The Risks of Hazard

Severe Convective Storm is, generally speaking, the type of storm responsible for damage from tornado, hail, “straight-line” wind (i.e., not a tornado), and lightning. (For a more thorough, academic definition of SCS I will point you toward the American Meteorological Society.) Recently, I have begun researching how to present risks related to SCS in the USA and Canada, and I've come across some interesting challenges.

Modeling these types of natural events to a level where individual properties can be evaluated is not easy, if it’s even possible. There is no direct influence from anything in a fixed location (terrain, vegetation, etc.) — all the primary drivers are atmospheric. So, unlike flood or wildfire, SCS risk models need to portray the likelihood of an event that could happen anywhere (within certain bounds). Not an easy task.

Insuring property against natural catastrophes is a funny business because periodical losses are important to the market; this post from Sam Friedman explores why. In a nutshell, the insurance industry depends on catastrophic losses from time to time to normalize the supply and demand — and thus the pricing — of insurance capacity. The post is worth reading not just because it’s informative, but also because it explains the concept of “naïve capacity” (what a brilliant term for much of what happens in the capital markets these days!).

Property insurers rely on many types of tools for risk analysis, but none quite so complex as the cat model. Short for catastrophe, cat modeling uses computer-assisted calculations to estimate the losses that could be sustained due to a catastrophic natural event. Perils analyzed include flood, hurricane (wind damage and storm surge), earthquake, tornado, hail, wildfire and winter storm. The principle function of cat models is to help insurers prove their financial solvency. 

One of the keys to understanding flood risk is understanding the nuances of the type (or types) of flood you face. Why? A flood’s a flood, right? Wrong. There are several different kinds of flood, and each one bears a different impact in terms of how it occurs, the damage it causes, and how it is forecasted. Here’s a crash course on three common types of flood to help you better assess your risk.