The Risks of Hazard

The Risks of Hazard takes a great interest in the protection gap because it is both an opportunity for underwriters and a shortcoming of insurance as an industry. Last week, Insurance Journal published a very informative look at the U.S. residential protection gap from a novel perspective: the policy holder’s perspective.

The insurance aspects of the protection gap are well documented, including how to write in the flood protection gap, what it looks like, and how it compares to emerging risks. But it is surprisingly rare to read about what that means to the policy holders. Happily, the Big I and Trusted Choice did some homework, and the results are stark.

AM Best and Target Markets (the Program Administrators Association) just put on their annual webinar exploring the state of program business. 

Quickly, here is a primer on what “programs” are. Programs are when a carrier delegates underwriting of a well-defined type of coverage with very specific underwriting guidelines to independent underwriting groups typically known as Managing General Agents (MGAs) or Managing General Underwriters (MGUs). The carrier carries the risk, while the underwriting groups are the distribution network for the carrier. Lloyd’s of London does most of their US business through programs, but other big carriers (AIG, QBE, Zurich are a few that come to mind) have a wide offering of programs. A well designed program is a classic win-win, with the carrier collecting premium without the cost of sales and marketing the insurance products, and underwriters can sell coverages without bearing the risk. 

Programs are interesting because they are the crucible in which many coverages are initiated and tested before becoming more broadly offered. The underwriters who bring programs to the market are known for their innovation and the field is full of start-ups. Most programs are built around non-admitted risks that require deep specialized knowledge to underwrite. Flood is a peril that fits well into a program.

Insurers are posting results for the second quarter now, and cat losses are making headlines. There were certainly a lot of claims, with Q2 driving the highest cat losses seen since Sandy in 2012. The One Brief (from Aon) published an excellent synopsis of the losses here and it makes bleak reading.

On the same day as the Aon article, Travelers published their results. Sure enough, they shared some discouraging news:

• Catastrophe losses of $333 million, up from $221 million for the same period last year, driven by wildfires at Fort McMurray in Canada and hail storms in Texas.
• Net and operating income of $664 million and $649 million, respectively, declined from the prior year quarter, primarily due to the higher catastrophe losses, higher non-catastrophe weather-related losses and lower net investment income.
• It was the smallest quarterly profit since 2012 after superstorm Sandy.

Risks of Hazard took a look at Houston last year after the flooding that ravaged the city in May. We discussed the flooding problem in Houston, and a way to handle it for underwriting flood insurance. Since then, in the past 12 months, Houston has had three (THREE!) headline-making floods.

According to The Weather Network, Houston is America’s Flooding Capital– a designation easily assigned. According to the article, Houston has had 96 days with reported residential flooding (pretty much entirely pluvial) in the past 20 years, averaging a little under five such days each year. It’s a staggering statistic – forget 100 year flood plains, because Houston is in a 2 MONTH flood plain based on the past two decades.

To try and get a better view of the flood risk, here is a very handy flood management tool published by Harris County. It’s a mapping portal that displays the FEMA (NFIP) flood zones, the bayous/waterways designed to whisk flood waters into the Gulf of Mexico, and ponding areas where water is expected to accumulate during storms.

It is always exciting to find others in the industry discussing topics that we here at The Risks of Hazard consider important. When those others carry the credibility of Swiss Re and A.M. Best, it’s especially exciting. Here is an interview from A.M. Best TV, with Meg Green talking to Megan Linkin (a natural disasters expert with Swiss Re) about the protection gap
The protection gap is a favorite topic here at the Risks of Hazard. All I need to add is: What she said!