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).

One of the best talks I’ve heard on insurance innovation is The Changing Landscape of Risk presented by Robert Schimek of AIG (SVP and CEO of Americas Region). He was speaking at MarketScout’s Entrepreneurial Insurance Symposium in Dallas in December.

The fact that only the people in the room, plus 63 people on YouTube, have heard it is a shame. It is super informative, very entertaining (on the Insurance Technology Lecture scale), and (for me) it accomplished the elusive goals of a good talk: it asked questions that changed the way the audience thought of problems, and provided answers to questions the audience didn’t know they had. As a bonus for blog writers, it is a gold mine of material – I will be visiting Mr. Schimek’s material over and over.

The overall subject of the presentation was the importance of entrepreneurial innovation in insurance. He had to lay a little groundwork, because AIG’s view of innovation is likely to be different from pretty much the rest of the industry’s; i.e. 63,000 employees and they pay ~ $110M in claims every day…not quite your typical insurance company. Because of this, he is also able to bring some interesting holistic macro viewpoints to the conversation.

Last week, Property and Casualty 360 published a post by Sean Allen entitled 4 areas for the Insurance Industry to Modernize. The article is based on the consensus after the Xchanging London Market Conference last November, and it starts with:

Fair or not, many look at insurance as an outdated industry, lagging behind others of similar stature and scale when it comes to innovation.

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 September I wrote about the difference between underwriting with a pen vs. a paint-roller, exploring the problem with using analytics and data that are not able to accurately depict flood risk at a specific location. The post took a critical look at using FIRMs for underwriting flood insurance because they are not intended to depict location-specific flood risk (they’re pricing tools for the NFIP). That blog was very well received, so I thought I would follow it up with a graphical look at the same topic. The notion was reinforced by the news from Washington on the Flood Bill.