The Risks of Hazard

All the Possible Ways

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? A few days ago, we did an overview with a deep look at the key problem and solution. Today is a review of their survey of all the available ways that private flood can be introduced into the US market.

Below, in the graphic from Deloitte, are the ten possible ways for private flood insurance to happen, all plotted on a chart depicting increasing Ease of Implementation and Risk Sharing (page 11 of the report).

There they are: ten ways to introduce private flood. There might be more, but I can’t think of any. In the report, each is defined. Let’s take a look at a selection of them:

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.

“An ambitious amateur will rise above a complacent master.”
― Matshona Dhliwayo

Complacency will lead to major financial loss, or…The need to close the Protection Gap

Last month I watched a webinar from Advisen Ltd. titled Natural and Man-Made Catastrophes in 2015 - Calm Before the Storm? Swiss-Re was the sponsor, and it featured analysis by two distinguished gentlemen: Thomas Holzheu, Chief Economist Americas from Swiss Re, and Robert Hartwig, President of Insurance Information Institute.

 If 26,000 casualties last year aren’t enough, there is some fascinating loss information and some frightening predictions if we assume that status quo continues to be the norm.

Mr. Holzheu started the webinar with results from Sigma, which is a long-term study of Cat losses globally. Some of the most salient points included:

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?