Insurance Post

The nature of the beast


With hurricanes increasing in frequency by 35% in the 15 years since Hurricane Andrew struck, Jane Bernstein looks at how far the insurance market has progressed in that time and asks if it has the modelling and human resources balance right yet

Some 15 years ago, Hurricane Andrew struck the north-western Bahamas, southern Florida and south-west Louisiana, and was the costliest natural disaster in US history - until it was surpassed by Hurricane Katrina in 2005. Since Andrew, significant developments have been made that can help in reducing and managing the risks. While some of these involve high-tech forecasting systems, much of the progress has also been in the knowledge and expertise among those dealing with hurricanes, and an increasing willingness on the part of the relevant bodies to work together.

In particular, early notification has made a difference both to the safety of residents in hurricane-prone areas, and to the speed of response once a hurricane strikes. Bev Fitzgerald, managing director at Fitzgerald Consulting, summarises the effect: "It allows the public to evacuate, and policyholders can carry out preventative measures. It also means that insurers and loss adjusters can plan their response much more effectively - they know where they will need to be, and can be aware of the likely extent of the damage."

Unpredictable results

There are, however, still limitations to the powers of weather forecasters. David Harrod, Lloyd's and London market director for McLarens Young International, explains: "They are accurate on a three-day track but there is still a level of unpredictability. Hurricane Marilyn in 1995 went from a category one to a category five inside about 12 miles."

Catastrophe models in general are becoming increasingly sophisticated, but they also come with a certain health warning. Paul Delbridge, partner at Pricewaterhouse Coopers, says: "Cat models are not the Holy Grail - they are tools that can inform but cannot be relied upon in full."

Problems involving models include a limited volume of data to draw on, as well as inherent difficulties in predicting not only the storm track but also the cost of the resulting damage. Mr Delbridge points to 'demand surge' as one of the less predictable factors: "During a major hurricane, such as Katrina, building materials and building contractors will suddenly be in short supply, so what you would typically assume to be average building costs jump significantly."

While it is vital to obtain a balance between reliance on Cat models and other underwriting tools, most industry professionals believe insurers are getting it right. James Johns, managing director in the global property practice at Marsh, explains: "The London market has struck the right balance between modelling output and traditional commercial underwriting decision-making."

When Cat models were first introduced into the property market, there was concern over the concept of machines dictating premium levels. However, Mr Johns says: "There is now a clear understanding that they are just a tool, and that underwriters do use them well."

Quick contact

These developments, in conjunction with improvements in mapping technology, have also greatly helped insurers to improve customer service levels by ensuring that once a hurricane has reached land, they can make contact with customers as quickly as possible. In some cases, this can be before customers themselves know they need to make a claim. Mr Fitzgerald summarises one of the key benefits of this approach: "Hurricanes often hit holiday resorts, so people with substantial houses may not be there and may not know that their property has been damaged."

There is also a wide consensus that the insurance industry has improved its ability to mobilise people and resources in the past 15 years. Again, early notification technology has helped. For example, it used to be impossible to physically access an area that had been devastated by a hurricane. Now, armed with a fairly accurate prediction about the hurricane's likely destination, some loss adjusters will arrive on the scene before it makes landfall.

However, a successful operation also relies on the skill and expertise of the people involved. After all, not everybody would be prepared to fly into a hurricane situation, especially when most of the area's residents are preparing to leave. "It's a demanding job," comments Mr Harrod. "You are often working under very difficult circumstances, with no lights, food and water."

In some ways, however, the development of human resources continues to lag behind the huge leaps being made in technology. The question is, does the industry have sufficient resources in terms of skills and expertise to manage hurricanes worldwide?

Bud Trice, Crawford and Company's vice president of catastrophe services, responds: "No. At least not to the standards adopted in the peace and quiet of non-hurricane season. Companies should not only have catastrophe plans in place, they should have developed contingency plans for personnel shortages. Such plans may include expanded proactive call centre capability, cross-training of field staff, just-in-time recruitment, training and deployment models and alternative claims adjustment methodologies."

Mr Delbridge points out that one area in which the insurance industry is making inroads is in funding relevant research. FM Global, for example, runs a 1600-acre research campus in West Glocester, US, that focuses on property loss prevention, scientific research and product testing. Reinsurance intermediary Benfield sponsors the Benfield UCL Hazard Research Centre, which covers geological hazards, meteorological hazards and seasonal forecasting, and disaster studies and management.

Dr Claire Souch, senior director of model management for RMS, comments: "In the past few years, the insurance industry has invested significantly in products and models to understand and manage their risk - but more can still be done."

