The Risks of Hazard

Last week, Cyrena Arnold, the Director of Product Sciences at Weather Analytics, and I blogged about hail, exploring available analytics with the March storm in the Fort Worth area. The response has been incredible to that blog, so a reprise is in order. Revisiting the topic seven days later might seem like a stretch, but there is plenty to discuss from those seven days.

Texas had a really bad March, with the big carriers posting results impacted by the March storms: Allstate, Travelers, and Progressive led the way. Then, April happened, including the April 12th storm in San Antonio that is shaping up as the costliest in Texas history – expecting over $1.3B in insured losses.

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).

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, I had the pleasure of meeting representatives from three Lloyd’s syndicates for the first time. It was an exciting time for me and my product (InsitePro™), because Lloyd’s is always a milestone for any new product serving insurance. The real beauty of the meetings, though, was that they were not in the City of London, but rather, in a small American prairie city.

The Lloyd’s market is an icon of insurance, with its vast history, its innovative approach to risk management, and its global reach. To many people, Lloyd’s of London IS insurance. I always thought, though, that my first meetings with a Lloyd’s syndicate would be in London at their famous headquarters. Nope.