Insurers brace for another year of natural disasters

By Doug Bailey

Property and casualty insurers are bracing for another year of record losses from catastrophic hurricanes, tornadoes, wildfires, flooding, and other natural disasters already unfolding.

Extreme events in fact are no longer rare, leaving insurers to ponder whether the losses can ever be stemmed or if the government can provide greater protection in both bracing for catastrophes and contributing financially.

“I’ve been in the business over 30 years and we’ve always had big catastrophes,” said Steve Clarke, vice president, Government Relations for Verisk Analytics Inc., a multinational data analytics and risk assessment firm based in Jersey City, New Jersey. “But there's been a shift in extreme events, most notably in the last decade. Losses have increased dramatically. Once the exception, the billion-dollar catastrophe appears to becoming more the norm.”

In an online presentation for insurers this week, Verisk officials noted that last year was the sixth consecutive year of above average in number and intensity of hurricanes. And another is in the making.

“A number of agencies – government, private, and public – that issue seasonal forecasts for the North Atlantic … are all predicting another above average hurricane season,” said Dr. Jeffrey Strong, an extreme event solutions scientist at Verisk. “They’re predicting 18 to 19 named storms, eight hurricanes—four in a major category or above—and all above the 30-year average in number and intensity.”

Strong said the Pacific Ocean is going to be cooler than normal thanks to La Niña, which will cause reduced wind shear in the Atlantic, which allows tropical storms and cyclones to develop and become stronger.

“We’ll have to wait and see how it plays out but it’s certainly looking like it’s going to be an active year,” he said.

Meanwhile, the wildfire season is already upon us.

Dr. Arindam Samanta, director of product management, said the more than 4.5 million properties are at risk from extreme wildfires, two million of those are in California.

“And that's a really significant number because that indicates the potential for destructive loss causing wildfires,” he said. “And in fact, we have seen in the last several years, many highly destructive wildfires.”

Already, the number of acres burned this year has exceeded by 1.2 million acres the 800,000 acres that had burned at this point last year.

“A big driver of the acres burned this year has been the early season fires in Arizona and New Mexico,” he said.

The wildfire “season,” he said has really evolved into a lengthy year-long occurrence.’

“That is because of several climate related factors, such as warming trends, drought patterns, as well as earlier snowmelt that we see in many parts of the western states,” Samanta said. “And another significant factor is the human factor, the high level of building activity that is taking place in woodland areas.”

With the growing number and intensity of storms – and multiple billion-dollar catastrophes – questions loom about much the insurance industrial can withstand and whether enough is being done to mitigate the natural disasters. In just a 24 hour span this month, US towns and cities were confronted with severe weather threats that left hundreds of thousands without power in the Midwest, trapped flooded communities in Montana without clean drinking water, prompted tornado warnings in Chicago, and had millions basking in dangerous heat.

Nevertheless, as the damage and losses compile, Verisk’s Clarke believes the industry has the ability to withstand nature’s onslaught.

“With a few exceptions, there is ample capacity within the marketplace, both through primary carriers and the reinsurance and catastrophic bond mechanisms,” he said. “As long as carriers have the tools to properly assess risk, manage their aggregations, and charge a premium commensurate with the exposures they assume, that shouldn’t change in the short term.”

Clarke said measures to enact some types of government backstop for insurers but there hasn’t really been a market failure that would precede such action.

“Where issues exist, there are state-run markets, such Florida Citizens and California FAIR Plan, which have taken up any slack,” he said.

Clarke added that the focus should be on mitigation and resiliency.

“We understand how to earthquake-proof structures through engineering studies and testing, and applied the same principles to wind mitigation,” he said. “Today, we see a similar effort being applied to wildfire through the work of the Institute for Building and Home Safety. As risk management professionals first, we can educate our customers to the importance of actions they can take to reduce the exposure to loss. We can support strong building codes and enforcement as well as smart land use policies. Taken together these efforts can lead not only to a more resilient community but to the individual structures as well.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].