It Had to Happen Sometime; Massive Catastrophe Losses Are Pushing Insurers to Raise Rates

Total economic losses from natural catastrophes and man-made disasters in 2018 were $165 billion, and that number is only growing.
By: | May 30, 2019

A serious storm is bearing down on the densely populated southeastern edge of Florida.

Not a hurricane, but rather a storm of premium increases and tightening terms and conditions in property insurance in the aftermath of hurricanes. The previous two years, 2017 and 2018, saw the highest-ever two-year insured-loss rate, according to Swiss Re, with a combined hit of $219 billion.

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The actual total may be higher, because of the creep often associated with natural catastrophes that affect a large area.

Total economic losses from natural catastrophes and man-made disasters in 2018 were $165 billion, according to a recent report from the Swiss Re Institute.

Insurance covered $85 billion of those losses, the fourth highest one-year aggregate industry payout ever, and a good deal above the previous 10-year annual average of $71 billion. Of last year’s insured losses, $76 billion were due to natural catastrophes and of those, more than 60% of claims were to help populations affected by ‘secondary’ peril events.

The single biggest natural catastrophe insurance loss event of 2018 was the Camp Fire in California, $12 billion, a secondary peril, according to Swiss Re. Indicative of a growing trend, the combined insured losses were the highest ever for a two-year period.

Growing CATs, Growing Concerns

“Stakeholders in building resilience, including insurers, are well advised to pay more attention to the growing risk these perils present,” the report stated.

“The global all-catastrophe protection gap of the past two years combined was also impressively large at $280 billion, and more than half of that resulted from independent secondary and secondary-effect peril events.”

In property lines, “the risk accumulation plus asset accumulation is outpacing economic growth, even in mature economies,” noted Thomas Holzheu, chief economist for the Americas at Swiss Re.

“Development is human activity. The ‘natural’ part of natural catastrophe is the hurricane or flood; the ‘catastrophe’ part is human. That is the same worldwide, but especially in Asia. There is storm risk, as well as earthquake and tsunami. Economic development is primarily coastal, which is straight in harm’s way.”

“While the U.S. has experienced elevated natural catastrophes within the last two years from widely reported events such as hurricanes and wildfires, it’s important to take a historical look at these events.” — Derek Talbott, division president, Chubb North America Property and Specialty

The difference in the U.S. and some other developed countries is that wind is covered, but earthquake and flood are excluded.

“There is stress on all property catastrophe markets,” said Marc Lauricella, partner and head of the capital group at reinsurance broker TigerRisk Partners.

Florida provides a painful example, where insurers underestimated their losses from 2017’s Hurricane Irma.

“The storm hit the southwest coast of Florida, yet many insurance companies are paying for significant unexpected losses from the tri-county area to the east, which includes Miami-Dade, Broward and Palm Beach. Insurance companies under-projected their losses from these densely populated areas, and those losses have continued to creep,” said Lauricella.

It was expected that premiums would rise and terms tighten for renewals in January 2018, and that did happen. Lauricella added: “At that time, hurricane loss inflation due to social-loss costs of assignment of benefits and the Florida legal environment regarding hurricane losses was not fully appreciated.”

He added that “the reinsurance and insurance capital remained relatively stable year over year with the continued strong support of alternative capital providers. At the January 2019 renewals, there was some increase in reinsurance pricing but not as much as many had expected.

“The insurance market is now in the midst of the June reinsurance renewals, a pivotal renewal for Florida and Southeast regional insurance companies. Many reinsurers are pushing for larger increases.”

As 2018 ended, “markets started to tighten,” said Sanjay Godhwani, executive vice president for property at Berkshire Hathaway Specialty Insurance, part of Berkshire Hathaway.

The markets will only tighten more, he said. “The expectations are that sublimits will decrease and it will become harder and harder to get renewals at previous premiums. [National] markets will be looking for rate into next year because of their size and the extent of their book; they can’t get it all in one year.”

The most significant changes are being seen in hospitality and in low-rise residential segments. Offices are not seeing the same degree of tightness. More regional perils such as hail and tornado are rising but are localized.

The one countercyclical line is earthquake: “That market has been softening for some time,” said Godhwani. “Premiums are less adequate. Even inadequate.