Dr Souch believes that investment in data will be the differentiating factor, adding: "Those that ensure they have detailed and accurate information on property characteristics and locations will be able to manage their risk more effectively, and be far better placed to weather any future storms or catastrophes."

Changing climate

One of the many challenges for those researching hurricane activity is that the nature of the hurricanes themselves is constantly changing. Professor Mark Saunders, lead scientist in the Tropical Storm Risk forecasting group and head of weather and climate extremes at the Benfield UCL Hazard Research Centre, comments: "Hurricanes have increased in frequency by 35% over the past 15 years, although the North Atlantic is the only basin where hurricane-strength events have become more common over this period. The jury remains out on whether this increase is due to a natural multidecadal cycle, called the Atlantic Multidecadal Oscillation, or whether global warming has played a part."

Francesco Nazzini, managing consultant in the modelling, analysis and design team at Marsh, comments that, in addition to an increased frequency and severity recorded in hurricane activity, their impact has also been affected by a higher population density along coastlines. "There are higher exposed values now, and these will increase the loss independently of the event itself," he explains.

Despite this, there is some hope that new building regulations will help mitigate the losses (see box). Andrew Mitchell, business leader of catastrophe management services at Willis Analytics, says there has been a strong trend during the past 25 years of incremental improvements to the design codes for hurricane resistance, intended to increase the structural robustness of vulnerable building components.

However, Mr Mitchell adds: "Although vulnerability may have reduced, this is offset by the growth in exposure values and urban density over the same period, and by the complex interdependence of present day socio-economic mechanisms. This means that, hypothetically, exact repeats of historic hurricanes will tend to generate larger losses."

This view is widely held among industry experts, as Mr Trice points out: "Population migration to coastal areas has done more to affect the industry's ultimate cost of a hurricane. Overall, building practices have improved, however, this gain is marginal compared to the increased exposure."

As far as the overall response to a hurricane is concerned, there is a view that, while the insurance industry is getting much better at co-ordinating its efforts, there is room for improvement on all levels. "Co-ordination does occur at the emergency management or response level, as well as the regulatory level," Mr Trice comments. "Certain US states work with the industry on issues such as adjuster access to restricted areas and damage assessment."

Room for improvement

However, he adds that other states have not seen a need to work with the industry in advance, and that there is room for more co-operation.

Even with the best intentions to pool resources and share information, lines of communication can fail during a hurricane situation, as infrastructure collapses and phone lines are down. Mr Fitzgerald adds, however, that mobile phone developments have helped enormously.

Another notable concept that has developed is business interruption planning. Mr Johns observes: "We have seen it evolve over the years, and companies now have sophisticated plans around how to mobilise people and move business operations to mitigate potential BI."

Technological advances and developments in expertise are helping to forecast and deal with the aftermath of hurricanes, but even the best laid plans will always be hampered if a town's infrastructure is completely destroyed. Furthermore, there will always be a certain level of unpredictability about hurricanes. The question now is how far technology can go from this point forward.


Stefano Tranquillo, vice-president UK operations for FM Global, responds: "In the US, many building codes have become more robust as a result of lessons learnt from hurricane damage. Yet a look at historical loss data for windstorms, as well as recent reports from the above-average 2004 and 2005 hurricane seasons in the US, highlights some familiar themes.

"According to the US-based Roofing Industry Committee On Weather Issues, poor workmanship and improper materials and specifications were the primary causes of hurricane-related roof failures in Florida and on the Gulf Coast in 2004 during hurricanes Charley and Ivan. RICOWI reported that nearly 95% of roof failures were caused by poor workmanship and substituted materials.

"In a related study of hurricane damage caused by Hurricane Katrina in 2006, the US-based Institute for Business and Home Safety reported that 'most of the affected areas experienced gust wind speeds below those established in the American Society of Civil Engineers' ASCE 7 Standard, which guides construction practices in high-wind-exposed areas'.

"The IBHS also noted that 'most of the wind damage to structures built after 1995 could have been prevented had the jurisdictions adopted and actively enforced model building codes and high-wind deem-to-comply documents available in the early 1990s'. The IBHS further suggested the best approach to preventing property losses caused by such storms in the future would be to, among other things, 'require the adoption and enforcement of modern building codes and standards where they do not exist', and to 'require training for builders, subcontractors, architects, engineers and building officials on wind-resistant design and construction'.

"That being said, the majority of building-related professionals are reputable, conscientious and hard-working people, and have their clients' best interests at heart."

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