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PML Risk Analyses for Insurance Risk Transfer
Capacity Tightening in the Property Insurance Markets
The significant increase in natural hazard event losses over the past two years has hit the reinsurance market hard. Primary market underwriters began to move quickly at the end of last year to pass their significant treaty rate hikes on to renewing corporate buyers. The result is a reduction in insurance capacity in certain areas with high exposure to natural hazard risk and an upward pressure on pricing.
As a result, risk managers with catastrophe-exposed accounts are expected to experience high double-digit rate increases on their renewals, which in many cases are still in the process of being completed. The trend is likely to continue throughout 2006 and possibly into 2007, depending upon the prevalence of significant natural hazard catastrophes in this policy period. This is true for seismic, flood and other risks as well as for the windstorm perils of hurricane and typhoon.
Many scientists and researchers, including Dr. William Gray of the Colorado State University Tropical Meteorology Project, believe that the US Gulf and Atlantic coasts are about 10 years into an increased cycle of tropical cyclone activity, which is likely to produce an above average number of events during the hurricane season over the next 15 to 20 years. If the coastlines suffer more destructive years as in the past season (2005), the capacity tightening in the insurance market that is already underway will continue, placing pressure on chief risk officers and risk managers trying to acquire affordable risk transfer protection for assets in highly exposed regions.
Source: NOAA/NWS, Tropical Prediction Center
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This insurance issue extends beyond wind-exposed regions to areas with higher seismic risk, such as that found along the West Coast of the US and Canada and Midwestern US as well as in the Pacific Rim, Latin America and portions of Europe. An article published in the Baltimore Sun, "San Francisco's Buildings at Great Risk During Quakes," advised that according to a 2003 assessment of quake-vulnerable buildings in San Francisco, as much as 35 percent of the city's private buildings—and up to 70 percent of its wooden housing—could be lost to a fire or earthquake. Insurance coverage in these higher risk-prone areas can be difficult to obtain and value, unless an appropriate risk assessment has been conducted by a catastrophe analysis expert.
In many cases, insurance coverage is purchased based upon total values at risk rather than a true risk determination of expected damage. This broad-brush approach typically ignores mitigation measures taken by property owners and tenants. To better match coverage with exposure, individual site or regional portfolios should be coordinated with a local risk assessment of assets that are exposed to unique and varying natural hazard risk to avoid the acquisition of inappropriate levels of insurance coverage. This is also true for business interruption and contingent business interruption insurance, which can be expensive and increasingly difficult to obtain.
Determining Property and BI Insurance Coverage for Catastrophic Risk
ABS Consulting provides an effective approach for determining appropriate levels of catastrophe risk insurance and the most cost effective means of managing the risk. We utilize EQECAT’s certified and validated catastrophe models, incorporating key asset location risk assessments conducted by our catastrophe engineers, to develop accurate risk characterization. Many characteristics and factors interact to determine the eventual outcome of damage or financial loss to a structure or asset from natural disaster events. Unique or unknown conditions may exist, which can alter substantially the actual damage sustained to an asset. Experienced catastrophe engineers conducting site visits are in the best position to identify, and qualify, the existence or lack of critical features that will ultimately describe the potential loss during and following catastrophic events.
Damage to industrial structure during Typhoon Paka (left). Mitigating structural features must be identified to appropriately assess risk from catastrophic events (right).
Wind-induced structural damage during Hurricane Opal, 1995.
These factors may include construction methods, building codes in effect during design, building layout/configuration, setbacks, construction materials, exterior cladding, age, condition of the asset, adjacent properties, and localized economic situations which influence how rapidly a facility returns to full operation following a major catastrophic event.
Earthquake damage to industrial structures during 1999 Izmut, Turkey earthquake (left). Total building collapse during 1999 Izmut, Turkey earthquake in building supposedly designed to California Building Code.
Multi-family high-rise collapses during the 1999 Chi Chi, Taiwan earthquake (left). Damage to winery storage building during 1999 Taiwan earthquake (right).
Many of these characteristics and conditions cannot be determined from a photograph or building description and require review by a qualified structural engineer with natural hazard experience to enable an accurate assessment of contribution to damage or loss from an extreme natural hazard event.
Once site and local characteristics have been identified, detailed catastrophe models provide scenario and probabilistic analyses based upon robust event sets describing the hazard in question. The models discriminate levels of expected damage and financial loss based on hazard and vulnerability assessments of the specific assets. The use of EQECAT's detailed catastrophe models enables determination of exposure of multiple locations or assets exposed to individual events, providing an accurate view of per occurrence and annual aggregate losses. This approach is necessary for determining the appropriate limits and sub-limit structure for catastrophe property insurance protection.
EQECAT-produced flood damage map following Hurricane Katrina, 2005 (left). EQECAT estimated wind-field map of peak gust winds during Hurricane Katrina (right).
EQECAT WorldCat ground-shaking map of 1999 Chi Chi Earthquake.
ABS Consulting has more than 20 years of on-site experience in risk assessment and mitigation analyses for virtually every kind of facility, from multifamily and commercial buildings to complex chemical, petrochemical, manufacturing, utility, energy and transmission and distribution operations. This includes both pre and post loss activities for a wide variety of natural and man-made hazard events including earthquake, hurricane/typhoon, flood, tsunami, industrial releases and fire/explosion occurrences.
This experience allows us to assist property owners, plant/facility operators, real estate companies, insurers and reinsurers and brokers to accurately quantify exposure and to develop methods for estimating and reducing aggregate exposures to natural and process-related hazards on a localized or portfolio basis.
Risk Transfer Analysis Services
ABS Consulting supports a wide variety of market segment clients requiring determination of probable and expected natural hazard losses for individual locations or a portfolio of assets to support insurance risk transfer and/or risk financing decisions. These service offerings include:
- Scenario Expected Loss analysis for selected extreme events
- Scenario Upper Loss analysis for selected extreme events
- Probable Maximum Loss (PML) evaluations
- Probabilistic Analysis
- ASTM E2026-99 analyses
- Phase I Seismic Risk Surveys
- Phase II Seismic Risk Evaluations
For more information, contact:
Kenneth A. Travers
SVP, ABS Consulting/EQECAT
1-302-239-1145 | ktravers@eqecat.com |
