Entries tagged with “Catastrophes”.
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Tuesday, July 21, 2015
Posted by Claire under Catastrophes, Insurers and the Economy
Despite a rather quiet first half of 2015 for global catastrophes, insurers endured at least five separate billion-dollar insured loss events (all weather-related), according to Aon Benfield’s just-released Global Catastrophe Recap: First Half of 2015.
None of the events crossed the multi-billion dollar loss threshold ($2 billion or greater) and four of the five were recorded in the United States, Aon Benfield said.
The costliest event for the insurance industry was an extended period of snow and frigid temperatures in the U.S. during February ($1.8 billion in insured losses). (See our earlier post on first half winter storm losses here).
Other billion-dollar insured loss events in the U.S. included an early April severe thunderstorm outbreak ($1 billion), a severe thunderstorm and flash flood event at the end of May ($1.2 billion), and projected losses arising from the ongoing drought across the West ($1 billion and counting).
The sole billion-dollar insured loss event to be recorded outside the U.S. during the first half of 2015 was Windstorms Mike and Niklas in Western and Central Europe at the end of March/early April. Niklas became the first billion-dollar insured loss windstorm event in Europe since Xaver in December 2013, Aon Benfield said.
Note: the loss totals, which include those sustained by public and private insurance entities, are preliminary and subject to change.
If you’re wondering about the difference between economic and insured loss totals, the 7.8 magnitude earthquake that hit Nepal on April 25 (and subsequent aftershocks) is a good example.
From an economic loss standpoint, the Nepal earthquake ranks as the costliest global natural disaster during the first half of 2015, Aon Benfield reports.
Total damage and reconstruction costs throughout the impacted areas were estimated as high as $10 billion (subject to change), with reconstruction costs in Nepal alone put at nearly $7 billion.
Despite having a multi-billion-dollar economic cost to Nepal with overall economic effects poised to equal more than one-third of the country’s entire GDP, only a very small fraction of those losses – about 2 percent – was covered by insurance.
Check out Insurance Information Institute (I.I.I.) facts and statistics on global catastrophes here.
Tuesday, July 14, 2015
Posted by Claire under Catastrophes, Winter Storms
As my kids head off for their snowy-themed day at camp, the statistic that jumps off the page in the 2015 Half-Year Natural Catastrophe Review jointly presented by Munich Re and the Insurance Information Institute (I.I.I.) is the record $2.9 billion (and counting) in aggregate insured losses caused by the second winter of brutal cold across the Northeastern United States.
As Munich Re illustrates in the following slide, a total of 11 winter storm and cold wave events resulted in 80 fatalities and caused an estimated $3.8 billion in overall economic losses in the period from January 2015 to the end of winter:
But the $2.9 billion in insured losses goes higher still when you factor in 2014’s contribution to winter storm losses.
As Munich Re America notes in a press release, if the harsh U.S. winter of 2014/15 is taken as a whole, then the insured losses rise to $3.2 billion and overall economic losses to $4.3 billion.
And this figure does not include indirect losses due to delayed flights, power failures and business interruptions.
As Tony Kuczinski, president and CEO of Munich Re America, says:
The fact that, once again, tens of thousands of people were temporarily left without electricity shows that the U.S. simply must invest in stronger, more weather resilient, infrastructure.”
And when you consider that losses from snow, ice, freezing and related causes typically cost insurers between $1 billion and $2 billion annually, as noted by Dr. Robert Hartwig, I.I.I. president, the impact of the exceptionally cold winter of 2014/15 really starts to bite.
Thursday, April 30, 2015
Posted by Claire under Catastrophes, Earthquakes
As the death toll from Saturday’s devastating 7.8 magnitude earthquake in Nepal continues to rise, we’re reading about the health threat facing survivors.
In addition to the injured, an estimated 2.8 million people have been displaced by the earthquake as many are afraid to return to their homes.
The United Nations (UN) has launched an urgent appeal for $415 million to reach over 8 million people with life-saving assistance and protection over the next three months.
