The Risks of Hazard

Wildfire has been big news in 2015. The USA and Canada are both having epic years, as long-term droughts combine with hotter and drier-than-normal temperatures in much of the West burning more acres and buildings than ever. Yet, when I talk to carriers about risk analytics, wildfire seems like an ignored peril. Why?

Historically, wildfire has been underwritten (or excluded) based on proximity to trees. Historically, that was adequate, too. But over the past 20 years, as towns and suburbs have expanded into wildland, the exposure to losses has increased exponentially. This week, AM Best (mind the subscription-wall) is reporting on Guy Carpenter’s estimated losses for the Western US in 2015 and the figures are eye-catching: $1.75 billion.

One of the story lines emerging from this year’s Rendez-vous de septembre in Monte Carlo was the continued relevance of P & C insurance and reinsurance. At first, it sounds a bit overdramatic, but there is something to it.

The continued relevance of the P & C industry was first questioned in 2012 by XL Group’s CEO Mike McGavick in an Insurance Journal article. Many of his points were centered on the relationship of insurers and reinsurers with other global industries, including their access to capital. The one point from this three-year old article that resonated for me is this:

As another example McGavick noted that following the floods in Thailand the price of computer chips rose by 10 percent. But the P & C industry’s response hasn’t been to offer solutions. It’s mainly been to impose sub-limits or to exclude it entirely. [McGavick] warned: “We cannot exclude our way to prosperity, and we cannot sub-limit our way to relevance.”

From a P & C executive, a CEO no less, those are fighting words, a rallying cry. Unfortunately, Mr. McGavick was viewed more as a Cassandra (to use IJ’s description) than a Henry IV.

Recently, I’ve explored in this blog the potential earthquakes in the New Madrid and Cascadia seismic zones. (By the way…little rumblings in New Madrid this week.) One of the main points of those blog posts was how underinsured the property is in those regions, where the seismic risk is possibly underappreciated. Let’s take a look at California, where everyone knows a big earthquake is going to happen; including the USGS, which suggests California has more than a 99% chance of having a magnitude 6.7 or larger earthquake within the next 30 years.

Swiss Re published a paper describing a potential natural catastrophe that would be the costliest nat cat event in U.S. (and, ipso facto, global) history. Other publications are picking it up for obvious reasons, including Insurance Journal and Carrier Management. The first surprise of many who read the paper is the event they are describing: Midwest earthquake.

Really?

AM Best has had some really compelling videos on their site this week, including this clip from Tuesday that showed us the future of underwriting through the crystal ball of Gail McGiffin of Ernst & Young. She and Meg Green discuss what property insurance underwriters of the future will be expected to do and how they will do it.