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On a beautiful late spring day, I left my house for a “scenic” drive to our home office in Bloomington, IL. The sun was out, the temperature was perfect at 78 degrees, and traffic was moving at a great pace….until the dark clouds rolled in from the west and the rain started, reducing visibility to almost nothing and bringing all traffic to a standstill with blinkers flashing. Add some amazing lightning and thunder and some nickel-sized hail and my afternoon was no longer any fun. My long drive finished with tornado and flood warnings and enough water in the streets to make Bloomington look like a small water park.
Weather remains one of the most significant risk factors facing property & casualty insurers. Wind, rain and hail events confound the planning process each year and keep many a reinsurer in business. Ratemaking and reserving actuaries continue to look for new ways to gather reliable estimates of weather impacts to help make business decisions. Where is the data we need?
Weather data has of course long existed, and is making a rapid movement into the forefront of analytics for property & casualty insurers. At any trade show, multiple vendors are present with weather data that is increasingly robust. We no longer measure in tens of square miles but now have square mile increments available to us. Detailed reports are readily available after storms and insured loss damage estimates can be quickly produced based on individual insurer exposure and risk concentration.
Weather analytics have generally included meteorologists and data scientists, but actuaries and insurance experts are increasingly becoming partners and collaborators as we seek to better understand weather as a risk factor. Rating territory analysis often includes a weather component to identify and cluster areas with a higher propensity for weather-related losses. Rating by peril is used to more precisely assess the potential impacts of weather events. Catastrophe and weather models including simulation analysis are prevalent and largely accepted by regulators today. Planning and underwriting strategy focus on concentration of risk.
Every year, insurers are concerned with Nor’easter storms impacting New England, , hurricanes affecting Florida and the Gulf Coast, wildfires or mudslides in California and wind/hail events throughout the country.
Coastal properties have greater risk and are generally charged more for property coverage, but insurers typically were not concerned about significant hurricane damage in the Midwest until Hurricane Ike in 2008; Hurricane Isaac followed a similar path in 2012. Likewise, the risk of tornadoes in southern California were not on many insurers’ radars until last December 12, 2014 when one struck Los Angeles. No one can predict the whims of Mother Nature.
A significant challenge to insurers is to take massive quantities of data in granular form and apply them to a model that may better predict insured losses due to weather events. An even larger challenge is to understand the impacts of weather over time to manage, price, and underwrite risks in certain geographic locations. Fortunately, the data and the models continue to improve as do meteorological tools.
Sitting in a restaurant or working at an industry trade show while everyone’s phones simultaneously chime a weather alert is proof of our advances in preparation. So, the industry will continue to monitor the data, develop even better models, and gather information to assess the potential damage of future weather events. And always hope that Mother Nature is in a good mood tomorrow, next week, next month and next year.
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Pinnacle is an actuarial firm focused on property/casualty insurance, including alternative markets, captives, self insureds, enterprise risk management, predictive analytics, commercial lines and more. We serve trucking, insurance, health care, medical professional liability, reinsurance, workers compensation, public entities and other companies and concerns.
Our services include expert witness, loss reserving, litigation support, pricing, ratemaking, rate filing, statements of actuarial opinion, feasibility studies, capital modeling and other actuarial services and products.
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