“Some carriers are very actively re-underwriting,” Godhwani added. “Others are more on their front foot, looking at opportunities to collaborate with their insureds on how to mitigate exposures.”

The responses from owners are not surprising.

Derek Talbott, division president, Chubb North America Property and Specialty

“They are definitely shopping,” said Godhwani.

“Brokers have a job to do. Some incumbents are losing their positions. Customers are accepting larger deductibles with some sublimits. They are buying less coverage and retaining more risk.”

And owners are engaging with their underwriters.

“Anything customers and their brokers can do to differentiate is helpful to the carrier,” said Godhwani.

“We are looking to differentiate our risks and not treat the market uniformly. We want to hear what owners have done to mitigate their own risks. Even if things have gone badly and there have been losses, we want to hear about what they are doing differently. That level of detail is very helpful.”

P&C Staying Strong

For all the concern over premium adequacy, the Swiss Re report noted the “paradox: the insurance industry is well capitalized to absorb this risk. Total capital in the non-life reinsurance market, including alternative capital, was more than $2 trillion at the end of 2018.

“The main explanations for the underinsurance are lack of consumer risk awareness and poor understanding of catastrophe insurance covers, and on occasion hesitation to provide cover where risk assessment is uncertain,” read the report.

“Overall, the current P&C marketplace has a strong capital position to meet the exposures related to natural catastrophes,” said Derek Talbott, division president for Chubb North America Property and Specialty.

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“We focus on underwriting discipline to help keep us in position to be able to pay our claims. For insurers to meet their obligations, they need enough premium to adequately take on the risks associated with losses from natural catastrophes as well as those stemming from non-CATs, such as losses from internal water damage or fire.

“In fact,” Talbott continued, “many of our business clients experienced property losses this past winter from internal water damage due to pipes bursting from extreme variation in winter temperatures.”

Lauricella is careful to note that some of the current market stress is cyclical. And some is actually new.

“If you consider hurricane activity prior to 2016, it was relatively quiet during the previous 10 years or so. This current pricing cycle is in response to the aggregate CAT losses of recent years and the changing risk profile of U.S. hurricane and wildfire perils as well as the decreasing available reinsurance capital needed to support the market.

“Wildfires have always been a risk,” said Lauricella. “However, their risk profile has changed due to a drier climate, less forest management, and older power lines and electrical power systems.”

Similarly, population growth in mountain and coastal regions is magnifying exposures, creating greater concentrations of risk.

“The exposure density is increasing, and the CAT perils are more frequent and volatile,” he said.

The view is similar among primary underwriters.

“Wildfires have always been a risk. However, their risk profile has changed due to a drier climate, less forest management, and older power lines and electrical power systems.”  —  Marc Lauricella, partner and head of the capital group, TigerRisk Partners

“While the U.S. has experienced elevated natural catastrophes within the last two years from widely reported events such as hurricanes and wildfires, it’s important to take a historical look at these events,” said Talbott.

“From 2006 to 2016, we did not have a single major hurricane make landfall in the U.S. mainland.”

Chubb “continues to focus on price adequacy,” said Talbott.

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“To achieve this, it means properly underwriting the exposures. Insurers will look at their property risk portfolios and position their books to obtain adequate pricing for the exposures. Every carrier will have a different set of risks and they will steer their books through different market cycles.”

A prime example is how flood models have improved. “Insurers did not have the basis for pricing,” said Holzheu at Swiss Re.

“FEMA did not differentiate well, because they did not know the risk exposures. Flood mapping has changed dramatically in the last 10 years, and insurers can now offer proper pricing.”

Looking at Each Potential Catastrophe

Earthquake and wildfire are less well-modeled and also more localized, a double whammy for underwriting.

To help understand what is happening with wildfire coverage and pricing on the West Coast, Lauricella made an analogy to Florida property rates following Hurricane Andrew.

“When Andrew hit Florida in 1992, catastrophe models were fairly new and undeveloped for insurance companies to properly assess their projected losses or actively manage their exposures.

“Following Andrew, insurance carriers determined the need to improve the risk management of their catastrophe exposure and also their regulatory exposure — the inability to increase rates to insure the risks and purchase reinsurance.”

