Many Texans have had little else other than drought on their mind for the past two years. I, for one, still feel the effects of our most recent dry, hot summer; especially as I replace “evergreen” plants that are anything but green!
But, while ranchers and gardeners have been praying for rain in any form, another organization has been rethinking the risk model of a very different catastrophic weather occurrence: hurricanes and windstorms. RMS (Risk Management Solutions), a catastrophic risk modeling firm that produces models and reports for the insurance industry and others, recently released a newly calibrated catastrophe model for Atlantic tropical storms that has dramatic implications for property insurance capacity, underwriting and pricing.
Following are some of the pertinent points regarding the findings and possible impact on insurance programs:
- Previously, hurricane modeling predictive tools were drawn from a sample database of storms going back 100 years;
- RMS found that over the extreme long term, their loss predictive tools were accurate, but needed to be revised due to cyclical variations such as El Niño or La Niña and long-term temperature fluctuations (whether natural or man-made) that we’re currently experiencing;
- Since 1995 there has been a marked increase in sea surface temperatures. Temperature fluctuations (i.e., climate change) appear to cause higher sea surface temperatures. Higher sea surface temperatures are strongly linked to a higher rate of hurricane activity;
- Researchers from several esteemed universities were engaged to validate these findings and they concurred that higher sea surface temperatures were here to stay for at least five years;
- For the next five years they expect greater frequency and severity for windstorm losses including hurricanes;
- The new hurricane model takes into account $18 billion of detailed claims data for the past 20 years and analysis including pre- and post-landfall behaviors;
- Due to increased and highly specialized new instrumentation, these new models appear to be more scientifically accurate;
- In 2011, the U.S. had a reported $25 billion in losses from storms, and these numbers have not been factored into the new model;
- The likelihood of a Cat 3 storm making landfall is 20% higher than previously modeled;
- Losses are expected to be 40% greater, on average, than previously modeled for the Gulf Coast;
- “Super Cat” is a new term applied to some regions expected to experience Hurricane Katrina-type losses in the next 2-5 years. Properties in these areas are expected to see up to 125% greater losses than other “high-prone areas” and include Houston;
- Underwriters of property insurance will be more demanding of explicit, accurate and complete information to properly evaluate and price risks; specifically areas that have a direct correlation to the degree of vulnerability to the amount of the loss
- Occupancy type
- Year built
- Construction type
- Number of stories
- Loss amplification factors have also been added to the model, i.e., additional inflated areas in the claims payout due to the catastrophe nature of the loss
- Demand surge – increased costs due to demand on building materials and suppliers
- Delay in repair – generating further deterioration of damaged property and longer payouts in extra expense or business interruption values
- Claims inflation and coverage leakage – increased claims settlements in an attempt to close claims files quickly, including covering some items that may have been otherwise denied, just to close the file without further delay
The implementation of this new modeling is upon us and we’re already seeing increases in property insurance statewide, with significant increases in property insurance in the Houston area. Chubb has indicated that they will no longer accept ANY new values in Houston – even a small branch of a bank located elsewhere! So we know that Chubb is “rebalancing” their portfolio to reduce the amount of “Super Cat” locations they have on the books.
Travelers is also realigning their windstorm writings. At least at this point, they’re still offering coverage for good risks in all areas of Texas; albeit at increased premiums and deductibles. We recently received an offer from them that placed a minimum wind/hail deductible on Houston properties at $50,000.
The insurance carriers have to pay attention to this modeling because it’s the acceptable barometer in the industry and therefore they must use it to make prudent pricing and deductible offers for coverage. Likewise, the insurance carriers have to show an acceptable underwriting profit so the rating agencies will continue to look favorably upon them. We’ve recently seen the effect that a reduced AM Best Rating has on insurance carriers with the downgrading of BancInsure. The cause and effect of this new model is harsh for all of us.
We’ll continue to report on the changes in our markets as they develop.
Carol Troy is the Agency Manager and Chief Operating Officer for IBAT Financial Services, a corporate insurance agency licensed by the State of Texas to offer insurance services to Texas community banks.