The Risks of Hazard

While it might seem pretty obvious to most readers that good underwriting is an important part of a healthy insurance industry, it has not always been. When interest rates were high in the past decades, underwriting was the scoop with which insurers piled as much premium as possible into their coffers. With rates of return on capital at historic lows, for a long time now, underwriting is no longer a scoop – it needs to be a finely honed source of profit.

In a recent article on AM Best, Pat Gallagher – chairman and president of the eponymous brokerage giant, made this point. Here is the relevant bit:

For more than five years he (Mr. Gallagher) said he’s warned about the lack of investment income, and thinks the renewed emphasis on underwriting helps carriers and customers.
“From 1986 to 2001 we saw a ton of insurance companies go broke,” said Gallagher, as pricing “went down and down, and then after 9/11 everyone went up 100%. That’s not a good thing.”

At first, I thought it was an odd thing to say, and even more odd to publish. It seemed a bit like reading: people eating is good for the restaurant industry. But, I filed it in my ideas folder and kept coming back to it…why?

Wow, 2016 is now half over. It has been an eventful half year, including private flood legislation coming closer to implementation and historic wildfires in Alberta and California.

One of the most enduring insurance news stories of 2016, so far, has been private flood insurance in the United States. I've also covered it heavily right here in the Risks of Hazard. Regulations are evolving to support it, and the number of insurers offering it is growing steadily. For insurers entering the market, one of the key technical problems to solve is how to rate the flood risk at a given property in a way that lets them determine pricing and conditions independently of NFIP information.

AM Best has published their annual look at World Catastrophes for 2015 (mind the subscription wall). The main three overall takeaways from 2015 are:

1. The largest cat loss of the year was man-made. The explosion in Tanjian, China, caused more insured losses than any natural catastrophe last year, and was the third costliest man-made disaster for insurers in history.
2. Overall, it was another quiet year for cat losses. See Graphic 1 for an historical look.
3. The Protection Gap was huge enormous gigantic, especially in Asia. See Graphic 2 for the gap between total and insured losses. Light green = Gap.

Earlier this month the New York Times published an op-ed piece discussing the new FIRMs in New Orleans. Now, if ever there were going to be contentious flood maps published by FEMA, these would be them. It is nigh impossible to discuss flood mitigation or flood risk in that city objectively after Katrina.

The author, Andy Horowitz (an assistant professor of history at Tulane), states his intent early: “I was briefly elated — and then, horrified — when, earlier this year, the federal government declared most of New Orleans safe from flooding.” At length, here is the cause for his concern: