The Risks of Hazard

Insurers are posting results for the second quarter now, and cat losses are making headlines. There were certainly a lot of claims, with Q2 driving the highest cat losses seen since Sandy in 2012. The One Brief (from Aon) published an excellent synopsis of the losses here and it makes bleak reading.

On the same day as the Aon article, Travelers published their results. Sure enough, they shared some discouraging news:

• Catastrophe losses of $333 million, up from $221 million for the same period last year, driven by wildfires at Fort McMurray in Canada and hail storms in Texas.
• Net and operating income of $664 million and $649 million, respectively, declined from the prior year quarter, primarily due to the higher catastrophe losses, higher non-catastrophe weather-related losses and lower net investment income.
• It was the smallest quarterly profit since 2012 after superstorm Sandy.

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.

Earlier this week, I wrote about Goldfish Underwriting and referred to this Brink article (thanks again to authors Carolyn Kousky and Erwann Michel-Kerjan) to describe how flood risk varies within NFIP A zones. The Brink article summarizes a study of NFIP claims over the past 35 years. At first I thought it would be a standard-issue, “NFIP-is-broken” article, but it is completely different from anything else I’ve read about NFIP losses, and the authors' four conclusions are each worth a look.

There are two distinct analyses needed to underwrite property: risk assessment and accumulation. The first is the evaluation of a risk based on information specific to the risk, so that it can be accepted and rated, or rejected. The second limits the writing of new risks within a defined geographical area to prevent excessive losses from a single event. Both are important for underwriting cat risks: assessment because of the potential of losses up to the full value of a property (and beyond), and accumulation because cat events cause damage to swaths of properties at once.

For many cat perils, though, much of the data used to assess the risk is not specific enough – it is generalized and inadequate for underwriting. Underwriters that use generalized data for risk assessment and depend upon their accumulation to manage their portfolio are goldfish underwriters; they keep writing risks until they fill up their aggregation limits, like goldfish keep eating until they fill up their bowl.

Last week on AMBest TV there was an interview with Hemant Shah, the articulate co-founder and CEO of cat-model makers RMS. It was a standard set of questions one would ask a cat modeler, but there was one response that’s worth a deeper look.