Thirty years ago, the Mw6.9 Loma Prieta Earthquake
struck the San Francisco Bay Area. When looking back at disasters, it is always
particularly relevant to understand the moment in time impacted. The Loma
Prieta Earthquake struck on Tuesday, October 17, 1989 at 5:04 p.m. local time,
but it was no ordinary Tuesday afternoon. Game Three of the Major League
Baseball 1989 World Series was to start at 5:35 p.m. between the two Bay Area
teams: the Oakland Athletics and the San Francisco Giants.
Typically, 5:04 p.m. would represent the height of rush hour in the Bay Area, but because of the game a significant component of the workforce had left work early or had stayed late to watch it. While 63 lives were lost, this loss level was much lower than it might have been given the level of damage that impacted highways across the region including the failures of the Nimitz Freeway and the San Francisco–Oakland Bay Bridge.
I was at Stanford University in the Terman Engineering Building studying when the earthquake struck. The Stanford campus made up of numerous historical buildings saw substantial damage. In all, more than 200 structures were impacted. The restoration of the damage took more than a decade to fix and cost Stanford more than US$160 million. Classes were canceled for more than a week. Students were locked out of damaged buildings which meant they could not access their research samples, data and equipment. Adding to the stress were the innumerable aftershocks. For those of us studying engineering, it really brought home the importance of our work.
Risk scoring is a fundamental part of the property and casualty underwriting process, allowing underwriters to sort and rank the quality of submissions. This process culminates in critical business decisions on quoting, declination, referral, and pricing, which taken together can make the difference between an insurer’s survival and its failure. The best insurers make these decisions in a manner that is disciplined, consistent, and data-driven. Those who fail to do this fall prey to adverse selection, pay high reinsurance costs, and suffer at the hands of disapproving rating agencies.
Given this high stakes game, why does the industry continue to rely on oversimplified, unproven, and outdated risk scores for natural catastrophe underwriting?
At this year’s RMS Terrorism Risk Summit, we focused attention on the U.S. landscape. The main issue these days in terrorism insurance discussions relates to the Terrorism Risk Insurance Protection and Reauthorization Act (TRIPRA), which will expire at the end of December 2020 if not reauthorized. This important legislation is also known by other acronyms including TRIA (Terrorism Risk Insurance Act) and TRIP (Terrorism Risk Insurance Program). In discussing the U.S. federal backstop for certified acts of terrorism, all these names are synonymous.
To help make sense of the
speculation and various policy options, RMS was proud to host Scott Williamson,
Vice President and Director of Financial Analytics at the Reinsurance
Association of America (RAA). Mr. Williamson has developed legislative
models to assist the RAA in its advocacy on issues such as TRIA.
At the RMS event, Mr. Williamson provided an overview of the current TRIA structure and explored some alternative modifications to the program that were considered to make a legislative recommendation. This included an evaluation of multiple ‘what-if’ scenarios, using a range of attack modes and targets, and various assumptions regarding the compounded average growth rate of the U.S. economy. For this study, RMS partnered with RAA to estimate economic losses due to a range of scenario terrorism events for property and workers’ compensation lines of businesses, using its latest Terrorism Model and Economic Exposure Data.
Despite the paucity of large-scale terrorism attacks in North America, the multifaceted terrorism threat in the U.S. continues to be a significant one that must be managed by the (re)insurance risk management industry, according to experts at this year’s RMS Terrorism Risk Summit.
The theme for this year’s summit, held in New York on September 25, focused on the multifaceted terrorism threat landscape in the U.S. and how the peril can be managed by the insurance industry. While terrorism insurance take-up rates remain healthy, and the U.S. Government Terrorism Risk Insurance Program (TRIP) backstop offers reassurance in the event of a large-scale attack, the uncertainty around TRIP’s pending renewal at the end of 2020 and the fluid threat environment have given (re)insurers some pause for thought.
The invited speakers for this year‘s summit included Ambassador Dan Benjamin, director of The John Sloan Dickey Center at Dartmouth University, Steven Simon, professor of security studies at Colby College and Scott Williamson, vice president and director of Financial Analytics at Reinsurance Association of America (RAA).
Japan continues to assess the extent of the damage caused by
Typhoon Hagibis, which made landfall near the Izu Peninsula in Shizuoka
Prefecture on Saturday, October 12. Current reports state that at least 66
people have been killed, dozens of people are missing, and hundreds are injured.
At this time, the worst impacted prefectures include Nagano, Saitama,
Shizuoka, and Fukushima.
