Unmodeled catastrophe losses are a growing component of insurance claims: RMS
Not only did natural catastrophes in 2021 break insurance claims records, but they also highlighted the rising cost of unmodeled characteristics of catastrophes, which are changing the industry’s understanding of these risks, according to a published report. by RMS.
“Secondary perils,” such as severe convective storms, floods and wildfires, are occurring with greater frequency across the globe and have contributed to a significant industry loss in recent years, said the Newark, Calif.-based modeling company in its report. titled “Retrospective of the year of disaster 2021”.
Secondary perils, which are generally not modeled to the same extent as primary perils, are defined as small to medium scale events, or secondary effects that follow a primary peril, such as hurricane flooding, storm surges, hailstorms, tsunamis, and fire following an earthquake.
“[T]The complex and unmodeled characteristics of events make losses more difficult than past events, not only for modellers, but also for the insurance industry itself,” said Mohsen Rahnama, Head of Risk Modeling. at RMS, which wrote a chapter of the report. , titled “2021 turns out to be another game changer”.
He cited the examples of recent years of Typhoon Jebi in 2018 and Hurricane Irma in 2017, when insurers saw sharp increases in loss trends over the following months, which “took the whole world by surprise”.
Additionally, the report indicates that other unmodeled trends have risen to prominence and raised the price for insurers, such as potential business interruptions, infrastructure damage, supply chain disruptions. and soaring demand.
Rahnama then turned to the examples of the winter storm in Texas in February 2021 and the July floods in Western and Central Europe.
These events “have particularly highlighted the significance of potential business interruptions and additional expense caused by infrastructure damage, such as the Texas power grid outage and the destruction of German roads and bridges,” explained Rahnama.
“For the second year in a row, supply chain issues and high demand for housing caused by COVID-19 led to an amplification of post-event losses and an increase in economic demand beyond normal expectations” , he added.
A separate chapter of the report, titled “Tropical Cyclone Ida Devastates Louisiana, Floods the Northeast,” noted that Hurricane Ida was a complex event “that occurred in the context of the COVID-19 pandemic. ongoing, rising construction costs, labor shortages, overlapping events and property undervaluation – all of which should influence the total financial cost of the event.
RMS said Hurricane Ida was one of the costliest US hurricanes on record with an insured price ranging from $30.3 billion to $42.5 billion. This cost includes losses from wind and storm surges in the Gulf of Mexico and the effects of rain-induced inland flooding in the Gulf, Ohio Valley, Mid-Atlantic and from the northeast.
“This reflects property damage and business interruption in the residential, commercial, automotive, industrial, infrastructure, marine cargo and cash, watercraft and other specialty industries,” the report said. “The estimate also includes factors reflecting the impacts of post-event loss amplification and unmodeled loss sources.”
RMS pointed to lumber costs as another unexpected factor driving disaster losses.
In early 2021, high lumber prices were driven by “a combination of low mortgage rates, strong increases in housing starts, COVID-19 stay-at-home orders and supply chain disruptions.” supply,” according to the Hurricane Ida section of the report, which was authored by James Cosgrove, senior modeler, RMS Event Response, and Jeff Waters senior product manager, RMS Product Management.
“At the peak, prices rose five to seven times above normal. By the time Ida hit, prices had fallen significantly, but were still above the long-term historical average. Steel, copper, fuel and other appliances also saw their costs rise,” Cosgrove and Waters said. “The insurance industry’s tendency to undervalue many exposures and business volumes may also exacerbate the overall cost of repairs for this event, thereby compounding rising construction costs.”
These issues have exacerbated other unmodeled trends that have gained prominence in recent years, Rahnama said. “For example, our industry is well aware of the unique circumstances and building codes in Florida, such as the Benefit Assignment and the ‘25% Roof Replacement Rule,’ which significantly increase the cost of claims.”
(An AOB is an agreement that transfers insurance benefits from one policy to a third party, which can inflate claims. The roof replacement rule states that if more than 25% of the roof is damaged in a hurricane , then the homeowner, in many cases, is entitled to a complete roof replacement under Florida building codes).
In their section on Hurricane Ida, Cosgrove and Waters said that labor market trends, such as high unemployment rates in the construction industry, could cause AOB to increase slightly, which ” could potentially increase the costs of a claim and the subsequent adjustment of losses.” expenses.”
“Many areas of Louisiana, including New Orleans, suffered extended power outages following the event as high winds downed power lines and damaged parts of the state’s power grid. Extended business interruption claims could result from extended power outages,” the report continues.
RMS noted that many Ida-affected areas on the Gulf Coast were still recovering from the 2020 storms – Hurricanes Laura, Delta and Zeta – and about 35% of claims filed as a result of those storms had not been closed. when Ida knocked.
“Properties that had not yet been prepared were more susceptible to further damage from Ida, particularly from rainfall infiltration or where tarps had been improperly secured,” Cosgrove and Waters said in their commentary. “These open claims will make the attribution and differentiation of losses more complex and time-consuming, which could result in longer claim settlement periods.”
In addition, the pressure to settle claims quickly could lead to inflated claims frequency and severity, what RMS calls “claims inflation,” they explained.
Besides Hurricane Ida, other record-breaking natural disasters in 2021 were winter storms in Texas, which cost insurers around $15 billion, and July floods in Western and Central Europe, which RMS says will cost to industry 10.0 billion euros for 13.2 billion euros (11.5 billion dollars to 15.1 billion dollars).
“These events follow in the footsteps of Hurricanes Harvey, Irma and Maria in 2017, Typhoon Jebi in 2018, wildfires in the western United States in 2018 and 2020, and the hyperactive Atlantic hurricane season in 2020. The record books have been completely rewritten in just the past four years,” Rahnama said in the report chapter that describes 2021 as a game changer.
Photograph: Nathan Fabre checks his home and boat destroyed by Hurricane Ida, Sunday, Sept. 5, 2021, in Lafitte, Louisiana. “We lost everything,” Fabre said of the destruction of his home. Photo credit: AP Photo/John Locher.
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