Property losses from catastrophes are getting worse

DOWNLOAD THE DISASTER RECOVERY CASE STUDY: UK FLOODS 2007

DOWNLOAD THE DISASTER RECOVERY CASE STUDY: FLOODING IN GERMANY 2013

It’s no accident that the origins of contemporary civilization sprang up on fertile floodplains. The annual floods along the Nile, Tigris and Yellow Rivers were welcomed as they returned nutrients to the soil and replenished the groundwater, creating ideal conditions for intensive agricultural production.

However, as towns and cities developed alongside major rivers worldwide, floods took on a new, modern context: destructive as opposed to regenerative. And that has led to ongoing efforts to minimize their capacity to wreak havoc in our lives.

Massive investments have been made, for instance, in engineering solutions designed to constrain floodwaters; meanwhile, our predictive capabilities continue to improve. Today, detailed flood maps exist for virtually every location where floods pose a significant risk to people and property. Combined with increasingly sophisticated weather forecasting, we can now predict – further in advance and with greater accuracy – areas that will be affected by flooding as well as the duration and extent of the impacts.

The role of insurance
All these factors notwithstanding, floods remain highly destructive. In 2018, for instance, there were 384 catastrophic hydrological events; these represented 48 percent of the 800 weather-related catastrophes recorded that year. These floods and mass movements caused more than 3,700 fatalities, almost USD 25 billion in economic losses and USD 4.6 billion in insured losses.

We can’t, of course, reduce the number of extreme weather events that occur every year. And as the world continues to warm, hydrological events are expected to become even more frequent and intense. So, the question remains: What more can be done to limit the destruction?

We have ample evidence and experience showing how engineering solutions along with public policy measures can help protect communities. We also have considerable insight into steps that can be taken pre- and post-event to support fast and effective responses and, in turn, reduce recovery times.

What is less well understood is the relationship between insurance penetration and the pace of economic recovery. Intuitively, we know the speed and scale of protection that the re/insurance industry provides can dramatically reduce the recovery time for communities suffering from extreme catastrophes. But, by how much? And, how is re/insurance best structured and deployed?

Because these questions haven’t been studied in detail, AXA XL has partnered with the Cambridge Centre for Risk Studies at the University of Cambridge Judge Business School (“CCRS”) to examine more than 100 catastrophes. By analysing these events from multiple perspectives and comparing the outcomes, we aim to create a body of work that policymakers and governments worldwide can draw on when evaluating disaster preparedness and seeking to fully understand, from the lessons learned by others, the impact of

• displaced populations
• increasing personal debt levels
• changes in the economic mix of industry
• political upheaval
• overall time to recover

These case studies also address the need to better recognise and explain the value of “building back better”; that is, reformative recovery where the structures are repaired or rebuilt to a higher standard to increase long-term resilience. While this approach implies higher marginal costs, the benefits are assumed to be substantial. If that is so, re/insurers need to be prepared to provide extra limits and contractual stipulations that align with “building back better”.

Putting knowledge to work
CCRS originally planned to issue a consolidated report in 2020 covering the main findings, conclusions and recommendations from the overall body of research. That will still happen. However, the case studies prepared by the CCRS are so interesting and of such quality that we’ve opted to share them as they become available.
We published two case studies last year; one focused on lessons learned from Hurricanes Katrina, Wilma and Rita, and one on Superstorm Sandy.

This year we are publishing two case studies that cover major flood events in the UK in 2007 and in Germany in 2013 .

In both cases, the CCRS team conducted extensive research into the respective events, documenting

• how the floods unfolded: how much rain fell over what areas, the rivers that flooded and the extent and depth of the flooding
• physical, social and economic impacts: the number of homes and businesses that flooded, the number of people directly affected, the effects on
• infrastructure and a breakdown on the estimated direct and indirect costs
• the disaster response effort: how well various agencies and authorities responded, as well as how the economic losses were funded, that is, via insurance, government grants/aid or directly by affected individuals/businesses.

The researchers also surveyed people directly impacted as well as those involved in the recovery process. This comprehensive set of facts and first-hand observations provided the basis and context for assessing the speed and quality of the recovery process.

While there is a definite shift in businesses having a significant increase in intangible assets that need protection as opposed to tangible assets like real estate, facilities and equipment; the fact of the matter is, for many businesses, physical property is still a very valued possession and needs the right insurance protection. In fact, many couldn’t conduct business without a well-managed, safe facility with the right equipment.

That’s why it is so surprising how often business’ physical operations and properties are undervalued, according to Michele Sansone, President of AXA XL’s North America Property insurance team. An undervaluation can have a big effect on insurance protection. Here she shares her thoughts.

How’s the commercial property market overall? Are commercial property insurers getting the adequate rate for the risks they’re insuring?

Sansone: It’s still a very competitive market, although we’ve seen some rate correction. I think we can expect some more this year having just gone through another record-breaking year of Nat Cat losses. On the property side, many broker reports anticipate that non-catastrophe-exposed risks will see rates flat to 5% higher, while cat-exposed risks will likely see a projected increase in the range of 2.5% to 7.5% and cat-exposed properties with losses could experience rate increases of 10% or more.

