Tag Archives: hurricane coverage

Surveying the damage: The impact of Harvey, Irma, and Maria on the alternative capital market

In the wake of Hurricanes Harvey, Irma, and Maria, the property and casualty insurance and reinsurance markets are positioned to step in and provide perhaps the largest series of storm-related payouts in history. And for the first time, certain financial investors will contribute to insurance payouts as well, as providers of alternative capital to the reinsurance markets. For many participants in the alternative capital market—or equivalently, the insurance-linked securities market—2017 will represent the first major test of their risk selections and operational capabilities. Milliman consultant Aaron Koch offers perspective in this article.

Reading list: Florida’s private flood insurance market

Advances in catastrophe models and new state insurance regulations have opened the door for an affordable, risk-based private insurance market in Florida. This reading list highlights articles focusing on various issues and implications related to the market. The articles feature Milliman consultants Nancy Watkins and Matt Chamberlain, whose knowledge and experience is helping insurers to understand and price flood risk more precisely.

Forbes: “The private flood insurance market is stirring after more than 50 years of dormancy
The reemergence of private flood insurance has piqued the interest of carriers seeking to enter the market. Some catastrophe (CAT) modeling companies are creating flood models to help insurers price policies. Here’s an excerpt:

Nancy Watkins, a principal consulting actuary for Milliman, likened the current level of interest from insurers to enter the private flood insurance market to popcorn.

“We are at that stage where you can hear the space between pops. You can hear one kernel at a time,” she said. “What I think is going to happen is, in one to two years, there’s going to be a lot more going on.”

Bradenton Herald: “Important for homeowners to compare flood insurance options
Florida homeowners must consider the issues related to the National Flood Insurance Program (NFIP) and private flood policies. Private insurers can use predictive modeling technology to determine a home’s distinct flood risk.

Tampa Bay Times: “Remember the flood insurance scare of 2013? It’s creeping back into Tampa Bay and Florida
Real estate and insurance experts comment on the possible effects that high flood insurance rates may have on homeowners. Insurers express interest in the granular modeling of flood-prone territories.

Tampa Bay Business Journal: “Why some Tampa Bay property insurers are offering flood coverage and others are not” (subscription required)
Insurers need to weight the risks and rewards associated with the underwriting of flood insurance. A few carriers have already decided to participate in Florida’s private flood insurance market.

Hurricanes and analytics: A 21st century approach to pricing

Catastrophic events can threaten the profits of property insurers. Changes in catastrophe models have boosted estimated losses, leading to ratings pressures and higher reinsurance rates.

In this short film, Milliman’s Matt Chamberlain discusses how geographic information systems can be leveraged to reduce loss ratios related to hurricane risk.

To learn more about Milliman’s predictive analytics solutions, click here.

The financial aftermath of Tropical Storm Sandy

Tropical Storm Sandy left behind significant financial implications for homeowners, businesses, and property insurers alike. Through executive orders and press releases, several states moved quickly to relieve property owners from some of the financial burden associated with the storm by transferring a portion of the claim costs back to insurers.

A new article by Milliman’s Phil Borba presents a series of scenarios on the relationship between the insured value, the covered loss, and deductibles for a property policy. Under two sets of scenarios the findings were for 4.7% and 10.6% increases in the amount paid by insurers.

Here is an excerpt from the paper:

We developed six scenarios based on two assumed levels of loss, to illustrate the manner in which the presence or absence of hurricane deductibles might affect insured losses. The table in Figure 1 outlines these scenarios, presenting the amounts paid by the policyholder and by the insurer. Under both assumptions, the insured value is $200,000. The first three scenarios assume a 50% loss of the insured value; the last three scenarios assume a 100% loss of the insured value.

• For Scenario 1, there is a $500 standard all-perils deductible. For a $100,000 windstorm loss (50% of the insured value of $200,000), the policyholder would pay $500, the insurer would pay $99,500, and the deductible (the amount paid by the policyholder) would account for 0.5% of the amount paid by the insurer.

• For Scenario 2, there is a 5% wind deductible and a $500 deductible for all other perils (AOP). For the same $100,000 windstorm loss, the policyholder would pay $10,000, the insurer would pay $90,000 and the deductible would account for 11.1% of the amount paid by the insurer.

• Scenario 3 presents the same circumstances as Scenario 2, except the 5% wind deductible is disallowed and the $500 AOP deductible would be applied. Disallowing the wind deductible produces the same results as the $500 deductible policy under Scenario 1: the policyholder would pay $500, the insurer would pay $99,500, and the deductible would account for 0.5% of the amount paid by the insurer.

Removing the 5% wind deductible from the policy shifts $9,500 of the loss from the policyholder to the insurer. This shift increases the amount of losses paid by the insurer by 10.6% (from $90,000 to $99,500).

