Insurance Business America Executive Insights Series: Natural Catastrophes 2021

EXECUTIVE INSIGHTS SERIES

NATURAL CATASTROPHES 2021 As climate change rewrites the rules on insuring natural disasters, IBA finds out what brokers need to know to help clients get prepared

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NATURAL CATASTROPHES 2021 As climate change continues to heighten the frequency and severity of natural disasters, IBA turned to the experts to get answers to brokers’ most pressing questions about future catastrophes

MOTHER NATURE never fails to remind us of her overwhelming power. In 2020, global economic losses from natural catastrophes hit $190 billion, according to the Swiss Re Institute, marking a 1.6% increase between 1970 and 2020 based on the 10-year moving average. Global insured losses from disaster events in 2020 were $89 billion, mostly resulting from secondary perils like severe convective storms, floods and wildfires.

Severe convective storms – which encompass tornadoes, hail, straight-line winds and lightning – were the main lossdriving peril in 2020, resulting in $36.3 billion in global insured losses, followed by wildfires at $11.6 billion and floods at $6.1 billion, according to Swiss Re. Accumulated insured losses from severe convective storms from 2011 to 2020 exceeded the losses from all primary perils (including hurricanes, earthquakes and winter storms) put together.

While scientists can’t say whether the frequency of severe convective storms has gone up, the severity of losses from these storms has certainly increased, primarily due to population growth and economic development. The unpredictable location and frequency of severe convective storms makes them difficult for many insurers to confront.

“The October 2010 hailstorm in Phoenix, Arizona, is a prime example of a very costly event – around $5 billion in

economic loss – that occurred in a very unexpected location,” says Michael Young, vice president of product management at RMS. “It is clear that hail losses are not just the annual sum of many small events in the usual places.”

Wildfire is another peril that has increased in severity due to economic development. From January 1 to July 27, 2021, there were 36,796 wildfires, according to the National Interagency Fire Center (NIFC), up from 30,760 fires in the same period last year. In 2020, wildfires burned approximately 10.1 million acres, according to the NIFC, compared to 4.7 million acres in 2019.

“A complex interplay of man-made and natural factors has made wildfires a hazard that is difficult to quantify and, in many places, an increasingly common sight,” says Raghuveer Vinukollu, SVP and nat cat solutions lead at Munich Re US. In North America, flooding is the most frequent and costly natural disaster.

Almost all Americans have some form of flood exposure, yet the US still has a sizable flood insurance protection gap.

Closing this gap is just one step in improving America’s resilience to flooding and other climate-related disasters. In recent years, momentum has built in the private flood insurance market, presenting more flexible and affordable coverage options beyond the National Flood Insurance Program (NFIP).

As for hurricanes, in July, Elsa became the first hurricane to make landfall on US soil in 2021. Initial estimates from catastrophe modeling firm Karen Clark & Company suggest that privately insured wind and storm surge damages to onshore properties and automobiles could be close to $240 million – a relatively expensive start to what is predicted to be yet another overactive hurricane season.

According to Tom Larsen, principal for industry solutions at CoreLogic, the “shift toward more intense major hurricanes is consistent with current projected climate change effects and will likely accelerate the trend of insurers moving away from experience-based hurricane frequencies and toward model-predicted frequency models.”

Technology isn’t just impacting how insurers are dealing with hurricane risk – it also plays a growing role in the monitoring, management and prediction of all catastrophic events. Leading insurance carriers are turning to advanced data modeling tools to better understand the impact of climate change and socioeconomic developments on catastrophic weather risk so they can meet the needs of insureds today and develop innovative solutions for the future.

Bethan Moorcraft Senior editor Insurance Business America

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FLOOD

MEET THE EXPERTS Dr. Raghuveer Vinukollu SVP and nat cat solutions lead Munich Re US Dr. Raghuveer Vinukollu is a member of the strategic products team at Munich Re. He leads the nat cat solutions group, which focuses on developing innovative products designed to cover various natural catastrophe exposures. Prior to joining Munich Re, Vinukollu worked at Swiss Re, where he began as a natural hazard specialist. He later transitioned to the facultative programs unit as a property reinsurance underwriter.

Vinukollu has a PhD in land surface hydrology and is an advocate for climate adaptation and resilience.

Dr. Arindam Samanta Director of product management Verisk Dr. Arindam Samanta leads property underwriting product management in the areas of weather and natural hazards, including FireLine, Verisk’s wildfire risk management tool for the insurance industry, and a range of other property risk assessment tools related to hail, wind and lightning.

Samanta did his academic and research work at the Indian Institute of Technology, Caltech and Boston University. Marc Treacy, Verisk’s managing director of flood insurance, partnered with Samanta to provide his expertise on flooding.

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Tom Larsen Principal for industry solutions CoreLogic

Tom Larsen holds the position of principal for industry solutions at CoreLogic. In this role, Larsen is responsible for subject-matter expertise and thought leadership focused on insurance, hazard risk, climate change and catastrophe risk modeling. He has more than 30 years of experience in natural catastrophe modeling for insurers, reinsurers and governments. He has a master’s degree in structural mechanics from UC Berkeley and a bachelor’s degree in civil engineering from Stanford University.