The current wildfire coverage situation in California is similar to post-Hurricane Andrew.

Due to the unappreciated hurricane risk in Florida and the increased concentration of property risk, few expected losses the size of those that Andrew produced.

Similarly, as the insurance market reassesses the risk profile of wildfires, insurance companies will look to reduce their concentration in this changing exposure. Insurers will be challenged to right-size their wildfire exposures and properly price the wildfire peril while simultaneously continuing their support of their insureds.

As wildfire coverage becomes scarcer or too expensive, the question is: Will regulators allow for separate wildfire DIC (difference in conditions)insurance? (They do allow earthquake DIC.)

Tackling NFIP

For all those uncertainties, the poster child for NAT CAT complication is the National Flood Insurance Program (NFIP).

There is near-universal agreement by insurance professionals and even Congress that the plan has been counterproductive, encouraging development in flood-prone areas. Reform has been slow, despite the knowledge that a relatively few areas are responsible for a diproportionally large number of claims.

There is no shortage of reform bills, but the existing program has been routinely reauthorized on a temporary basis, usually for six months at a time, for many years.

The irony is that the NFIP was created in 1968 as a collaboration between government and commercial carriers. After a complex skein of events, commercial carriers were no longer involved 10 years later.

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They were kicked out, said Craig K. Poulton, chief executive officer of Poulton Associates and administrator of the Natural Catastrophe Insurance Program, a web-based commercial alternative to NFIP.

“The problem with NFIP is that premiums are randomly assigned; they are not correlated to risk,” he said.

“Half of policy holders are undercharged, half are overcharged, regardless of actual risk. It is perceived as too cheap overall, but it has never been a fair system.”

According to FEMA, which administers the NFIP, there have been six reform laws: 1973, 1994, 2004, 2012, and two in 2014.

The 2012 Biggert-Waters Flood Insurance Reform Act is most notable. It “authorized and funded the national mapping program and certain rate increases to ensure the fiscal soundness of the program by transitioning the program from subsidized rates, also known as artificially low rates, to offer full actuarial rates reflective of risk,” according to the agency. &

Gregory DL Morris is an independent business journalist based in North Carolina with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Scenario

The Betrayal of Elizabeth

In this Risk Scenario, Risk & Insurance explores what might happen in the event a telemedicine or similar home health visit violates a patient's privacy. What consequences await when a young girl's tele visit goes viral?
By: | October 12, 2020
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

PART ONE: CRACKS IN THE FOUNDATION

Elizabeth Cunningham seemingly had it all. The daughter of two well-established professionals — her father was a personal injury attorney, her mother, also an attorney, had her own estate planning practice — she grew up in a house in Maryland horse country with lots of love and the financial security that can iron out at least some of life’s problems.

Tall, good-looking and talented, Elizabeth was moving through her junior year at the University of Pennsylvania in seemingly good order; check that, very good order, by all appearances.

Her pre-med grades were outstanding. Despite the heavy load of her course work, she’d even managed to place in the Penn Relays in the mile, in the spring of her sophomore season, in May of 2019.

But the winter of 2019/2020 brought challenges, challenges that festered below the surface, known only to her and a couple of close friends.

First came betrayal at the hands of her boyfriend, Tom, right around Thanksgiving. She saw a message pop up on his phone from Rebecca, a young woman she thought was their friend. As it turned out, Rebecca and Tom had been intimate together, and both seemed game to do it again.

Reeling, her holiday mood shattered and her relationship with Tom fractured, Elizabeth was beset by deep feelings of anxiety. As the winter gray became more dense and forbidding, the anxiety grew.

Fed up, she broke up with Tom just after Christmas. What looked like a promising start to 2020 now didn’t feel as joyous.

Right around the end of the year, she plucked a copy of her father’s New York Times from the table in his study. A budding physician, her eyes were drawn to a piece about an outbreak of a highly contagious virus in Wuhan, China.

“Sounds dreadful,” she said to herself.

Within three months, anxiety gnawed at Elizabeth daily as she sat cloistered in her family’s house in Bel Air, Maryland.

It didn’t help matters that her brother, Billy, a high school senior and a constant thorn in her side, was cloistered with her.

