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3 Ways Best-in-Class Property Insurers Prepare for a Severe Hurricane Season

Resiliency through multiple catastrophes requires years of disciplined underwriting and portfolio management, and the ability to think beyond immediate risks.
By: | May 15, 2020

Successful businesses are characterized in part by their ability to keep one foot in the present and the other in the future. Stability is the product of the careful balancing of short- and long-term goals, and the shrewd analysis of risk versus reward.

In the midst of today’s uncertainty, planning ahead seems like a fruitless exercise for many businesses. Long-term goals can seem superfluous when simple survival is a top priority. But the companies that emerge from the pandemic in the strongest position will be those that prepare for threats beyond the current crisis.

Right now, the threat that should be top of mind for many risk managers is the approaching hurricane season — one predicted to be more active than usual. Forecasters anticipate 18 named storms this year, compared to the annual average of 12.

Much like the pandemic, businesses have no control over what Mother Nature will bring, but they can protect themselves by taking proactive risk mitigation measures, and partnering with a property insurer that is prepared to keep its promises whatever the future holds.

“The key for us is stability and the removal of uncertainty for our clients. At no time in recent history — or at least in my 30 years of underwriting experience — has there been more uncertainty surrounding a hurricane season,” said Cliff Hope, Head of Property at Lexington Insurance Company, a member of AIG. “The question on most catastrophe exposed policyholders’ minds will be: is the insurance industry prepared for severe hurricane losses amid all of the disruption caused by COVID-19?”

Here’s how best-in-class property insurers have been readying for the season ahead and keeping promises of stability for insureds:

1. Building Capital through Reasonable Rate Increases

Cliff Hope, Head of Property at Lexington Insurance Company, a member of AIG

The reality is that for responsible insurers, the hurricane predictions of forecasters, while informative, aren’t of huge consequence. Carriers that are committed to the property market for the long haul don’t make last-minute adjustments to rate or capacity due to a weather forecast.  Instead, they stick to a long-term strategy of sustainable capitalization through surplus management and highly technical analytic catastrophe modeling.

“From 2013 through 2015, we experienced very benign years and many, many policyholders out there saw significant rate decreases as carriers clamored for market share,” Hope said.

“Then in 2016 through 2018, we were hit with a series of catastrophic events, including Harvey, Irma and Maria in 2017, Michael and Florence in 2018, and a plethora of large hail events, tornadic activity, spring floods and devastating wildfires. Those events exposed high attritional loss ratio that had been hidden by a lack of catastrophes.”

In response, underwriters began steadily increasing rates, a trend expected to continue through 2020. Though the rate levels of 2013 have not been fully regained, the property market appears well-capitalized coming off a quiet 2019.

“There seems to be satisfactory capitalization across the Property Insurance market, including appropriate levels of surplus built in for a large catastrophe event across the industry,” Hope said. “That’s the cumulative effect of 2 years of stair-stepped, fair rate increases and more disciplined portfolio management, not a response to predictions of a severe season.”  While capital ebbs and flows in the Property catastrophe market, it is important to have a steady hand on the rudder when it comes to Underwriting.

2. Increasing Resilience through Portfolio Diversification

The aggregate limit offered by a carrier is a quantification of its total exposure and should serve as a firm benchmark against which solvency can be measured. If an insurer has the capital to cover their aggregate exposure, it can keep its promise to pay claims even in the worst-case scenario.

That’s difficult to manage if that entire limit is dedicated to a few high-risk areas.

“One way to ensure stability over a long period of time is to make sure that you’re deploying your capacity in a reasonable and thoughtful way. That means avoiding heavy concentrations of capital in any one area; you want to balance the portfolio so that you’re diversified geographically and don’t have peak zones that are well above what you would consider an acceptable loss scenario,” Hope said.

A broad spread of aggregate limits indicates an ability to withstand multiple catastrophic events in different parts of the country. Combined with long-term efforts to regain rate, portfolio diversification ensures resiliency no matter how many hurricanes make landfall on the U.S. coast this year.

3. Factoring Black Swans into the Equation

Black Swan events – those catastrophes that are rare, shocking and economically devastating — create volatility and uncertainty because they take everyone by surprise. No one can truly predict when such an event will occur or how severe the impact will be. However, thanks to the advancement of data analytics and development of scientific catastrophe modeling tools, unpredictability is no excuse for lack of preparedness.

“Using model outputs, we can evaluate certain types of maximum loss events with return periods of 10 years all the way up to 10,000 years. We can project what type of exposure across multiple geographies, depending on the type of CAT event — we’re not just looking at named storms in Florida or along the Gulf Coast — and come up with potential annual average loss picks,” Hope said.

“With those estimations in hand, we can make sure that we’re protected, whether that’s through our regular surplus or through reinsurance treaties, retrocessional covers and other alternative capital products.”

Accounting for the effects of very low-frequency, high-severity events effectively minimizes the element of surprise and enables continued stability across all lines of coverage. Proactively addressing Black Swans means that claims for unrelated losses don’t have to take a back seat.

Fulfilling the Claims Promise Through Any Catastrophe

The most important touchpoints that any insurer has with a policyholder exist in claim management. None of the proactive measures taken to ensure stability mean much to risk managers if the process of actually using a policy becomes complicated or arduous.

A fast response is always critical after hurricane-related losses. Businesses want to fix their damage and become fully operational as quickly as possible, but are often competing for resources against other impacted companies. This year, still reeling from the disruption of the pandemic, policyholders in hurricane-exposed regions will need speed and efficiency more than ever.

“We’ve made adjustments in this unusual environment to ensure our claims staff is as prepared as possible,” Hope said. That includes implementing a variety of virtual capabilities. Drones and smart phone cameras are replacing some boots on the ground for loss control surveys and inspections. Video conferencing is stepping in for in-person interaction.

“We’ll use all the digital components we can to continue servicing our clients in the event of a claim in the safest possible way,” Hope said.

In fact, the pressure applied by the pandemic has spurred an even greater sense of focus and commitment across all business units at Lexington Insurance.

“We’re in the middle of a very tragic and frustrating time, but we made a promise to be responsive to our policyholders when something happens,” Hope said. “Our underwriters, claims team, loss control experts, actuaries and operational staff are all working double-time toward the same goal of being consistent and certain for the people we do business with. The culture at Lexington is centered around getting the job done, no matter how unusual the circumstances.”

As always, AIG’s claims promise is that once coverage is confirmed, we can advance up to 50% of an agreed loss estimate within 7 days, giving an insured the immediate working funds it needs for property damage/repairs, clean-up costs and extra expense. Lexington’s years-long development of a stable property business, combined with its ability to adapt to today’s unique environment, means that it will be there to fulfill that promise not just through the upcoming hurricane season, but any catastrophe that comes after it.

To learn more, visit https://www.lexingtoninsurance.com/propcat .

The views and opinions expressed herein are those of the author and do not necessarily reflect those of American International Group, Inc. or its subsidiaries, business units or affiliates.


This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.

The R&I Brand Studio, a unit of the advertising department of Risk & Insurance, is a dedicated group of professionals who work with clients to develop custom content.

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