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How Hurricanes Have Changed Property Casualty Insurance

Posted by: Agent Hub

Although hurricane season is well underway, we’re entering into peak season, and even if U.S. forecasters predict below-normal activity for this year’s Atlantic Hurricane Season, we are reminded that disasters can happen without warning. This year marks the 10th anniversary of the devastation caused by Hurricane Katrina.

Hurricanes, including Katrina in 2005 and “Superstorm” Sandy in 2012, have dramatically changed the property casualty insurance business over the years. Although tragic and costly, these massive storms have paved the way for several advancements within the industry:

Better Catastrophe Modeling

Although Katrina spearheaded the catastrophe modeling shift from a reinsurance domain to widespread adoption, catastrophe modeling, or cat modeling, practices have dramatically improved, too. Historically, modeling data missed the mark when it came to hurricane and catastrophic event damage because of the focus on annual average losses. Thanks to advanced technology and better data collection methods, insurance companies can now access more accurate modeling. This decreases model uncertainty and can help underwriters to better assess risk. Changes in cat modeling have accompanied every major storm. For instance, Ike in 2008 changed cat modeling for wind. Additionally, Ike adjusted modeling methods for how hurricanes affect inland areas, where previous hurricane modeling focused on the coast.

Clarified Policy Verbiage

Much like how Ike changed wind coverage, Katrina changed how insurers handle storm surges. Many insured did not realize that having windstorm coverage did not include the damage caused by storm surges, which falls under flood peril. Insurers have since adjusted policy verbiage, especially when it came to mention of flood peril. Most catastrophic events lead to a scrutinization of property policy and scope of coverage.  After Katrina and Sandy, insurers now commonly include use of named-storm or windstorms with storm-surge clauses. Additionally, policy verbiage now reflects dramatically different coverage limits and deductible application. Katrina’s devastation also led to increased clarity on risk transfer.

More Government Involvement

Hurricanes, Katrina in particular, have caused an increase in government involvement and regulation. Regarding disaster preparedness planning, for instance, the National Response Framework now mandates how all federal agencies will respond to emergencies, and focuses predominantly on improved communication and coordination across all agencies. In addition to planning, major hurricanes have sparked the creation of new government agencies, such as the Federal Insurance and Mitigation Administration, which manages the National Flood Insurance Program. In order to help mitigate loss due to floods, FIMA offers flood insurance through their Risk Insurance division.