The implications for insurers if a hurricane is a wind versus water event

The implications for insurers if a hurricane is a wind versus water event | Insurance Business

The implications for insurers if a hurricane is a wind versus water event

With hurricane season in the US about to take off, insurance experts would do well to look back on events from the past year and consider the implications of hurricanes that submerge communities versus ones that blow them away.

Hurricane Florence, which pummelled the Carolinas in September, was a particularly notable catastrophe, as was Hurricane Michael, though the flood and wind damage inflicted by these events landed on opposite ends of the spectrum.

“The flood damage from Florence caused more than 10 times as much loss as the damage from wind. But whereas wind damage was insured, 85% of the losses from flood were not, causing financial hardship for affected property owners,” said Shelly Yerkes, senior professional of product management at CoreLogic. “Soon thereafter, however, Hurricane Michael made landfall on the Florida Panhandle in an area with less development. Its cat 5 level winds devastated structures and surrounding forests, but the impact of flooding was low.”

Analysis from CoreLogic’s US Inland Flood model revealed that the correlation of flood to wind damage varies depending on storm severity and where the storm makes landfall, a finding that has compared well to real events, explained Yerkes.

“We’ve seen that along the gulf coast and Mid-Atlantic regions, the contribution of flooding is much higher relative to wind damage, as we saw with Harvey, Katrina, and Florence. Compare this to hurricanes that make landfall around Florida that tend to be drier storms that make headlines as wind events,” she told Insurance Business.

The correlation between flood and wind damage as a result of hurricanes is important for insurers to pay attention to because it can be a critical obstacle when a company is considering writing a flood endorsement.

“Atlantic Hurricanes are the source of the greatest catastrophe loss potential for many insurers in the United States. Wind insurance is the primary driver of these losses. In order to grow business and extend flood insurance to the many properties without NFIP protections, they will look to add flood endorsements to their insurance policies or offer separate flood policies,” said Yerkes. “This has the potential to increase their loss profile for a single hurricane event, and consequentially will require them to carry more capital or transfer more risk to the reinsurance market.”

Understanding the variability of flood to wind risk along the hurricane-exposed coastline in the US can then impact insurers’ capital allocation and reinsurance decisions. The challenge is that the correlation between hurricane wind and flood losses varies with landfall location and hurricane intensity and speed, though granular quantitative risk models for flood can help insurers assess this correlation across their unique portfolios, in turn providing them with the information they need to make better decisions when considering a flood endorsement.

As for whether insurers should consider buying more hurricane reinsurance when taking into account the events we've seen in recent years, Yerkes says that with the loss potential for hurricanes being carriers’ key catastrophic exposure, she expects that continued growth in flood insurance availability will trigger carriers to re-evaluate their reinsurance programs. After all, the catastrophic events from the past decade are pointing to a critical need for more flood insurance in the marketplace.

“Almost 60% of all FEMA disaster declarations in the past 10 years have included flooding associated with severe storms in addition to the major hurricane events. During this past decade, development has also accelerated in low lying metro areas across the country, and many properties outside of the 100-year flood zone are being damaged. Over 80% of these properties are uninsured for flood, pointing to a need in the market for viable insurance products,” Yerkes told Insurance Business. “The introduction of flood models like the CoreLogic model is triggering the expansion of the flood endorsement to more policyholders. This increase in flood insurance will inevitably lead to increased losses, especially from hurricanes and tropical storms.”

Read more: 2018 was another big year for catastrophes - CoreLogic

Nonetheless, the help that CoreLogic provides insurance companies goes far beyond catastrophe models.

“Before a company can determine its exposure to loss, they need to make sure they actually know the where and what of their exposure. CoreLogic has vast libraries of property data and analytic tools to ensure companies can enrich their property data and ensure with our structure footprint geocoding that it’s in the right spot,” said Yerkes. “With a peril like flood, a 50-foot error in locational accuracy can make a significant difference in the quality of the loss estimates. This is helpful at the point of underwriting to event response to portfolio management.”