Property & Casualty Insight
Managing Catastrophe Exposures:
Risk of a Big Event Getting Bigger
Climate and catastrophe risk experts are
bracing for a wave of extreme weather
events in the coming months and years as
the current El Niño system strengthens to
unprecedented levels and the potential
for stronger seismic events in the United
States increase.
El Niño, which causes flooding, drought, wildfires, and
winter storms, to name a few, is showing no sign of cooling
after causing $12.6 billion in natural catastrophe losses
during the first half of 2015. On Nov 8, 2015, the El Niño
index, a measure of Pacific Ocean temperatures, set a
record of 2.8, the warmest in recorded history, according
to the National Oceanic and Atmospheric Administration.
Meanwhile, catastrophe risks experts are also concerned
about recent scientific studies evidencing an elevated
risk of seismic activity in the United States. According
to new research, the New Madrid fault line, which has
been more active in recent years, has a greater range of
potential earthquake magnitude than previously imagined.
The New Madrid Seismic Zone extends through parts
of Missouri, Arkansas, Tennessee, Mississippi, Kentucky,
Indiana and Illinois.
Another study produced by NASA’s Jet Propulsion
Laboratory is also disconcerting. It predicts a high
probability of a significant earthquake striking the greater
Los Angeles area within the next three years.
Given the increased concerns about catastrophe risks,
USI’s middle market clients are stepping up their
catastrophe risk management programs going into the
New Year. In the Real Estate sector, for example, USI
has been working with property owners and managers
of varying sizes to quantify and plan for not only a
Black Swan event, but also for more frequent and costly
catastrophe events.
Following are four catastrophe risk management solutions
many Real Estate clients are implementing with the
support of the USI ONE Advantage®, a unique approach
to managing clients’ risks:
Clarifying Catastrophe Deductible
Wording
Off-the-shelf catastrophe deductibles, if structured
incorrectly, can be very punitive in the event of a loss.
For example, a common catastrophe deductible applies
a percentage against all values at an impacted location,
typically in the range of 3% to 5%. Understanding how the
deductible would perform in the event of a catastrophe
event is crucial.
Recently, the chief financial officer of a company which
owns and manages garden style apartments with multiple
buildings in the Southeast, engaged USI to review its
property catastrophe program.
USI evaluated the existing deductible language and
determined that the deductible applied against the total
values at an impacted location regardless of the number of
buildings damaged. The highest potential deductible was
5% of $30 million or $1.5 million.
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Continued from page 1
Based on this finding, USI refined the policy wording
to apply on a per-unit-of-insurance basis and against
the values declared at inception. The revised deductible
language created certainty for the CFO knowing that the
probability of damage to every building at a given location
was low.
Set Proper Limits Based on Catastrophe
Modeling
Flood Zone Determination and
Correction
USI relies on this modeling approach in its pre-underwriting
process to establish appropriate limits for the client based
on actual risks. In addition, the company’s risk specialists,
supported by data from USI’s proprietary OMNI engine,
negotiate with carriers to place the structured coverage into
the market.
Changes to flood zones during the course of a policy year
can create underinsured exposure for property owners and
managers. The financial impact of such changes typically
surfaces in two areas:
ƒƒ Reduced flood coverage due to inadequate limit
ƒƒ Increased deductible for High-Hazard Flood areas
For example, following significant flooding in Central
Texas, a real estate owner suffered $2 million in damage to a
building that was previously designated as being outside of
the most hazardous flood zones.
The company was not aware that FEMA had adjusted flood
maps during the policy year, and several of its properties
were now deemed to be in hazardous zones. The insurance
carrier paid the claim based on a $1 million-limit for
High Hazard Flood Zones and the company suffered an
uninsured loss of $1 million.
After becoming a client, USI modified the policy language
to eliminate the carrier’s ability to reduce coverage if flood
zones changed during the policy year.
Catastrophe modeling simulates a natural disaster event
using a client’s location and building information to measure
the potential loss that could occur.
Quantification of Risk through Modeling
for Catastrophes
Proper risk quantification and limit adjustment for assets
exposed to a flood event or earthquake are a critical aspect
of catastrophe risk management.
At USI, risk consultants specialize in performing actuarial
analysis, using the AIR Worldwide modeling platform
to provide an estimate of the potential cost of damage
from flood or earthquakes. The process allows for a better
understanding of the coverage and pricing needed.
For example, working with a new client on risk strategies,
USI determined that an Austin boutique hotel had highvalue assets in their first floor lobby area.
The hotel’s previous property coverage included $5
million of flood coverage. USI modeled the flood risk and
determined that the hotel was exposed to flood damage of
up to $6.5 million.
Based on this finding, USI and the client agreed on the need
to purchase additional flood coverage to address the $1.5
million potential coverage gap.
2014 National Seismic Hazard Map
The U.S. Geological Survey National Seismic Hazard Maps display
earthquake ground motions for various probability levels across the
United States. The map represents an assessment of the best available
science in earthquake hazards and incorporate new findings on
earthquake ground shaking, faults, seismicity, and geodesy.
This client engagement and others described above
underscore two important facts about catastrophe risk
management: The right partner makes a big difference and
proper planning is the surest way to stay ahead when disaster
strikes.
To learn more about the solutions discussed here and the USI
ONE Advantage® contact a USI consultant.
Source: earthquake.usgs.gov
Property & Casualty | Employee Benefits | Personal Risk Services | Retirement Consulting
©2015 USI Insurance Services. All rights reserved.