Braving the elements: Manage rising peril risk with science
This article examines the overall importance of data and analytics in navigating natural catastrophe risk.
Natural catastrophe claims are on an uneven but upward path for U.S. property& casualty insurers. The average was $100 billion from 2017 through 2021, up from less than $50 billion in the previous five-year period. Heightened awareness of climate change might suggest that our warming planet is the leading cause, but closer analysis points to a more nuanced perspective:
- Comparing any two five-year periods can give a false impression of longer-term trends because of extreme variability in natural catastrophe experience. Verisk’s modeling suggests it’s not rare for average losses to exceed $100 billion in any five-year span.
- Climate change indeed affects multiple atmospheric perils in various ways, from precipitation patterns in wildfire-prone areas to the effects of ocean temperatures on hurricane activity.
- Legal and regulatory trends, such as increasingly costly claims litigation and broader coverage requirements, are adding a man-made factor to rising catastrophe claims.
For insurers and reinsurers, the way forward through these complex challenges is preparedness. This article, the first in a series, examines the overall importance of data and analytics in navigating natural catastrophe risk. Articles to follow will look more deeply into three perils: Severe thunderstorms and hail, wildfire, and hurricanes.
Data matters. But what kind?
Sophisticated sources of data and analytics can yield competitive advantages, from long-term planning and positioning to day-to-day decision-making. Insurers and reinsurers depend on current, actionable data up front to help guide underwriting and rating and keep policyholders appropriately protected.
Component-based replacement costs for materials and labor — spanning personal and commercial properties — are an important part of the data insurers need to maintain proper pricing and insurance-to-value. In 2022, as supply-chain issues and strong demand continued, combined costs for materials increased 8.1%, according to Verisk data — a strong surge following a 5.7% rise in 2021. Lumber prices remained the most volatile, reaching an increase of 41.8% in April 2022 and then falling by April 2023 to a 37.3% decrease. But as lumber prices plunged, other materials, such as interior trim, roofing, drywall, and paint increased significantly, stabilizing labor and materials overall despite lumber’s large drop.
Specific factors raise the pressure on costs after a natural catastrophe:
- Wood framing, which makes up much of a residential structure, can jump sharply in line with lumber costs.
- Lumber-derived finishes, such as interior trim, require specialized manufacturing skills and can be sensitive to labor costs.
- Roofing materials, which can be most subject to condition issues, may be affected by underlying costs of crude oil (asphalt shingles) and lumber (wooden shakes)
- Labor supply may struggle to keep up when a severe event spikes local demand.
When construction prices are unsettled, monthly pricing matters for keeping pace with current market realities. Frequent updates can flatten the curve of potential spikes and boost confidence in policy quotes for property owners.
Pursuing value for your inspection dollar
Property inspections are critical throughout the life of a policy, but they’re costly and time-consuming when done on site. So typically, only a fraction of an insurer’s risks get in-person visits during any given year. That may not suffice in heavily exposed regions or where a catastrophe has recently occurred.
Digital inspection and verification tools, though, can help keep costs in check while providing a glimpse into property conditions both before and after an event:
- For thunderstorm or hail events, virtual surveys can flag potential hazards such as clogged gutters, overhanging tree limbs, or vehicles exposed to damage.
- In wildfire management, insurers can remotely confirm mitigation steps such as defensible space and structure hardening.
- For hurricanes and wind events, digital tools can verify structure hardening efforts, home condition, and property hazards, including roof condition.
- After an event, virtual tools can verify damage and subsequent repairs, help customers to digitally document losses, and enable collaboration between policyholders and insurers.
A nuanced view of cause and effect
A common thread in all these perils is the effect of climate change, but it’s difficult to separate this factor from inherent climate variability with high confidence. Wrong assumptions could lead to misguided strategy. Blending the physical risk of climate change into practical, numerical risk analytics demands deep scientific insight that can support extensive risk modeling.
Differing seasonal weather effects are one example of how what seems obvious may be more nuanced on closer examination. Summers are quickly getting hotter across the continental regions of the Northern Hemisphere. But winters have warmed more gradually, even cooling in some regions, and widespread severe winter weather still occurs. Research into satellite records suggests an explanation: Increasing fall and winter disruptions to the polar vortex — low-pressure areas near each of the Earth’s poles that can expand and push frigid air into more temperate latitudes — contribute to more severe winter weather.
Insights such as this underpin sophisticated sources of data, which can help (re)insurers gain a competitive edge in the market. Proprietary algorithms, scientifically derived weather and climate models, and the complementary expertise of specialized partners could be the difference maker that helps a (re)insurer navigate a turbulent and changing climate.
Dr. Arindam Samanta (Arindam.Samanta@verisk.com) leads property underwriting product management efforts 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. Additionally, he supports ISO’s personal lines product innovation pipeline and agenda. Dr. Samanta did his academic and research work at the Indian Institute of Technology (IIT), Caltech, and Boston University.
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