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Insurers can play crucial role in resilience efforts


Every year provides opportunities for the global insurance industry and policyholders to learn from loss events. As we look back at 2016, by most measures an average year for catastrophe losses, there are some specific lessons for mitigating the consequences.

Swiss Re Ltd. estimates that natural catastrophes and man-made events in 2016 accounted for 10,000 deaths and at least $158 billion in economic losses, of which insured losses were $49 billion.

While total insured losses increased 33% from 2015, economic losses were a quite different story — rising 68% from the prior year. The 10-year average for insured disasters was $53 billion. 2016 showed a stark gap between insured and uninsured loss, as the costliest cat events tended to strike in areas where insurance penetration was low.

In the United States, the largest cat events of 2016 were Hurricane Matthew, severe weather that spawned a hailstorm in Texas, and flooding. Swiss Re estimates that Matthew caused at least $8 billion in economic losses and more than $4 billion in insured losses. The Texas hailstorm caused widespread damage to homes and businesses and generated $3 billion in insured losses.

Matthew caught many residents in the Southeastern United States by surprise. It was the first hurricane to reach Category 5 in the Atlantic basin since 2007. Although Matthew made landfall as a Category 1 hurricane, it caused massive rainfall and flooding far inland in the Carolinas. When catastrophes are fewer and farther between, people unfortunately tend to become complacent. As in investing, the past is no guarantee of future performance when it comes to where — and how hard — the wind blows.

Catastrophe frequency and severity ebb and flow, but it seems that a 1-in-100year event occurs almost annually. How can that be? The insurance industry does itself and the public no favors with this terminology. Actuaries express nonlife loss probabilities in terms of years.Translated, a 1-in-100-year event has a 1% chance of occurring. When does the 100-year period start and end, exactly? It's confusing to most people, particularly insurance buyers.

Loss mitigation

Insurance provides vital financial protection for natural disasters, but where the industry can offer an even greater service is through risk control and mitigation. The more people and businesses make use of insurance, the more the industry can bring its expertise in reducing the frequency and severity of losses.

The community of Flagler Beach along the Atlantic coast of Florida offers an interesting study in catastrophe risk mitigation. Matthew’s storm surge destroyed a 1.4-mile stretch of historic federal highway A1A, but coastal homes near sand dunes were largely spared. Sand dunes and beaches are natural defenses to storms and flooding, and they must be replenished. While some homeowners associations balk at the cost of rebuilding dunes annually, there is little argument that without such protection, the damage from windstorms would be far greater.

Mangrove trees and shrubs, incidentally, are another natural defense to flooding. Mangroves grow in the brackish waters of tropical and subtropical intertidal zones around the world and support complex coastal ecosystems. But mangroves and sand dunes cannot themselves solve catastrophe loss. A combination of greater insurance penetration and sensible local planning is needed in many areas of the world to protect people and property exposed to natural catastrophes.

Value at risk has increased, especially in coastal areas. AIR Worldwide, for example, estimated that in 2015, the total insured value on the U.S. East and Gulf coasts exposed to maximum storm surge was $17 trillion. That is a staggering amount. Likewise, the global population at risk has grown exponentially in the just the past few decades. Hundreds of millions of people now live in areas susceptible to sea-level rise.

Dealing with underinsurance is a significant global problem for governments, as the cost ultimately is borne by taxpayers. Insurers and reinsurers take on a large part of the risk from governments, but a majority of the exposure is essentially self-insured and unfunded. A 2012 analysis by Lloyd's shows that 17 countries with varying nonlife exposures are underinsured by $168 billion. Among them are countries such as Bangladesh, which faces the highest annual exposure to loss as a percentage of gross domestic product. Reinsurance intermediary Aon Benfield, analyzing cat loss data since 1980, found that 90% of uninsured catastrophes occur in the Asia-Pacific region, compared with 77% in Europe, the Middle East and Africa and 55% in the United States.

The global insurance industry and governments can do more to protect the most vulnerable. There is an opportunity for innovation, to explore new models and methods of delivering insurance as well as responding to claims.

Claims innovations

The industry should rethink its model for responding to catastrophe claims. Access to affected areas following a disaster is often difficult, yet the traditional model is “boots on the ground” when it comes to adjusting. That is simply not a recipe for rapid claims response.

Insurers can improve claim response by developing a new model. Technology is offering opportunities that a few years ago would have seemed to be science fiction. For example, drones, mobile apps, data capture and predictive modeling are now able pinpoint losses with greater speed and accuracy. Human judgment and contact are still necessary in insurance because it's a people business. But the industry can complement its “boots on the ground” strategy by using a trained network of contractors to evaluate property damage. This approach has been successfully used and implemented by a global claims company, and can be a force multiplier that removes steps in the process and accelerates claim resolution, making the customer experience better.

Catastrophic events can create complex and straightforward claims. Where there is no dispute, the industry should compensate policyholders quickly, using alternative payment methods if necessary. There is no question that the rapid flow of claim payments helps people, businesses and communities recover, which limits economic losses.

The customer’s experience during the “moment of truth” influences their opinions and behaviors toward the insurance industry. There is a relatively simple formula that the industry can apply in catastrophe-loss scenarios. Better perception of insurance plus more participation equal greater spread of risk and ability to protect people and property more effectively. That’s a win for all concerned.

Jeffrey T. Bowman is president and CEO of Arcarius Consultancy L.L.C. and chairman of the Board of Trustees of The Institutes. He was formerly president and global CEO of claims manager Crawford & Co. He can be reached at jeffreytbowman@gmail.com.