The property insurance market has seen steady rate increases that affect both commercial and homeowners’ lines of business. While insurance companies have taken different approaches to managing their property business, the tightening of underwriting guidelines, higher rates and reduced appetites for some territories continue to be seen. The property insurance world is being impacted by multiple events. This is driving the experience in ways that are not familiar to many insurance companies.
Catastrophe exposures
Traditional catastrophe exposures were hurricanes and earthquakes. These were geographically centered and there were well established models to predict losses. One method of managing risk was avoiding these areas. There has been a shift in catastrophe events that has added a number of new perils to the catastrophe line up.
Flood Exposures
The FEMA 100-year and 500-year flood probabilities are being stressed. The City of Cincinnati recently started a study group to address how to manage the numerous 100-year flood events that have occurred. FEMA acknowledges that over 30% of flood events occur outside of their mapped Special Flood Hazard zones. The flood mapping system is not reflecting the hazards. Several trends are converging to make flood events more severe.
The first factor is development along floodways. As more areas are developed and paved, the amount of water being sent to floodways increases. As flow in the floodway increases so does sedimentation that essentially narrows the floodway and reduces its capacity. Higher flows in smaller channels create a higher hazard. The age of flood maps makes this problem more difficult to manage. The data for many flood maps is out of date.
Climate change also affects flood hazards. This past summer was the warmest summer on record. As air temperature increases, so does the ability of the air to hold moisture. Rain events can be more severe than anticipated. If the heavier rain follows a prolonged dry period, the dry ground cannot absorb the heavy rain resulting in higher flows to the floodway. These local flooding events also contribute to the sedimentation of the floodway.
Development and climate change are not geographically limited. Flood hazards are present in all geographic areas, so avoidance is no longer an effective strategy.
The release of FEMA 2.0 flood rating will impact all customers of the National Flood Insurance Program. Revised flood hazard models will add new territory to flood hazard zones. See our prior article on Flood Insurance and the use of FloodFactor as a tool for your evaluating exposures.
Hail
The same changing weather trends have impacted hail events. As warmer, moisture laden air collides with colder air the severity of thunderstorms has increased. With more moisture available in the atmosphere, hailstone sizes and hailstorm frequency are increasing. Hail is driving property losses in geographic regions that previously were not considered to be catastrophe prone areas. Avoidance is not a workable strategy.
Many carriers are implementing hail deductibles and roof covering coverage limitations. Roof material manufacturers are also changing their products to address the larger hail sizes. Factory Mutual updated their hail maps and product approvals to help manage their hail exposures. There is evidence that the existing UL standards for hail resistance are not effective. The Insurance Institute for Business and Home Safety (IHBS) published a report on currently available roofing materials. https://ibhs.org/hail/shingle-performance-ratings/
Wildfire
This was originally believed to be a California issue. Recent wildfire seasons have demonstrated that the hazard has expanded past California. On September 8, 2021, there were 83 major wildfires occurring in the US. Wildfires were burning from California to Minnesota. Additional development has increased the urban wildland interface zones. This places more property adjacent to wildfire prone forests and brushlands. As the hazard moves away from the west coast, there is pressure on local fire departments to improve their level of training and equipment for this hazard. As the geographic spread continues the ability to avoid the hazard is diminished.
Fire Behavior
Changes in fuel packages have changed the behavior of structure fires. Time to intervene has been significantly reduced. Testing at Underwriters Laboratories has demonstrated that legacy furnishings from 20 years ago would reach flashover in 20 minutes. Current furnishings reach flashover in 3 minutes. This reduces the impact of fire department response.
A traditional underwriting tool has been the Public Protection Class system to evaluate fire departments, water supplies and alarm handling to offer pricing changes in property insurance. The fire behavior changes may make this long-standing tool obsolete.
Loss Severity
While the number of structure fires have significantly diminished in the past 25 years, the cost of the fires has doubled. From an insurance standpoint frequency is down but severity is up. The most common underwriting tools, small rate and deductible increases, are generally effective against frequency. Severity is a much more difficult number to influence. In most cases the tools to address loss severity are avoidance or significant pricing increases.
Fire deaths and Injuries
Injury rates have increased from 26 injuries per 1000 fires in 1980 to 30 injuries per 1000 fires in 2018. Death rates have also increased. Fire deaths in 1908 were 7 deaths per 1000 fires and this has increased to 7.5 deaths per 1000 fires in 2018. This may be attributed to the more aggressive fuel packages that create faster and hotter fires.
Law of Large Numbers
The insurance industry has always depended on the long history of coverages, loss data and the links between the two to set rates. The impact of more severe flooding, larger hail stones and increased wildfire activity has occurred in a short period of time. There is no history to use to place these events into a large number context. In this day of data driven decision making, the lack of a track record with these issues makes the decision making more difficult.
Solutions
The implementation of smoke alarms in the early 1980’s had a significant impact of fire safety in the United States. With broad adoption of this technology, the benefits have been seen and the impact has now plateaued. The next technology to apply to the fire problem in America is increased adoption of automatic sprinkler systems. The model codes have had provisions to add sprinklers to homes and other occupancies since 2005. These code changes have been stalled at state and local levels. The change in fuel packages make this the only practical method to reduce risk and losses.
Climate change research and implementation of resiliency as part of development planning can have a positive effect on flooding and wildfire exposures. There are recognized control methods that can be implemented to affect changes. There are emerging data sources such as Floodfactor that can help identify flood hazards and lead to better decisions.
Hail losses can be affected by changes in building materials. Factory Mutual has changed its approval standards for hail resistant roofing materials to improve performance. Research by Insurance Institute for Business and Home Safety (IBHS) has shown that the existing building codes for hail resistance need to be strengthened. Improvements in roofing materials can impact these loss events.
The Driehaus Difference
We understand the risk management choices that influence property loss expectations and potential premium costs. We can help you identify cost effective risk reduction programs and strategies that will improve your insurance program and your risk level. We share our insights on pricing trends to help our clients make informed decisions. Call us at 513-977-6860 or contact us on the internet at www.driehausins.com to learn more.