Property and Casualty Insurers: How are You Updating Your Catastrophic Event Modeling?
By: Andy Damrow
Texas counties freeze under the strain of cold weather rarely seen in the area. Wildfires break out in southern California. A derecho strikes Iowa. Hurricanes pound Florida, Puerto Rico and the Caribbean. These devastating events have all come over a few years.
In an era of climate change and resulting instability, catastrophic weather events (CATs) are becoming a common occurrence, striking multiple times a year, sometimes in unexpected areas or out of season.
Extreme weather events have a horrific human cost, taking lives and inflicting severe injuries. Those who survive often have to deal with severe damage to their property. The companies helping them rebuild, property and casualty insurers, have a firsthand view of the devastation, and are facing challenging conditions of their own.
As a property and casualty insurer in an age of more frequent and severe CATs, how can you adjust your planning strategies to cope with the new and ever-evolving norms facing your clients? The trend toward devastating weather events isn't abating, so it's essential that you answer this question.
How Have Catastrophic Event Patterns Changed Recently?
Each time a massive storm makes landfall or a tornado cuts a swath of destruction through a neighborhood, there is the potential for severe loss of life and property damage. People displaced from their homes by CATs have to scramble to rebuild while still at risk of suffering from another severe event.
Claims also come from companies' business interruption insurance (BII) policies, which take effect when those organizations are forced to shut down their operations. In the wake of an extra-severe storm, these interruptions can stretch for weeks or months, representing extra expenses for property and casualty insurers.
Unfortunately, in an era of climate damage, these problems have appeared with increasing regularity. Some of the most damaging hurricanes, cyclones and fires in history, among other CATs, have taken place in just the past few years.
Environmental data has shown the connection between a changing climate and weather patterns. As average temperatures increase, the balance of weather patterns has been upset. Natural disasters take many forms, and several of these incident types have become concerningly common.
The Environmental Protection Agency (EPA) can offer a few highlights on ever-escalating risks:
With temperatures rising across the Southwest (every part of the region was hotter between 2000-2020 than between 1895 and 2020), residents have experienced higher rates of drought, which can bring wildfires.
Higher ocean temperatures have U.S. government climate scientists predicting increasingly intense cyclones over the course of the 21st century. While storm power has fluctuated throughout the years, it's been rising since 1995.
Warmer oceans also affect the rate and intensity of heavy precipitation. Increasingly severe precipitation events like downpours and blizzards aren't just damaging on their own; they're also contributors to inland flooding risk as rivers overflow their banks.
With these and other severe weather events seeing increased risk, and the underlying pressures of climate change ongoing, there's a pressing need to predict where and when they might strike. While great preparation can't stop CATs from striking, it can mitigate the damage and help homeowners, responders and insurers alike formulate their responses.
What's the Impact of Increased CAT Activity on Insurers?
The insurance industry is straining under the burden of covering an overwhelming number of damaging weather events. If you operate in the property and casualty field, you've likely experienced the painful combination of underwriting losses and low income spurred by numerous factors, the rise of CATs among them.
A survey by the American Property Casualty Insurance Association (APCIA) and Verisk put the issue in stark terms: The net underwriting loss for insurers was $26.9 billion in 2022. Just the previous year, the loss was only $3.8 billion. The industry hadn't suffered such a severe loss in that area for over 10 years.
In a statement released alongside the survey results, Verisk's Neil Spector named two major factors that made 2022 so tough in the property space. On one side, inflation was constraining spending power. On the other hand, Hurricane Ian caused a tremendous amount of damage, acting as a stand-in for the storms that have battered the country in recent years.
A City A.M. report based on Swiss Re research puts the Hurricane Ian damage in context as the latest in a line of deadly and damaging storms. There have only been five years since 1970 in which insurers have suffered over $100 billion in losses based on CATs, and three of those have come recently — 2017, 2021 and 2022.
The accumulated damage of Hurricane Ian and multiple winter storms made 2022 an especially painful year in terms of natural disasters, but with the impact of climate change raising risk factors, insurers can't write it off as a fluke. Preparedness for similarly damaging years should be an important priority.
Capacity in the insurance space is constrained today, and reinsurance is now harder and more expensive to purchase. McKinsey research found there is a limited amount of capital in traditional and alternative markets. Responses to these may include risk factor education and warnings — being proactive to keep the damage liability from reaching such elevated levels.
While insurers aren't the ones on the frontlines of disaster response, they do have to account for the increasing risks they're facing to make sure they'll be able to provide adequate service in the face of devastating weather events.
How Can Insurance Companies Plan More Effectively for CATs?
In unprecedented times of risk and damages, insurers will have to change the way they think about predictions to stay one step ahead of the next catastrophe. This means discarding some long-held assumptions and creating new models.
Contributing to The Business Reporter, AdvantageGo's Simon Fagg pointed out a few priorities for insurers in the age of climate change and the resulting damage. Perhaps most prominently, future predictions should no longer be fully based on past performance.
Using the 10-20 year weather history of an era as the measuring stick to make predictions is a flawed concept when climate change has altered the likelihood of those weather patterns repeating. There is a need to diversify the data sources and models that go into planning, rather than assuming damage will move along a predictable path.
Fortunately for insurers, the current business environment is more data-rich than it has been in the past, providing new content that can help companies build more sophisticated predictive models. Fagg pointed to real-time monitoring technology and Internet of Things (IoT) sensors as new content sources that could help insurers rewrite their predictions.
The assumptions that make up insurers' plans are based on variables including:
Quarter-by-quarter plans for the number and severity of CATs.
Assumptions about reinsurance coverage, including the difference between gross and net losses.
Projections about how much retention the insurer plans on holding.
All of these have to shift away from the long-form models that have defined thinking thus far to a far more reactive and present-focused model. Using planning software is the ideal way to make such a mindset change, as the technology is designed to support advanced modeling.
What Does CAT Planning Look Like with Anaplan?
Using specialized technology tools such as Anaplan is a way for companies to take that next step and become more intentional and data-driven in their projections and scenario modeling. In today's property and casualty insurance market, this analytical technology can play a pivotal role in staying one step ahead of accelerating losses.
Models built into planning software can be both more in-depth and more accessible than those created with non-specialized tools. Both sides of that equation are important — the high degree of detail allows for more precise results, while the ease of interpretation helps executives act on their findings.
Using technology like Anaplan allows insurers to create the types of models that can have a significant effect on their planning, such as multiple-scenario comparisons. Rather than being limited to one set of predictions and assumptions, the company can make contingency plans, reflecting the high-risk environment presented by today's extreme weather patterns.
Since Anaplan connects directly to a range of data types and sources, it can enable the in-depth planning that is necessary as insurers move away from a model heavily informed by historical data. Faced with choices regarding their plans, insurers can simulate each option and move forward with a loss-mitigation strategy that makes sense for them.
How Can You Get Started with Anaplan?
If you're ready to get started with Anaplan, it pays to get the setup process right. While the solution is user-friendly, there is an art to configuring the software for the exact needs and risks facing your organization. Using this method, you can hit the ground running and start making actionable projections faster.
Working with the experts at Allitix is the quickest, easiest way to get started predicting and mitigating your CAT risk with Anaplan. As an Anaplan Gold Partner, Allitix is well-versed in the process of setting up Anaplan implementations that suit the exact, specific needs of companies across industries.
Solving your most pressing analytical problems with Anaplan is a high-priority undertaking, and it's best tackled with expert assistance. Reach out to discuss best practices and your options.