New Zealand Quake Heralds Increasing CAT Losses

The Feb. 22 earthquake that struck near Christchurch, New Zealand was a reminder of the potential for large insurance losses in far-flung regions at a time when many North American and European insurers are diversifying their books of business. Though measuring 6.1 on the Mercalli scale, the quake was technically an aftershock of the 7.1 Canterbury quake of Sept. 4, 2010. Despite its lower rating, the Christchurch quake’s losses have already far surpassed those of the Canterbury event. The quake suggests that in terms of mounting global catastrophe, losses 2011 could be an aftershock that, like the Christchurch quake, significantly exceeds the impact 2010.

Despite an unusually mild 2010 Atlantic hurricane season in terms of insurance losses, last year was among the five costliest years for the insurance industry since 1980, according to Munich Re. The United States experienced the highest winter storm losses since 2003, the largest wildfire loss in Colorado history, and the third consecutive year of over $9 billion in thunderstorm related insurance losses, according to the reinsurer. The U.S. set a record for overall number of natural catastrophes, with 247; and the global figure of 950 events was the second highest since 1980, surpassing the 10-year average by 165 events. The major earthquake that struck Chile in Feb. 2010 was the second costliest earthquake for the insurance industry since 1950, and the Canterbury quake was the costliest natural disaster ever to strike the Australia/Oceania region. Severe flooding in Queensland, Australia began in December and became worse on the other side of the Jan. 1 policy renewal date.

“It was a bad year to have a fair portion of book exposed to natural hazard,” opines John DeMartini, the Stamford, Conn.-based leader of Towers Watson’s catastrophe risk management practice and the company’s U.S. Property reinsurance specialty practice.

In the face of increasing events of certain types, reinsurers are reevaluating their books of business, according to DeMartini. Reacting to the severe convective storm activity — which includes thunderstorms, tornadoes and hailstorms — in the Midwest over the last three years reinsurers are increasing pricing and adjusting the capacity they allocate to the region. “We’re aware of a major Bermuda-based reinsurer trimming its Midwest book by a third,” DeMartini says. “The industry has arrived at a kind of ‘enough is enough’ situation.”

Many reinsurers have found reason to rethink geographical diversification of their books, according to DeMartini. “Diversification is obviously a way of increasing the top line and avoiding over-concentration in places like Texas and South Florida,” he says. “However, you end up knowing less about the exposure because data quality isn’t what it is in the U.S.”

The events of 2010 are likely to force the insurers and vendors to reevaluate existing catastrophe models, according to Howard Mills, chief advisor of Deloitte’s (New York) national insurance group. Existing models have probably underestimated the probability and loss profile of events such as European wind and cold weather storms, Mills suggests. “In a year such as 2010, events such as these can add up for insurers who have significant global exposure,” he comments.

However, models don’t merely need to reflect a better understanding of newer high-loss natural catastrophes, suggests Towers Watson’s DeMartini. Risk modeling companies have begun to predict higher probable losses for Atlantic hurricanes as well. On Feb. 28, 2011, RMS will release a new model that factors in the experience of Hurricane Ike and other storms that caused significant losses well inland, according to DeMartini. “RMS has determined that there are other areas in Texas, the Mid-Atlantic and the Northeast that will be impacted in similar fashion by future hurricanes,” he says.

Once the new model is run against insurers’ portfolios, it is likely to affect pricing, DeMartini implies. Considering scenarios such as the new RMS model implies, it is important to bear in mind that 2010 was in fact one of the most active hurricane seasons on record, despite very low losses. The NOAA has called 2010 a “gentle giant” that was not a break with recent high activity.

“The 2010 season continues the string of active hurricane seasons that began in 1995,” a NOAA statement says. “In the Atlantic Basin a total of 19 named storms formed -- tied with 1887 and 1995 for third highest on record. Of those, 12 became hurricanes -- tied with 1969 for second highest on record. Five of those reached major hurricane status of Category 3 or higher.”

In addition to revising predictive CAT models, IT can help the insurance industry adjust to the changing risk environment in a variety of ways, according to Bruce Zaccanti, a Chicago-based principal in the insurance and actuarial advisory services practice of Ernst & Young’s Financial Services office. Modern policy administration systems, imaging technology, claims applications and cloud-related communications capabilities have enabled rapid access to data, resulting in faster and more accurate resolution of claims, according to Zaccanti. “When it comes to CAT claims especially, time is money,” he remarks.

Zaccanti emphasizes the importance of recent applications of predictive modeling: “Predictive models have moved into the claim world, helping to get the right claim with the right characteristics to the right model, have the claims handled quickly and effectively, make sure [the insurer] is paying the right amount per insured contract but also controlling costs and protecting surplus.”

Among the lessons of the 2010 catastrophe losses is that insurers need to invest in the right technology, Zaccanti stresses. “Information needs to go into CAT models as soon as data is clean to help insurers understand the risks they’re going to underwrite and what pricing is needed to support what kinds of risks.”

“There are a lot of CAT-related claims processes here in the U.S. that insurers need to move into other parts of the world — policy administration systems, remote servers, contractor relationships,” Zaccanti adds. “All of that stuff needs to be put in place globally so that insurers can take control of claims. We’ll never stop losses from happening but we can continue to use better technology to improve planning, controlling, and mitigating losses, and then learning from losses and improving profitability.”

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio