Insurance experts see need for resiliency amid natural disasters

Nov. 20--NORMAL -- The bad news is insurance premiums are likely to go up if, as predicted, the frequency and intensity of hurricanes and wildfires increases as a result of climate change.

The good news is insurance companies are likely to weather those storms and steps can be taken to hold down costs and enable communities to survive as well.

That is the insurance outlook as seen by two insurance industry experts.

"The latest tragedy in California should teach us, this isn't just about money. This isn't just about insurance rates. It's about people's lives," said Jim Jones, director of the Katie School of Insurance and Risk Management at Illinois State University.

The same steps that can hold down insurance rates, such as using fire-resistant roof shingles or curtailing combustible landscaping, also can save lives, he said.

The Camp Fire in northern California is already the deadliest and most destructive wildfire in that state's history and it's still burning.

"This tragedy is going to play out in a way that it will grab people's attention," said Jones. "As they rebuild these communities, they're going to have to think about how to make them resilient."

Although the wildfires are getting the most attention, the 2018 hurricane season brought a lot of destruction on the other side of the country.

"We're going to see a record number of tragedies this year," said Jones. "We're starting to see risk probabilities at a level that we haven't seen before."

While those tragedies will hit insurance companies hard, the industry as a whole is prepared for that, according to Robert Hartwig, professor of risk management, insurance and finance at the University of South Carolina.

"What you're going to see in the insurance industry is there's a great deal of longevity," said Hartwig, former president and economist for the Insurance Information Institute.

He noted that Bloomington-based State Farm and other insurance companies are more than a century old.

Insurance companies are skilled at adapting to changes in their operating environment, whether it is changes in the economy hurting their investments, more litigation or "unanticipated weather-related events courtesy of Mother Nature or courtesy of mankind," said Hartwig.

Insurance companies work with teams of scientists and others who create models about anticipated risks, then plug in information about their policy holders, Jones explains.

"It certainly affects rates," he said.

It also affects how much capital companies need to have on hand to pay claims, said Hartwig.

Before the start of the hurricane season, insurance companies had $700 billion of claims-paying capital on hand, he said.

"They have to operate as if every day is a potential doomsday," said Hartwig.

Last year's wildfires cost insurance companies $12 billion in claims paid, he said, and "this year could be on track to meet or exceed that."

The rising cost from wildfires and hurricanes is not only because of an increase in frequency or intensity but also because of more people building in areas at risk for such disasters, according to Hartwig.

"These communities are addicted to this kind of growth because they bring jobs and wealth," he said, therefore, they are unlikely to stop further building.

However, high insurance premiums can get the attention of policy holders, causing them to rethink where they build or how they build, said Hartwig.

Moving forward, insurance companies have to review their overall strategies, Jones said, and ask, "Is there a way insurance companies can help their policy holders and their communities become more resilient?"

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Contact Lenore Sobota at (309) 820-3240. Follow her on Twitter: @Pg_Sobota

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