The three scenarios in the bottom half of Figure 1 follow the same line of reasoning but assume there was a 100% loss to the $200,000 insured value. Scenarios 4-6 use the same assumptions for the all perils, wind, and AOP deductibles that were used for Scenarios 1-3. Under Scenario 4, the $500 standard all-perils deductible would account for 0.3% of the amount paid by the insurer. Under Scenarios 5 and 6, the removal of the 5% wind deductible shifts $9,500 in payments from the policyholder to the insurer. In this case, the shift would cause a 4.7% increase in the payment by the insurer; that is, the removal of the 5% wind deductible would increase the payments from $190,000 to $199,500, for a 4.7% increase in the amount paid by the insurer.

To read the entire article, click here.

Hurricane Sandy reading list

Reuters is just out with preliminary analysis from Eqecat indicating there is ample coverage in the insurance industry to cover losses associated with Hurricane Sandy. This analysis offers an estimate of $5 billion to $10 billion, which represents “a preliminary forecast that could change after the storm makes landfall.”

In the same article, Morgan Stanley provides this observation:

“With $500 billion-plus of capital … we expect the (property and casualty) industry is once again well prepared to pay all Frankenstorm insured losses,” Morgan Stanley analyst Gregory Locraft said in a report on Monday, using the nickname for the Sandy-nor’easter combo.

Rather than predicting what’s about to happen, we’ll point you to some reading on events in the rearview mirror. You can learn a lot about insurance just through how the industry has evolved following natural catastrophes.

  • David Sanders frames up the challenge of insuring natural catastrophes in his 2006 paper, “The Price of Civilization.” Sanders builds off of something Voltaire said after witnessing the wreckage following the 1755 Lisbon earthquake: “Is this the price mankind must pay for civilization?”  Sanders tries to answer this question by looking at how we pay the price that natural catastrophes extract and examining who bears the brunt of that expense. Here’s a helpful excerpt:

To assess how dangerous an insurance risk is, it is often convenient to apply the Pareto parameter. This rule—commonly known as the 80/20 rule—states that 20% of the claims in a particular portfolio are responsible for more than 80% of the total portfolio claim amount. With the Pareto parameter as a baseline, we can assess a portfolio’s vulnerability. If a single event can spell financial ruin, there may be a problem.

Hurricane data in the Caribbean indicates that insurers can make profit for a number of years, and then find themselves hit by a “one-in-1,000-year” hurricane, which swallows up 95% of the sum insured in one go. For example, when Hugo hit the U.S. Virgin Islands, the total cost of the loss for residential property insurers was equal to 1,000 years’ worth of premiums.

The regulators of the insurance industry generally target a one-in-100-year to one-in-200-year insolvency level. They do not cater to the one-in-1,000-year event. Typical solvency levels for major developed insurance markets that cover catastrophes are on the order of three to six times the cost of a once-in-a-century event. However, Katrina-type losses are not one-in-100-year events. Recent history indicates that they are more like one-in-five-year events, which means every five years the insurance industry can expect a $50 billion loss [most recently Katrina4].

There is a finite amount of reinsurance capacity, with billions available worldwide. A company might find a reinsurer willing to insure a $100 million dollar loss, but can they find one willing to cover single-year losses that exceed that threshold? It is difficult to adequately spread around risk and fill a reinsurance dance card when aggregate losses reach ten digits, which is why “securitizing” insurance risks in the capital markets has become an attractive option. Cat bonds were born in the early 1990s following Hurricane Andrew–a seminal event because it revealed the limits of reinsurance. Since then, companies, insurers, and reinsurers have used cat bonds to provide another layer of insurance, often protecting against an insurer’s unlikely third or fourth hundred-million-dollar loss–the one that finally exhausts insurance or reinsurance capacity.

  • Companies looking to triage the flood of claims that will come their way in the next two to five days might look to text mining as a way of comprehending Sandy’s claims. Phil Borba’s article on text mining shows how insurers can analyze claim notes to better screen and triage their claims.
  • Matt Chamberlain’s recent article examines how something called geocoding can lead to more precise pricing for homeowners policies in hurricane-prone parts of Florida.

Although it may seem like defining the “coastline” is clear-cut, it is actually quite ambiguous when considering a property’s exposure to a hurricane. Does the coastline follow bays, such as Tampa Bay? Does it follow barrier islands? Does it follow rivers and, if so, how far? After a company decides that it should organize its territories based on distance to the coast, that company’s first instinct may be to use an existing coastline. However, such a coastline may not be suitable for the purpose. Off-the-shelf coastlines may follow many small-scale features that do not, in fact, affect hurricane risk.

Maybe we’ll have to publish a follow-up article analyzing the potential for geocoding in Lower Manhattan.

Wherever you are, stay safe and dry. And if you are lucky enough to maintain electricity and Internet, feel free to post related reading below.