However, the full extent of the damage is not expected to be known for several days as rescue operations and official damage assessments continue – rescuers cannot reach some areas due to high water levels. The Japanese Prime Minister, Shinzo Abe, stated that there is no plan to slow rescue operations, with around 13,000 police, 66,000 firefighters and 31,000 Self-Defense Forces personnel involved. The numbers of structures and properties affected is predicted to rise.
RMS launches new exposure management application focused on the portfolio manager – ExposureIQ on the new cloud platform, Risk Intelligence™.
The role of a portfolio manager is a demanding one. It represents a high-wire balancing act between managing profitability and growth on one hand and keeping within exposed limits and minimizing risk accumulation and potential losses on the other. It is the portfolio manager who must uncover the “hot spots” if an individual line of business, geography, or risk type is looking under pressure as a loss driver – and highlight the “cold spots” where segments have growth potential.
They are always under the watchful eye of regulators and governance functions who need regular reports to show that the business is sticking to its stringent boundaries and limits. And if all this wasn’t enough, they are also on the frontline when a cat event strikes and on duty throughout to regularly update and reveal the impact of the event on the portfolio before, during, and post-event.
The last two North America wildfire seasons have seen total insured losses skyrocket to over US$23 billion – compared to 1991-2010 where average annual losses totaled US$600 million. Wildfire has staked its claim as a major U.S. peril, with events now consistently topping the multi-billion dollar mark. Four of the five all-time biggest wildfire events occurred in 2017 and 2018, and seven wildfires exceeded the US$1 billion threshold in this timeframe.
When the WUI is Not Enough
Wildfire risk can no longer be managed through accumulation strategies, hazard zoning, or simple extrapolation of historical data because the fundamental drivers of wildfire risk are changing:
There are 30 percent more buildings at risk than there were 30 years ago
Recent weather patterns show that the fire season is getting hotter and drier than in the past
All these factors mean that past losses cannot be easily extrapolated to predict future risk levels. Instead, the industry needs tools from a probabilistic catastrophe model to properly capture future wildfire risk.
Wildfire risk is not limited to the Wildland Urban Interface (WUI) anymore. The figure below shows DINS (Damage Inspection) data from CAL FIRE overlaid on the burn perimeter for the 2017 Tubbs Fire in Northern California. Almost half of the destroyed structures in that fire came from areas considered to have no wildfire risk since they are in sub-urban areas classified as non-burnable by existing risk scoring methods. It is not sufficient to manage insurance portfolios with simple hazard zoning approaches.
If you are a business insurer, then your clients are typically being exposed to cyber risk. As RMS has discussed previously in our 2019 Cyber Risk Outlook, the digital economy has become more pervasive and now accounts for almost a third of the GDP of developed countries, and e-commerce now represents 14 cents in every U.S. dollar spent in retail. The “attack surface” vulnerable to cyber risk expands as more and more business devices are being connected to the Internet, with technologies become more standardized, homogenized, and cloud dependent.
So, it’s never been more important to understand the cyber risk landscape, whether you are a dedicated affirmative cyber insurer or exposed to “silent-cyber” – where potential cyber-related losses stem from traditional property and liability policies not specifically designed to cover cyber risk.
of Thursday afternoon (October 10), Super Typhoon Hagibis remains a powerful
Category 4 equivalent hurricane with maximum sustained wind speeds of 150 miles
per hour (240 kilometers per hour). The Japan Meteorological Agency (JMA) has described the storm as “violent” – its highest tropical cyclone classification.
Hagibis hit the headlines in recent days after it underwent one of the most rapid intensifications ever observed: its maximum sustained wind speeds intensified from 60 to 160 miles per hour in just 24 hours on October 6-7. According to media reports, only Hurricane Wilma in 2005 and Patricia in 2015, are known to have strengthened more quickly. Its peak wind speed of 160 miles per hour (258 kilometers an hour) is equivalent to a Category 5 hurricane on the Saffir-Simpson Hurricane Wind Scale.
September, RMS ran a series of cyber risk seminars in London and New York. These
half-day events coincided with the release of RMS Cyber Solutions version 4.0 and
featured both RMS and industry experts discussing cyber risk and the opportunities
for the cyber insurance industry.
At both events, the day kicked off with Dr. Andrew Coburn, senior vice president for RMS, examining recent developments within the cyber risk landscape by outlining the approach RMS takes to tracking and categorizing the wide range of evolving threat actor groups. He also proposed some key future trends, such as the potential impact of a “gloves-off” nation-state cyberattack and its implications for the cyber insurance industry.