Michael Young Vice president, product management RMS Michael Young is an expert in modeling catastrophic climate perils for the insurance and reinsurance industry. In the 17 years he’s spent at RMS, Young has led teams that have developed hurricane, convective storm and flood models. He is currently the product manager of the RMS North America wildfire models suite. Young has a bachelor’s degree in civil engineering from the University of Alberta and a master’s in wind engineering from Western University.

How has the US flood insurance market evolved in the past year?

Arindam Samanta: Multiple states have begun working on legislation to enable private insurers to enter their flood insurance markets. And with the removal of non-compete restrictions for writeyour-own insurers, some of these companies are now entering the private market as MGAs. The private market is getting more equipped to write flood confidently. Probabilistic models, such as Verisk’s, for the United States are constantly improving, and more powerful underwriting tools are emerging. Flood risk scores are now available at the individual address level.

The traditional source of coverage is also making strides. The National Flood Insurance Program is preparing to launch Risk Rating 2.0 in October, which is expected to begin using probabilistic modeling and actuarially sound rates to underwrite flood more like other lines of insurance.

Why is the flood protection gap still so significant, and what can insurers do to tackle this problem?

Raghuveer Vinukollu: In the past, homes and businesses in high-risk flood zones that have mortgages have been required to purchase flood insurance. In addition, the FEMA flood zone maps used to determine a mandatory purchase have traditionally focused on past events and not taken into consideration the increase in frequency and severity of flood events in the US. Many property owners are simply unaware of their actual risk potential or that most policies exclude flood coverage altogether.

One way the insurance industry can help in closing the flood protection gap is to work on increasing awareness through educating consumers about their real flood

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risk and the importance of flood insurance, as well as educating them on their options.

Insurers need to continue to develop innovative solutions and work with regulators on public policy to increase the availability and affordability of private flood insurance to better meet customer needs.

Another way insurers can help to close the gap is to collaborate with government entities to identify and implement man-made and nature-based mitigation efforts. By reducing the impacts created by

it’s covered is still relatively immature.

Entities are creating products to help consumers and residential property owners understand flood risk outside of traditional FEMA flood zones. Many consumers still see flood insurance only as a purchase that may be required by their mortgage lender, not as a form of risk transfer for a peril that could actually affect them.

Flood insurance also isn’t as readily available as other coverages. Most private flood is sold by MGAs and excess &

“Many consumers still see flood insurance only as a purchase that may be required by their mortgage lender, not as a form of risk transfer for a peril that could actually affect them” Dr. Arindam Samanta, Verisk extreme precipitation and flooding, while better protecting their residents, communities and insurers are working together to help reduce future risk and make insurance more affordable.

Arindam Samanta: The consumerlevel understanding of flood risk and how

surplus lines writers, which aren’t familiar or easily accessible to many consumers.

Only a few primary insurers are offering the coverage.

There has been talk in some quarters of expanding flood insurance requirements as a way to close the flood protection

gap. However, any move in this direction would likely raise discussion and potential debate about consumers’ personal choice to assume or transfer risk at their discretion.

How would you describe the strength of flood preparedness and resilience on a national and state scale? How can insurers, brokers and agents partner with key stakeholders to improve flood resilience?

Michael Young: Flooding is the most frequent and costly natural disaster in the US, and over 90% of natural disasters involve flooding from either storm surge, pluvial or fluvial sources.

Communities in coastal and inland areas have found themselves increasingly vulnerable to flooding from climate-changeinduced stressors. This includes sea level rise, the change in frequency and intensity of rainfall, and aging infrastructure previously built assuming backward-looking climate modeling. The compounding impact from these stressors exacerbates flood risk. Though complete flood prevention is not achievable in many communities, increased investment in mitigation tactics to withstand and minimize the impacts before, during and after a flood can improve community resilience.

As conditions differ depending on the region, there is no one-size-fits-all strategy to manage flood. The cost to mitigate risk plays an important role in planning and decision-making processes. With this context in mind, it’s critical for risk and insurance professionals to gain a more comprehensive understanding of the state of flood risk. The RMS view on flood risk can play an important role for stakeholders across the value chain, including insurers, reinsurers, brokers and agents, governments, mortgage lenders, financial services, and their customers.

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WILDFIRE The US has experienced several years of record-breaking wildfires.

How are insurers reacting to this increased exposure?

Tom Larsen: Since 2010, record-setting wildfires across multiple states have occurred more frequently than ever before in modern history. Naturally, an insurer might want to pull back and take a more measured or conservative approach to writing new policies. Instead, we’re commonly seeing a desire and need to continue expanding business and insure more properties.

I believe insurers are cautious, but at the same time, they are looking for ways to identify properties in and around high-risk areas that would fit into their portfolio without taking on a disproportionate amount of high risk. Insurers look to CoreLogic to help provide an accurate assessment of the wildfire threat on a parcel-by-parcel basis, as well as evaluate the aggregation of risk that can be concentrated in a specific geographic area.

The record-breaking fires have occurred across many of the western states. One of the most troubling aspects of some of these recent fires is they occurred in areas that have not burned in over 100 years and consumed vegetation not usually associated with intense or destructive wildfires. The accumulated effects of climate change appear to be enhancing the size and intensity of more fires than ever before.

