RMS eyes opportunities in flood risk
Risk modelling company RMS is preparing to back the expected business boom from public-private insurance collaborations by developing products to cater to the new marketplace.
The company is poised to introduce a US flood-related solution next year and launch a countrywide flood hazard map, Jeff Waters, product manager at RMS, told PCI Today. This will be quickly followed up by a probabilistic model.
Flooding is the most common and costly natural disaster in the US, causing an average of $50 billion in economic losses each year. Most US natural disasters declared by the president each year involve flooding, according the Insurance Information Institute.
The national flood insurance program (NFIP) was established by the US government in an effort to indemnify property owners should they be caught up in a serious flood event. However, poor actuarial data saw the product priced too cheaply and the initiative has now costs the US Treasury $23 billion a year, up from $20 billion in 2012.
This is prompting the government to look again at the model. “The progression towards a private market in terms of flood insurance in the US is looking more achievable,” said Waters.
He is assuming efforts to reform or replace the struggling NFIP will be successful.
“A combination of reform in terms of rating and pricing and a new wave of flood analytics is setting the stage for a gradual progression to a private market. But there are so many moving pieces—how quickly we move on this depends on how much the government wants it to happen. The big hurdle to the private market is the fact that the rates aren’t exactly sound,” he said.
RMS is already working in collaboration with several government organisations in preparing the road to privatisation of flood risk which could eventually be worth billions to the re/insurance industry.
Waters warned that coastal flood risk is expected to increase in the future as coastal exposures continue to rise along with sea levels. RMS research has estimated that coastal flooding will be the primary driver of hurricane losses in select coastal cities by 2100, including New York City.
“Our internal research shows that coastal flooding will be the primary driver of insured exposures for many coastal cities by 2100, including New York, Baltimore and Tampa, and the damage will be driven by storm surge as opposed to windstorm. Water is the new wind,” said Waters.
In New York City, the likelihood of a $15 billion surge loss today is relatively low with a 200-year return period—but that drops dramatically to 45 years by 2100.
And he revealed that although climate change was not part of its model today, RMS would consider incorporating it in its modelling if there was “general acceptance” that it existed.
“We are working on studies and side projects to understand the impacts of climate change on the overall insurance risk landscape,” said Waters.
Meanwhile, he revealed the seven industry giants that are partnering RMS in the trial period of its new marine catastrophe model. Aon Benfield is joined in the project with ACE, Amlin, Munich Re, Canopius Sompo, AXIS and Liberty.
“We have seen some recent events that have highlighted the exposures here—Tianjin and Hurricane Sandy—and the urgent need for a solution. But there are huge challenges and these are uncharted waters for RMS,” he said.
