The Risks of Hazard

Earlier this month I published a post on LinkedIn about underwriting “challenging” flood in California’s Central Valley. It generated a decent readership and some likes, but, most importantly, it generated some comments. One of the comments posted was a very prescient piece of commentary, and it deserves a blog post to explore the topic it raised: The limitations of analytics.

The comment came from Mr. Tim Pappas (a VP at Gen Re), and I am grateful to him for raising this important topic. Here are the points he raises that this post will address:

• Without understanding the limitations of “superior analytics,” insurance companies can be putting their bottom line in great danger.
• The picture may not be quite as clear as the “high resolution” data provided indicates.
• The complexity of all the factors involved can lead to errors in estimation, making the computations imprecise and sometimes outright faulty.
• If the data is off on just a small percentage of risks, the impact on portfolio profitability can be quite large.

In August 2015, Lloyd’s and JBA Consulting published a white paper called California Flood – Central Valley Risk Analysis. At the time of publication, it was received with raised eyebrows as the state was in an historic drought. Characteristically, Lloyd’s took the long view and they released the study, knowing El Niño was on the way.

The report is very much focused on the accumulated flood risk in the Central Valley, including property, crop, and business interruption, and the figures it cites are as huge as expected – a potential loss exceeding $24B.

Last week I took a look at the Top 5 Risks of Hazard articles from 2015. Today, here is a look at the Top 5 Accomplishments of InsitePro^™, the risk assessment software we are building here when not writing blog posts.

5. API connectivity. Insurance software is slowly but surely moving towards interconnectivity between disparate systems and software packages. Not everything is in the cloud (yet), but almost all insurance systems are able to integrate analytics and datasets. InsitePro fits this type of environment with its full suite of APIs and web services, plus it is based in the cloud and waiting for the industry to realize the benefits there.

One of the key attributes of a flood model is the Base Flood Elevation, or BFE. It represents the elevation of the water surface during a perfectly calm flood of precisely defined annual probability – in other words, it’s a fiction. Happily, it is a very useful fiction.

The context in which most people are familiar with BFE is through the FEMA FIRMs. For many (but not all) Special Flood Hazard Areas (SFHAs), FEMA publishes a BFE – i.e. the elevation of the water during a flood that would mimic the relevant A or V zone. To obtain a Letter of Map Change from FEMA, and to be excused from the regulations governing a property within an SFHA, a homeowner needs to demonstrate that their ground floor elevation is above the BFE. In other words, a 1% flood would not get their front door wet.

The Curiosity Rover has discovered liquid water on the surface of Mars. While this is an epoch-defining moment for planetary scientists and astro-biologists, the news also heralds a new peril for the P & C insurance industry. Martian Flood is a nascent market, and preparatory work is already underway to enable early innovators to enter it.

The announcement came two weeks ago, and stated that liquid water was observed to be seeping from the sides of canyons and craters. The source of the water is not yet understood, but the leading theories suggest it is coming from aquifers, melting surface ice, or condensation. Regardless of the source, the marks of the water can be seen on the rusty landscape.