Its report offers insight into the scale of the unfolding humanitarian disaster:
According to initial estimations and based on the latest earthquake intensity mapping, over 8 million people are affected in 39 of Nepal’s 75 districts. Over 2 million people live in the 11 most critically hit districts.”
The government estimates that over 70,000 houses have been destroyed, Over 3,000 schools are located in the 11 most severely affected districts. Up to 90 percent of health facilities in rural areas have been damaged. Hospitals in district capitals, including Kathmandu, are overcrowded and lack medical supplies and capacity.”
Strong tremors have damaged infrastructure, including bridges and roads and telecommunications systems. Transport of fresh water has been interrupted and fuel is running low in many areas.
The UN also reports that an estimated 3.5 million people are in need of food assistance, of which 1.4 million need priority assistance, while 4.2 million are urgently in need of water, sanitation and hygiene support.
While it’s far too early to know if these estimates will hold, clearly the Nepal earthquake is as catastrophe modeling firm RMS says: “shaping up to be the worst natural disaster this calendar year, particularly because Nepal is remote, economically challenged, and not resilient to an earthquake of this magnitude.”
Indeed, the earthquake is expected to inflict at least $5 billion in total economic losses – that’s more than 20 percent of Nepal’s gross domestic product – and could end up exceeding the country’s GDP.
Not surprisingly, insurance penetration in what is one of the world’s poorest nations is extremely low, as the I.I.I. explains here.
Information on the most deadly and the most costly world earthquakes is posted here.
It’s always heartening to read about insurance being made available to a market or sector that for whatever reason has not been able to benefit from risk transfer in the face of natural disaster.
So the news that countries of Central America will now be able to access affordable catastrophe cover by joining the former Caribbean Catastrophe Risk Insurance Facility—now the CCRIF SPC—is a positive.
A memorandum of understanding signed by the Council of Ministers of Finance of Central America, Panama and the Dominican Republic (COSEFIN) and CCRIF SPC will allow Central American countries to join the sovereign catastrophe risk insurance pool.
Nicaragua has signed a participation agreement to become the first Central American country to join the pool. Other member nations of COSEFIN are expected to join later this year and in 2016.
A press release puts some context around the need:
Nine countries in Central America and the Caribbean experienced at least one disaster with an economic impact of more than 50 percent of their annual gross domestic product (GDP) since 1980.
The impact of Haiti’s earthquake was estimated at 120 percent of GDP. That same year, tropical cyclone Agatha, in Guatemala, had devastating consequences and poverty rates increased by 5.5 percent.
Climate change also represents a significant development challenge, with average economic losses due to weather-related disasters amounting to 1 percent or more of GDP in 10 Caribbean countries and four Central American nations, including Nicaragua.”
As Artemis blog reports here, some 16 Caribbean countries are now members of the 2007-established CCRIF SPC, benefiting from parametric insurance products covering tropical storm and hurricane risks, earthquake risks or excess rainfall risks.
The risk pooling facility helps its members to access post-event risk financing, based on the actual event parameters, with a rapid payout and disbursement of as little as two weeks possible. This enables countries to access financing for recovery from natural catastrophes, while benefiting from cheaper premiums due to the risk pooling nature.”
The newly-expanded 23-nation partnership is a win-win for both existing and new CCRIF members, providing low prices due to more efficient use of capital and insurance market instruments. New members will be able to take advantage of CCRIF’s low premium costs and existing members could realize premium reductions due to the increased size of the CCRIF portfolio.
Consider this example: the CCRIF made a $7.75 million payout to the Haitian government some two weeks after the January 2010 earthquake hit close to Port-au-Prince. The value represented approximately 20 times the premium of $385,500 based on Haiti’s catastrophe insurance policy for earthquakes for the 2009/2010 policy year.
A major hurricane or earthquake hitting a densely populated metropolitan area like Miami or Los Angeles will leave insurers facing losses that far exceed their estimated 100 year probable maximum loss (PML) due to highly concentrated property values, a new report suggests.
In its analysis, Karen Clark & Company (KCC) notes that the PMLs that the insurance industry has been using to manage risk and rating agencies and regulators have been using to monitor solvency can give a false sense of security.
