Unmodeled disaster losses are a growing component of insurance claims: RMS

Natural catastrophes in 2021 not only broke insurance claim records, but also highlighted the rising cost of unmodeled features of disasters, which are altering the industry’s understanding of these risks, according to a report published by RMS.

“Secondary hazards” such as severe convective storms, flooding and wildfires are occurring with increasing frequency around the world and have contributed to a significant number of industry losses in recent years, the US-based modeling firm said. Newark, California, in his report. titled “Review of the catastrophic year 2021”.

Secondary hazards, which are generally not modeled to the same extent as primary hazards, are defined as small to medium sized events, or the secondary effects that follow a primary hazard, such as hurricane-induced flooding, storm surge, hail, tsunamis, and fire after an earthquake.

“[T]The complex and unmodeled characteristics of the events make loss more challenging than past events, not only for modelers but also for the insurance industry itself,” said Mohsen Rahnama, director of risk modeling at RMS, author of a chapter in the report. , titled “2021 Proves To Be Another Game Changer”.

He cited the examples in recent years of Typhoon Jebi in 2018 and Hurricane Irma in 2017, when insurers saw sharp spikes in loss development in the following months, “taking everyone by surprise”.

In addition, the report indicated that other unmodeled trends have gained prominence and increased the price for insurers, such as contingent business interruption, infrastructure damage, supply chain disruptions and increased demand.

Rahnama then turned to the examples of the Texas winter storm in February 2021 and the July floods in Western and Central Europe.

These events “particularly highlighted the importance of contingent business disruption and additional expenses caused by infrastructure damage, such as the failure of the Texas power grid and the destruction of German roads and bridges,” Rahnama explained.

“For the second year in a row, supply chain issues and high demand for housing triggered by COVID-19 have driven the amplification of post-event losses and increased economic demand beyond normal expectations,” he added. .

A separate chapter of the report, titled “Tropical Cyclone Ida Devastates Louisiana, Drenches Northeast,” noted that Hurricane Ida was a complex event “occurring amid the ongoing COVID-19 pandemic, rising costs construction costs, labor shortages, overlapping events and property undervaluation, all of which are expected to influence the total financial cost of the event.”

RMS said Hurricane Ida was one of the costliest U.S. landfalling hurricanes on record, with an insured price tag ranging from $30.3 billion to $42.5 billion. This cost includes wind and storm surge losses in the Gulf of Mexico and the effects of inland rain-induced flooding in the Gulf, Ohio Valley, Mid-Atlantic and Northeast regions.

“Reflects property damage and business interruption residential, commercial, automotive, industrial, infrastructure, cargo and marine, ship and other specialty lines of business,” the report said. “The estimate also includes factors to reflect the impacts of post-event loss amplification and unmodeled sources of loss.”

wood costs

RMS highlighted timber costs as another unexpected factor causing catastrophic losses.

In early 2021, high lumber prices were fueled by “a combination of low mortgage rates, sharp increases in housing starts, COVID-19 lockdown orders, and global supply chain disruptions,” according to the Hurricane Ida section of the report, which was written by James Cosgrove, Senior Modeler, RMS Event Response, and Jeff Waters, Senior Product Manager, RMS Product Management.

“At the peak, prices were five to seven times higher than normal. When Ida arrived, prices had dropped significantly, but were still higher than the long-term historical average. Steel, copper, fuel and other appliances also saw rising costs,” Cosgrove and Waters said. “The insurance industry’s tendency to undervalue many exposures and business books may also exacerbate the overall cost of repairs for this event, compounding rising construction costs.”

These problems exacerbated other unmodeled trends that have come to the fore in recent years, Rahnama said. “For example, our industry is well aware of the unique circumstances and building codes in Florida, such as the assignment of benefits and the ‘25% roof replacement rule’ that significantly increase the cost of claims.”

(An AOB is an agreement that transfers insurance claim benefits from a policy to a third party, which can inflate claims. The roof replacement rule states that if more than 25% of the roof is damaged by a hurricane, then the owner, in many cases, is entitled to a complete roof replacement under Florida building codes).

In their section addressing Hurricane Ida, Cosgrove and Waters said that trends in the labor market, such as high levels of unemployment in the construction sector, could lead to a rebound in AOB, which “could potentially drive up costs.” of a claim and subsequent loss adjustment. bills.”

“Many areas in Louisiana, including New Orleans, experienced extended power outages after the event as high winds downed power lines and damaged parts of the state’s power grid. Extended business interruption claims could result from extended power outages,” the report continued.

RMS noted that many of the Ida-affected areas on the Gulf Coast were still recovering from the 2020 storms (Hurricanes Laura, Delta, and Zeta) and approximately 35% of the claims filed for those storms had not been closed by the time. hit Ida.

“Properties that had not yet been prepared were more susceptible to further damage from Ida, particularly through rain infiltration or where tarps were poorly secured,” Cosgrove and Waters said in their commentary. “These open claims will make loss attribution and differentiation more complex and time consuming, which could lead to longer claims settlement periods.”

In addition, the pressure to settle claims quickly could lead to inflated claims frequency and severity, which RMS refers to as “claims inflation,” they explained.

In addition to Hurricane Ida, other record-breaking natural catastrophes in 2021 included the winter storms in Texas, which cost insurers an estimated $15 billion, and the July floods in western and central Europe, which RMS estimates will they will cost the industry €10 billion to €13.2 billion (US$11.5 billion to US$15.1 billion).

“These events follow in the footsteps of Hurricanes Harvey, Irma and Maria in 2017, Typhoon Jebi in 2018, the 2018 and 2020 Western US wildfires, and the hyperactive 2020 Atlantic hurricane season. last four years,” Rahnama said in the report chapter describing 2021 as a game changer.

Photo: Nathan Fabre checks out his home and boat destroyed by Hurricane Ida, Sunday, Sept. 5, 2021, in Lafitte, Louisiana. “We lost everything,” Fabre said of the destruction of his house. Photo credit: AP Photo/John Locher.

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