Natural catastrophe risk is one of the biggest exposures that societies and businesses face today. And as companies expand globally into new territories, this risk can increase in importance. For insurers of global programmes, assessing and underwriting these risks is no easy task. And the nature of the risk is ever present and changing.
But according to Martin Vinkenfluegel, international property – risk engineering leader at XL Catlin, constant improvements in modelling and tools are helping to make this risk more manageable. Loss prevention, pre-emergency planning and truly understanding the supply chain can also help clients to improve their risk profile, he says. As a leader of more than 2,000 global insurance programmes, which include localised insurance coverage in more than 210 countries, XL Catlin has valuable experience of how these measures can reduce the risk that natural catastrophes pose to businesses.
What are some of the challenges in underwriting natural catastrophe exposures in global programmes?
One of the biggest challenges in underwriting property catastrophe risks in global programmes is dealing with models and data that are not perfect. For example, with flood exposures, the granularity of data varies from country to country. There is extensive data for countries such as Germany and the UK, for example, but for places like China and Thailand the data is not always so detailed.
How can risk engineering help?
Our risk engineers visit sites to assess the exposure to natural catastrophe. For example, recently the risk engineers discovered that there was a flood risk at a client’s proposed new site location. As a result, the height of the site was raised. If a site is already in place, then we recommend loss prevention measures. For example, we have a team of wind loss prevention experts along the US east coast. They will look at how the roof is fastened to a building, for example, or how attachments are affixed to a building. For flood risk, we ensure that clients have pre-emergency plans in place, such as having sandbags in warehouses or portable flood barriers in a building’s basement that can be installed quickly to protect the site. Modern portable flood barriers are easy to install and can even be erected along the perimeter of the site. We also make sure that we know all the places where water can come into a building and that there are pneumatic plugs available to close any holes. These pneumatic plugs work like a balloon and can be inflated quickly in holes and drains to stop water flow. For earthquake risk, we discuss pre-emergency planning with clients – we ask them what their supply chain looks like and what measures they have in place to deal with business interruption.
How are improvements in models and tools helping you to underwrite natural catastrophe risk within global programmes?
Models and tools are constantly improving – sometimes in great leaps. In the UK, for example, we work with a company whose mission is to improve the quality of data available on flood risk. In some areas now they are able to pinpoint flood risk to a 30 metre by 30 metre grid. This extra granularity of data gives clients a much greater understanding of the potential – or not – for their site to be flooded. And for us, when we are underwriting a global programme, it is helpful to have much more accurate data about the risks. Of course, models are only as good as the data that goes into them.
Are there emerging or evolving natural catastrophe risks that clients and underwriters need to be aware of?
Underwriters are concerned about accumulation of risk in certain areas. The Thai floods in 2011 came as a big surprise to many people. Insured losses were about $15bn. And they drew a lot of attention to supply chain risk, as did the 2011 Japanese earthquake and tsunami, which caused insured losses of about $35bn. But there has not been an event of that magnitude since, and it is amazing how quickly people forget. So we work closely with clients to make sure they understand their supply chains. Hail is a risk that is top of mind after recent large losses in the US in 2016. Insured losses in Texas in 2016 surpassed $2bn, after a series of storms in April. In Germany in 2016, hailstorms caused insured losses of about €2.7bn. More recently, hailstorms in Sydney, Australia in February resulted in estimated insured losses of $42m. And wildfires are a new topic because of the events in Fort McMurray, Canada and the US last year, which caused insured losses of about $3.6bn. There are no models yet for wildfire. Drought is another risk that underwriters and clients need to be aware of. For example, a drought can leave an area with very dry ground which, if there is then rainfall, cannot absorb the water and there is a problem of run-off of excess water, leading to flooding. In California in February, thousands of homes were evacuated after the risk of the Oroville Dam bursting increased drastically, following heavy rainfalls in an area that has recently suffered from a historic drought.
How can clients work with their underwriters to improve their risk profiles?
As I have said previously, tools are getting better all the time, and the general understanding of natural catastrophe exposures is improving a great deal too. With global programmes, we send in our risk engineers who can check all the exposed locations and discuss loss prevention measures and pre-emergency planning. We also discuss with clients what measures they have in place to deal with business interruption risk. This approach means that, if the worst should happen, we can reduce the damage to property and to business.