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Hurricanes and Floods Insurance Responses And, Sandy

Hurricanes and Floods Insurance Responses And, Sandy. ACTUARIAL ISSUES. MAAC Fall Meeting Thursday, September 12, 2013. Stuart Mathewson, FCAS, MAAA, CPCU Sr. Property Actuary, Swiss Re Co-Chair, AAA Extreme Events Committee. Agenda. Hurricane Modeling Hurricane Insurance/Reinsurance

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Hurricanes and Floods Insurance Responses And, Sandy

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  1. Hurricanes and FloodsInsurance ResponsesAnd, Sandy ACTUARIAL ISSUES MAAC Fall Meeting Thursday, September 12, 2013 Stuart Mathewson, FCAS, MAAA, CPCU Sr. Property Actuary, Swiss Re Co-Chair, AAA Extreme Events Committee

  2. Agenda • Hurricane Modeling • Hurricane Insurance/Reinsurance • Flood Insurance - NFIP • Hurricane Sandy • Questions and Answers

  3. WHAT is Cat Modeling? What? • Computer simulation of catastrophic events • Run against a portfolio of property risks • Gives an estimate of how much loss will be incurred in the event • Somewhat “black box”

  4. WHY Do We Use Cat Modeling? Why? • To estimate potential loss to a company • To determine pricing of cat portion of account • Much better than previous approaches • Low frequency/High severity events • Actual data is nearly useless • Industry-wide use promotes market stability

  5. How is the Cat Modeling Done? How • Four modules • Science 1 • Simulates a cat event (e.g., hurricane) • Science 2 • Calculates the loss drivers (e.g., wind speed) at the various location affected • Engineering • Estimates damage to structures from the event • Financial • Calculates insured loss from the damage • Library of possible events, with probabilities

  6. How is the Cat Modeling Done? • Brief explanation of hurricane modeling

  7. x Definition of a Hurricane Key Parameters Forward Velocity (VF) Landfall Location (LF) Track Angle of Landfall (a) Rmax Eye CentralPressure Hurricane Hugo

  8. Cat 5 Cat 4 Cat 3 Cat 2 Cat 1 An Average of 1.66 Hurricanes per Year in United States

  9. Cat 5 Cat 4 Extreme Hurricane on Average Every 5.8 Years

  10. Hurricane Strikes by Region 13 Recorded Landfalls (1899-1996) 63 35 Northeast 3 34 Mid-Atlantic 34 Southeast Gulf Florida Texas

  11. Assess WindField Quantify Risk Define Hurricanes Calculate Damage Hurricane Modeling Methodology Science -Stochastic Event Module Science - Hazard Module Engineering - Vulnerability Module Financial Analysis Module

  12. Define Hurricanes • Determination of key hurricane variables • Central pressure • Radius of maximum winds • Forward speed • Landfall point and direction • Probabilities of each storm

  13. Modeling Windfields from Hurricanes Maximum windspeed experienced from Hurricane Hugo 1989 Peak Gusts in mph 150 + 150 - 140 140 - 130 130 - 120 120 - 110 110 - 100 100 - 90 90 - 80 80 - 70 70 - 60 60 - 50

  14. Terrain Effects on Windspeeds Surface roughness and fetch affect wind speed estimation. Rougher terrain causes larger frictional effects on the windspeed .

  15. 70 60 50 40 Mean Damage Ratio (%) 30 20 10 0 Wind speed Vulnerability Curves Hurricane vulnerability curves represent the relationship between wind speed experienced and damage caused to the buildings

  16. Financial Analysis Model • Insurance or reinsurance losses can be calculated from different financial perspectives including: Ground-up, gross, net after reinsurance, catastrophe reinsurance cover • Attachment points for can be specified at location, policy, account or portfolio level • Model takes into account all affected properties in a given scenario

  17. Modeled Hurricane Risk by State Average Homeowners’ Rates 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 TX LA MS AL FL GA SC NC VA WV MD DE PA NJ NY CT RI MA NH VT ME

  18. HOW Do We Use Cat Modeling? Model Input • Location of building • Construction • Number of stories • Year built • Occupancy • Secondary characteristics

  19. HOW Do We Use Cat Modeling? Model Output • Annual Average Loss (AAL) • Standard deviation of AAL (SD) • PML levels • E.g., 100-yr • That is, how much loss do we expect with a probability of 1%?

  20. HOW do we use Cat Modeling? Example of PML Curve

  21. HOW do we use Cat Modeling? • Pricing needs to include provision for the cost of potential loss • Plus a load to pay for the risk • For the capacity we have to allocate for the potential loss • For the riskiness in having accumulations in hazardous areas • For the volatility of frequency of loss

  22. Hurricane Insurance & Reinsurance • Price based on • Location • Susceptibility of the area • Distance to the coast • Construction • Terms • Higher deductibles – often percentage of value • Market • Near coast, often many companies exclude wind loss • Wind pools are prevalent • Flood (including storm surge) is almost always excluded • Leads to issues of which peril caused the loss

  23. Flood Insurance – National Flood Insurance Program (NFIP) • Property insurers determined long ago that flood was not insurable • In 1968, Congress passed an act to establish NFIP • By 1973, most communities were up and running • Some key points • Flood insurance available only in communities that established mandated controls • Buildings built before establishment of flood maps were charged subsidized rates • Program needs to be re-authorized periodically • Later laws mandated insurance for properties with federally insured mortgages

