EXPOSURE Magazine: Essential Reading in Changing Times

The pace of change continues to accelerate across the insurance industry, whether it is from technology, regulation or market developments, and EXPOSURE magazine helps risk professionals to explore some of the key drivers of these changes.

In this latest edition available for distribution at the Monte Carlo Rendezvous and online, the lead story looks at the recent market activity from Tower Insurance in New Zealand. By adopting high-definition earthquake modeling, Tower gained the confidence to launch risk-based pricing for its customers, providing savings for the majority of policyholders, but increases for others. EXPOSURE looks at the implications of Tower’s actions and how this could affect the New Zealand insurance market.

High resolution modeling has also helped Flood Re in the U.K. to better understand how it can work towards its remit of delivering a flood insurance market based on risk-reflective pricing that is affordable to policyholders. EXPOSURE shows how innovative use of modeling could guide Flood Re when recommending investment measures to protect properties at risk of flooding.

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The Three “Protection Gaps” (And the Role of Protection Gap Analytics)

The rallying cry has sounded — to “close the protection gap”, the difference between what is paid out by insurance and the total cost of some incident or disaster. Here is an issue that can unite and promote the insurance industry, extending benefits to those in peril by expanding the insurance sector. Having ex-post access to funding after a loss, we know, can bring important benefits.

Yet in reality, there is not just one, but three distinct insurance “protection gaps”, each with separate causes and each requiring different remedies. These protection gaps are so different to one another that we should stop treating them as a single category. Lumping them together can cause confusion.

In this series of four blogs, I will explore each of these three distinct gaps, together with the role of protection gap analytics, and the actions we can plan to address these protection gaps.

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The Emerging Markets Protection Gap

This is the second blog in a series of four blogs examining three potential “protection gaps” and the importance of “protection gap analytics”. To read the first blog post in this series, click here.

Year-by-year, we can check to see if the gap between insured and economic disaster losses in emerging economies is starting to shrink. The gap remains resolutely stuck in the range 80 to 100 percent uninsured. Even a 90 percent average flatters the proportion, as coverage is concentrated in high value hotels, factories and central business districts whereas almost all ordinary houses are without insurance.

We should not be surprised how the emerging markets gap stays so wide.

See what happened in Japan. Unregulated mass rebuilding after the war led to a rising toll of flood disasters. In one single year in the 1950s, more than a million properties were flooded. Then in 1959 there was Typhoon Vera and the Ise Bay storm surge flood catastrophe in which more than 5,000 died. In 1960 the Government declared the level of risk to be intolerable and directed that seven to eight percent of government expenditure should be invested in funding disaster risk reduction. The annual investment proved successful and by the 1980s the annual number of houses flooded had reduced to only three percent of its 1950s level.

For any emerging economy the question can be asked: when did the nation reach the equivalent of Japan in 1960 and start to invest in disaster risk reduction. China passed the point of “intolerable disaster risk” towards the end of the 1990s, while India is undergoing that transition today. This is not just investment in physical disaster risk reduction, but also good risk governance and education.

Insurance is a product of this disaster risk management culture.

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The Intangibles Protection Gap

This is the third blog in a series of four blogs examining three potential “protection gaps” and the importance of “protection gap analytics”. To read the first blog post in this series, click here.

In 1975, 83 percent of the value of the S&P 500 companies was invested in physical assets: factories, refineries, ships and offices. By 2015 that percentage had fallen to 16 percent, leaving 84 percent of the assets as intangible. Intangibles included intellectual property, data on clients, brand value and innovation potential. This massive shift has had huge significance for insurance.

The insurance product was designed to cover tangible risks: first ships and their cargoes, then houses, factories, cars and airplanes. Each item could be independently valued. A claims assessor could be sent out to inspect the damage and measure the costs of repair and replacement.

Now, much of business value is intangible. The “Intangibles Protection Gap” includes all those situations where insurance fails to cover losses suffered by non-physical business assets. How does one assess the value of intangibles — how does one measure loss? Some intellectual property (IP) has been stolen — how much is it worth? You are a cloud service provider hit by a deadly cyberattack which has released some confidential data. What is the value of your lost business, the damage to your reputation and of the penalties levied by the regulator and your customers.

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Protection Gap Analytics: The Role of Risk Modeling

This is the final blog in a series of four blogs examining three potential “protection gaps” and the importance of “protection gap analytics”. To read the first blog post in this series, click here.

We are not going to be able to take effective action to reduce any of these three protection gaps unless we can first learn how to consistently measure the difference between insured and total loss. Such measurement means we can know the current situation as well as set appropriate targets and monitor progress in reducing the gap. It can also help to focus investment and action.

