The Risks of Hazard

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What would an underwriter say if they heard that a monumental amount of unwritten premium was about to become available in a few months? This is something property underwriters are contemplating as the NFIP re-authorization approaches. But is that the right question?

There is a lot of buzz in industry literature about how underwriting profit is increasingly an essential profit source, with investment returns on capital so low.

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.