RMS: Storm Surge Risk Greater Than Hurricane Wind

As we approach the peak of hurricane season, catastrophe modeler RMS has warned that storm surge poses a greater risk than hurricane wind.

RMS says its updated North American hurricane model shows there is a 20 percent chance that storm surge loss will be greater than wind loss for any U.S. hurricane that makes landfall. And for the northeast coast of the U.S. the risk is even higher.

Dr. Claire Souch, vice president, model solutions at RMS says:

Our model shows there is a 20 percent chance that storm surge loss will be greater than wind loss for any U.S. hurricane that makes landfall, which rises to almost 40 percent along the northeast coast of the United States – this is a risk the market can no longer afford to ignore.”

RMS’ updated North Atlantic hurricane model suite includes the ability to fully quantify the risk from catastrophic hurricane-driven storm surge.

An earlier paper by RMS on Superstorm Sandy made the point that storm surge loss can drive more insurance loss than hurricane wind.

In the paper RMS noted that while Sandy was not even classified as a hurricane at landfall, it caused a Category 2 storm surge in New York City:

This is not the first time that storm surge has had a dominant effect. It was responsible for more than half of the total loss from 2005’s Hurricane Katrina, which was a Category 3 storm at landfall, but had a Category 5 equivalent storm surge.”

Recent analysis by CoreLogic estimates that more than 4.2 million U.S. residential properties are exposed to storm-surge risk valued at roughly $1.1 trillion, with more than $658 billion of that risk concentrated in 10 major metro areas.

According to I.I.I. facts and stats on flood insurance, Hurricane Sandy was the second costliest U.S. flood, based on National Flood Insurance Program (NFIP) payouts as of July 12, 2013.

Disparity Between Economic and Insured Loss Widens

Around 24 percent of global economic losses due to natural catastrophes during the first half of 2013 were covered by insurance, slightly below the 10-year (2003-2012) average of 28 percent, according to Aon Benfield Impact Forecasting.

In its 1H 2013 Global Natural Disaster Analysis, Aon Benfield says the larger disparity between the economic and insured loss is due to multiple significant catastrophe events occurring in areas where insurance penetration or specific peril coverage remained low.

The analysis shows that economic losses from global natural disasters during the first half of 2013 totaled $85 billion – around 15 percent lower than the 10-year average of $100 billion. Insured losses for the period reached $20 billion – some 20 percent below the 10-year average of $25 billion.

Roughly 50 percent of the insured losses resulting from natural disaster events were recorded in the United States, down from 83 percent in the first half of 2012.

In order of size the five largest economic loss events in the first half of 2013 were: the Central Europe floods during May/June ($22 billion); the China earthquake on April 20 ($14 billion); the Brazil drought ($8.3 billion); the U.S. severe weather outbreak from May 18-22 ($4.5 billion); and the China drought ($4.2 billion).

Meanwhile, the first half of 2013 comprised seven billion-dollar insured loss events, of which five were in the U.S.: the Central Europe floods during May/June (USD5.3bn); the U.S. severe weather outbreak of May 18-22 (USD2.5bn); the U.S. severe weather outbreak of March 18-20 (USD1.25bn); the U.S. severe weather outbreak of May 26-June 2 (USD1.20bn); the Australia floods during January (USD1.04bn); the Canada floods during June (USD1.0 billion); and a U.S. winter storm in early April (USD1.0bn).

*By the way, the latest edition of Cavalcade of Risk, a round-up of risk-related posts from around the blogosphere, is now live over at Insurance Coverage Law in Massachussetts. It includes a link to our recent post New York MTA in Storm Surge Catastrophe Bond First.

Terrorism Risk and Insurers

Ratings agency Fitch has warned that failure to renew the federally backed Terrorism Risk Insurance Program could have a significant impact on the availability and pricing of workers compensation and commercial property insurance coverage.

Insurer credit ratings and the commercial mortgage backed securities (CMBS) market would also be affected.

The report comes as at least 19 U.S. embassies and consulates in the Middle East and North Africa remain closed through the week after the State Department issued aglobal travel alert to U.S. citizens due to potential terrorist threats.

Fitch notes that workers compensation insurers could be particularly vulnerable to large losses if an extreme terrorist event takes place without the federal terrorism reinsurance program in place:

Recognition of this vulnerability may lead to a withdrawal of insurer’s underwriting capacity from the workers’ compensation market, particularly in industries and geographic areas with greater perceived risk of terrorism-related losses. Reduced workers’ compensation coverage availability would generate broader economic consequences for employers.”