Understandably, insurers are concerned with these trends. CoreLogic regularly represents these factors and the changing conditions in our analysis.

Arindam Samanta: Recent wildfire seasons have continued to illuminate how dynamic and variable the wildfire threat can be. For example, there were 10 million and 5.6 million acres burned in 2015 and 2016, respectively. [Last year] was particularly

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historic, with California, Oregon, Washington and Colorado all experiencing recordbreaking wildfire seasons – 2020 totals included 58,000 wildfires, which burned nearly 10.3 million acres in the United States, according to the National Oceanic and Atmospheric Administration [NOAA].

The rising long-term trajectory highlights the role of mitigation for property owners and the use of mitigation data for many insurers. At the property level, this can include maintaining defensible space between structures and surrounding

in proximity to a structure is the starting point for all analysis.

Terrain contributes to risk, since fires on level ground may display different burn patterns and characteristics than those occurring in rugged areas with steep slopes.

It can be quite difficult for firefighters to access fires in steeper, more remote areas, hindering their ability to combat those fires and thus increasing the risk to the property.

Wind is an unpredictable factor and is often responsible for both the size and intensity of a fire. In addition, wind is the

“The accumulated effects of climate change appear to be enhancing the size and intensity of more fires than ever before” Tom Larsen, CoreLogic combustibles, as well as hardening those structures through the choice of building materials and maintenance practices. This can include clearing gutters and excess fuels.

For local communities, national and regional organizations promote collective prevention, readiness and resilience. Data about where these multi-tiered efforts are in place can complement the wide range of insights insurers use to underwrite wildfire-exposed properties.

What are the key contributors to wildfire risk in the United States?

Tom Larsen: Vegetation is the number-one factor responsible for fueling wildfires. All other factors are secondary.

While all vegetation can burn, various species have different levels of flammability and degrees of intensity. It is necessary to differentiate between types of vegetation to effectively assess the wildfire threat. The type and amount of fuel

driving force behind devastating ember storms that create spot fires. These are commonly responsible for the ignition of structures located far away from the main fire. These properties, though located up to a mile from actual high-risk fuels, are still identified as having an increased threat from wildfire.

Long-term and severe drought conditions typically contribute to a more rapid increase of dead fuels. Dead vegetation that builds up on the ground accumulates over time as natural growth cycles occur. During drought conditions, the accumulation of these fuels tends to increase – leading to more available fuel that is easily ignited and in prime condition to burn.

Raghuveer Vinukollu: Escalating impacts from climate change are being felt the world over. The US has been heavily impacted by wildfires, more severely over the past four years. Longer dry seasons and higher temperatures, with climate change

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YOU + WEATHER EVENTS + VERISK This is your insurance ecosystem

Can you identify nature’s most active zones?

Weather-related perils have been increasing in frequency, severity, and variability-- heightening the urgency for you to understand your exposure. Grasp the risks you face by: ■ Managing wildfire risk at the address level ■ Identifying past hail damage—and the risk of more to come ■ Measuring flood risk across the contiguous United States

Get a comprehensive view of property risk™ with Verisk: www.verisk.com/catastrophe-risk

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nities participate in effective mitigation measures, wildfire risk may be reduced.

What are some crucial mitigation techniques for wildfires? What role should insurers and brokers play in mitigation?

Arindam Samanta: Mitigation spans a

as a contributing factor, are becoming more common, especially in California. This can fuel extreme wildfire events.

A complex interplay of man-made and natural factors has made wildfires a hazard that is difficult to quantify and, in many places, an increasingly common sight. The majority of fires near populated areas are caused by human activity, while a smaller portion start naturally as a result of lightning, for example. Alongside accidental fires, a significant number are also started deliberately.

Aside from the environmental aspects, urban sprawl is also playing a critical role in the changing loss potential. An increasing number of houses are being built in the transitional zones – i.e. the wildland-urban interface – between the outskirts of cities and nearby forested areas.

Arindam Samanta: Understanding wildfire exposure begins with a combination of risk components that drive the

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course of these events on the ground. The data and science on these are firmly established and widely available to help guide risk measurement and mitigation.

There are several baseline wildfire risk factors. Wildland vegetation in the form of grass, trees and dense brush provides fuel.

Terrain, specifically steep slopes, accelerates the spread and raises the intensity of wildfire. Road access – or the lack of it – to an area that’s burning can aid or impede fire suppression efforts. And wind patterns, such as the Santa Ana, Diablo and Sundowner winds in California, can carry embers over long distances.

These are paired with climate factors such as increasing droughts and rising temperatures. At the local level, property development and human encroachment on wildlands can also influence wildfire risk and put people and property in close proximity to exposed areas. On the flip side of this, when property owners and commu-

range of property- and community-level strategies and techniques. An important aspect of property-level mitigation is maintaining defensible space – minimizing combustible vegetation and other potential fuels close to structures. Two common benchmarks are clearances of 30 feet and 100 feet between a structure and nearby vegetation or other combustible material.