For example, it says the 100 year hurricane making a direct hit on downtown Miami will cause over $250 billion insured losses today, twice the estimated 100 year PML.
Insurers typically manage their potential catastrophe losses to the 100 year PMLs, but because of increasingly concentrated property values in several major metropolitan areas, the losses insurers will suffer from the 100 year event will greatly exceed their estimated 100 year PMLs.”
Instead, the report suggests new risk metrics—Characteristic Events (CEs)—could help insurers better understand their catastrophe loss potential and avoid surprise solvency-impairing events.
The CE approach defines the probabilities of a mega-catastrophe event based on the hazard rather than the loss and gives a more complete picture of catastrophe loss potential.
Rather than simulating many thousands of random events, the CE approach creates events using all of the scientific knowledge about the events in specific regions.
This information is then used to develop events with characteristics reflecting various return periods of interest, such as 100 and 250 year, which are then floated to estimate losses at specific locations.
To protect against solvency-impairing events, the report suggests insurers should monitor their exposure concentrations with additional metrics, such as the CEs and the CE to PML ratio.
KCC estimates that overall U.S. insured property values increased by 9 percent from 2012 to 2014, faster than the general economy.
The state with the most property value is California, followed by New York and Texas. The top 10 states account for over 50 percent of the U.S. total.
U.S. vulnerability to hurricanes and other coastal hazards continues to rise because of increasing concentrations of property values along the coast.
Of the $90 trillion in total U.S. property exposure, over $16 trillion is in the first tier of Gulf and Atlantic coastal counties, up from $14.5 trillion in 2012, KCC estimates.
Monday, March 30, 2015
Posted by Claire under Catastrophes, Insurers and the Economy
The amount of financial loss caused by catastrophes not covered by insurance is growing, according to the latest Swiss Re sigma report.
This so-called global insurance protection or funding gap totaled $75 billion in 2014.
The rate of growth of total losses has outpaced the growth of insured losses over the course of the last three decades, Swiss Re notes:
In terms of the 10-year moving average, insured losses grew at 10.7 percent between 1979 and 2014, and total losses by 11.4 percent.”
Here’s the Swiss Re visual showing global insured vs. uninsured losses from natural catastrophes and man-made disasters from 1970 to 2014:
Lack of insurance cover clearly remains an issue in many countries.
Swiss Re gives the example of low pressure system Yvette last May which brought very heavy rain in Europe to Serbia, Bosnia and Croatia – in some areas the heaviest downpour in 120 years. Yvette resulted in 82 fatalities, the largest loss of life from a natural catastrophe in Europe in 2014, and total losses were estimated to be $3 billion – mostly uninsured.
Areas of the United States are also underinsured, sigma reports. Last August’s South Napa earthquake caused structural and inventory damage of $0.7 billion, particularly in the numerous local wine barrel storage facilities. However, the insured loss was just $0.16 billion.
As Lucia Bevere, co-author of the sigma study, notes:
In spite of high exposure to seismic risk, insurance take-up in San Francisco County and California state generally is still very low, even for commercial properties. That’s why insured losses, in certain areas, can be surprisingly low when disaster events happen.”
Meanwhile, the economic cost of natural disasters continues to rise due to economic development, population growth, a higher concentration of assets in exposed areas and a changing climate.
Without a commensurate increase in insurance penetration, the above will likely result in a widening protection gap over the long term, sigma concludes.
I.I.I. has more facts and statistics on global catastrophes available here.
Thursday, March 26, 2015
Posted by Claire under Alternative Risk Transfer (ART), Reinsurance
A new Insurance Information Institute white paper examines the impact of alternative capital on reinsurance, says I.I.I. chief actuary and paper co-author Jim Lynch.
What sounds like a dry topic actually may in the long run significantly affect the entire insurance industry, right down to the humble buyer of a homeowners policy.
It’s a dry phrase, so let’s parse the phrase alternative capital on reinsurance by starting at its back end. Reinsurance is the insurance that insurance companies buy. Insurance companies accept risk with every policy. They work hard to ensure they don’t have too much risk in one area, like too many homes along Florida’s Atlantic coast.
