Hurricane season 2016: Spotlight on flood exposure
The power of storm surges are well documented, from Hurricane Katrina in 2005 to Superstorm Sandy in 2012, when we all saw the destruction that the water caused to businesses and homes.
Sandy firmly put a spotlight on flood insurance and coverage issues we are still dealing with today. Currently a number of U.S. government agencies are trying to solve the problem of the rising cost of flood risk, including the National Flood Insurance Program (NFIP), the federally-guaranteed program protecting millions of American properties.
And the start of hurricane season on June 1 once again is bringing this risk to the forefront.
While weather predictions are mainly crystal-ball gazing exercises, most forecasters agree the dwindling El Niño weather phenomenon in the Pacific Ocean may increase the chances of hurricanes forming in the Atlantic.
Colorado State University’s Tropical Meteorology Project says this year’s hurricane activity will be about average. This comes after two years of below average named storms forming in the Atlantic on top of a 10-year period during which Florida has not seen a single hurricane come ashore.
Last year’s El Niño is weakening, according to Colorado State, and is likely to transition to either neutral or La Niña conditions - a cooling of the Pacific - by the peak of the hurricane season.
The insurance and reinsurance markets will never become complacent about the potential impact of hurricane and windstorm given the magnitude of destruction they can leave behind, but flooding is now one of the biggest challenges facing the industry.
Historically, flood risk has been considered smaller than wind in terms of catastrophe exposure; however it has proven to be a major risk for U.S. policyholders. The NFIP is set to expire in September 2017. Since its inception in 1968, the NFIP has seen many revisions. This time around, however, many private insurers and reinsurers appear more prepared to get involved and share a greater portion of the risk. This is at the core of Congress’ plans to reform the current program. The U.S. House of Representatives unanimously passed the Flood Insurance Market Parity and Modernization Act (H.R. 2901). The legislation offers consumers a choice between the NFIP and the private insurance market. The next step is U.S. Senate to consider the bill. As the current NFIP has a nearly $24 billion deficit, many are eager to find an alternative for US taxpayers to this costly program.
This new legislation may also provide an opportunity for XL Catlin’s Reinsurance operation to assist our Excess and Surplus Lines (E&S) clients meet the potential demand for privatized flood insurance. Those seeking to reform NFIP see potential in tapping into the current reinsurance market’s abundant capital as well as alternative capital options. The pathway into this capacity may come through the non-admitted market. XL Catlin’s reinsurance operation in the U.S. provides coverage to E&S companies on both the commercial and personal lines segments.
flooding is now one of the biggest challenges facing the industry.
Additionally, the opening of private markets may lead to more risk management service available to insureds with flood exposures. The NFIP program does not have the capacity to offer loss prevention services as part of its offering. A privatized market may create a better environment for investing in and finding innovative ways to avoid or reduce loss impact.
One of our senior underwriters, Sheila Kelly, is working both internally and on the Reinsurance Association of America’s (RAA) Extreme Events Committee Flood Task Force to ensure we stay at the forefront of this changing landscape and are prepared to work with our clients.
Flood, along with other perils such as cyber and terrorism, continues to be one of the most challenging risks facing the industry. This is because modeling is difficult and data is often inadequate, making it a particularly difficult risk to quantify and price.
Progress is, however, being made by modeling companies, which are working alongside the insurance and reinsurance markets and other stakeholders.
The reinsurance industry has proven to be remarkably adept over the years at finding solutions to even the most complex of risks. Our strong track record in understanding property and casualty risks and overcoming obstacles puts us in position to address the topic of flood and broadening coverage. Our success, as with other reinsured perils, will rely on our ability to identify strong insurance partners and work with them to provide capacity to the marketplace. Our clients will identify the opportunities to provide coverage and we need to work with them to deliver appropriate solutions to their insureds.
As storms become more unpredictable, we need to change the way we approach flood insurance. With enhanced modeling, data and analytics, and continued flexibility in our underwriting approach, we’re boosting our preparedness and looking for more solutions for our customers.
Bud Lockwood is head of XL Catlin’s Property Treaty business in North America. XL Catlin offers property treaty reinsurance written on either a proportional or non-proportional basis for most classes and structures.