Insurance Isn’t Enough

According to the National Oceanic and Atmospheric Administration (NOAA), the U.S. averaged about six multi-billion-dollar weather-related disasters annually during the period 2000-2009. In 2010-2019, that number doubled to about 12 per year. Then, from 2020-2024, we experienced another doubling to about 23 per year. And not only frequency has increased, but so has severity.

When we think of weather catastrophes, usually hurricanes are the first kind of phenomena that comes to mind, but the number of hurricanes during this period has not increased enough to explain the growth in losses. Major insurance loss drivers are increasingly tied to severe convective storms that include hail and often straight-line or tornadic wind damage. Severity has also been impacted by isolated wildfires in expanding urban areas.

These increased losses (along with reinsurance rate increases) have resulted in increases in property insurance rates significantly beyond normal inflation rates. Where premium relief has not been readily available, many insurers have withdrawn from marketplaces, limited access to coverage, or tightened eligibility requirements by sometimes mandating roof covering replacement.

Many insurers have introduced coverage reductions in the form of higher deductibles (especially on wind and hail losses), exclusions and limitations for things like “cosmetic” damage, or limiting valuation of damage to certain types of property only to ACV rather than replacement cost.

So, what does this all mean? When insurance becomes unaffordable or unavailable, we must look to risk management alternatives. In fact, insurance should never be the sole risk management technique for addressing most loss exposures.

When frequency and severity reach a tipping point, insurance no longer works and becomes unavailable for some and unaffordable for many others. In addition, as greater numbers of insureds are subject to increased loss frequency and/or severity, it becomes more and more difficult to spread the risk of loss–and insurance is all about risk transfer. Long before losses approach a statistical certainty and become truly uninsurable, we run out of people to spread risk to anyway.

Managing the Risk

“Risk management” approaches are often classed as (1) avoidance, (2) loss control (pre-loss prevention and post-loss reduction), (3) retention, (4) transfer (insurance/pooling and contractual indemnification), and (5) segregation of exposure units. When loss frequency and severity are low, risk retention is the most common approach. When loss frequency and severity are high, avoidance is virtually mandated. When loss frequency is high but severity is low, retention and loss prevention are the focus. When frequency is low and severity is high, risk transfer and loss reduction are the dominant approaches.

If you have ever read my bio on my website or LinkedIn page, you know my early education and industry background was as a fire protection engineer. Most of my work involved underwriting and loss control property inspections for insurers, evaluating risk exposures ranging from Orand’s Barber Shop to FedEx’s aircraft facilities in Memphis. I also was one of the ISO public fire protection guys who rated cities and fire districts from PPC 1 to 10, evaluating fire departments, water systems, and codes enforcement.

Last year, one of my college engineering classmates, Carl Baldassarra of the civil engineering firm Wiss, Janney, Elstner Associates Inc., reached out to me for some insurance information related to a presentation he was making at a Society of Fire Protection Engineers conference regarding large losses attributed to climate change or at least evolving weather patterns. His question was whether there was a need for changes in government regulations as occurred in the last century following urban fire conflagrations with regard to municipal water supplies, fire department standards, and local building and life safety codes.

Improving Building Codes, Zoning Restrictions

I have blogged about this and discussed it extensively on LinkedIn in the past. I’m convinced that there is a significant need for more realistic building codes and zoning restrictions. A good example of improved building materials standards is a roofing product from a company called Brava that my friend and agent Tim Wahl, CIC of Missouri, told me about.

My understanding is that Brava shingles have a Class 4 hail rating and purport to be able to withstand winds of up to 188 mph with nails and 211 mph with screws. Tim got a sample of the slate-style shingle they offer and beat it mightily with a hammer without any visible damage. He indicated that the cost was about double that of typical asphalt shingles, increasing the cost of construction of a home by 5%-10%. Considering the cost of a home today, that seems to be a relatively small price to pay for near indestructability.

If this type of wind-and-hail-resistant shingle was mass produced, the cost could probably drop substantially. Replacing existing roofs with construction of this type following a loss would increase the loss payment but likely make it highly unlikely that such an expense would reoccur in the future. Right now, I’m not sure if any insurers are granting premium credits for the use of such material.

This is just one example of a potential solution that involves improved construction standards and building code enhancements. For wildfires, land management is critical along with zoning restrictions, the latter also critical with regard to flood exposures. For some examples of wildfire solutions, check out several articles written by consultant John Putnam, CPCU, ARM at www.irmi.com (just search for John’s name to get a list of his articles addressing risk management issues involving wildfires).

With regard to building codes, zoning ordinances, and land management, government involvement would obviously be critical but futile without the political will to implement and enforce such measures. As I’ve written before, I believe that the NFIP flood program and all its red ink could wash away if flood coverage, with a TRIA-like federal backstop, was built into all property policies and adequate codes and zoning were implemented and enforced by government at all levels. What do you think?

Tune in again next month when we address some risk management measures insurers and insureds can do right now to reduce losses.