logo image
Helen YatesSeptember 22, 2021
Florida houses aerial view
Florida houses aerial view
Deconstructing Social Inflation
September 22, 2021

After the loss creep associated with Hurricane Irma in 2017, (re)insurers are keen to quantify how social inflation could exacerbate claims costs in the future. The challenge lies in eliminating the more persistent, longer-term trends, allowing these factors to be explicitly modeled and reducing the “surprise factor” the next time a major storm blows through.  A few days after Hurricane Irma passed over Marco Island, Florida, on September 10, 2017, RMS® deployed a reconnaissance team to offer some initial feedback on the damage that was sustained. Most properties on the island had clay tile roofs and while the team noted some dislodged or broken tiles, damage did not appear to be severe. A year later, when Peter Datin, senior director of modeling at RMS, decided to revisit the area, he was shocked by what he saw. “There were so many roofing contractors still on the island, and almost every house seemed to be getting a full roof replacement. We found out that US$900 million worth of roofing permits for repairs had been filed in Marco Island alone.” Trying to find the exact shape and color for tile replacements was a challenge, forcing contractors to replace the entire roof for aesthetic reasons. Then there is Florida's “25 percent rule,” which previously applied to High-Velocity Hurricane Zones in South Florida (Miami-Dade and Broward Counties) before expanding statewide under the 2017 Florida Building Code. Under the rule, if a loss assessor or contractor determines that a quarter or more of the roof has been damaged in the last 12 months, it cannot simply be repaired, and 100 percent must be replaced. This begins to explain why, in the aftermath of Hurricane Irma and to a lesser extent Hurricane Michael in 2018, claims severity and loss creep were such an issue. “We looked at some modeling aspects in terms of the physical meaning of this,” says Datin. “If we were to directly implement an engineering or physics-based approach, what does that mean? How does it impact the vulnerability curve? "We went through this exercise last summer and found that if you hit that threshold of the 25 percent roof damage ratio, particularly for low wind speeds, that's a fourfold increase on your claims. At certain wind speeds, it can therefore have a very material increase on the losses being paid. It’s not quite that straightforward to implement on the vulnerability curve, but it is very significant.” But issues such as the 25 percent rule do not tell the whole story, and in a highly litigious market such as Florida, determining whether a roof needs a complete replacement is not just down to physics. Increasingly, the confluence of additional factors that fall under the broad description of “social inflation” are also having a meaningful impact on the total cost of claims. What Is Social Inflation? Broadly, social inflation refers to all the ways in which insurers’ claims costs rise over and above general economic inflation (i.e., growth in wages and prices), which will influence the cost of repairs and/or replacing damaged property. It therefore captures the growth in costs connected to the following: unanticipated emerging perils associated with, for example, new materials or technologies, shifts in the legal environment, evolving social attitudes and preferences towards equitable risk absorption, and demographic and political developments. (Source: Geneva Association) Florida's “David and Goliath” Law A major driver is the assertive strategies of the plaintiffs' bar, compounded by the three-year window in which to file a claim and the use and potential abuse of practices such as assignment of benefits (AOB). The use of public adjusters and broader societal attitudes towards insurance claiming also need to be taken into consideration. Meanwhile, the expansion of coverage terms and conditions in the loss-free years between 2005 and 2017 and generous policy interpretations play their part in driving up claims frequency and severity. What Is Assignment of Benefits (AOB)? An assignment of benefits, or AOB, is a document signed by a policyholder that allows a third party, such as a water extraction company, a roofer or a plumber to '”stand in the shoes” of the insured and seek payment directly from the policyholder's insurance company for the cost of repairs. AOBs have long been part of Florida’s insurance marketplace. (Source: Florida Office of Insurance Regulation) More recently, the effects of COVID-19 has impacted the cost of repairs, in turn increasing insurers' loss ratios. (Re)insurers naturally want to better understand how social inflation is likely to impact their cost of claims. But determining the impact of social inflation on the “claims signal” is far from simple. From a modeling perspective, the first step is deselecting the different elements that contribute toward social inflation and understanding which trends are longer