Changes in risk profiles, especially for atmospheric perils, should be a key issue for property re/insurers right now—especially as the protection gap widens in the US.
Clark told Intelligent Insurer that the most important output of a catastrophe model is the exceedance probability (EP) curve, which provides insurers and reinsurers with a view of the probabilities of losses of different sizes—either on their own book of business, or for the industry as a whole.
However, Clark pointed out, many older models no longer offer a credible view of today’s risk profile. In particular, some risks once categorised as secondary perils, should now be reassessed and reprioritised.
She pointed to wildfire losses and arctic cold snaps such as the one that hit Texas in February 2021 as examples of the kind of surprise losses that used to be labelled as secondary perils.
“Even in the US the protection gap is growing.” Karen Clark, KCC“For KCC, these have never been secondary perils,” she said. “We’ve invested a lot of resources in making sure the models that we produce for severe convective storm, winter storm and wildfire are accurate, along the whole risk profile, because our models have identified that the shape of this EP curve is changing.
“So, the probabilities of $10-20-30 billion losses are increasing faster than the losses in the tail of the distribution and you’re seeing faster increases in the lower return periods and losses.”
Clark stressed that climate change is impacting the severity of hurricanes, with a higher proportion of major hurricanes, such as category three, four and five storms, as a higher proportion of the total number of hurricanes.
And she underlined that a protection gap is opening up in the US, as it becomes ever harder to get property insurance in places such as Florida.
“We’re always talking about the protection gap in the industry as a whole and we like to think of that as being in developing economies,” she said. “But even in the US the protection gap is growing. It used to be focused on flood and earthquake and now you’re seeing it on wildfire and on hurricane coverage.”
That’s why KCC has invested so much in better models and better technology, Clark said. She believes it’s vitally important for insurers and reinsurers to understand these perils, to make sure they can underwrite and price them. She cited the underwriting maxim that there’s no such thing as a bad risk, there’s just a bad price.
Clark added that companies need to be more nimble and able to embrace new models, new technology and updated models more frequently. She pointed out that in the catastrophe modelling industry, model updates have been dreaded by companies because, especially with the older models, updates can be infrequent and it can take a long time to get a new model implemented, something that she said was “archaic”.
However, Clark added, it is important not to rush too fast with some new technologies. She stressed that tools such as artificial intelligence (AI), while being potentially very useful, have to be understood properly, with their advantages and disadvantages taken into account.
She concluded that AI is a useful technology for the insurance industry, if it is correctly understood and used.
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KCC, Karen Clark, Risk, Insurance, Reinsurance, Global