Insurance Disaster Response: how CAT Risk systems can save the day

With the recent notice given by environmental agencies in most African countries on the expected inclement weather condition expected this year, the insurance sector is again exposed on its lack of readiness to offer adequate cover to the insured.

The extraordinary nature of the 2011 catastrophe season worldwide is nearly folklore in the global insurance industry. The latest research reinforcing just how devastating the past year's disaster events were worldwide comes from Zurich-based Swiss Re ($2.6 billion in net income), whose Sigma study revealed that total insured losses from catastrophe events worldwide in 2011 were $116 billion — and total losses overall were $370 billion.

The major events of 2011 — earthquakes in Japan and New Zealand, floods in Thailand, and storms in the United States — indicate "increasing risk accumulation, particularly in emerging markets," according to Swiss Re. And the industry is moving to adapt its understanding of CAT risk.

Swiss Re reports that it is planning enhancements to its CatNet information system, including more detailed river flood hazard zones, in spring of this year, geared mostly toward providing a fuller view of flood risk worldwide. And it's not alone: CoreLogic Spatial Solutions, a Santa Ana, Calif.-based provider of business intelligence services, told Insurance & Technology in February that it is offering products that provide a more nuanced view of U.S. flood risk. In addition, the company released in March a study, Tornado and Hail Risk Beyond Tornado Alley, in tandem with new risk assessment products to give insurers a better view of where tornadoes can strike.

"Many companies moving to by-peril rating are incorporating highly granular wind and hail hazard risk maps into their underwriting and pricing models," says Howard Botts, EVP and director of database development for CoreLogic. "Investment portfolios generating low income returns, combined with the soft P&C market, have provided the impetus for many companies to look more closely at their sources of hazard losses over their entire area of geographic coverage."

According to CoreLogic's study of the 10 states with the highest number of tornado touchdowns between 1980 and 2009, only three tornadoes actually fell within what is traditionally considered "Tornado Alley." Further, tornado risk extends across most of the eastern half of the U.S., with some 26 states facing extreme tornado risk at least in part.

"The Joplin, Mo., tornado and the 'Super Outbreak' of last spring focused renewed attention on hail and tornado risk, and the Alabama tornadoes this year are representative of the tornado risk beyond tornado alley that has many insurance companies evaluating their current risk assessment of damaging winds loss potential," Botts says. "Many major companies have significant initiatives well underway that should result in underwriting changes, new product development and targeted marketing initiatives in 2012."

Better insight into tornado risk can help insurers plan for the events, which are difficult to forecast and come with a lot of unknowns, according to Douglas Nadeau, a spokesman for State Farm (Bloomington, Ill.; $1 billion in 2011 net income.) "State Farm continually analyzes the effects of severe weather events, including the tornados of the past few years, to determine if there is any influence on our historical claims data," he says. "The State Farm Catastrophe Team has the advantage of a fleet of mobile claim handling facilities specially designed to … provide optimal customer service even under challenging conditions."

Tornadoes aren't the only natural disaster for which insurers must be prepared this year; wildfires also present a very real risk, says CoreLogic's Botts. "Last year was a very wet, cool year in California," he notes. "With the weather pattern switching from La Nina to El Nino, there's real fear of wildfire in California, and companies are revisiting their exposure there."

Lamont Norman, a wildfire science modeling expert at Pitney Bowes Software (Stamford, Conn.), agrees that there is an increased risk of fire this year due to weather patterns, but he also notes that there is much more property at risk. "If you look at the number, 80 to 100 million properties are at risk of fire," Norman says. "And there's more than structural loss in danger. Traditional home properties are an attention grabber, but there are other types of properties, such as ranches."

Pitney Bowes has updated its Fire Risk Pro product to help insurers more accurately price property that is potentially in the path of wildfire, Norman reports. "We were seeing insurers back away from underwriting properties that were in those areas," he says. "But we feel our model will allow them to underwrite at a more profitable rate."