Category Archives: Flood

Will California be “Puerto Rico” or “New Orleans”?

It is now exactly a quarter of a century, on January 17, 1994, since the last significant U.S. earthquake disaster. A previously unknown blind thrust ruptured beneath Northridge, in the San Fernando Valley north of Los Angeles. Casualties were fortunately modest (57 deaths) because the Mw6.7 shock happened at 4.30 a.m. local time, but the damage was significant – estimated as at least US$30 billion in 1994 prices, as the fault lay directly underneath the city.

Sooner or later California will experience another Mw6.7-7.5 earthquake disaster, in the highly populated San Francisco Bay Area or under sprawling greater Los Angeles. Year-on-year, while the probability rises, the proportion of the affected population with any previous disaster experience dwindles. When it happens, in all senses of the word – it will be a great shock.

One prediction is inevitable: after the next big Bay Area or LA earthquake, there will be large numbers of uninsured homeowners, landlords and small business owners looking for compensation. Given the high deductible and low take-up rates for earthquake insurance, as much as 90 percent of the residential losses will not be covered by insurance payouts: a far higher percentage than in 1994.

And the question is then, will the Federal Government response match that which followed Hurricane Maria, or can we expect it to be more like the aftermath of Hurricane Katrina. Or to put it another way: will California be “Puerto Rico” or “New Orleans”?

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U.S. Flood Insurance: Top Five Things You Should Know From 2018

As we move full steam in to 2019, it is worth remembering that some good progress was made during 2018 with regards to advancing the private flood insurance market in the U.S. – even though Congress struggled with reform of the National Flood Insurance Program (NFIP).

Here’s five takeaway points from the past year:

1. Extending the Extension: The NFIP saw numerous extensions and a few short lapses. Just before the end of the year, Congress reauthorized the NFIP until May 31, 2019 right before the government shutdown commenced on December 22, 2018. But decisions by FEMA during the last week of the year brought uncertainty to the housing and insurance industry as it dealt with changing guidelines on whether policies could be sold or renewed during the shutdown. Ultimately, the NFIP is still operating, but the back and forth of 2018 did not bolster confidence in the stability of the program and left many asking … will 2019 be the breakthrough year?

2. FEMA Boosts the Private Flood Market: Although Congress struggled to act on the NFIP, FEMA did, with technical changes that came into force on October 1, 2018, to attract new private carriers and help existing carriers who participate in the NFIP “Write Your Own” (WYO) program.

First – removing a “non-compete” clause for carriers operating within WYO, now allows WYO carriers to offer their own private flood coverage as well as NFIP policies, with the condition that these businesses are kept separate. Second – policyholders can now cancel their NFIP policy mid-term, before its expiration date when a policyholder has obtained a duplicate policy. In combination, these steps removed hurdles that were hindering carriers from offering new flood products and making it difficult for consumers to purchase those products from the private market.

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De-risking the City

I am in Wellington, New Zealand, looking out from a rainy hotel window high over the city, admiring the older wooden houses on the forested slopes. Below there are four to eight story office and retail buildings, a number of which are shrouded in scaffolding, still repairing damage from the 2016 Kaikoura earthquake. The earthquake epicenter was some distance from the city, but the pattern of fault ruptures propelled long period ground shaking into the heart of Wellington.

In 1848, only eight years after the city was founded, a Mw7.5 earthquake on the far side of Cook Strait, shattered the town’s brick buildings. The Lieutenant Governor, Edward Eyre, forgetting his official role as colonial booster, declared the “… town of Wellington is in ruins … Terror and despair reign everywhere. Ships now in port … (are) crowded to excess with colonists abandoning the country.” However, the tremors declined, and the town survived.

Many ordinary houses were rebuilt using wood instead of brick. As a result, they suffered far less damage from a larger and closer Mw8.2 earthquake in 1855, that struck at the end of a two-day public holiday to celebrate the fifteenth anniversary of the city’s formation. This ruined all the remaining brick and stone commercial buildings including churches, barracks, the jail, and the colonial hospital. However, the earthquake delivered a tectonic bounty, raising the city by one to two meters (3.2 to 6.5 feet), turning the harbor into new land for development.

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The Sum of Its Parts: Wildfire in Multi-Peril Catastrophe Bonds

Water, wind, and wildfire. It’s been a devastating three months for the U.S.

Total insured losses from Hurricanes Florence and Michael, and the Camp and Woolsey wildfires are estimated by RMS in the range US$18.6 billion to US$28 billion (see table below):

September 1 Hurricane Florence $2.8 – $5.0 billion
October 8 Hurricane Michael $6.8 – $10.0 billion
November 8 Camp Wildfire $7.5 – $10.0 billion
November 8 Woolsey Wildfire $1.5 – $3.0 billion
TOTAL INSURED LOSSES   $18.6 – $28 billion

While California wildfires may seem far removed from Atlantic storms, for capital markets investors the fires may make the difference to how 2018 is remembered. Insurance Linked Securities (ILS) eyes are now trained on multi-peril aggregate catastrophe bonds.

