brokers aggressively marketed the Stock Through Put (STP) policy, as an alternative, for wineries to insure their wine inventory.  This ALL RISK policy, underwritten by Lloyds of London, offered broader coverages, including Earthquake, Flood and Spoilage, than were available through domestic carriers. Coupled with a bullish pricing strategy, Lloyds emerged as the predominate writer in this market, insuring billions of dollars of wine inventory values.

To Seller’s Market

Lloyd’s honeymoon with writing wine inventory STP policies ended, this past April, when several syndicates withdrew from this market.  This was partly due to losses from the Napa earth quake, California wildfires and last year’s Guerneville flood; it also reflected Lloyd’s business plan to exit from underperforming lines of business. These factors curbed Lloyds capacity (capital) and appetite for continuing to insure wine inventory exposures—leaving wineries scrambling to replace their non renewing STP policies.

 

Since then, wineries continue to be challenged by the quickening pace of the hardening California property insurance market.  Rather than absorbing Lloyd’s nonrenewing STP business, domestic carriers have been taking steps to limit their exposure to insuring wine inventory values. This has had a major impact on the limits, pricing and terms available to wineries, seeking to purchase wine inventory coverage.

 

This perfect storm is driven by a spiraling chain of events, beginning with the impact of California’s wildfires on domestic insurers surplus (net worth), which, in turn, has lowered their capacity for writing new wine inventory business.

 

Adding to this disruption, global reinsurance markets have lowered the thresholds and vertical limits of reinsurance that they will write (cede) over domestic carriers’ wine inventory values.  This, plus skyrocketing reinsurance premiums, have all but eliminated the ability of domestic carriers to lay this exposure off to reinsurance carriers, thus further limiting their capacity to insure this line of business.

 

This explains why carrier’s, like Chubb and Allianz, hands are tied from adding wine inventory coverage to their insured’s existing commercial package policies.

 

In response, brokers have turned to the Excess & Surplus Lines (E & S) market to insure their clients’ wine inventory. Outside of the state insurance commissioner’s approval process, carriers in this market offer dramatically differing coverage and pricing terms, raising red caution flags for insurance buyers.

 

Just recently, an E & S carrier quoted an annual premium of $225,000, for a $16 million coverage limit,  on a client’s wine inventory; whereas,  the client’s expiring STP premium was @ $36,000: a 600 % + increase!

Proactive steps for wineries

In view of this changing landscape, wineries should take proactive steps to soften the impact of the hard market, including;

• Meeting with their broker at least 4 months in advance of their STP renewals, to update their insurance specifications, review their marketing plans and premiums forecasts;
• Reducing concentration of wine values at any one location, especially in high risk fire areas;
• Understanding their risk tolerance for large deductibles or self-insuring certain exposures;
• Having all stakeholders participate in the risk tolerance decision making process e.g. owners exposed to personal loan guarantees / lenders and their insurance requirements;
• Thoroughly reviewing the terms of all insurance proposals, with their brokers, and
• Considering all first-round proposals to be a beginning point of negotiations.

 

Aside from these current insurance woes, there’s still an elephant in the room, that hasn’t been heard from.  This is the other shoe that brokers and their clients are hoping won’t drop . . .   stay tuned!