The Risks of Hazard

In the past, this blog has asked rhetorically “Why do insurers ignore wildfire?” It’s a peril that causes real losses (about $6B in the past 20 years in the USA alone), yet has data and analytics that can significantly improve residential and commercial underwriting for it. The readership metrics for Risks of Hazard reinforces the question: blogs about wildfire get opened less than any other subject we write about. Today, let’s answer that rhetorical question: Here is why insurers pay less attention to wildfire than they should.

Every summer, wildfire is high profile. The names of some recent fires are evocative: Rim, Sleepy Hollow, Waldo Canyon. This year the headlines are coming from the East: Pennsylvania has the Lehigh Valley Fire, and the late April NFS situation report lists fires in six eastern states. In Canada, the news is harrowing as Fort McMurray (pop. 80,000) is being evacuated as the city burns. Notoriety and media coverage is not the problem.

Last week, Cyrena Arnold, the Director of Product Sciences at Weather Analytics, and I blogged about hail, exploring available analytics with the March storm in the Fort Worth area. The response has been incredible to that blog, so a reprise is in order. Revisiting the topic seven days later might seem like a stretch, but there is plenty to discuss from those seven days.

Texas had a really bad March, with the big carriers posting results impacted by the March storms: Allstate, Travelers, and Progressive led the way. Then, April happened, including the April 12th storm in San Antonio that is shaping up as the costliest in Texas history – expecting over $1.3B in insured losses.

Earlier this month I published a post on LinkedIn about underwriting “challenging” flood in California’s Central Valley. It generated a decent readership and some likes, but, most importantly, it generated some comments. One of the comments posted was a very prescient piece of commentary, and it deserves a blog post to explore the topic it raised: The limitations of analytics.

The comment came from Mr. Tim Pappas (a VP at Gen Re), and I am grateful to him for raising this important topic. Here are the points he raises that this post will address:

• Without understanding the limitations of “superior analytics,” insurance companies can be putting their bottom line in great danger.
• The picture may not be quite as clear as the “high resolution” data provided indicates.
• The complexity of all the factors involved can lead to errors in estimation, making the computations imprecise and sometimes outright faulty.
• If the data is off on just a small percentage of risks, the impact on portfolio profitability can be quite large.

This is a joint post by Ivan Maddox and Cyrena Arnold, Director of Product Sciences at Weather Analytics.

Hail. For property underwriters, hail is the peril that probably frightens them most. It is rarely excluded from homeowner policies, it is highly damaging, and very common in certain areas. Hail caused $6.6B in claims in the US in 2014 (AM Best), and there are hardly any decent underwriting tools to help out with it. In case a reminder was needed, here is AM Best’s coverage of Progressive’s Q1 results:

Net income dropped 13% at Progressive Corp. in the first quarter as catastrophe losses increased to $102 million, compared with $9 million a year earlier. Eighty percent of those losses came in March, when wind and hailstorms pummeled Texas and Louisiana.

Two hailstorms in the Dallas-Fort Worth metroplex caused insured losses industrywide of about $1.3 billion. A third storm in the region on April 11, with reports of softball-size hail and strong winds, may have been even more damaging (Best’s News Service, April 12, 2016).

After returning from a springtime vacation, and a hiatus from Risks of Hazard, I didn’t have to look hard to find topics to write about:

• Its hail season now, and I have some new stuff to share on that.
• Wildfire season is here now, too, and there is a post on that, coming soon.
• And, Houston has been flooded again so we need to revisit the challenges of underwriting flood in that city.

But, deciding what to write first was easy once I saw this video from AM Best at RIMS. Meg Ryan hosts an executive panel discussion that includes Kelly Lyles (XL Catlin), Rob Shimek (from AIG, who has provided much foundation for this blog in the past couple months – thanks Mr. Shimek!), and Inga Beale (Lloyd’s).