Another major line of business that is highly sensitive to changes in the terrorism risk insurance program is commercial property insurance.

Fitch says withdrawal of the federal backstop without readily available substitute coverage would likely move commercial property insurers to exclude terrorism from property coverage.

Fitch notes that demand for private market terrorism insurance protection will inevitably increase and premium rates will significantly rise if the terrorism risk insurance program is not extended beyond its December 31, 2014 expiration, or coverage is materially reduced.

The private market is unlikely to duplicate the coverage limits available under the current federal program if renewal is unsuccessful, Fitch says.

PC360 has more on this story.

Typhoon Haiyan: The Insurance Perspective

Amid the pictures and stories of destruction from Typhoon Haiyan come some facts that put the damage from this storm in perspective, at least in insurance terms.

Typhoon Haiyan hit the central Philippines as an extreme Category 5 storm, with winds of 195 miles per hour as well as a massive storm surge on November 8. It then traveled across the South China Sea and made landfall on the north Vietnam coast as a Category 1 storm with 75 mile per hour winds on November 10.

Latest media reports put the death toll in the city of Tacloban alone at more than 10,000. While this figure seems high, the Capital Weather Gang blog notes that even if the death toll estimate holds up Haiyan would rank outside the top 35 deadliest tropical cyclones on record.

For comparison, the most deadly tropical cyclone on record was the Great Bhola Cyclone that claimed 300,000-500,000 lives in Bangladesh in November 1970.

According to Swiss Re sigma statistics, Haiyan may also fall outside the top 25 worst catastrophes in terms of victims (1970-2012).

Insurance industry experts predict that while the economic impact of Typhoon Haiyan will be significant, insured losses are likely to be low.

AIR Worldwide reports that the economic cost of the typhoon is expected to be the highest from a natural disaster in the Philippines’ history, although only a small portion of it is expected to be insured.

Officials suggest more than two million families (nearly 10 million people) have been affected by Haiyan in the Philippines, with more than 650,000 people displaced, AIR Worldwide adds.

Dr. Robert Hartwig, president of the Insurance Information Institute (I.I.I.) notes that the Philippines is a very small market for property/casualty insurance, with premiums written in 2012 of just $1.23 billion. On a per capita basis, this works out to just $12.70, compared with $1,223.90 in the United States.

Another reason why insured losses may be nominal, Dr. Hartwig says, is that the storm did not make a direct hit on Manila, the capital and largest city in the Philippines.

The I.I.I. reports that prior to Haiyan, the strongest storm to hit this region was Super Typhoon Megi in October 2010, which impacted the Luzon region. Insured losses for that storm were estimated at less than $150 million.

Check out this satellite image of Haiyan, as it moved over the central Philippines November 8, courtesy of NASA:

Life Insurance Retained Asset Accounts: A Perspective

We take a break from our vacation to bring you our first ever post on a life insurance topic. I.I.I. senior vice president and chief economist Dr. Steven Weisbart offers an insightful perspective on an established life insurance industry practice that is coming under fire.

A life insurance industry practice that has served beneficiaries well for a quarter century and has generated few if any complaints to state insurance departments came under withering fire last week via an article published online and scheduled to appear in the September issue of Bloomberg Markets magazine. The article focused on how the industry practice affected the beneficiary of a $400,000 life insurance policy – the mother of an army sergeant who died in Afghanistan while saving the lives of three others.

Seemingly within minutes of the article’s appearance, the acting under secretary for benefits at the U.S. Department of Veterans Affairs, Michael Walcoff, announced an investigation, and New York Attorney General (and candidate for New York Governor) Andrew Cuomo subpoenaed a half dozen life insurers as part of another investigation. A few days later, U.S. Representative Debbie Halvorson (D-IL) introduced a bill that would set new rules for life insurers using this practice.

What practice caused this furor? In the absence of any other selected settlement option, life insurers place death benefits in the equivalent of an interest-paying checking account. Beneficiaries get checks with which to withdraw/spend the money, which stays in the life insurer’s general account until it’s withdrawn. Materials provided to beneficiaries make clear that the account is not FDIC-insured and periodically report on interest credited and the remaining balance.