She felt like she was suffocating.

One night in early May, feeling shutdown and unable to bring herself to tell her parents about her true condition, Elizabeth reached out to her family physician for help.

Dr. Johnson had been Elizabeth’s doctor for a number of years and, being from a small town, Elizabeth had grown up and gone to school with Dr. Johnson’s son Evan. In fact, back in high school, Evan had asked Elizabeth out once. Not interested, Elizabeth had declined Evan’s advances and did not give this a second thought.

Dr. Johnson’s practice had recently been acquired by a Virginia-based hospital system, Medwell, so when Elizabeth called the office, she was first patched through to Medwell’s receptionist/scheduling service. Within 30 minutes, an online Telehealth consult had been arranged for her to speak directly with Dr. Johnson.

Due to the pandemic, Dr. Johnson called from the office in her home. The doctor was kind. She was practiced.

“So can you tell me what’s going on?” she said.

Elizabeth took a deep breath. She tried to fight what was happening. But she could not. Tears started streaming down her face.

“It’s just… It’s just…” she managed to stammer.

The doctor waited patiently. “It’s okay,” she said. “Just take your time.”

Elizabeth took a deep breath. “It’s like I can’t manage my own mind anymore. It’s nonstop. It won’t turn off…”

More tears streamed down her face.

Patiently, with compassion, the doctor walked Elizabeth through what she might be experiencing. The doctor recommended a follow-up with Medwell’s psychology department.

“Okay,” Elizabeth said, some semblance of relief passing through her.

Unbeknownst to Dr. Johnson, her office door had not been completely closed. During the telehealth call, Evan stopped by his mother’s office to ask her a question. Before knocking he overheard Elizabeth talking and decided to listen in.

PART TWO: BETRAYAL

As Elizabeth was finding the courage to open up to Dr. Johnson about her psychological condition, Evan was recording her with his smartphone through a crack in the doorway.

Spurred by who knows what — his attraction to her, his irritation at being rejected, the idleness of the COVID quarantine — it really didn’t matter. Evan posted his recording of Elizabeth to his Instagram feed.

#CantManageMyMind, #CrazyGirl, #HelpMeDoctorImBeautiful is just some of what followed.

Elizabeth and Evan were both well-liked and very well connected on social media. The posts, shares and reactions that followed Evan’s digital betrayal numbered in the hundreds. Each one of them a knife into the already troubled soul of Elizabeth Cunningham.

By noon of the following day, her well-connected father unleashed the dogs of war.

Rand Davis, the risk manager for the Medwell Health System, a 15-hospital health care company based in Alexandria, Virginia was just finishing lunch when he got a call from the company’s general counsel, Emily Vittorio.

“Yes?” Rand said. He and Emily were accustomed to being quick and blunt with each other. They didn’t have time for much else.

“I just picked up a notice of intent to sue from a personal injury attorney in Bel Air, Maryland. It seems his daughter was in a teleconference with one of our docs. She was experiencing anxiety, the daughter that is. The doctor’s son recorded the call and posted it to social media.”

“Great. Thanks, kid,” Rand said.

“His attorneys want to initiate a discovery dialogue on Monday,” Emily said.

It was Thursday. Rand’s dreams of slipping onto his fishing boat over the weekend evaporated, just like that. He closed his eyes and tilted his face up to the heavens.

Wasn’t it enough that he and the other members of the C-suite fought tooth and nail to keep thousands of people safe and treat them during the COVID-crisis?

He’d watched the explosion in the use of telemedicine with a mixture of awe and alarm. On the one hand, they were saving lives. On the other hand, they were opening themselves to exposures under the Health Insurance Portability and Accountability Act. He just knew it.

He and his colleagues tried to do the right thing. But what they were doing, overwhelmed as they were, was simply not enough.

PART THREE: FALLING DOMINOES

Within the space of two weeks, the torture suffered by Elizabeth Cunningham grew into a class action against Medwell.

In addition to the violation of her privacy, the investigation by Mr. Cunningham’s attorneys revealed the following:

Medwell’s telemedicine component, as needed and well-intended as it was, lacked a viable informed consent protocol.

