Behind the Numbers: AIR’s Puerto Rico Estimate

Catastrophe modeler AIR shook up the insurance world this week with its insured loss estimate for the Caribbean from Hurricane Maria: $40 billion to $85 billion – which would put it on par with Hurricane Katrina and the 2011 Japan earthquake and tsunami as the worst insured catastrophes in history, according to I.I.I. research.

Concerned mixed with skepticism; RMS has an estimate less than half the size. This from the Artemis reinsurance blog:

The size of AIR’s industry loss estimate has already raised questions among industry analysts, some of whom are questioning the range and believe the eventual industry exposure could be even lower than the bottom end of it.

But AIR’s estimate reflects the enormous damage and disruption that hurricane Maria has caused and with Puerto Rico badly hit the final cost to insurance and reinsurance interests is going to be very high.

Late Thursday, AIR published an explanation of their estimate. They call it “all but the perfect storm for Puerto Rico.” Intense winds enveloped the island; not a corner escaped. And Puerto Rico, unlike most Caribbean islands, has a significant industrial presence – more than $120 billion, and that is where two-thirds of the AIR’s estimate comes from.

The range of the estimate is quite wide. For Puerto Rico by itself, it’s $35 billion to $70 billion. Sources of uncertainty, AIR indicates, are

  • Demand surge.
  • How dwellings will contend with the wind vs. water question.
  • How business interruption and business income losses will unfold, particularly among hotels. Other BI issues include how much excess inventory manufacturers have on hand, how soon infrastructure will resuscitate, and whether insurance settlements will be affected by political pressure.

Update: As were getting ready to post, RMS explained its pick. TL;DR – industrial buildings on the island are sturdily built, so not much damage. And Karen Clark & Co. puts Puerto Rico losses at $28 billion, in about the same range as RMS.

The Week in a Minute, 9/28/17

The III’s Michael Barry briefs our membership every week on key insurance related stories. Here are some highlights. 

  • One week after Hurricane Maria struck Puerto Rico, the U.S. territory’s residents are dealing with extensive power outages and a breakdown of the supply chain which brings food and other essentials to the island.
  • The U.S. signed an agreement with the European Union (EU) governing how U.S. insurers and reinsurers are regulated in EU nations.
  • California’s Canyon Fire (Orange/Riverside Counties) and Grass Fire (Alameda County) have generated mandatory evacuations and widespread news coverage.

The Equifax data breach, your credit reports and your insurance policies

Our communications department has gotten calls about the insurance implications of the Equifax breach and what might happen to your rates if you freeze your credit. The answer, for most people, is not much. Insurers, where legal, look at your credit information when you first become a customer – when you first applied for coverage. They don’t re-evaluate unless you ask them to – something to keep in mind if you think your credit has improved. (This last is also subject to state laws – some states require a re-evaluation.) So, if you freeze your credit, there’d typically be no impact with the insurer you already have.

If you are shopping for insurance, the fact that you have applied for a policy, in most states, means that you have given permission that transcends your freeze order. So, the insurer would be able to use the information in its rating (as always, where legal.)
We also got a lot of other good information from Fair Isaac (inventor of the credit score). We will share that in a future post. . .. .

 

 

NFIP reinsurance protection a good thing

From January 1, 2017, FEMA – the Federal Emergency Management Agency – secured increased reinsurance protection to share a meaningful portion of the risk of large and unexpected flooding with private reinsurance markets.

This placement of reinsurance transferred $1.042 billion in risk above a $4 billion deductible to 25 reinsurance companies.

Under this agreement, the reinsurers can cover 26 percent of losses between $4 billion and $8 billion arising from a single flooding event.

As Artemis blog reports here, with flood losses from Hurricanes Harvey and Irma on the rise, estimates suggest that the NFIP reinsurance program will pay out in full with losses from Hurricane Harvey alone.

Per Artemis: “The NFIP reinsurance program is a per-occurrence arrangement, meaning it covers a single loss event.”

Also noted by Artemis at the very end of its blog post, the NFIP reinsurance layer does not have a reinstatement provision.

This means that the NFIP cannot also claim on the program for its losses from Hurricane Irma as a second and separate event.

Nevertheless, it’s a good thing that NFIP secured first event coverage. A reinsurance payment for Hurricane Harvey flood losses will be welcome.

The Week in a Minute, 9/20/17

The I.I.I.’s California representative, Janet Ruiz briefed our membership this week on key insurance related stories. Here are some highlights. 

