The Risks of Hazard

This week I am in Atlanta hanging out at the annual NAPSLO convention. NAPSLO is the Nat’l Association of Professional Surplus Lines Offices – but if you don’t know that already, it probably still doesn’t make much sense. After all, what’s a “surplus line”? It sounds like an empty subway, or maybe the third line at a square dance.

Here is NAPSLO’s definition: surplus lines insurers fill the need for coverage in the marketplace by insuring those risks that are declined by the standard underwriting and pricing processes of admitted insurance carriers.

Further, there are three categories of such risks:

1. Non-standard risks, which have unusual underwriting characteristics.
2. Unique risks for which admitted carriers do not offer a filed policy form or rate.
3. Capacity risks where an insured seeks a higher level of coverage than most insurers are willing to provide.

Just because it’s surplus, though, doesn’t mean it’s a small sector - $38B in annual written premium in the US is a significant portion of the market.

But why am I here?

As the analysis of insurer’s first half results come in, there are a few consistent refrains. In fact, they sound like broken records.

Last month there was an article published by the Tampa Bay Times (see here) on flood insurance that really stood out for The Risks of Hazard. Not only was the author, John Romano, supporting the continued expansion of private (i.e. actuarial, i.e. market-driven) flood insurance – he was advocating for the logical next step, universal flood coverage.

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.

One of the most enduring insurance news stories of 2016, so far, has been private flood insurance in the United States. I've also covered it heavily right here in the Risks of Hazard. Regulations are evolving to support it, and the number of insurers offering it is growing steadily. For insurers entering the market, one of the key technical problems to solve is how to rate the flood risk at a given property in a way that lets them determine pricing and conditions independently of NFIP information.