The Risks of Hazard

Flaws and All

In 2014 Deloitte published a research paper entitled The potential for flood insurance privatization in the U.S. Could carriers keep their heads above water? Despite the marks the authors might have lost in the “Title Brevity” category, they more than redeemed themselves in the all-important “Usefulness” category. This is a white paper that anyone underwriting, contemplating, competing with, or studying private flood should read, over and over. It is such a rich vein of material that The Risks of Hazard is going to write two posts on it this week. Today, we will provide an overview that includes a deeper look at the key problem and solution. Later this week, we will review their survey of all the available ways that private flood can be introduced into the US market. 

The title of the introductory section reveals the conclusion: Greater privatization may provide growth opportunities, but leveraging them might be problematic. It is a very safe, uncontroversial conclusion, which makes sense because it was written 2 years before the current private flood legislation is on its way to becoming law. The first half dozen pages of the report offer an orthodox summary and summation of the NFIP, its travails and its successes (yes, it has been a success for some – especially lenders).

Then it gets more interesting.

It is not often a new cat peril appears, but Oklahoma is now an earthquake zone. The changing seismicity in the state is so pronounced that the USGS is committing to updating their earthquake hazard maps annually, instead of every five years. The high risk blotch on the USGS maps dwarf the better-known (but still relatively obscure) New Madrid zone in southeast Missouri and the Cascadia zone in Washington. Note: these are “chance of damage” maps, and do not express severity.

The arrival of a localized cat peril has provided a unique glimpse into how insurers and regulators work together to ensure the risk to property is adequately mitigated. According to AM Best (May 25, mind the subscription wall) the Oklahoma Insurance Commissioner, Mr. John Doak, is making a determination right now on whether the insurance market for quake coverage is competitive enough to avoid further state regulation. His decision will determine whether state regulators will have more or less influence on insurance pricing and terms. Specifically, according to the AM Best article: “Doak is concerned recent filings do not substantiate the need for increased rates, that the use of multi-line discounts discourages consumers to switch carriers for a lower price and that 70% of earthquake policies are sold by just a few companies (Best’s News Service, April 19, 2016).”

Usually financial results are black and white, positive or negative, good or bad. However, the analyses of the P & C underwriting results from 2015 are coming in and looking decidedly gray – neither good nor bad.

According to an article in Insurance Journal, “...net written premium grew by 3.4 percent in 2015 versus a 4.2 percent hike in the previous year.” Further, “...the combined ratio grew to 97.8 from 97 in 2014. In 2013, the figure was at 96.2. As the ISO/PCI report points out, this is the first time the combined ratio was under 100 three years in a row since 1971-1973.”

On the one hand net premium grew, and the combined ratio was still in the black. Not only that, it’s the first time in over 40 years that there have been three consecutive years of positive combined ratios. Great! Right?

This week I attended the PCI National Flood Conference in Washington, DC (in Arlington, VA for geographic sticklers like me). Over the weekend, as everyone converged on the city, the sun was shining and the Potomac was sparkling as it flowed gently between its protected banks into Chesapeake Bay. It was a welcoming setting, especially for the delegation coming over from London – a significant number of underwriters and brokers from Lloyd’s.

With the published agenda occupied by 90 percent NFIP material meant to cover assorted minutiae of the program, what might these underwriters be doing there? Private flood is what they were doing there. The remaining 10 percent of the agenda addressed private flood topics, but it was the corridor talk that was predominantly about private flood.

Two weeks ago, we published a post on how analytics aren’t so smart after all. It has been a sensation (only our Cat Modeler’s Guide to the Protection Gap has been read more this year), so it is only natural that we pursue the topic further.

The blog that lit up a little corner of the web was about the limitations of analytics, specifically flood risk analytics. It turns out there is some interesting science and folklore about the topic, so let’s take a look.

Analytics are an attempt to measure an immeasurable phenomenon. Cat risk analytics (flood, quake, hail, etc.) are perfect examples, as they aspire to determine the chance of something happening in a given location during a given timeframe – it is not possible. However, by evaluating a combination of different types of information, they can begin to produce results that are useful for underwriters who need those unknowable answers.