Living with increasing US nat cat exposure

The figures are concerning. Early estimates of global 2021 losses from natural catastrophes are higher than $105bn, which would make it the fourth-highest annual total since 1970, says AM Best. And this is now becoming the norm, with the global insurance industry facing a long-run annual average loss of $106bn, compared to $75bn a year during the past decade, according to AIR Worldwide.

The modeller says there is a greater than 40% chance the insurance industry will experience losses of more than $200bn in a single year during the next decade. It says insured losses will average about $66bn in North America, where about 50% of the economic loss from natural disasters is insured.

And a recent study by Chaucer found that hurricanes and tropical storms are no longer the preserve of southern US states and Caribbean islands, with a shift northwards exposing locations outside of traditional storm hotspots. The study reveals that 16% of US and Caribbean hurricanes, tropical storms and tropical depressions are now hitting northern states, such as New York, New Jersey and the states of New England, compared to 12% some 40 years ago.

There is a growing trend of hurricanes moving further north with greater ferocity, while increasing temperatures are making serious hurricanes even more severe. The (re)insurer says this will mean that locations outside of traditional storm hotspots are likely to be affected more often and, as a result, insurers must reconsider historical norms used to model risk.
Secondary perils on the rise

But it is not just hurricanes. Secondary perils such as wildfires, tornadoes and severe thunderstorms are accounting for a larger share of the losses from catastrophe events than primary perils such as hurricanes, according to Best. It says the US continues to suffer many of the most intense and most impactful natural disasters in terms of total damages and insured losses.

Shruthi Rao, CEO and co-founder, Adapt Ready, notes that climate change is accelerating the frequency and intensity of certain types of extreme weather in the US, from an increase in heavy downpours such as those along the Gulf Coast and eastern states, to wildfire seasons that last longer, an increased vulnerability to drought, and even the 2021 cold wave in Texas.

She points out that in 2020, the US experienced a record Atlantic hurricane season and 22 billion-dollar disasters, while 2021 saw 20 billion-dollar disasters (including the Texas cold snap and three tornado outbreaks). And it is not just homes that are affected. Rao explains that several of the US’s manufacturing regions are in areas exposed to natural catastrophes and, as a result, large corporates have suffered increasing losses from these natural catastrophes. For example, the so-called ‘Chemical Alley’ region in the south and Gulf Coast, and the pharmaceutical industry in Puerto Rico, have seen significant downtimes and losses.

And it is not just these types of direct impacts that companies face every day – there have been significant losses from indirect impacts as well, from supply chain issues both upstream and downstream, says Rao. For example, multiple closures of one of petrochemicals manufacturer Indorama Ventures’ plants during the 2020 hurricane season impacted the supplies for several downstream industries and companies like Goodyear.

Secondary perils are a challenge because they are harder to predict, and the cost of their impact is related to where they hit, explains Rao. “As a single event, they may not lead to large loss, but on aggregate, they account for significant and growing losses for the insurance industry. Hurricane Ida, which led a wave of destruction in the southern state of Louisiana, caused tornadoes (a secondary peril in this case) in the northeast, with damages estimated to be between $16bn and $24bn. And the lack of granular data coupled with limited monitoring of such events and insufficient early warning systems compound the problem,” she says.

John Andre, managing director, AM Best, says: “The fact remains that secondary perils have not been modelled to the same extent as primary perils, although this modelling is evolving and insurers are taking actions to address exposures to these risks through underwriting and pricing actions.”

Modelling the risk
Most risk managers will tend to use their insurer or broker’s expertise when it comes to nat cats and modelling. David Wyatt, client director, RMS, says many corporates use RMS models, especially via their brokers during insurance purchases, noting that RMS models are one of the key components of catastrophe insurance pricing, with most insurers working with RMS models to price these risks.

He adds that RMS also engages with corporations for key risk management studies to help with risk understanding, risk transfer and resilience. His colleague Ben Brookes, vice-president, consulting, RMS, says: “We work with corporates and reinsurers all the time to help them understand risk and resilience opportunities. This ranges from helping provide a solid understanding of risk upon which insurance risk transfer strategies can be determined, to understanding of resilience and risk reduction opportunities, to climate change analytics for strategic planning, reporting and ESG considerations. Many banks are now looking at how they can better understand physical climate change risk in their corporate lending portfolios too.”

Cat modelling may become an important tool for risk and insurance managers as climate change plays havoc with traditional weather patterns and claims experience, especially as the hard market is seeing more companies considering covering cat risks in their captives. Last year’s World Captive Forum heard one US captive owner say: “Traditionally, we always thought that cat is verboten inside a captive – you should never put cat in a captive – and yet it’s becoming that we have to move in that direction because the market is in such disarray.”