term in nature. The recently released Version 21 of the RMS North Atlantic Hurricane Models incorporates an alternative view of vulnerability for clients and reflects the changing market conditions applicable to Florida residential lines, including the 25 percent roof replacement rule. However, the effects of social inflation are still largely considered non-modeled. They are removed from available data where possible, during the model development process. Any residual impacts are implicitly represented in the model. “Quantifying the impacts of social inflation is a complex task, partly because of the uncertainty in how long these factors will persist,” says Jeff Waters, senior product manager at RMS. “The question is, going forward, how much of an issue is social inflation really going to be for the next three, five or 10 years? Should we start thinking more about ways in which to explicitly account for these social inflation factors or give model users the ability to manually fold in these different factors? “One issue is that social inflation really ramped up over the last few years,” he continues. “It's especially true in Florida following events like Hurricanes Irma and Michael. At RMS, we have been working hard trying to determine which of these signals are caused by social inflation and which are caused by other things happening in Florida. Certainly, the view of vulnerability in Version 21 starts to reflect these elevated risk factors.” AOB had a clear impact on claims from Irma and Michael. Florida's “David and Goliath” law was intended to level the playing field between policyholders and economically powerful insurers, notes the Insurance Information Institute's Jeff Dunsavage. Instead, the law offered an incentive for attorneys to file thousands of AOB-related suits. The ease with which unscrupulous contractors can “find” damage and make claims within three years of a catastrophe loss has further exacerbated the problem. Waters points out that in 2006 there were only around 400 AOB lawsuits in the market. By 2018, that number had risen to over 135,000. In a decade that had seen very few storms, it was difficult to predict how significant an impact AOB would have on hurricane-related claims, until Irma struck. Of the Irma and Michael claims investigated by RMS, roughly 20 percent were impacted by AOB. “From a claims severity standpoint, the cost of those claims increased up to threefold on average compared to claims that were not affected by AOB," says Waters. Insurers on the Brink The problem is not just limited to recent hurricane events. Due to the Sunshine State's increased litigation, insurers are continuing to face a barrage of AOB non-catastrophe claims, including losses relating to water and roof damage. Reforms introduced in 2019 initially helped rein in the more opportunistic claims, but notifications dialed back up again after attorneys were able to find and exploit loopholes. Amid pressures on the court system due to COVID-19, reform efforts are continuing. In April 2021, the Florida Legislature passed a new law intended to curb market abuse of litigation and roofing contractor practices, among other reforms. Governor Ron DeSantis said the law had been a reaction to “mounting insurance costs” for homeowners. As loss ratios rose, carriers have been passing some of the additional costs back onto the policyholders in the form of additional premiums (around US$680 per family on average). Meanwhile, some carriers have begun to offer policies with limited AOB rights, or none at all, in an effort to get more control over the spiraling situation. “There are some pushes in the legislature to try to curb some of the more litigious behavior on the part of the trial lawyers,” says Matthew Nielsen, senior director, regulatory affairs at RMS. Nielsen thinks the 2021 hurricane season could be telling in terms of separating out some of the more permanent changes in the market where social inflation is concerned. The National Oceanic and Atmospheric Administration (NOAA) still predicts another above-average season in the North Atlantic, but currently does not anticipate the historic level of storm activity seen in 2020.  “What's going to happen when the next hurricane makes landfall, and which of these elements are actually going to still be here?” asks Nielsen. “What nobody wants to see again is the kind of chaos that came after 2004 and 2005, when there were questions about the health of the insurance market and what the roles of the Florida Hurricane Catastrophe Fund (FHCF) and Florida Citizens Property Insurance Corporation were going to be.” “Ultimately, we're trying to figure out which of these social inflation signals are going to stick around, and the difficulty is separating the long-term signals from the short-term ones,” he continues. “The 25 percent roof replacement rule is written into legislation, and so that is going to be the new reality going forward. On the other hand, we don't want to include something that is a temporary blip on the radar.”

