Shaping Insurance Portfolios to Manage High Risk from Natural Disasters

In its recent “Global Risks Report”, the World Economic Forum (WEF) provided a comprehensive analysis of the risks and threats that the world faces, from economic, environmental, to geopolitical. Now in its thirteenth report, each year it publishes tables of the top ten risks in terms of their likelihood of happening, and potential impact. Although “newer” risks such as cyberattacks and data fraud do feature in the top five in terms of likelihood, it is extreme weather events and natural disasters that are in the top two or three in each list. In fact, in the view of the WEF, only weapons of mass destruction are ahead of extreme weather and natural disasters in terms of their impact on the globe. Nat cat events have not always topped the table — maybe the scale of the events of 2017 have brought the impact of nat cats to the fore.

There is also a recognition from the WEF that the failure to adapt and mitigate to climate change is rising as a threat. The World Weather Attribution coalition of scientists stated that 19 trillion gallons of rainfall from Hurricane Harvey that hit the Houston area was three-times more likely to occur due to climate change, and 15 percent more intense.

A Texas National Guardsman carries a resident from her flooded home following Hurricane Harvey in Houston, Aug. 27, 2017. Image credit: U.S. Army National Guard photo by Lt. Zachary West

In a world where extreme weather events may become more frequent and intense, all of us in the resilience industry want to further protect the communities and businesses from the risk of natural perils. Significant investment and research is required by way of organizing better defenses, mitigating hazards through preventive measures, and quickly responding to minimize human fatalities when disaster strikes. This makes the risk more insurable as well.

What the WEF report shows is that the insurance industry is covering the top risks in the WEF report, natural disasters and extreme weather are the mainstream risks that the industry covers. And their recent severity did affect the industry; Lloyd’s is undergoing an underwriting review due to the large losses that have come upon the syndicates from property cats globally. So how can insurers and reinsurers remain resilient in these changing times and continue to address the biggest threats? The clear message is the need to understand such risks better and build a more resilient business — but how can we do this?

Here are some ideas. First, stochastic events are best dealt with probabilistic models. Underwriting models that are predictive based upon past history and experience will not factor the changing nature of the climate and the new sciences that inform the latest understanding of weather patterns and interconnected nature of the perils. Second, a thorough ground-up view of a portfolio and regular optimization of the book can build business resilience. Getting into the discipline of modeling for every new account that is written, and by ensuring that peak renewal season is managed using a strategy well informed by knowledge of the perils and their impact to the book of business helps leverage strategic insight provided through probabilistic models.

New models are also being introduced that help get a more granular level of detail at location level, and to understand the interconnected nature of peril, such as storm surge. This gives you a true view of the exposure risk profile from a ground-up stand point.

This is all more work, and many carriers state they do not have the scale to handle the additional cat modeling work that this level of diligence requires. As the cat view of property risk becomes equally if not more important than an actuarial and an underwriting view of risk, it is important to build out an organization that can achieve this. For many years at RMS, we have supported carriers through our Analytical Services operations who need scale to handle areas such as cleansing and geocoding of property data to ensure accurate results, account modeling for key accounts exposed to hazard, and regular portfolio analysis and optimization for both insurers and reinsurers.

Taking a disciplined approach and leveraging modeling insights across risk management, actuarial sciences and underwriting will help build a more resilient insurance business. Strengthening the risk management allows carriers to shape their portfolios to handle exposure accumulation issues and comparing their premium pricing with the technical pricing. This practice has allowed carriers to reduce loss ratio by up to five points over a period of years and improve credibility with rating agencies. It has also allowed insureds to enjoy rate stability and improved customer retention as a result. If you would like more information, contact our sales team.

Rajesh Narayan

Senior Director, Product Management, RMS

Rajesh Narayan CPCU CIOP LSSBB, helps insurance carriers establish cat modeling best practices in his role as Managed Services Business Leader for RMS.

His work over the past 18 years in the P&C insurance industry has centered around increasing the reach and availability of insurance globally through core operations transformation using data, analytics and process optimization. He can be reached on LinkedIn.

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