Fires, floods, and hurricanes seemed to be all over the news in 2018. From Hurricane Michael to the massive California wildfires, natural disasters struck the U.S. with full force leaving residents, emergency personnel, and insurers reeling. Sure, FEMA and rescue groups do what they can, but at the end of the day, it’s up to insurers to replace what once was, and this can have a devastating impact on unprepared companies. In this roundup, Financial Technology Today takes a look back at the natural disasters of 2018 and how they have impacted the insurance industry as well as how finance and insurance groups are changing policy to be better prepared for when disaster strikes.
According to Munich Re, the California wildfires and Hurricane Michael were the costliest disasters in 2018. The report indicated that the California fires, known as “Camp Fire,” totaled losses of over $16.5 billion and insured losses over $12.5 billion. Hurricane Michael was close behind, with losses over $16 billion and insured losses of $10 billion.
Last year’s total insured losses of $80 billion were far above the inflation-adjusted average for the past 30 years. The United States wasn’t the only country to see massive disaster, the 2018 cyclone season caused losses of $56 billion worldwide with about half that cost covered by insurance.
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The Danger of Inaccurate Insurance
Natural disasters not only have a significant economic impact on the area affected – but on how insurance companies will cover those areas in the future. A study by Perr & Knight, analyzed how insurers can be negatively impacted by insurance data discrepancies and how these data sets impact premiums. The study looked at how insurance premiums compare using data sets such as zip codes compared to parcel-level data.
In five to ten percent of cases, pricing was inaccurate and premiums were either under or overpriced. Some policies were underpriced by 86.7 percent which translated to a $2,800 annual loss for insurers. When polices are incorrectly priced, it causes strain on both the insurer and customer. An insurance company with multiple inaccurate polices faced with natural disaster claims to pay, may just find themselves out of business.
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The World Bank has doubled its disaster risk insurance for the Philippines, which is now bumped to $390 million. This policy will cover typhoon and earthquakes in 25 provinces. The World Bank will enter into agreements with private reinsurers to provide coverage to national government agencies and provinces. The policy is designed to provide liquidity when a disaster strikes.
“This initiative demonstrates the Philippines’s strong commitment to continue investing in innovative financial solutions that will mitigate the impacts of major earthquakes and extreme climate and weather-related events,” said Mara K. Warwick, World Bank country director for Brunei Darussalam, Malaysia, Philippines, and Thailand. “The program complements the country’s overall strategy and efforts in ensuring resilience against natural disasters and climate change impacts.”
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Natural Disaster Risk Analysis
According to a recent study by FM Global, finance chiefs world-wide could better communicate the risks from natural disasters. Climate change hastens the need for CFOs to spell out the risks for their companies’ operations, cash flow, and market evaluations, said Eric Jones, global manager for business risk consulting at FM Global. “CFOs really need to think about how vulnerable their businesses are,” Jones said.
CFOs at large international companies should take a two-to-five-year review when assessing their disaster risk. Leaders should also create plans for alternative transportation if a disaster damages their main production mean. “Relying on a single port, a single rail line or a single river presents a risk,” Jones said. With disaster plans put into place, companies should assess their insurance coverage in case of a natural disaster.
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To learn more about insurance data and how location can impact policies, click here.
