The Risks of Hazard

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). 

With wildfire season officially here, the Risks of Hazard is republishing the below post from last year. The question we asked in October remains valid – why do insures not do more with wildfire analytics when it’s one of the most robustly modeled cat perils?

Wildfire has been big news in 2015. The USA and Canada are both having epic years, as long-term droughts combine with hotter and drier-than-normal temperatures in much of the West burning more acres and buildings than ever. Yet, when I talk to carriers about risk analytics, wildfire seems like an ignored peril. Why?

Historically, wildfire has been underwritten (or excluded) based on proximity to trees. Historically, that was adequate, too. But over the past 20 years, as towns and suburbs have expanded into wildland, the exposure to losses has increased exponentially. This week, AM Best (mind the subscription-wall) is reporting on Guy Carpenter’s estimated losses for the Western US in 2015 and the figures are eye-catching: $1.75 billion.

There is a lot of buzz in industry literature about how underwriting profit is increasingly an essential profit source, with investment returns on capital so low.

Earlier this week, I wrote about Goldfish Underwriting and referred to this Brink article (thanks again to authors Carolyn Kousky and Erwann Michel-Kerjan) to describe how flood risk varies within NFIP A zones. The Brink article summarizes a study of NFIP claims over the past 35 years. At first I thought it would be a standard-issue, “NFIP-is-broken” article, but it is completely different from anything else I’ve read about NFIP losses, and the authors' four conclusions are each worth a look.