So what’s wrong with this? According to the Bloomberg article, virtually everything. The article suggests the practice cheats the families of those who die, stealing money from the families of our fallen servicemen. This unregulated quasi-banking system operated by insurers has none of the protections of the actual banking system, the article reports. Next, life insurers are accused of not disclosing that the funds aren’t FDIC-insured, so beneficiaries are misled into thinking the funds are in an FDIC-insured bank. The industry does this to hold onto death benefits that they’re not entitled to. The article notes that life insurers earn interest on the funds at their corporate rate yet credit uncompetitive rates on death benefit balances, resulting in secret profits for insurers. And so on.

The article is such a one-sided diatribe that it’s hard to know where to start. It treats an FDIC-insured bank account as safer for death benefits than the general account of a life insurer, ignoring the state guaranty laws that insure death benefits for $300,000 to $500,000, depending on the state (vs. FDIC’s $250,000 limit, which was $100,000 at the time the death of the army sergeant occurred). It ignores the bank failure rate of the past few years vs. the superior rate of almost no life insurer failures. It says life insurers shouldn’t earn a higher rate on the funds and credit a lower rate, but says the money should go into a bank account (where it ignores the fact that the bank would do the same thing). It says the insurer should send the beneficiary a check for the entire amount instead of holding onto the money, ignoring the likelihood, based on long insurer experience, that when insurers did that the checks often either went uncashed for long periods of time or were spent/invested unwisely and effectively lost. This practice, at least, credits interest uninterruptedly at a rate that is comparable to accounts with instant liquidity.”

Regulatory Focus on Use of Retained Asset Accounts

The use of retained asset accounts by some life insurers was a key topic of debate at a quarterly meeting of the National Association of Insurance Commissioners (NAIC) in Seattle yesterday.

The NAIC recently created a new working group to review the use of retained asset accounts by insurers and to study whether appropriate consumer protections are in place.

It has also issued a consumer alert on retained asset accounts explaining what consumers need to know about life insurance benefit payment options.

The increased regulatory scrutiny follows a Bloomberg markets magazine article that focused on how the industry practice affected the beneficiary of a $400,000 life insurance policy – the mother of an army sergeant killed in Afghanistan.

A weekend column in the Wall Street Journal by Leslie Scism and Erik Holm poses the question: are life insurers playing fair?

In a Q&A format, the article explains how retained asset accounts work and attempts to sort out whether beneficiaries understand their payout options when an insured person dies.

I.I.I. chief economist and senior vice president Dr. Steven Weisbart recently noted that the use of retained asset accounts is a life insurance industry practice that has served beneficiaries well for a quarter century and has generated few if any complaints to state insurance departments.

Women and Life Insurance

March is Women’s History Month, an important time to empower women about their finances, and one area women underestimate their contribution to their families’ economic well-being is by lacking sufficient life insurance, says the Insurance Information Institute (I.I.I.).

The I.I.I. raises an important point. A national poll by wholesaleinsurance.net found that 43 percent of adult women have no life insurance and among those that are insured, many are severely underinsured, carrying just one-fourth of the amount that would likely be needed by their life insurance policies’ beneficiaries.

Indeed, women who are a family’s primary breadwinner carry 31 percent less life insurance than their male counterparts, even as a growing number of women earn as much, if not more, than their husbands, says the I.I.I.

Loretta Worters, vice president with the I.I.I., notes:

Ironically, 100 years ago women weren’t even able to buy life insurance. Today, women can protect their finances, but they aren’t buying the coverage or, if they are, it isn’t enough.”

This leads us to wonder why more women don’t buy adequate life insurance.

Metlife’s 2012 Protecting a Diverse Workforce report offers some interesting perspective on this issue. Its findings confirm that women are less insured with only twice their income in life insurance coverage, compared to men, who are covered for nearly three times their earnings.

However, the tendency for women to be underinsured is not due to a lack of awareness about life insurance. Metlife reported that 50 percent of women who earn $50,000 or more in income believe they don’t have as much coverage as they need, versus 39 percent of men.

Instead, the report found that more women than men find the process of choosing the right life insurance product to be complex. Some 67 percent of women believe that selecting the right life insurance product is a complicated process, compared with 59 percent of men.

MetLife noted that this belief also extends to selecting the right amount of coverage, where some 59 percent of women feel it can be a complicated process, compared to 50 percent of men.

Another key takeaway from the MetLife study is a difference in the perceived purpose of life insurance among men and women.

Not only do men place a higher value on insuring their income and protecting their financial security than women, but about half of women view life insurance primarily for burial and final expenses, compared to 40 percent of men.

As MetLife says:

This presents the opportunity to educate and reinforce the income protection role of this product, especially with women.”