Communities, in cooperation with national or regional organizations that support mitigation, readiness and resilience, can also help educate and support property owners in wildfire prevention and safety. Verisk collaborates with these organizations, such as the National Fire Protection Association, and insurers can use this data to underscore the importance of these efforts by encouraging and recognizing community participation.

Insurers can play a role by promoting the importance of mitigation efforts to customers, agents and brokers, and by encouraging completion of mitigation measures. Brokers, as the point of contact with many customers, can have an important part in educating property owners about the risk and how to protect their homes.

Michael Young: Recent wildfires across the western US have created an insurance crisis across several states.

Homeowners are facing non-renewals and steep increases in insurance premium rates due to costly wildfires in 2017, 2018 and 2020. In turn, state departments of insurance and other state policymakers are being pressured to act.

Research by renowned organizations such as the Insurance Institute for Business & Home Safety [IBHS] and the

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National Institute of Standards and Technology [NIST] provide guidance on how to create more wildfire-resilient communities using a combination of locationspecific building science, as well as creating defensible spaces around homes and properties. However, until now, it was difficult for insurance companies to quantify the benefits of the mitigation and prove that there is material benefit.

RMS recently partnered with the NAIC’s Center for Insurance Policy Research and IBHS to explore the benefitcost of wildfire resilience strategies in the western US and produced a report that examined the applications of risk reduction measures to mitigate wildfire risk. The research demonstrated the possible relativities – it is possible to incentivize effective mitigation investments if insurance carriers are given the flexibility to offer appropriate differentials.

What wildfire insurance claims trends have you identified in the past year? Have these trends highlighted opportunities for improvement in the industry?

Arindam Samanta: The 2020 wildfire season was notable in its severity. In 2020, more than 58,000 wildfires burned nearly 10.3 million acres in the United States, according to NOAA. This is about 3.5 million more acres burned than the average of the past 10 years. In addition, California’s 2020 wildfire season broke records for acreage burned by a wide margin – five of the 10 largest fires ever recorded in the state occurred in 2020.

Already in 2021, more acres have burned in California than this time last year.

Verisk’s Property Claim Services made 17 wildfire catastrophe designations in 2020, which was the most active year it has recorded for wildfire frequency. These were tied to more than $11 billion of insured losses – nearly half of the total for the 38 PCS-designated wildfire catastrophes recorded over the past 10 years.

HURRICANES The US has experienced aboveaverage hurricane seasons for the past few years. Is this the new normal, and how are insurers reacting to this increased exposure?

Tom Larsen: Insurers must take a hard look at the most recent decade and the distribution of major hurricanes. The count of major landfalling hurricanes from 2011 to 2020 trended below the long-term decadal average of major hurricanes, but the intensity of major hurricanes in the last decade is higher than the long-term [average]. This shift toward more intense major hurricanes is consistent with current projected climate change effects and will likely accelerate the trend of insurers moving away from experience-based hurricane frequencies and toward modelpredicted frequency models.

In response to more severe hurricane seasons, insurers are consistently looking to improve the claims process for their policyholders. Against the headwinds of COVID-19 restrictions, this led to a focus on more self-service apps and a streamlining of processes. Those who have adopted these new tools have been rewarded, and we expect innovations in this area to continue growing rapidly.

The ‘new normal’ that insurers are confronting is a marketplace of competing to deliver a better insurance claim experience while also competing on price. This challenge is overcome with the adoption of more self-service, automation and direct communications between policyholders and the reconstruction contractors who repair their homes. The experience of the last few years has shown great progress toward the ideal goal of converting the quote-tobind process into a single transaction on a smartphone and a future where the time lag between first notice of loss and damage restoration is counted in hours, not days.

What are some critical risk mitigation techniques for hurricanes and the accompanying storm surge?

Raghuveer Vinukollu: According to a 2019 National Institute of Building Sciences report, it is estimated that every $1 invested in disaster mitigation saves $6 in future damages. The cost of damages

“It is estimated that every $1 invested in disaster mitigation saves $6 in future damages. The cost of damages and disruption far outweighs the costs of prevention” Dr. Raghuveer Vinukollu, Munich Re US and disruption far outweighs the costs of prevention. In some cases, materials that could significantly enhance a structure’s ability to withstand severe weather can be relatively inexpensive, particularly if done at the time of construction. Insurance companies, through the setting of riskbased rates and underwriting guidelines, have the opportunity to help educate property owners to local governments about making better choices around where and how to build resiliently.

Building codes and land-use planning are areas in which more work needs to be done nationally. Since building codes are a state, not federal, issue, a patchwork of

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HAIL Hail has been at the center of some of the costliest catastrophic weather events in recent years. Why is hail so challenging to deal with?

Arindam Samanta: The hail hazard is

inconsistent federal regulations exists that makes some areas far more vulnerable to natural disasters than others. Proper land-use planning will equally become more important in warmer climates, as most coastal regions might be exposed to more frequent extreme precipitation, while others will become uninhabitable due to sea level rise.

Additionally, as a society, we continue to build in increasingly vulnerable areas.