Especially after the last two years of record-breaking losses, it’s clear that we cannot turn a blind eye to the long-term health of the industry. We need to get rate adequacy in line with the risks that we are assuming and the Nat Cat trends we are experiencing.

What has caused the greatest challenges to your book of property business over the past two years?

There are a couple of challenges. For one, not getting accurate Total Insurable Values (TIVs) across our clients’ enterprises is a challenge because it does not allow us to price the risk adequately. In commercial property insurance, TIV is the sum of the full value of a client’s covered property, business income values and any other insured property, like equipment. It’s the collective valuation of the business’ operation. Too often in the annual property underwriting process, TIVs get a passing glance. They are not updated regularly.

When businesses provide out-of-date or underestimated TIVs, pricing is based on faulty data. TIVs are more than just real estate values or replacement costs of a building. Here lies the second challenge -- assessing a business’ contingent risks. Getting a full understanding and gaining an appreciation of our client’s suppliers and others that touch their business is challenging, but important to accurately evaluate potential business interruption exposures.

Assessing pricing risks accurately for the long term is imperative to remain a financially strong carrier and be ready for the next “big one.” Undervaluing properties or the cost of potential business interruption can potentially leave insureds holding the bag if they exhaust the tower of coverages that they buy.

How and why would businesses undervalue their property?

In many real estate markets, property values have continued to tick upwards. Cost of replacing equipment and in general, the cost of doing business overall has not remained stagnant either. All this factors into how property is valued and assessed for insurance. Unfortunately, when insuring commercial properties, we haven’t seen TIVs tick up accordingly.

Consider a 10,000-square-foot building that today would cost about $1 million to replace. Unfortunately, a business may still be providing their insurers with older information that says the building is valued at $750,000. If TIV is not reevaluated, and a property underwriter bases coverage and premium on that $750,000 value, obvious issues will crop up if there is a loss. For one, this business may be buying insufficient insurance if they have a total loss and need to totally rebuild. Likewise, the providing insurer would not be receiving an appropriate rate of premium for the exposure it’s taking on.

Businesses may be hesitant to bump up their TIVs because they are reluctant to pay more insurance premium. Insurers, given the competitive market, aren’t pushing for more TIV accuracy either. However, in the long run, and especially in the event of a loss, both insurers and their clients run the risk of being left short because of under-reported TIVs.

Unlike many who stumble into the insurance industry ‘by accident,’ Joe Moylan set his sights on a career in insurance right from the start. Now, as Northeast Regional Underwriting Leader for AXA XL’s North America Property team, Joe puts his 40 years of underwriting experience to work for some of AXA XL’s largest property clients based in a very populated part of the country. See why he still thinks he made the right career choice.

Why an insurance career?

Moylan: Why not an insurance career? Even then I saw that the industry had a lot of potential. I went to Baruch College here in New York City which at that time already had an insurance degree program. It was one of the first insurance degree programs.

After graduating college, I admittedly hung out at the beach for a month but then decided -- it was time to get this career started. I took the A train down to William H. McGee & Co., now part of AGCS Marine Insurance Company. I walked in looking for a job and they hired me as an inland marine underwriter.

Since then, my career path has taken me to positions with AIG, Travelers, Home Insurance, Zurich, Axis Capital and now here. I have to say one of my most interesting underwriting positions was when I was at Travelers in the early 1980s and served as a property underwriter at the New York Insurance Exchange. My guess is that many in the industry today have never heard of the Exchange, but back then, it was at the time was the #1 job that a property underwriter could get.

Many probably haven’t heard of it. What was the New York Insurance Exchange?

The Exchange was set up to operate like Lloyd’s as a centralized marketplace for the brokering and underwriting. It was established in 1980. Brokers, approved by the Exchange as members or associates, could place business with the Exchange’s underwriting members or syndicates. All business was to be processed through the Exchange facility. The Exchange only lasted about seven years, ceasing operation in 1987. Its rapid growth and the soft market conditions of the time are said to have contributed to its demise. However, given the variety and complexity of risks that went through the Exchange at the time, it was certainly a good training ground, a learning experience for an underwriter like me. There’s been some discussions since to establish another Exchange, but nothing has gotten off the ground.

It must have prepared you well for underwriting complex property risks. Now as head of AXA XL’s Northeast region in Property, what kinds of property risks do you see?

A good mix, like most of our regions. Given major cities like New York and Boston are within the region, we do underwrite plenty of real estate portfolios, insuring high rise office and apartment buildings, hotels, and the like. This region has a high concentration of pharmaceutical companies, so we see quite a few pharma property risks. We also see a lot of financial institutions, hospitals and servicing type businesses.

Does insuring properties in major metropolitan areas pose any special challenges or considerations?

No challenge that we aren’t well-equipped to handle. One consideration is the accumulation of high value properties in metropolitan areas like NYC AXA XL’s significant capacity is a plus for these property risks. But when insuring these properties, we do have to keep a careful eye on our aggregate exposure.

Of course, terrorism and political violence events in every corner of the world are prompting businesses worldwide to take a hard look at the risk that terrorism poses to their property and operations. Property owners in major cities have a piqued concern.