  24. Flood Insurance – National Flood Insurance Program (NFIP) • Some key points (cont.) • Intent is that program be self sufficient • In years that losses and expenses exceed premiums, NFIP can borrow from Treasury • Until 2004, NFIP was able to pay back Treasury in non-catastrophe years • Until 2005, borrowing limit was $1.5b • After Katrina, limit was raised to $21b • After Sandy, limit was raised to $30b • Current debt is $24b • Current annual premiums about $3.5b • Full-risk ("actuarial") rates vs Subsidized rates

  25. Brief background – AAA involvement • Previous Flood authorization expired in 2008 • AAA Extreme Events Committee started work on paper to address flood issue • Congress took 4 years – and numerous short-term authorizations to pass new law • The National Flood Insurance Program: Past, Present...and Future? – 2011 • Purpose was to educate on the Flood program to aid in the public discourse • Primary audiences • Actuaries • Decision makers

  26. Brief background – AAA involvement • Capitol Hill briefing on monograph (July, 2011) • Comment letters and written testimony to Congress when deliberations were ongoing (e.g., 6/28/12) • Presentations to NCOIL and NAIC (2011,2012)

  27. Biggert-Waters Flood Insurance Reform and Modernization Act of 2012 • Phases out subsidies for second homes, businesses and severe repetitive loss properties (25%/year) • Any policy for property not currently covered must pay "actuarial" rates • Raises cap on annual increases from 10 to 20% • Sets up reserve fund • Requires NFIP to set up a schedule to repay debt • Requires several studies by GAO, Treasury and others

  28. Current Events • Conversation with GAO on privatization • One of the studies mandated by Biggert-Waters • Discussed general actuarial views on privatization • Comment letter on HR1035 • Community-based Flood Insurance

  29. Privatization • Why was flood deemed uninsurable? • Only those who would often get flooded were interested in buying it • Premium for those properties alone would be prohibitive • Small premium base wouldn't support catastrophic potential

  30. Privatization • Do past issues still exist? • Current situation • No one stepping in to profit from this niche • Some companies offer excess coverage on high valued properties • Large commercial properties usually covered in all-risk policies • Few buy NFIP insurance unless forced • And, enforcement not consistent when mandated • Can new technologies help? • Wharton/CoreLogic Study • A Methodological Approach for Pricing Flood Insurance & Evaluating Loss Reduction Measures: Application to Texas

  31. Privatization • Can it be properly rated? And would those rates be sustainable in the market? • Expected Losses can be estimated by models • Much more granular rating than NFIP • NFIP has no capital requirements – therefore, no capital cost load – private companies would need a significant load • An estimate has been made that rates would have to be roughly doubled if written privately • Can it develop a broad base? • Without a mandate, it's hard to foresee increase in take-up rates

  32. Reinsurance or Capital Markets • Can these mechanisms be used to support the NFIP? • At current rate levels, there is little premium to cover the cost of private reinsurers • Could Federal government act as reinsurer instead of simply a lender? • One idea – Federal government pays for private market reinsurance • Would provide a stable expense for the government • Private/Public partnership in vogue now for some • Politically viable?

  33. Reinsurance or Capital Markets • Can these mechanisms be used to support a private market? • This could be a key piece of privatization – but requires enough premium to pay for the reinsurance

  34. Community-based Flood Insurance • HR1035 – mandating a study on community-based flood insurance • What does this envision? • Community is the insured • Risk assessment and pricing for community as a whole • Covers all properties in the community • Pros as per sponsors • Streamlined underwriting • Increased participation • Incentive for community-based mitigation • Issues • How do you decide how the taxpayers pay? • How do you get individual communities interested?

  35. Should the Debt be Forgiven • At current rate levels, it would take decades to repay debt – even without further major occurrences • After Katrina, about $20B – paid down to $17B+ by 2011 • After Sandy, up to $24B • Biggert-Waters requires FEMA to create a repayment schedule • Must submit to Congress a report on options to eliminate debt in 10 years

  36. Should the Debt be Forgiven • Reserve • Required by Biggert-Waters • 1% of "total loss potential" in force • Fund at 7.5% of reserve ratio until capitalized • If NFIP unable to make the minimum contribution, it must report this to Congress • How is this to be paid for?

  37. Flood Modeling • Hydrological model • Basis for NFIP rates • Probabilistic models • Even more difficult to model than earthquake • Needs data at a very small granular detail for a large area of the country • Changes to river basins often change significantly • Not currently as useful for US insurers as for Europe

  38. Sandy • Weird storm • Hurricane or not? • Flood/Wind/Earth Movement • Issues • Legal • Legislative/Political • NFIP

  39. Cat 5 Cat 4 Cat 3 Cat 2 Cat 1 Historical Storm Tracks

  40. Weird Storm • As we have seen in the maps, it is very rare to have a storm curve into land in New Jersey • NASA study • Typically, the tropical storms and hurricanes that strike the Northeast are pushed in a northeasterly direction by the prevailing upper level winds • Most storms hit the coast at a grazing angle, and only areas of land that stick out into the ocean, such as Cape Hatteras, N.C., and Cape Cod, Mass., have a long history of experiencing storms that hit at a perilous perpendicular angle. • But with Sandy, the combination of a storm diving southeast from Canada, into the Midwest, and a large high pressure area in northeastern Canada and southern Greenland pinned the storm and forced it westward into the East coast

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