The CoreLogic 2021 Hurricane Report estimated that approximately 8 million homes in America could be at risk from storm surge, and more than 31 million homes have moderate or extreme risk exposure to hurricane winds. Deeper relationships between the insurance industry, private organizations and public entities can foster the policy changes necessary to ensure resilient communities.

Tom Larsen: Hurricanes arrive with three distinct damage-causing sub-perils: wind, surge and flooding. As a hurricane arrives onshore, the rotating winds push ocean water toward shore, elevating the sea level and imposing waves – the kinetic energy within a 6-foot wave can easily

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destroy most structures. Hurricanes arrive within a very large storm system that includes significant precipitation. This rainfall can bring flooding hundreds of miles from shore.

Successful mitigation begins with identifying the design effects from each peril – wind speed at the location, potential wave heights and floodwater elevations.

Designing homes for wind and waves involves strengthening the structure and mitigating the effects of wind-borne debris that could weaken the structure.

The primary technique for flood design is avoidance – elevating the structure or isolating the property from floods by using levees or other structures. Mitigation requires actions and investments from the policyholder and a migration toward granular, risk-based pricing by insurers.

Insurers need to provide a clear cost signal and help their policyholders better understand the benefits of performing mitigation. The performance of property risk mitigation actions is improving the resilience of our communities to the inevitable damage and surprises from natural catastrophes.

challenging for several reasons, but especially due to its variability and emerging scope. The past 10 years of data illustrate the extreme swings that are inherent in hail activity. According to Verisk estimates, 2018 was relatively quiet but was bracketed by above-average years in 2017 and 2019. However, the above-average 2019 season was followed by a lower 2020 season. Even in a relatively quiet season such as 2020, some storms may pass over densely populated areas and set the stage for future claims when the impact of those events finally emerges.

The unpredictable location and frequency of hail activity also makes it troublesome for many insurers to confront, especially after recent seasons such as 2020, where hail activity expanded outside of the traditional ‘Hail Alley’ states. But a strategy built on advanced technology and analytics can help. This is particularly important in regard to roof condition, as roofs are the part of the home most vulnerable to hail damage. With the right data, insurers can make more informed underwriting decisions and manage hail risk more effectively.

Michael Young: Hail contributes the most to insured losses from severe convective storms. It’s deceptive because it can seem purely attritional. In Europe, hailstorms in one fortnight alone in June 2021 caused insured losses of multiple billions of euros. The Calgary hailstorm of June 2020 was the fourth costliest natural disaster in Canada. The October 2010 hailstorm in Phoenix, Arizona, is a prime example of a very costly event – around $5 billion in economic loss – that occurred

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in a very unexpected location. It is clear that hail losses are not just the annual sum of many small events in the usual places.

Hail is covered on standard homeowner’s, commercial and auto policies, resulting in widespread exposure. In highhazard areas of the US, some carriers issue actual cash value policies for hail based on the roof age. Information on roof age, however, can be hard to obtain. Aging roofs are one reason losses from hail in the US are hyper-inflating; others include urban expansion, increased cost of labor and materials, and unscrupulous behavior among some roaming roof contractors.

Understanding hail hazard is a challenge. No single data source gives a complete picture. To overcome this, RMS combines observations, numerical models, and radar and satellite data to surmount their individual limitations and benefit

from the positive and complementary aspects of each data set. The stochastic module then simulates a vast number of hail events, ensuring the loss results

THE COSTLIEST PERILS IN THE US NATURAL CATASTROPHE LOSSES BY PERIL, 2020 Economic losses Severe convective storms

Insured losses Flooding

$49.3 billion

$5.3 billion

$35 billion

$2.2 billion

Tropical cyclones

Winter storms

$40 billion

$1.6 billion

$21.6 billion

$930 million

Wildfire, drought, heatwave

$22.9 billion $13.9 billion

Earthquakes

$152 million $58 million Source: Aon

account for what is possible, not just what has been observed before.

Is it possible to mitigate hail damage? How can property owners protect themselves?

Arindam Samanta: Mitigation in the traditional sense is difficult. But awareness can help property owners and insurers respond promptly to hail damage, especially to roofs, where the effects of hail can go undetected for months or years.

The undetected toll of hail can make a roof even more vulnerable to future damage and more prone to leaks.

According to Verisk estimates, one in three hail claims has the wrong date of loss.

Early detection can avoid claims emerging long after an event or the gradual escalation of unnoticed hail damage, which can even get passed on to an insurer that wasn’t covering the property when the storm hit.

A better understanding of both hail risk and the potential for pre-existing damage can be achieved through address-level hail exposure data, combined with roof data and analytic solutions.

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TECHNOLOGY

What role can technology play in monitoring, managing and predicting catastrophic events?

Tom Larsen: Technology has a strong and growing role in the monitoring, management and prediction of catastrophic events.

In the last 10 years, we’ve seen a rapid evolution from technology potential to functionality realized. Straight-through processing is realized today when hazard modeling and scoring data are seamlessly accessed in the underwriting process via integrated data. Underwriting is supported by analyzing hazard loss history, providing the underwriter with independent verifications of the last natural catastrophe loss to a structure.

