U.S insured property values as of 2014 exceed $90 trillion, but the bulk of that is increasingly concentrated in vulnerable coastal areas. With that in mind, new risk metrics could better help monitor exposures, Karen Clark & Co. concludes in a new report.
KCC notes that the insurance industry typically uses multiples of probable maximum losses (PMLs) to manage risk, addressing potential catastrophe losses to the 100-year PMLs. Rating agencies and regulators rely on those calculations to monitor solvency.
KCC argues, however, that these metrics aren’t ideal any more because property values are increasingly concentrated in vulnerable coastal areas such as metro-Miami, Los Angeles, the Galveston-Houston region and Atlantic coasts. In other words, the high coastal concentrations of property value skews the numbers.
The cat modeling and consulting firm said that new risk metrics such as Characteristic Event (CE) approaches might be more appropriate now, because they can help companies better grasp their potential for catastrophe losses in the hopes of avoiding surprise mega-losses that could impair longer-term viability. CE calculations use scientific data based on events in specific regions to calculate risk. They define probabilities of events based on the hazard rather than the loss, according to KCC.
How much more concentrated are property values in vulnerable areas? KCC noted, for example, that tier one counties along the Gulf and Atlantic coasts account for more $16 trillion of total exposure – more than 17 percent of the total. That’s a jump from $14.5 trillion in 2012.
Other findings in the KCC report:
- California has the most property value, followed by New York and Texas.
- California, New York, Texas, Illinois, Florida, Pennsylvania, Ohio, Michigan, New Jersey and Georgia account for more than 50 percent of property values.
- Five of the top 10 counties in terms of property value are in areas with huge vulnerabilities to major natural catastrophes: Los Angeles (California), New York (New York), Cook (Illinois), Orange (California), Harris (Texas), San Diego (California), Maricopa (Arizona), King (Washington), Dallas (Texas) and Miami-Dade (Florida).
- Los Angeles County alone accounts for more than three percent of exposed property values.
- The changes of a mega-catastrophe loss (a 100-year type event) are increasing as property values rise and become concentrated in areas more likely to experience natural disasters.
In a 2013 analysis using the CE methodology and taking property value concentrations into account, KCC showed that 100-year storms coming ashore along the western end of Long Island would result in insured losses exceeding $100 billion today. Also, the CE approach showed that if the Great New England Hurricane of 1938 were to occur today, insured losses would exceed $35 billion and that if a similar storm tracked to the west, insured losses would top $100 billion.
Source: Karen Clark & Co.
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- Karen Clark & Co. Report Looks Back at New England Hurricane of 1938
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