Insurer Strategies for Managing Extreme Weather Risk

Common strategies for risk management include catastrophe modeling, reinsurance, higher deductibles or broader exclusions in risk-prone areas, particularly coastal zones, and a tight control of aggregate exposure, including rebalancing property with other lines of business, according to the Ceres report “Insurer Climate Risk Disclosure Survey: 2012 Findings & Recommendations.”

“The most frequent challenge to risk management cited by insurers is regulatory pricing controls, in which prices are not permitted to rise as quickly to higher risk levels in regulated markets,” the report stated.

Risk modeling was specified by 40 insurers as an important technique to explore their capital adequacy, using realistic disaster scenarios and catastrophe models in the case of P/C insurers.

Twenty underwriters, mainly P/C insurers, mentioned accumulation control, in which the insurer limits the amount of risk it will accept in high-hazard regions.

For example, Mercury Casualty stated: “Because of the predicted increase in hurricane frequency, Mercury is taking numerous steps to monitor, control or even reduce exposure to catastrophic losses caused by hurricanes. Mercury is also exiting the homeowners insurance market in Florida.”

David Snyder, vice president of international policy for the Property Casualty Insurers Association of America, took exception with assertions in the Ceres report that insurers are relying on standard risk strategies.

“That’s not, by a long shot, all of what the industry is doing,” Snyder said.

He noted that insurers have rolled out usage-based auto insurance, which helps decrease carbon emissions; insurers are increasing the effectiveness of catastrophe modeling; they are pricing for changing weather patterns; and they are pushing building codes and smarter development so that stronger buildings are constructed in safer areas and existing buildings are made more weather-resistant.

“Across the board we think the industry is responding to the needs of its policyholders,” Snyder said, adding that “the industry responds to risks as proven through actuarial means that have to meet a very high test of credibility.”

Snyder doesn’t think a “one size fits all” strategy should be adopted for all insurers, and added that better reporting is not the answer. “Future actions shouldn’t be more reporting, but rather be focused on joint action to actually reduce risk,” he said.