Cloud-based risk modeling can be linked to real-time weather data to develop insights into what is really happening, guiding the claims department as it gauges the necessary event response level, the finance department as it assesses the liquidity needed to support policyholder

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repairs, and by contractors and material suppliers who recognize that with today’s technology, the recovery process from an event begins before the event is complete.

Technology is supporting insurers and all of the related parties in the natural catastrophe event recovery ecosystem.

Michael Young: Technology can play a critical role in enabling the analytics required to understand and manage risk from catastrophic events before, during and after they occur. Before an event can be predicted, effective underwriting, portfolio management and reinsurance purchasing are critical to mitigating potential losses.

Improvements in the availability and quality of data support these processes.

Furthermore, by leveraging cloud computing for such risk analytics, this data can be brought together in a unified manner, and insight into concentrations of exposure and tail risk can be generated more quickly through increased performance and simplified workflows.

Greater data availability is also increasing the ability to monitor and predict catastrophic events. Satellite data provides insight into wildfires and floods, and radar data highlights areas likely to be affected by damaging hail. Portable anemometers can also be deployed in advance of hurricanes to provide wind observations from the storm. Incorporating these data feeds provides valuable insights into hazards from such events.

Combined with processes to convert this data into representative footprints of the event, automatically made available alongside exposure data, insights into the potential impact of the event can be quickly generated. For example, forecasts of the wind and surge hazard from hurricanes can be visualized against exposure, and locations likely to be affected can be identified up to five days before landfall. Machine learning techniques are also playing an increasing role, from improving forecasting of the hurricane intensity to identifying damaged properties from aerial imagery.

Access to cloud computing pushes past limitations in scale and performance and provides insurers and reinsurers with deeper insights in shorter timeframes.

This allows them to make decisions based on holistic views of their risk, whereas they only had views on subsets of their data previously due to scale constraints.

Improved performance allows them to build and run more stress test scenarios in parallel to ensure access to a wide spectrum of results, which is critical when assessing an oncoming storm’s potential path.

How can insurance organizations make better use of predictive data to manage catastrophic weather risk?

Tom Larsen: Natural catastrophes present broad challenges to insurers, including a huge increase in the demand from policy-

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Re | imagine the meaning of resiliency For the most vulnerable communities, coming back from a natural catastrophe can be a near impossible task. It’s why Munich Re is a long-time leader in measuring and helping mitigate the impact of climate change. We believe innovative risk solutions and greater resiliency – now and in the future – should be for everyone. Let’s talk.

Learn how at munichreus.ly/closingthegap © 2021 Munich Reinsurance America, Inc. All rights reserved.

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holders to quickly repair and restore, and a financial need to fund these efforts.

Predictive science assists both. Predictive data can help insurers in the days before a catastrophe – the mobilization of claims and policyholder support is a staffing and logistics challenge. Predictive science is also used to triage claims, supporting a more timely and efficient processing of policyholder damage claims.

Perhaps even more importantly, predictive analytical data can be integrated into software apps for policyholders, providing a closer communication and alignment between the insurer and the insured at a time of greatest need.

Michael Young: Data forecasting the potential impact of catastrophic weather events can be leveraged in several ways to better manage the risk. By the time an event can be predicted, insurance organizations

are already responsible for any losses from risks they have underwritten. A number of steps can be taken to limit the number and cost of claims and ensure additional risk is not taken on.

By using predictive data to identify areas likely to be affected, underwriting moratoriums can be put in place to ensure new policies are not issued in places where claims from the event are likely. Additionally, existing policyholders can be warned of the threat so they can take steps to mitigate their risk, such as boarding up windows in advance of a hurricane.

Combining these activities can minimize the number of claims and average claims size from an event.

This data can also be used to better understand the likely volume and location of claims, providing the insight necessary to make more informed decisions around

the number of claims adjusters required to respond to the event and where they should be deployed. With claims adjusters in the right place at the right time, escalation of the costs required to resolve them can be avoided.

Lastly, forecast data can be used to estimate the range of potential losses from events, enabling insurance organizations to keep their stakeholders informed and to determine if additional reinsurance cover may be necessary to cap losses.

How can climate modeling technology help insurers and risk managers understand and react to climate change?

Raghuveer Vinukollu: The need for improved ways to assess natural catastrophe and climate-related risk, as well as develop a plan to manage and miti-

THE BIGGEST WEATHER DISASTERS OF 2020 BILLION-DOLLAR WEATHER AND CLIMATE DISASTERS IN THE US, 2020 SEVERE WEATHER

July 10-11

TORNADOES, STORMS AND FLOODING

January 10-12

HAILSTORMS AND SEVERE WEATHER

April 7-8

DERECHO

SEVERE WEATHER

August 10

February 5-7

DROUGHT/HEATWAVE

Summer/fall 2020

SEVERE WEATHER

May 20-23

SEVERE WEATHER

May 3-5

SEVERE WEATHER

WILDFIRES/ FIRESTORMS

March 27-28

Fall 2020

TORNADOES

HURRICANE ISAIAS

April 12-13

August 3-4

SEVERE WEATHER

April 21-23

TORNADOES AND SEVERE WEATHER

SEVERE WEATHER

April 27-30

HAILSTORMS

May 27

March 2-4

HURRICANE DELTA

HURRICANE SALLY

October 9-11

HURRICANE HANNA

July 25-26

September 15-17

HURRICANE LAURA

August 27-28

HURRICANE ZETA

October 28-29

TROPICAL STORM ETA

November 8-12

Source: NOAA

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gate that risk, has never been greater.