At present, the only form of measurement is to acknowledge the difference between insured loss and the estimated total economic loss once the claims have settled, one or two years after a significant disaster.

In the same way that probabilistic catastrophe risk models were developed to enable insurers and reinsurers to look beyond the latest event loss, so the same models are now required to monitor the protection gap. This is the focus of “protection gap analytics”.

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Super Typhoon Jebi Follows a Long Stretch of Japanese Cat Events

This time last year, we were in the thick of a series of Atlantic hurricanes that caught the world’s attention with images of significant damage and destruction. Fast forward to 2018 and it seems that Japan is bearing the brunt of natural catastrophes this summer, with a series of typhoons, floods, and earthquakes dominating global headlines.

The latest headline maker is Super Typhoon Jebi, the fifth typhoon to impact Japan this year and billed by many media outlets as Japan’s most powerful storm in 25 years. The country’s five typhoons are just one symptom of an overall active Pacific basin, alongside a record-setting pace of tropical development in the northeast Pacific. Some outlets tie this increased Pacific activity to an El Niño phase of the El Niño Southern Oscillation (ENSO), which conversely has repressed Atlantic hurricane activity to date.

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Central Gulf Coast Waits for Gordon’s Arrival

With alerts ranging from hurricane warnings to storm surge and flood watches, the central Gulf Coast states from Louisiana to the western counties of the Florida Panhandle await the arrival of Tropical Storm Gordon.

Located only 130 miles offshore of Mobile, Alabama, the outer rain bands of Gordon are beginning to bring deteriorating weather conditions to the Florida Panhandle and central Gulf coastline. A band of deep convection near its well-defined surface center and increased lightning activity near the inner core is indicative of an organized system with the potential to intensify. This is reflected in the latest National Hurricane Center (NHC) advisory, which calls for Gordon to be a Category 1 hurricane when it makes landfall in the north-central Gulf of Mexico coastline later tonight. Gordon looks set to be first hurricane to hit the contiguous U.S. this year, though it is not the first named system to threaten the central Gulf coastline; Alberto affected Louisiana and Alabama earlier in the season as a subtropical storm.

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Schrödinger’s Cat Model

Schrödinger’s cat inhabits a thought-experiment designed to reveal the paradox of quantum properties. A hypothetical cat is sealed in a windowless box, in which there is a device that will administer a lethal poison, according to whether a single atom undergoes radioactive decay. Should the atom decay the cat will be dead. If the atom survives so will the cat. Only the quantum state of the atom is completely unknowable. So, the cat — in principle at least, is half dead and half alive. The simultaneous state of being both alive and dead is called a “superposition”.

While quantum behavior is not an average insurance coverage, (at least until future quantum computer cyber cover emerges), there are situations in the world of risk modeling that come close to Schrödinger’s cat — or perhaps that should better be Schrödinger’s “Cat” (short for Catastrophe)?

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Kerala Floods: The Role of Insurance in Building a More Resilient State

In the first twenty days of August, the state of Kerala in southern India received rainfall that was 164 percent above the average. This rain built on very wet antecedent conditions, July had seen rainfall about 40 percent above average. As a result, to manage the flood waters, state authorities were forced to open 80 dams in the region, including the Idukki dam, one of the largest arch dams in Asia. Overall, this resulted in massive flooding, displacing millions of people while claiming the lives of more than 350 citizens, destroying trees and crops and severely disrupting tourism with the closure of Cochin International airport.

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Hurricane Lane: An Offshore Threat

All eyes are on Hurricane Lane as it started to make its northerly turn towards the Hawaiian Islands late yesterday (Wednesday, August 22) and at the time of writing (Thursday, August 23, 1600 UTC) Lane is heading north, some 200 miles from the Hawaiian Islands as a Category 4 major hurricane with wind speeds of 130 miles per hour (209 kilometers per hour).

If Hurricane Lane did make landfall in the state, according to CNN it would become the first major cyclone to achieve this in 26 years, since Hurricane Iniki in 1992. Landfall does not look likely though; the current best-estimate wind field forecasts from the Central Pacific Hurricane Center (CPHC) as of 1000 UTC, Thursday August 23, show that hurricane force winds are not currently expected to impact land. But there is still an outside chance; due to Lane’s forecast track, a shift in the track direction and intensity could bring hurricane force winds onto land. Based on the current CPHC wind speed probability, there is a less than 20 percent chance of hurricane force winds impacting any of the islands in Hawaii.

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