2004/2005 Hurricane Seasons Provided Unprecedented Claims Data

June 15, 2009

Cat Modelers and Insurers Applying Lessons Learned


Since Hurricane Katrina wreaked its damage in 2005, catastrophe modeling firms and the property and casualty insurance industry have learned more about the scientific and actuarial nature of hurricane risk, according to experts on a panel moderated by Louisiana Insurance Commissioner Jim Donelon at the Casualty Actuarial Society’s Spring Meeting in New Orleans.

John Rollins, vice president of AIR Worldwide Corp., said research on the impact of climate anomalies on hurricanes has influenced modeling advances. The 2004/2005 hurricanes provided unprecedented quantities of detailed claims data, Rollins said. He said that modeling firms review actual insurer storm claims data against modeled damage for the same locations and examine results by coverage, construction, and occupancy type.

For example, damage to pool enclosures, which are common in Florida and can cost between $10,000 to $50,000, accounted for about 15 percent to 20 percent of losses from these hurricanes. The average claim per unit of exposure was reported to be as much as 35 percent higher for homes with pool enclosures.

“We have to get a handle on what to charge for that because it’s the type of thing that might fly under the radar of a catastrophe modeler and the industry until after an event,” Rollins said.

A Stronger Louisiana Market

Louisiana’s property/casualty market has strengthened under the leadership of Commissioner Donelon and the policies he’s implemented, said John Forney, managing director for public finance at Raymond James & Associates Inc. The management team Donelon hired at the state-run property insurer of last resort, Louisiana Citizens Property Insurance Corp. has also been an asset, he added.

Donelon said the creation of Louisiana Citizens has worked exactly as it was designed and has put the state in a better position than other states with similar programs, such as Florida and Texas.

“Those states, though, like Louisiana, are working to solve their problems but are also looking to the federal government to create a responsible safety net similar to TRIA to provide financial assistance, if needed,” the commissioner added.

Addressing the hurricane peril in Louisiana in the post-Katrina landscape from a public policy standpoint, David Chernick, a consulting actuary for Milliman Inc., examined the capacity, availability and affordability of residential property insurance in the state.

“Since Katrina hit, the size and number of policies in the residual market is about the same and so obviously the work of the commissioner has paid off in keeping the policy count down,” he said. But the size of the exposure has doubled from $14.9 billion in December 2005 to $27 billion in April of this year, “and I think this is a phenomenon we’re going to see everywhere because the cost of rebuilding houses is going to go up every year.”

Chernick provided an overview of the Homeowners Defense Act of 2009, draft legislation that would create a national catastrophe fund, which among its provisions would offer catastrophe reinsurance to state catastrophe plans; encourage states to create state catastrophe funds; offer liquidity and catastrophic loans to state plans; and provide funding for mitigation and preparedness.

Applying the basic structure of a national and state catastrophe fund system to what is in place currently in Louisiana, Chernick showed that for a one-in-a-1,000 year event causing $16 billion in insured losses, primary insurers would pay out $6.9 billion, a Louisiana State Cat Fund would be responsible for $4.7 billion, a National Cat Fund would pickup $3.2 billion, and Louisiana Citizens would take care of the remaining $1.2 billion.

In contrast, under the current system primary insurers would pay out an estimated $9.5 billion, $4.1 billion would be from reinsurance/catastrophe bonds, and the remaining $2.4 billion would fall to the state-run Louisiana Citizens.

A national/state cat fund system would result in an average statewide savings in Louisiana of about 28 cents out of every dollar of homeowner insurance premium, he said.

This story is based on information from the Casualty Actuarial Society.

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Insurance Journal West June 15, 2009
June 15, 2009
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