Evaluating this type of escalating risk exposure is critical to insurers in the US and around the globe, many of whom are struggling to manage their portfolios, grow their business and remain profitable. It is clear that new technology, tools and risk strategies are not just savvy moves – they are key to a resilient and sustainable future for insurers and their clients.

Today, taking a more 360-degree view of risk, and actively developing longer-term prevention strategies, is key. Historical data alone is no longer a sufficient predictor of emerging or potential risks. Risk managers, underwriters, actuaries and brokers all need to focus on examining more current, real-world data that is both immediately relevant as well as predictive.

ance, while the increasing frequency and severity of these catastrophes will affect the costs of financing the capital structure for an insurer in the future. Climate modeling technology integrated into catastrophe models can help insurers answer these key operational challenges, now and in the future.

Michael Young: Today, climate change modeling technology is designed to support pricing and underwriting decisions. It can also help with planning the evolution of insurance portfolios that may be impacted by climate change for both near and long term, as well as compliance with emerging regulatory and reporting requirements.

Over short time horizons, climate change risk models enable insurers and

“It is clear that new technology, tools and risk strategies are not just savvy moves – they are key to a resilient and sustainable future for insurers and their clients” Dr. Raghuveer Vinukollu, Munich Re US The Climate Change Edition of Munich Re’s Location Risk Intelligence, the modular software solution, supports our clients in analyzing and assessing the risks of future climate change. In contrast to Munich Re’s traditional Natural Hazards Edition, risk assessments in this new module are not calculated on the basis of past events, but on forecasts of future events that are expected to occur as a result of climate change.

Tom Larsen: Catastrophe risk modelers for insurance companies are integrating climate modeling technology into risk models to enable the assessment of physical risks to properties in future climate scenarios. Climate-changeinfluenced changes in the physical risk to properties will impact the cost of insur-

risk managers to stress test their current portfolios against the potential impacts of climate change thus far and determine whether adjustments to pricing or underwriting guidelines are needed to adapt to the evolving risk.

In the longer term, such solutions can be used to inform strategy decisions around which regions and lines of business to expand into and where to pull back, by gaining insights into perils and regions where risk is likely to increase most significantly because of climate change.

Climate change risk models also provide the tools necessary to comply with new and coming regulatory requirements, such as TCFD reporting and ESG initiatives, and to simplify the process of reporting against these. Additionally, they can assist in better

articulating the impact of climate change on the business to board members, investors and other key stakeholders.

How can insurers use innovation and technology to bolster the catastrophic claims process?

Raghuveer Vinukollu: Innovation and technology are being used throughout the insurance industry to expedite and streamline natural catastrophe claims processing.

Claims inspections have never been this easy to perform, as many of the remote inspection solutions are coming to market.

Imagine a policyholder calling in a claim – within minutes, the policyholder is connected to a customized app on their smartphone. The policyholder records the damage on the spot, enabling a claims adjuster to view the video or photos, as well as capture inspection report notes and even possibly settle a claim the same day.

Technology like Munich Re’s Remote Inspection Solution elevates the customer experience, expedites claims inspections and reduces overall claims costs by reducing travel time and expenses. It also allows insurers to maximize precious inspector resources.

Tom Larsen: Innovation and technology are being used to bolster the catastrophic claims process for insurers. The COVID-19 pandemic accelerated the adoption of self-service and simplified claims processing. The technology underneath those innovations includes geo­ coding, remote sensing (visual imagery and enhanced data sensing) applications for detection of change, and AI and ML techniques for interior image processing.

All of these technologies must be linked to the insurer workflow for a successful deployment, relying on standardized APIs into cloud-based technologies. Initial feedback from the progress in 2020 has been favorable, from both policyholders seeking faster restoration and from insurers seeking lower costs and better coordination with restoration contractors.

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EXECUTIVE INSIGHTS SERIES

NATURAL CATASTROPHES

PARAMETRICS Why is parametric insurance an important solution for dealing with catastrophic weather perils?

Raghuveer Vinukollu: When disaster strikes, homeowners and businesses often require immediate funds to meet urgent needs, even before insurance claims can be settled. This ‘liquidity gap’ can be supplemented by special insurance designed expressly for faster payouts: parametric insurance.

Parametric insurance pays out pre­determined sums based on a series of event thresholds. The triggers are agreed to in advance and are based on transparent and objective data sources like the US Geological Survey for earthquakes or the National Hurricane Center for hurricanes. For example, a parametric insurance policy might trigger if a Category 3 hurricane tracks within 30 miles of an insured’s location.

Because the thresholds for parametric insurance are agreed to in advance, these solutions are very transparent in terms of when claims will be paid. The key strengths of parametric solutions are the speed of payment, the speed of settlement and the objective nature of the product.

What types of losses are covered by parametric solutions that aren’t covered by traditional policies?

Raghuveer Vinukollu: Both traditional and parametric insurance solutions have their respective benefits.

