The Risks of Hazard

A few weeks ago, I wrote about the New Madrid seismic zone, including how an earthquake there would be the costliest natural disaster in the country’s history. In those two weeks, the readership of that blog post has been enormous (thanks to Iain Bailey at Swiss Re for the original article!), and along with it came many questions and comments that mention the Cascadia subduction zone. So, let’s explore that seismic time bomb, including a comparison with New Madrid.

Until the 70s and 80s, the Cascadia subduction zone was unknown to science. Thanks to a July 2015 article in the New Yorker by Kathryn Schulz, it now has a high profile in the public consciousness. The article recounts the scientific detective story around its discovery, and describes the potential destruction to be wrought when (not if) the earthquake comes. It’s a fantastic – and very scary – article, and it has made the rounds of social and traditional media.

What are the similarities between the two seismic zones? Not much, beyond their shared potential for devastation (human and economic) of large populations.

The differences are more interesting.

I recently wrote a blog about how the future of underwriting software is now, exploring this AM Best video. One of the things that stood out was that underwriters are going to be more responsible for building and managing their sales pipeline. This is particularly prescient for those underwriting non-NFIP flood insurance because of the impending rush into that market – building strong portfolios will be extremely important because those portfolios will represent an insurer’s initial position in the market. As early adopters turn into the full industry’s arrival, competition will be fierce* for good risks. Differentiation will be necessary for success. (* it will probably be fierce, but not necessarily…but that’s another blog).

The main source of differentiation for an insurer is going to be the flood risk analytics they use. Ideally, those analytics will be based on their own experience, data, and expertise because when everyone uses the same models it is more difficult to differentiate. Quality of the insurance coverage will also quickly distinguish the players.

The National Research Council (NRC) published a report in June that explored how FEMA’s National Flood Insurance Program (NFIP) appraises flood insurance in the U.S. It is a very thorough and technical document (as one would expect), that reaches ten conclusions on how NFIP can improve its pricing strategies to become, essentially, more solvent. The conclusions focus on different aspects of how a policy price is determined, including the use of loss/claims data, the risk analysis, flood modeling techniques, damage and exposure estimations, replacement costs, and other factors. One conclusion stood out for me, and I wasn’t alone.

Two weeks ago, I wrote a post that explored the May 2015 Houston floods and suggested some lessons that might be offered by the events. This topic attracted a large audience and generated a lot of questions and discussion. In my conclusion, I suggested that carriers might consider creating a flood analytic specifically for this city.

With Tropical Storm Bill currently bearing down on Texas, today I will take a closer look at how a carrier or underwriting group could use Intermap's risk assessment software, InsitePro, to build a new analytic to handle "Houston Flood" as a distinctive peril.

The tragic flooding in Houston over the past few weeks has been well covered by the global media, as one would expect when the 4^th largest city in the United States is submerged under water. Property insurers are obviously concentrating on claims right now, helping their customers through this traumatic time and getting them ready to rebuild their lives. But as the facts and statistics begin to emerge, it is also interesting and instructive to explore how the risk of events like this can be adequately understood for underwriting and accumulation control by insurers.