Exploring the Link Between Natural Hazards and Climate Change: Understanding the Risks

Compounding fire losses are the loss dollars associated with natural hazards. Flood, wind, and hail are becoming a greater part of the loss dollars incurred by companies. Flood mapping by FEMA I known to be deficient, yet it remains a common tool. FEMA models use historic precipitation data that does not reflect current trends. This leads to underestimating hazard levels and damage potential. The results of the National Flood Insurance Program (NFIP) are a testament to the flaws in the risk models.

The influence of politics cannot be overlooked in flood insurance. As long as FEMA can be influenced by political pressure, flood maps and rating are a skewed tool that produces skewed results.

There are better flood modeling tools. The insurance industry needs to calibrate their risk selection and pricing using better tools.

Wind and hail provisions on the model code have proven ineffective in protecting structures from loss. The Insurance Institute for Business and Home Safety (IBHS) published their findings that UL listed hail resistant roof covering was not effective at resisting the hail size seen commonly today.  Codes are behind the curve. Increased storm frequency and severity make roof designs and installations more important than ever. The political influence where states do not adopt the most current codes or water them down makes addressing wind and hail more challenging.

How do insurance risk selection and pricing models deal with this variable? Drone pictures and satellite images coupled with artificial intelligence have been used. Having dealt with the output of these tools, the desk level underwriters are unable to explain the results and thus confidence in these tools is eroded. Just saying the “system says so” is not showing a great deal of business intelligence.  Deductibles can help the financial part of the equation, but there is a limit to the market tolerance of this approach.

Traditional rating tools are not properly addressing these hazards. The climate change that is influencing these hazards is not reflected in the traditional loss data. The rear view mirror does not offer the data needed going forward.