Extreme weather-related catastrophes are continuing to drive home the importance of risk management and the insurance industry is responding not only by focusing on helping customers mitigate the losses, but also sharing that information.
Jacob F. Scherer, Cincinnati Financial's chief insurance officer, said the company's loss control division has expanded significantly.
The company is "literally inspecting or re-inspecting hundreds of thousands of structures both in personal lines and commercial lines to give us a more confirmed view of the quality of the property that were insuring, the age of the roofs, the condition of the roofs...obviously with the weather being as bad as it has been, roof claims is a very significant part of what we've been battling," Scherer said during the company's fourth-quarter earnings conference call.
This renewed focus makes sense in the face of growing volatility of global weather conditions. Hurricane Sandy, record droughts in the Midwest, tornados, hail and wind, all contributed to an estimated $43 billion in insured catastrophe losses in 2012, according to A.M. Best Co.
Zurich, like Cincinnati Financial and much of the insurance industry, has a history of risk engineering and advising clients on how to mitigate or avoid losses. "We have always looked at these things, but now we are being asked to share that information, and looking at things in a broader context," said Lindene Patton, chief climate product officer for Zurich Insurance.
Education is the key, said David Treutel Jr., an insurance agent with offices in Mississippi and Alabama who helped launch Smart Home America, a nonprofit organization created to increase awareness of the benefits of fortified construction and mitigation.
"Everyone is trying to get their arms around extreme weather risk," he said. After hurricanes Katrina and Ivan, Treutel said he saw about 70,000 homes rebuilt in Mississippi. "How do you rebuild in a way to impact your homeowners insurance rates? The key is education," he said.
After every disaster, homeowners insurers pull back writing in the impacted areas, raising rates and deductibles, Treutel said.
But if the homes are rebuilt as certified fortified homes under the Institute for Business and Home Safety requirements, homeowners can find insurers not only competing for their business, but offering discounts, he said.
"The statistics in North America suggest there is increased volatility and increased severity" of extreme weather," said Patton. "This is the new normal, and we just have to deal with it. People are more attuned to extreme weather events than they've been historically."
The Alabama Department of Insurance has set discount tiers that insurers could either adopt or submit their own for homes that met the IBHS requirements. In 2010, four of the states six largest property insurers State Farm Fire and Casualty Co., the Alfa Mutual group, the Farmers Insurance Group and Nationwide Mutual Insurance Co. submitted their own discounted rates, in some cases offering higher discounts than the state proposed, Smart Home America said.
After Katrina, "what was weak was destroyed, what was rebuilt is stronger than before. It's an opportunity for insurers to come back," Treutel said.
Sandy can also be a learning opportunity, said Robert Hartwig, president and economist at the Insurance Information Institute.
"There's a lot of lessons to be learned. Some of it is in changing land use, zoning and building codes in those impacted areas," Hartwig said. "Insurers understood there could be an event in the Northeast with significant storm surge, but there's a learning opportunity for small to medium-size businesses, not only about construction, but about business interruption."
Sandy made landfall on the evening of Oct. 29, just southwest of Atlantic City, N.J., as a post-tropical cyclone. Total insured damages from the storm are expected by RMS to be up to $25 billion, which is one of the largest industry estimates.
Unlike other hurricanes, commercial insurers are expected to carry a higher percentage of losses from Sandy than personal lines carriers. As a result, insurers are focusing on loss prevention for business interruption and contingent business interruption insurance, Hartwig said.
"You would expect these sorts of efforts would be ramped up in the event that weather has become more variable and volatile on a global basis," Hartwig said. "In the wake of 2011, global corporations with far-flung operations found their supply chains to be very tenuous, vulnerable and fragile. It's not just a question of whether your building can withstand a Category 5 hurricane, but the vulnerability in your supply chain is something that has really emerged in the recent years."
While property damage has remained flat over the past decade or so, the percentage of business interruption and contingent business interruption claims continues to grow, Linda Conrad, director of strategic risk for Zurich said. About 40% of companies with extended supplier disruptions go completely out of business, she said.
"The overall theme that we are all recognizing both the industry and the customer is that there's an increase in extreme weather, not just in frequency but in severity. We want to help our customers better protect themselves," Conrad said. "We're doing a lot of education about contingent business interruption and supply chain, trying to get companies to not just think about their own sites, but thinking about critical suppliers."