Traditional insurance policies will typically focus mainly on actual physical damages to property, not taking into account the potentially extra expenses that homeowners and businesses will likely face.

Parametric insurance can be structured with pre-determined payments that are flexible. They do not come with contractual terms that dictate what type of losses

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“A major benefit for customers choosing a parametric product is that once a policy is triggered, the payout is then released, delivering much-needed funds” Michael Young, RMS these pre-determined payments can cover or reimburse. For example, before a hurricane strikes, a homeowner or a business owner might want to board up their property, secure their assets, buy extra supplies of food and water, and they might even want to evacuate their property. Traditional insurance does not normally provide reimbursement for these common mitigation expenses. If the hurricane ends up steering in a different direction, the money spent on those mitigation efforts would be an economic loss paid out of pocket.

Small businesses, even if their properties aren’t hit directly by the storm, could suffer economic losses caused by a reduc-

tion in business volume or increased operating expenses and transportation costs, but none of those losses would be covered by a traditional insurance policy because there was no damage to their property.

However, these are all losses that the parametric pre-determined payout could be applied to.

Even if insureds do suffer actual physical damage to their property, they still need to pay high out-of-pocket expenses, like the catastrophe deductible, which can range from 5% to 10% of the insured value in high-risk coastal zones, before their traditional insurance coverage kicks in.

Michael Young: Parametric solutions

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EXECUTIVE INSIGHTS SERIES

NATURAL CATASTROPHES

are regarded as complementary cover rather than a replacement for traditional indemnity insurance products. The major difference between indemnity and parametric is that an indemnity product would compensate the insured for the actual losses incurred, whereas a parametric product would pay out an agreed amount on the basis that a set of pre-agreed hazard-related parameters have been triggered. These triggers could include a flood gauge reaching a certain level or an earthquake striking an area above a specific magnitude.

A major benefit for customers choosing a parametric product is that once a policy is triggered, the payout is then released, delivering much-needed funds ready to be channeled into disaster recovery and rebuilding. This contrasts with traditional covers, which often pay out after a long claims adjustment period and sometimes fall short in covering all the costs associated with restoring a business.

Parametric solutions can be especially

useful when there is a lack of capacity or appetite from traditional insurance markets. For example, parametric solutions can be used to cover an insured’s exposure to high deductibles or to bridge the coverage gap against indirect losses – for example, business interruption where no physical damage has occurred.

How developed is the parametric marketplace? Are there parametric solutions for all catastrophic weather perils?

Raghuveer Vinukollu: Munich Re has over 20 years of experience with parametric products, which enables us to provide innovative parametric solutions that offer clear triggers and timely, flexible payouts following a covered triggering event. We can draw on our industry expertise and experience to help our clients initiate their parametric offerings.

In the US, we offer a white-label parametric endorsement, which we co-create and brand with our insurer partners.

THE RISE IN BILLION-DOLLAR DISASTERS ANNUAL NUMBER OF BILLION-DOLLAR DISASTERS IN THE US, 1980-2020 25

20

15

10

5

0

1980

1985

1990

1995

2000

2005

2010

2015

2020 Source: Climate.gov

16

Our partnership includes full-service implementation, IT integration, training, underwriting guidance, pricing and claim support, as well as talking to state departments of insurance and simply being an advisor for clients as they get comfortable with the product.

Currently, Munich Re offers hurricane and earthquake parametric solutions for individuals, businesses and public entities; however, there is potential to work with our clients to customize solutions that address additional catastrophic weather perils.

Michael Young: Parametric solutions are well-established and have been used to cover acute weather risks for more than two decades, especially in the catastrophe bond market and, more recently, in the corporate insurance space. The adoption of parametric risk transfer is certainly accelerating as new sources of granular data, advances in technology, and an increasing number of capacity providers and specialists look to underwrite risk on a parametric basis.

This increased demand sees parametric solutions edge closer to becoming mainstream, especially as the frequency and severity of climate-related weather events become more acute, unpredictable and, in some cases, uninsurable in the traditional markets. Parametric risk transfer is seen as an increasingly viable option for corporations to help build climate resilience with the reassurance that if an exceptional event occurs, a fast payout would lead to a quicker recovery.

Parametric solutions are available for many catastrophic weather perils.

Ultimately, if the hazard related to the event can be measured by an objective and consistent means, then there is a good possibility to design a risk transfer solution. Alongside a robust post-event process, protection buyers and sellers utilize the hazard module from wellestablished catastrophe risk models to set the price on risk transfer.

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Out-Model &

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And the list of driving forces is long – systemic risk, climate change, event volatility, the growing protection gap, cyberattacks, business interruptions, and new regulatory and financial expectations. Yet, despite these many challenges, new possibilities are emerging. With advanced technology, analytics, data, model science, and our unified risk platform, we’ve never been in a better place to manage the impacts of risk. We can be faster, more agile, and more resilient. So, whether you’re in need of better risk selection, improved underwriting profitability, accurate pricing, or diversified portfolios, turn to RMS. See how RMS helps customers outperform.

Visit: www.rms.com © 2021 Risk Management Solutions, Inc. All rights reserved.

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