The Risks of Hazard

Friday marked the introduction of new in-force FIRMs for New Orleans that were approved earlier in 2016. Because of Katrina and the politics around the creation of the new FIRMs, this was national news. The New York Times had a piece on it in, we here blogged about it, and it was even discussed on All Things Considered on Friday (yes – that is what I sound like). Rarely does FEMA generate such fanfare without a catastrophe actually happening.

Over the past year, flood and flood insurance has really become more apparent in the media and trade publications. Normally only catastrophic events (i.e. hurricanes) capture so much attention, but the combination of some massive floods and the continued progress of private flood legislation has started conversations that are overdue. Both the nature of these storms and floods, and their impact on property owners are getting close attention, and that is welcome because it is changing the way people think about underwriting flood insurance.

©2016 Roger Pottorff. All Rights Reserved.

In the past two weeks, there have been two articles published that illustrate such changes of perception.

The first is from Jeri Xu of Swiss Re, and she offers a very useful way to think of the rain events that have caused some of the most serious recent floods (i.e. 2016 Texas, West Virginia, Maryland, and Louisiana). She offers an angle on these events that is potentially transformative for evaluating flood risk: since flood-causing storms are localized at the county-level (roughly speaking), and there are about 3,000 counties in the country, it is not unreasonable to expect three 0.1% annual probability floods in any given year. In other words, we should expect three thousand-year-floods annually. With this insight, Ms. Xu has transformed the extremely rare to the commonplace, and reconciled the headlines with the stats.

The second is from David Bull, North America Editor of The Insurance Insider, specifically about the recent Louisiana floods. He has tracked down the 0.1% annual probability of the rain that caused these floods, ensuring his article is apples to the Swiss Re article’s apples. Mr. Bull writes about the profound protection gap in Baton Rouge and Lafayette for flood, quoting all the ugly stats about how most of the property that has been flooded is uncovered for it: “Across the Baton Rouge area, no more than 15 percent of homes have flood insurance, while Lafayette, also hard-hit, has a take-up rate of 14 percent.” The reason for this sorry penetration of flood insurance is the same as always: “many of the areas flooded were outside the 100-year floodplain and not considered at high risk.” Mr. Bull has shown the obvious need for a new form of flood insurance.

Risks of Hazard took a look at Houston last year after the flooding that ravaged the city in May. We discussed the flooding problem in Houston, and a way to handle it for underwriting flood insurance. Since then, in the past 12 months, Houston has had three (THREE!) headline-making floods.

According to The Weather Network, Houston is America’s Flooding Capital– a designation easily assigned. According to the article, Houston has had 96 days with reported residential flooding (pretty much entirely pluvial) in the past 20 years, averaging a little under five such days each year. It’s a staggering statistic – forget 100 year flood plains, because Houston is in a 2 MONTH flood plain based on the past two decades.

To try and get a better view of the flood risk, here is a very handy flood management tool published by Harris County. It’s a mapping portal that displays the FEMA (NFIP) flood zones, the bayous/waterways designed to whisk flood waters into the Gulf of Mexico, and ponding areas where water is expected to accumulate during storms.

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.