The Risks of Hazard

AM Best has published their annual look at World Catastrophes for 2015 (mind the subscription wall). The main three overall takeaways from 2015 are:

1. The largest cat loss of the year was man-made. The explosion in Tanjian, China, caused more insured losses than any natural catastrophe last year, and was the third costliest man-made disaster for insurers in history.
2. Overall, it was another quiet year for cat losses. See Graphic 1 for an historical look.
3. The Protection Gap was huge enormous gigantic, especially in Asia. See Graphic 2 for the gap between total and insured losses. Light green = Gap.

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:

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). 

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.