Helen YatesMay 11, 2018
Hurricane Claims
Hurricane Claims
Bringing Clarity to Slab Claims
May 11, 2018

How will a new collaboration between a major Texas insurer, RMS, Accenture and Texas Tech University provide the ability to determine with accuracy the source of slab claim loss? The litigation surrounding “slab claims” in the U.S. in the aftermath of a major hurricane has long been an issue within the insurance industry. When nothing is left of a coastal property but the concrete slab on which it was built, how do claims handlers determine whether the damage was predominantly caused by water or wind? The decision that many insurers take can spark protracted litigation, as was the case following Hurricane Ike, a powerful storm that caused widespread damage across the state after it made landfall over Galveston in September 2008. The storm had a very large footprint for a Category 2 hurricane, with sustained wind speeds of 110 mph and a 22-foot storm surge. Five years on, litigation surrounding how slab claim damage had been wrought rumbled on in the courts. Recognizing the extent of the issue, major coastal insurers knew they needed to improve their methodologies. It sparked a new collaboration between RMS, a major Texas insurer, Accenture and Texas Tech University (TTU). And from this year, the insurer will be able to utilize RMS data, hurricane modeling methodologies, and software analyses to track the likelihood of slab claims before a tropical cyclone makes landfall and document the post-landfall wind, storm surge and wave impacts over time. The approach will help determine the source of the property damage with greater accuracy and clarity, reducing the need for litigation post-loss, thus improving the overall claims experience for both the policyholder and insurer. To provide super accurate wind field data, RMS has signed a contract with TTU to expand a network of mobile meteorological stations that are ultimately positioned in areas predicted to experience landfall during a real-time event. “Our contract is focused on Texas, but they could also be deployed anywhere in the southern and eastern U.S.,” says Michael Young, senior director of product management at RMS. “The rapidly deployable weather stations collect peak and mean wind speed characteristics and transmit via the cell network the wind speeds for inclusion into our tropical cyclone data set. This is in addition to a wide range of other data sources, which this year includes 5,000 new data stations from our partner Earth Networks.” The storm surge component of this project utilizes the same hydrodynamic storm surge model methodologies embedded within the RMS North Atlantic Hurricane Models to develop an accurate view of the timing, extent and severity of storm surge and wave-driven hazards post-landfall. Similar to the wind field modeling process, this approach will also be informed by ground-truth terrain and observational data, such as high-resolution bathymetry data, tide and stream gauge sensors and high-water marks. “The whole purpose of our involvement in this project is to help the insurer get those insights into what’s causing the damage,” adds Jeff Waters, senior product manager at RMS. “The first eight hours of the time series at a particular location might involve mostly damaging surge, followed by eight hours of damaging wind and surge. So, we’ll know, for instance, that a lot of that damage that occurred in the first eight hours was probably caused by surge. It’s a very exciting and pretty unique project to be part of.”

NIGEL ALLENMay 10, 2018
In the Eye of the Storm
In the Eye of the Storm
In the Eye of the Storm
May 10, 2018

