Entries tagged with “Catastrophes”.
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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.
Wednesday, December 24, 2014
Posted by Claire under Catastrophes, Earthquakes
December 26 marks the 10th anniversary of the Indonesian earthquake and tsunami which killed more than a quarter of a million people in Indonesia, Thailand, Sri Lanka, India and other countries surrounding the Indian Ocean.
A decade later, it’s perhaps surprising to read that weaknesses remain in the tsunami warning system across the region.
Yet maybe the best protection for residents living in tsunami-vulnerable areas is to learn natural tsunami warning signals and which areas have the highest flood risk.
A gallery of tsunami protection lessons posted by Allianz cites three key signs from GeoHazards International’s Tsunami Preparedness Guidebook:
-Strong earthquake shaking, particularly shaking lasting longer than 30 seconds;
-Withdrawal of the sea to unusually low levels; and
-Loud roar from the ocean, similar to a jet airplane, explosion or sudden, intense rainfall.
Identifying evacuation routes — creating hazard and evacuation maps showing the quickest and safest routes to higher ground or other safe areas — is also a key recommendation. Allianz notes that it is critical to involve government and emergency responders when developing these maps.
Education and awareness among residents in tsunami-prone areas then, can play as important a role as instrument-based tsunami warning systems.
In addition to high mortality risk, earthquakes and tsunamis can cause significant insured property damages.
While insured losses from earthquakes and tsunamis amounted to just $45 million in 2013, this was far below the record $54 billion recorded in 2011, according to facts and statistics compiled by the I.I.I.
On March 11, 2011 a devastating tsunami hit the coast of northeast Japan, triggered by a powerful earthquake approximately 80 miles offshore. The quake and tsunami caused $35.7 billion in insured damages, according to Swiss Re.
Also, early in 2011, a powerful earthquake struck Christchurch, New Zealand, resulting in $15.3 billion in insured losses.
The Japan and New Zealand quakes are among the 10 costliest world earthquakes and tsunamis, based on insured damages, according to Munich Re.
Wednesday, December 17, 2014
Posted by Claire under Catastrophes, Insurers and the Economy
Natural catastrophes and man-made disasters cost insurers $34 billion in 2014, down 24 percent from $45 billion in 2013, according to just-released Swiss Re sigma preliminary estimates.
Of the $34 billion tab for insurers, some $29 billion was triggered by natural catastrophe events (compared with $37 billion in 2013), while man-made disasters generated the additional $5 billion in insured losses in 2014.
Despite total losses coming in at below annual averages, the United States still accounted for three of the most costly insured catastrophe losses for the year, with two thunderstorm events and one winter storm event causing just shy of $6 billion in insured losses (see chart below).
In mid-May, a spate of strong storms with large hail stones hit many parts of the U.S. over a five-day period resulting in insured losses of $2.9 billion – the highest of the year.
Extreme winter storms at the beginning of 2014 caused insured losses of $1.7 billion, above the average full-year winter storm loss number of $1.1 billion of the previous 10 years, sigma said.
Total economic losses from disaster events in 2014 reached $113 billion worldwide, according to sigma estimates, and around 11,000 people lost their lives in those events.
Ongoing events and revisions to estimates for previous ones may further change the 2014 loss outcomes, sigma noted, as this data includes updates to source data made by 28 November 2014 only.
More on global catastrophe losses from the I.I.I. here.
Friday, October 17, 2014
Posted by Claire under Catastrophes, Winter Storms
Winter storms caused $1.9 billion in insured losses in 2013, five times higher than the $38 million in damages seen in 2012, so it’s good to read via NOAA’s U.S. Winter Outlook that a repeat of last year’s winter of record cold and snow is unlikely.
In a release, NOAA’s Climate Prediction Center says:
Last year’s winter was exceptionally cold and snowy across most of the United States, east of the Rockies. A repeat of this extreme pattern is unlikely this year, although the Outlook does favor below-average temperatures in the south-central and southeastern states.”
While the South may experience a colder winter, the Outlook favors warmer-than-average temperatures in the western U.S., Alaska, Hawaii and New England, according to NOAA.
It’s important to note that for insurers, winter storms are historically very expensive and the third-largest cause of catastrophe losses, behind only hurricanes and tornadoes, according to the Insurance Information Institute (I.I.I.).
From 1994 to 2013, winter storms resulted in about $26.6 billion in insured losses, or $1.4 billion a year, on average, according to the Property Claim Services unit of ISO.
Meanwhile, NOAA’s Winter Outlook also suggests that California’s record-setting drought will persist or intensify in large parts of the state this winter.
Mike Halpert, acting director of NOAA’s Climate Prediction Center, says:
Complete drought recovery in California this winter is highly unlikely. While we’re predicting at least a 2 in 3 chance that winter precipitation will be near or above normal throughout the state, with such widespread, extreme deficits, recovery will be slow.”
Wednesday, August 27, 2014
Posted by Claire under Catastrophes, Thunderstorms
Natural catastrophe events in the United States accounted for three of the five most costly insured catastrophe losses in the first half of 2014, according to just-released Swiss Re sigma estimates.
In mid-May, a spate of severe storms and hail hit many parts of the U.S. over a five-day period, generating insured losses of $2.6 billion. Harsh spring weather also triggered thunderstorms and tornadoes, some of which caused insured claims of $1.1 billion.
The Polar Vortex in the U.S. in January also led to a long period of heavy snowfall and very cold temperatures in the east and southern states such as Mississippi and Georgia, resulting in combined insured losses of $1.7 billion.
These three events contributed $5.4 billion of the $19 billion in natural catastrophe-related insured losses covered by the global insurance industry in the first half of 2014, according to sigma estimates.
The $19 billion was 10 percent down from the $21 billion covered by insurers for natural catastrophe events in the first half of 2013. It was also below the average first-half year loss of the previous 10 years ($23 billion). Man-made disasters added $2 billion in insured losses in the first half of 2014, sigma reports.
The $21 billion in insured losses from disaster events in the first half of 2014 was 16 percent lower than the $25 billion generated in the first half of 2013, and lower than the average first-half year loss of the previous 10 years ($27 billion).
Total economic losses from natural catastrophes and man-made disasters reached $44 billion in the first half of 2014, according to sigma estimates.
More than 4,700 lives were lost as a result of natural catastrophes and man-made disasters in the first half of 2014.