  • The I.I.I.’s Steven Weisbart was quoted in a Washington Post story on the insurance industry’s financial strength in the wake of Hurricanes Harvey and Irma.
  • A FEMA/State Disaster Recovery Center opened today (September 20) at the Carolyn Sims Center in Boynton Beach (Palm Beach County) for Floridians impacted by Hurricane Irma.
  • Florida’s Department of Financial Services opened Irma-related Insurance Village locales this week in St. Augustine, Jacksonville, Fort Myers, and Naples.
  • The Texas Department of Insurance (TDI) released details on Hurricane Harvey’s Disaster Assistance Mobile Unit Locations.
  • Maria made landfall as a Category 4 storm in southeast Puerto Rico Wednesday. The governor’s spokesperson said ‘this is a total disaster.’  The same evacuation centers used for Irma are filled with thousands of people according to CNN.
  • The LA Times offered these earthquake preparedness tips in the wake of the deadly 7.1 quake that struck Mexico City on Tuesday.
  • Politico posted last week an in-depth story on how Oklahoma’s earthquakes could adversely impact the U.S.’s energy supplies.  It was written by the author of Quakeland: On the Road to America’s Next Devastating Earthquake (Dutton 2017).
  • Dr. David Harkey will succeed Dr. Adrian Lund in January 2018 as president of the Insurance Institute for Highway Safety (IIHS) and the Highway Loss Data Institute (HLDI).

 

Disaster Relief: Preparing for Fraudsters

By I.I.I. staffer Brent Carris

While natural disasters have the unique ability to unify people, it is important to stay cognizant of scams and fraud that follow.

PropertyCasualty360 addressed potential scams in this article, noting that hurricane relief fraudsters are some of the first to appear after a storm. One way to avoid scams is to donate strictly to well-known reputable organizations such as the Red Cross or Direct Relief.  The Insurance Industry Charitable Foundation has a Hurricane Harvey disaster relief fund as well.

Affected homeowners should be wary of who they let into their home for repairs. Regulators in Florida are warning consumers not to sign Assignment of Benefits (AOB) forms to get repair work started.

FEMA has launched this page with information on disaster relief and how affected individuals can prepare for the arising fraudsters.

 

Concurrent Causation and Hurricane Irma claims

The issue of causation, especially when there may be multiple causes of loss, can be a tricky one for both insureds and insurers. It comes down to what caused the loss – and in what order.

Take the example of a major catastrophe, like a hurricane, where there may be property claims arising from both wind and water. Determining the cause of loss is key to determining whether there is coverage under the terms of an insurance policy because there are two policies in play, one for wind damage and one for flood damage.

Some jurisdictions subscribe to the “efficient proximate cause doctrine” while others subscribe to the “concurrent causation doctrine”.

What’s that?

The efficient proximate cause doctrine finds that where there is a concurrence of different perils, the efficient cause – the one that set the other in motion – is the cause to which the loss should be attributed.

Under the concurrent causation doctrine, when multiple perils contribute to a loss, coverage is allowed if at least one cause of the loss is covered by the policy.

In the case of Florida, a recent court decision adopted the concurrent causation doctrine, which will impact Hurricane Irma claims.

Insurance and disaster aid for non-U.S. citizens

Our Communications department has received questions from Canadian news outlets on behalf of Canadian citizens who own homes in areas affected by either Hurricane Harvey or Irma. Here are some of their questions and the answers we found.  Of course, the answers below also apply to other non-citizens who own property in the U.S.

Q: Can Canadians qualify for a Federal Emergency Management Agency (FEMA) grant?

A:  It depends. To be eligible for assistance from FEMA, at least one person in the household must be a U.S. citizen, Qualified Alien or noncitizen national with a U.S. Social Security number.

Q: Can Canadians purchase a FEMA National Flood Insurance Program (NFIP) policy?

A: Yes. Anyone who owns property in the U.S. can buy a FEMA NFIP policy as long as their property is in a participating NFIP community. They should be able to buy excess flood coverage if the event they want policy limits above a beyond what FEMA’s NFIP offers ($250,000 for dwelling protection, and $100,000 for the dwelling’s contents).

Q: Can Canadians purchase a policy from Florida’s Citizens Property Insurance Corp.?

A: Yes, it appears. We found no restrictions on the citizenship of the buyer. To find out more about Florida Citizens’ eligibility requirements click here.

Counter-terrorism efforts key to estimating risk post-9/11

Today marks the 16-year anniversary of 9/11, and as we remember those who perished and honor first responders on that day, it’s worth noting that we have not had a large-scale terrorist attack on U.S. soil since then.

From a recent discussion by property underwriters Gedion Amesias and Jeri Xu at the Swiss Re Open Minds blog:

“Since 9/11, the U.S. government and four of its allies (Five Eyes alliance) have been spending tens of billions of dollars each year on counter-terrorism. Even though it’s hard to accurately estimate, there are experts that approximate the U.S. spends around $100 billion a year on counter-terrorism efforts. Successful attacks since 9/11 have been carried out by either a lone wolf or a duo, for example the 2016 cargo truck attack in Nice by one driver, and 2013 Boston Marathon bombing by a pair of brothers. Plots that involve more people are more likely to be discovered through the surveillance of their communications, so organized large-scale plots are less likely to occur.”

And:

“Terrorism insurance is effectively insurance against the failure of counter-terrorism. Because counter-terrorism efforts have increased so much post 9/11, a reasonable assumption to make is that the frequency and severity of loss from terrorism have decreased significantly.”

They conclude that underwriters need to think about how terrorists will behave going forward and how governments around the world will counteract terrorism in order to predict where and to what extent future losses may occur.

Willis Towers Watson offers insight into how insurers are responding to meet the evolving nature of terrorism.

The I.I.I. has resources on terrorism risk and insurance here.