Advances in data capture are helping to give (re)insurers an unparalleled insight into weather-related activity Weather-related data is now available on a much more localized level than ever before. Rapidly expanding weather station networks are capturing terabytes of data across multiple weather-related variables on an almost real-time basis, creating a “ground-truth” clarity multiple times sharper than that available only a few years ago. In fact, so hyperlocalized has this data become that it is now possible to capture weather information “down to a city street corner in some cases,” according to Earth Networks’ chief meteorologist Mark Hoekzema. “The greater the resolution of the data, the more accurate the damage verification” Mark Hoekzema earth networks This ground-level data is vital to the insurance industry given the potential for significant variations in sustained damage levels from one side of the street to the other during weather-related events, he adds. “Baseball-sized hail can fall on one side of the street while just a block over there might be only pea-sized hail and no damage. Tornados and lightning can decimate a neighborhood and leave a house untouched on the same street. The greater the resolution of the data, the more accurate the damage verification.” High-Resolution Perils This granularity of data is needed to fuel the high-resolution modeling capabilities that have become available over the last five to ten years. “With the continued increase in computational power,” Hoekzema explains, “the ability to run models at very high resolutions has become commonplace. Very high-resolution inputs are needed for these models to get the most out of the computations.” In July 2017, RMS teamed up with Earth Networks, capitalizing on its vast network of stations across North America and the Caribbean and reams of both current and historical data to feed into RMS HWind tropical cyclone wind field data products. “Through our linkup with Earth Networks, RMS has access to data from over 6,000 proprietary weather stations across the Americas and Caribbean, particularly across the U.S.,” explains Jeff Waters, senior product manager of model product management at RMS. “That means we can ingest data on multiple meteorological variables in almost real time: wind speed, wind direction and sea level pressure. “By integrating this ground-level data from Earth Networks into the HWind framework, we can generate a much more comprehensive, objective and accurate view of a tropical cyclone’s wind field as it progresses and evolves throughout the Atlantic Basin.” Another key advantage of the specific data the firm provides is that many of the stations are situated in highly built-up areas. “This helps us get a much more accurate depiction of wind speeds and hazards in areas where there are significant amounts of exposure,” Waters points out. According to Hoekzema, this data helps RMS gain a much more defined picture of how tropical cyclone events are evolving. “Earth Networks has thousands of unique observation points that are available to RMS for their proprietary analysis. The network provides unique locations along the U.S. coasts and across the Caribbean. These locations are live observation points, so data can be ingested at high temporal resolutions.” Across the Network Earth Networks operates the world’s largest weather network, with more than 12,000 neighborhood-level sensors installed at locations such as schools, businesses and government buildings. “Our stations are positioned on sturdy structures and able to withstand the worst weather a hurricane can deliver,” explains Hoekzema. Being positioned at such sites also means that the stations benefit from more reliable power sources and can capitalize on high-speed Internet connectivity to ensure the flow of data is maintained during extreme events. In September 2017, an Earth Networks weather station located at the Naples Airport in Florida was the source for one of the highest-recorded wind gusts from Hurricane Irma, registering 131 miles per hour. “The station operated through the entire storm,” he adds. “Through our linkup with Earth Networks … we can ingest data on multiple meteorological variables in almost real time” Jeff waters RMS This network of stations collates a colossal amount of data, with Earth Networks processing some 25 terabytes of data relating to over 25 weather variables on a daily basis, with information refreshed every few minutes. “The weather stations record many data elements,” he says, “including temperature, wind speed, wind gust, wind direction, humidity, dew point and many others. Because the stations are sending data in real time, Earth Networks stations also send very reliable rate information — or how the values are changing in real time. Real-time rate information provides valuable data on how a storm is developing and moving and what extreme changes could be happening on the ground.” Looking Further Ahead For RMS, such pinpoint data is not only helping ensure a continuous data feed during major tropical cyclone events but will also contribute to efforts to enhance the quality of insights delivered prior to landfall. “We’re currently working on the forecasting component of our HWind product suite,” says Waters. “Harnessing this hyperlocal data alongside weather forecast models will help us gain a more accurate picture of possible track and intensity scenarios leading up to landfall, and allow users to quantify the potential impacts to their book of business should some of these scenarios pan out.” RMS is also looking at the possibility of capitalizing on Earth Networks’ data for other perils, including flooding and wildfire, with the company set to release its North America Wildfire HD Models in the fall. For Earth Networks, the firm is capitalizing on new technologies to expand its data reach. “Weather data is being captured by autonomous vehicles such as self-driving cars and drones,” explains Hoekzema. “More and more sensors are going to be sampling areas of the globe and levels of the atmosphere that have never been measured,” he concludes. “As a broader variety of data is made available, AI-based models will be used to drive a broader array of decisions within weather-influenced industries.”

Loading Icon
close button
Overlay Image
Video Title

Thank You

You’ll be contacted by an Moody's RMS specialist shortly.