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Opportunities Ahead: A Review of the U.S. Private Flood Insurance Market

It is evident that the opportunities presented by the U.S. private flood insurance market are attracting attention across the industry, and interest in this market is growing. I was recently invited by insurance financial ratings specialist Demotech to be a panelist on their U.S. flood insurance webinar to give an overview and delve into these issues. Joseph Petrelli, president of Demotech was our host, with contributors Fred Karlinsky, co-chair of law firm Greenberg Traurig, and Meg Glenn, consulting actuary at Merlinos and Associates.

The webinar is definitely worth a viewing. Fred started the discussion with an overview of the current state of the private U.S. flood insurance market. The National Flood Insurance Program (NFIP) has towered over the market for the past 50 years, reporting US$3.5 billion of written premium and some 5.1 million flood policies as at the end of September 2018. Florida has 35 percent of all NFIP policies, followed by Texas with 12 percent, and Louisiana with ten percent, with NFIP policies in force in all U.S. states.

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The Lessons From “Last Year’s” Catastrophes

Catastrophe modeling remains work in progress. With each upgrade we aim to build a better model, employing expanded data sets for hazard calibration, longer simulation runs, more detailed exposure data, and higher resolution digital terrain models (DTMs).

Yet the principal way that the catastrophe model “learns” still comes from the experience of actual disasters. What elements, or impacts, were previously not fully appreciated? What loss pattern is new? How do actual claims relate to the severity of the hazard, or change with time through shifts in the claiming process?

After a particularly catastrophic season we give presentations around ”the lessons from last year’s catastrophes.” We should make it a practice, a few years later, to recount how those lessons became implemented in the models.

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A Toe in the Water: Trading Risk Panel Discusses U.S. Flood Risk Opportunities

With positive changes under way to improve both public and private carrier participation across the U.S. flood market, many are looking to seize the opportunity that the U.S. flood market presents. Insurers, reinsurers, and the capital markets are exploring this opportunity which, in turn, has created a thirst for knowledge. I had the opportunity to see this first-hand when I was invited by Trading Risk magazine to take part in a panel discussion at the Trading Risk ILS: Reloaded and Resurgent event in New York last month. Sofia Geraghty from Trading Risk served as our moderator, and Joanna Syroka, Director of New Markets at Fermat Capital Management, and Ian Hanson, Vice President of Willis Re, were also on the panel.

One point that the audience wanted to understand was the level of demand to take on flood risk from an investor’s viewpoint, and also whether U.S. flood risk can be a portfolio diversifier. From the insurance-linked securities (ILS) side, Joanna confirmed the demand is there, but as with any peril, the ILS market needs to be able to clearly understand and define the risk to get comfortable enough to invest.

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Hurricane Michael Field Reconnaissance: Contrasting Performance of Structures at Design Wind Speeds

Peter Datin, Director, Model Development, RMS

Derek Stedman, Lead Modeler, RMS

Holly Widen, Product Manager, RMS

 

Introduction

Hurricane Michael made landfall in the Florida Panhandle near Mexico Beach on October 10, 2018, as the strongest hurricane (by wind speed) to impact the area in recorded history. As a strong category 4 hurricane, Michael’s wind speeds were at or above the design-level wind speeds for this area specified by ASCE 7 and the Florida Building Code. Figure 1 below shows the RMS HWind 3-second peak gust footprint with the design wind speed contours from ASCE 7-16 for Risk Category II structures (e.g., single-family homes and most commercial structures).

Figure 1 : RMS HWind 3-second gust footprint for Hurricane Michael overlaid with the design wind speed contours in ASCE 7-16

The Florida Panhandle has historically considered itself less prone to intense hurricanes than other coastal areas such as the Greater Miami Area, where the probability of category 4 and 5 storms is much higher. As an example, in the history of the Florida Building Code (FBC), the Panhandle successfully lobbied for an exception to the windborne debris provisions that were introduced in the original 2001 FBC. This exception was ultimately lifted in 2007 but highlighted that this area contained many examples of pre-FBC construction side-by-side newer construction built to higher standards, featuring wind damage mitigation measures suggested by the engineering community and organizations such as the Insurance Institute for Business and Home Safety (IBHS).

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“We Can’t Control the Catastrophic Events. But We Can Control How We Deal With Them.”

Join our upcoming webinar and learn about risk modeling best practices from RMS Analytical Services

Standard and Poors (S&P) has been providing ratings for insurance carriers since 2005 by examining their risk management practices. They view effective Enterprise Risk Management (ERM) as a supporting pillar of their rating analysis, as ERM reaches across all the core attributes of a business.

This includes a carrier’s treatment of catastrophic events, and their preparation for the “unexpected”, with S&P laying out a method for carriers to establish best practices in this area. And, according to their recent findings, they concluded that carriers with stronger ERM programs weathered the 2017 natural catastrophes better than those with weaker programs.

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2018 North Atlantic Hurricane Season: Where Are We Now?

In the last month or so, two significant North Atlantic hurricane events have brought the latter half of the current hurricane season into sharp focus — and what marks these two events out was how different they were. With Hurricane Florence making landfall on September 14 in North Carolina, this event was one of the most intense storms to go above 30 degrees north in recent history.

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