The consultation with Elizabeth, and as it turned out, hundreds of additional patients in Maryland, Pennsylvania and West Virginia, violated telemedicine regulations in all three states.

Numerous practitioners in the system took part in teleconferences with patients in states in which they were not credentialed to provide that service.

Even if Evan hadn’t cracked open Dr. Johnson’s door and surreptitiously recorded her conversation with Elizabeth, the Medwell telehealth system was found to be insecure — yet another violation of HIPAA.

The amount sought in the class action was $100 million. In an era of social inflation, with jury awards that were once unthinkable becoming commonplace, Medwell was standing squarely in the crosshairs of a liability jury decision that was going to devour entire towers of its insurance program.

Adding another layer of certain pain to the equation was that the case would be heard in Baltimore, a jurisdiction where plaintiffs’ attorneys tended to dance out of courtrooms with millions in their pockets.

That fall, Rand sat with his broker on a call with a specialty insurer, talking about renewals of the group’s general liability, cyber and professional liability programs.

“Yeah, we were kind of hoping to keep the increases on all three at less than 25%,” the broker said breezily.

There was a long silence from the underwriters at the other end of the phone.

“To be honest, we’re borderline about being able to offer you any cover at all,” one of the lead underwriters said.

Rand just sat silently and waited for another shoe to drop.

“Well, what can you do?” the broker said, with hope draining from his voice.

The conversation that followed would propel Rand and his broker on the difficult, next to impossible path of trying to find coverage, with general liability underwriters in full retreat, professional liability underwriters looking for double digit increases and cyber underwriters asking very pointed questions about the health system’s risk management.

Elizabeth, a strong young woman with a good support network, would eventually recover from the damage done to her.

Medwell’s relationships with the insurance markets looked like it almost never would. &

Bar-Lessons-Learned---Partner's-Content-V1b

Risk & Insurance® partnered with Allied World to produce this scenario. Below are Allied World’s recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance.®.

The use of telehealth has exponentially accelerated with the advent of COVID-19. Few health care providers were prepared for this shift. Health care organizations should confirm that Telehealth coverage is included in their Medical Professional, General Liability and Cyber policies, and to what extent. Concerns around Telehealth focus on HIPAA compliance and the internal policies in place to meet the federal and state standards and best practices for privacy and quality care. As states open businesses and the crisis abates, will pre-COVID-19 telehealth policies and regulations once again be enforced?

Risk Management Considerations:

The same ethical and standard of care issues around caring for patients face-to-face in an office apply in telehealth settings:

  • maintain a strong patient-physician relationship;
  • protect patient privacy; and
  • seek the best possible outcome.

Telehealth can create challenges around “informed consent.” It is critical to inform patients of the potential benefits and risks of telehealth (including privacy and security), ensure the use of HIPAA compliant platforms and make sure there is a good level of understanding of the scope of telehealth. Providers must be aware of the regulatory and licensure requirements in the state where the patient is located, as well as those of the state in which they are licensed.

A professional and private environment should be maintained for patient privacy and confidentiality. Best practices must be in place and followed. Medical professionals who engage in telehealth should be fully trained in operating the technology. Patients must also be instructed in its use and provided instructions on what to do if there are technical difficulties.

This case study is for illustrative purposes only and is not intended to be a summary of, and does not in any way vary, the actual coverage available to a policyholder under any insurance policy. Actual coverage for specific claims will be determined by the actual policy language and will be based on the specific facts and circumstances of the claim. Consult your insurance advisors or legal counsel for guidance on your organization’s policies and coverage matters and other issues specific to your organization.

This information is provided as a general overview for agents and brokers. Coverage will be underwritten by an insurance subsidiary of Allied World Assurance Company Holdings, Ltd, a Fairfax company (“Allied World”). Such subsidiaries currently carry an A.M. Best rating of “A” (Excellent), a Moody’s rating of “A3” (Good) and a Standard & Poor’s rating of “A-” (Strong), as applicable. Coverage is offered only through licensed agents and brokers. Actual coverage may vary and is subject to policy language as issued. Coverage may not be available in all jurisdictions. Risk management services are provided or arranged through AWAC Services Company, a member company of Allied World. © 2020 Allied World Assurance Company Holdings, Ltd. All rights reserved.




Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]