When they do, they protect themselves by buying reinsurance. Instead of buying a policy that covers one risk, the insurance company enters into a treaty that can cover thousands in case of a catastrophe like a hurricane.
Catastrophes are a big deal for lines of business like homeowners. More than 30 percent of homeowners claim payments over a 17-year stretch came from catastrophes, according to a recent Insurance Research Council study, and many of those claims were paid by money that ultimately came from reinsurers.
Legally, the insurance company is obligated to pay all claims, regardless of any reinsurance it has. After Hurricane Awful, a homeowner files a claim with his or her insurer, and that insurer is responsible for payment, regardless of any reinsurance it may have purchased.
While reinsurance doesn’t affect the insurer’s obligations, the financial health of the insurer depends on the quality of its reinsurance arrangements. Insurance companies are careful to spread risk across many reinsurance companies, so the plight of one will not devastate their own affairs.
To the average person, a traditional reinsurance company looks a lot like an insurance company, run by professionals who underwrite risk and administer claims. The pool of money to cover extraordinary losses – capital – had been built from contributions by an original set of investors and augmented by earnings retained over decades.
Here’s where the word alternative comes in. The new arrangements feature two twists on traditional reinsurance.
First, the capital to protect against big losses doesn’t come from within the reinsurance company. It comes from outside investors like hedge funds, pensions and sovereign wealth funds.
Second, the reinsurance doesn’t sit within the confines of the traditional reinsurance company. Companies called collateralized reinsurers and sidecars let investors pop in and out of the reinsurance world relatively quickly. Some reinsurance is placed in the financial markets through structures known as catastrophe bonds.
The new investors don’t use the traditional structure, but they do use traditional tools. Most ally with traditional reinsurers to tap those companies’ underwriting acumen, and they use sophisticated models to price risks, just as reinsurers do. Deals are structured so to be as safe as placing a treaty with a traditional reinsurer.
Such deals have grown; their share of global reinsurance capital has doubled since the end of 2010, according to Aon Benfield Analytics.
The amount of capital in the reinsurance market drives prices in classic supply-demand fashion. As capital grows, reinsurance prices fall, and alternative capital has driven reinsurance rates lower, particularly for catastrophe reinsurance.
If insurers pay less for reinsurance, they pass along the savings to customers. Citizens Property Insurance, Florida’s largest homeowners writer, reduced rates 3.7 percent last year, in part because of lower reinsurance costs.
If, as some experts argue, alternative capital is the new normal, consumers will continue to benefit from lower rates. If, as others contend, it is akin to an investment fad, rates could creep higher as the fad recedes.
The I.I.I. white paper looks at the types of alternative capital, its growth and its future.
Tuesday, March 17, 2015
Posted by Claire under Catastrophes, Disaster Preparedness, Tornadoes
While certain parts of the country hold tornado drills and others test tornado preparedness systems, weather experts are pondering the slow start to tornado season.
Capital Weather Gang cites a weather.com report that not a single tornado has been reported to the National Weather Service in March, typically the first month of severe weather season in the Plains and Southeast.
The only other year since 1950 that there have been zero tornado reports in the first half of March was 1969, according to the Weather Channel’s severe weather expert Dr. Greg Forbes.
Per Dr. Forbes’ report from January 1 to March 12, only 27 tornadoes had been documented across the nation – the slowest start to the year since the 21 tornadoes recorded through March 12, 2003.
Sure enough a glance at the latest U.S. tornado statistics recorded by NOAA’s Storm Prediction Center shows 28 preliminary tornado reports so far in 2015 – 26 in January and 2 in February and 0 in March (to March 13).
Here they are:
As insurers know, a slow start to any catastrophe season is not something to hang your hat on.
In an average year, about 1,000 tornadoes are reported nationwide and tornadoes are among the largest causes of insured losses in any given year, accounting for 37.2 percent of insured catastrophe losses from 1994 to 2013, according to I.I.I. facts and statistics on tornadoes and thunderstorms.
Meanwhile, Climate Central reports that an experimental forecast team has put together the first seasonal outlook for tornadoes in the U.S. That forecast suggests the highest chances are for an average tornado season.
The researchers from Columbia University looked into how cyclical climate patterns known as El Niño and La Niña influence the larger atmospheric environment that sets the stage for tornado activity.
In a new study published in the journal Nature Geoscience they show that while El Niño tends to dampen tornado activity, La Niña can give it a boost.
Because the El Niño declared by forecasters earlier this month is a very weak one, the Columbia team is limited in what they can say about this year’s season, Climate Central says.
But based on their findings, the team gives a 60 percent chance that the 2015 tornado season will see normal levels of activity, a 30 percent chance that it will be below normal and a 10 percent chance it will be above normal.
Monday, February 23, 2015
Posted by Claire under Catastrophes, Homeowners Insurance
The cost of claims paid by homeowners insurers has been increasing at twice the rate of inflation, despite significant declines in recent years, according to the 2015 edition of a report from the Insurance Research Council (IRC).
Average homeowners claims payments per insured home have been increasing at an annualized rate of 5.0 percent since 1997, the IRC said, compared to the inflation average of approximately 2.4 percent.
Volatility—a major characteristic of homeowners insurance claims trends—is reflected in this chart:
The average claim payment per insured home countrywide rose to $625 in 2011, up from $229 in 1997, before falling to $442 in 2013.
What’s behind the increased costs?
All of the increase in average costs per insured home was due to growth in average claim severity, which rose at an annualized rate of 7.8 percent over the 17-year period—more than triple the rate of inflation, the IRC said.
The rise in claim severity more than offset a 2.6 percent annualized decrease in claim frequency, the report found.
That said, claim frequency trends were found to be significantly more volatile than claim severity trends, especially for experience identified by insurance companies as related to catastrophe events.
In the words of Elizabeth Sprinkel, senior vice president of the IRC:
Insurance companies face significant challenges in responding effectively to rapid growth in claim severity and in managing the extreme volatility of claim trends everywhere.
In addition, consumers will find it increasingly important to consider steps to control their personal exposure to risk and to mitigate the damages and costs associated with severe weather events.”
IRC analyzed data from the Fast Track Monitoring Service representing approximately 50 percent of the U.S. homeowners insurance market for the study.
I.I.I. has useful facts and statistics on homeowners insurance here.
Wednesday, January 7, 2015
Posted by Claire under Catastrophes, Industry Financials
The presence or lack of catastrophes is a defining event when it comes to the financial state of the U.S. property/casualty insurance industry.
At the 2014 Natural Catastrophe Year in Review webinar hosted by Munich Re and the Insurance Information Institute (I.I.I.), we can see just how defining the influence of catastrophes can be.
U.S. property/casualty insurers had their second best year in 2014 since the financial crisis – 2013 was the best – according to estimates presented by I.I.I. president Dr. Robert Hartwig.
P/C industry net income after taxes (profits) are estimated at around $50 billion in 2014, after 2013 when net income rose by 82 percent to $63.8 billion on lower catastrophe losses and capital gains.
P/C profitability is subject to cyclicality and ordinary volatility, typically due to catastrophe activity, Hartwig noted.
In 2014, natural catastrophe losses in the United States totaled $15.3 billion, far below the 2000 to 2013 average annual loss of $29 billion, according to Carl Hedde, head of risk accumulation, Munich Re America.
Lower catastrophe losses helped p/c industry ROEs in 2013 and 2014, relative to 2011 and 2012, and helped the p/c industry finish 2014 in very strong financial shape, despite the impact of low interest rates on their investments, Dr. Hartwig noted.
Overall industry capacity, as measured by policyholder surplus, is projected to have increased to $675 billion in 2014 – a record high.
The industry’s overall underwriting profit in 2014 is also estimated at $5.7 billion, on a combined ratio of 97.8.
Underwriting results in 2014 and 2013 were helped by generally modest catastrophe losses, a welcome respite from 2012 and 2011 when the industry felt the effects of Hurricane Sandy and record tornado losses, Dr. Hartwig noted.
Matthew Sturdevant of the Hartford Courant has a good round-up of the other webinar presentations here.