Carriers Brace for Change as Shifts in Weather Impact Risk

Posted on Dec 20 2018
Type Blog

In the last decade, 2018’s hurricane season has ranked third for damage costs behind Hurricane Sandy in 2015 and the combined effects of Hurricanes Harvey, Irma and Maria in 2017. This year’s hurricanes hit Florida for the second year in a row, as well as the Carolinas, highlighting a crucial developing trend in weather activity.

Weather events are now more frequent and more intense, changing the level of risk that they pose on U.S. infrastructure, according to the Fourth National Climate Assessment, a research initiative conducted by the U.S. Global Change Research Program. A shift in weather not only worsens the impact of hurricanes for coastal communities, but it also causes increased damage in regions that traditionally do not experience weather-related catastrophes. As U.S. infrastructure ages and deteriorates under the stress of worsening weather events, it’s important to understand what new perils are relevant to a carrier’s book of business to properly manage risk.

Weather events are changing and so are the associated perils

Just this year, Camp Fire – the most devastating wildfire in California history – tore through Butte County and claimed more than 14,000 structures. Wildfire activity is expected in California, but fires over the past few years have been getting worse and reaching increasingly populous areas. This is evident in wildfire costs, which have been steadily rising since 2013. Maintenance costs on residential structures alone in 2018 saw the largest jump with costs growing 93.80 percent year over year as of October 2018.

The destruction is not limited to wildfires. Storms are also dropping more rain than in years prior, leading to increased risk of storm surge and subsequent flooding. The severity of these events has threatened inland regions of the U.S. that don’t typically experience damages from weather events, causing increased repairs to structures, roads and bridges. 2018’s Hurricane Florence dropped record levels of rain and ensuing floods led to more damage than the strength of the storm itself in areas far more inland than these storms typically reach.

At the same time, catastrophes are growing more extreme in storm-prone regions as well, like the U.S.’s trillion-dollar coastal property market. Hurricanes Irma and Harvey were prime examples. Both hurricanes impacted large swaths of the coast – Hurricane Irma alone surpassed $11 billion in estimated insured losses. According to Aon Benfield, total economic losses from 2017 hurricanes were nearly five times the average of the preceding 16 years and losses from other severe storms were 16 percent higher.

The Aging Housing Stock Shows Signs of Decreased Risk for Insurance Carriers

Following the height of Great Recession in 2009, remodeling of residential structures increased a substantial 58.9 percent as of March 2018, according to BuildFax research. Additionally, in the first half of 2018 alone, residential remodeling increased 8.6 percent. Even as fewer homes went on the market than in years prior, the number of construction projects and spend on existing structures continued to rise.

Moreover, Florida outpaces most other states for remodeling activity, due in part to recovery efforts following major storms and hurricanes. BuildFax found that in the year after Irma, residential remodeling increased 20.29 percent in Florida compared to the year prior. Almost one-fifth of these remodels involved roof construction, a cornerstone of risk reduction. This is unsurprising given the level of destruction from Irma across the state.

It’s important to note that even as the rate of remodel activity rose in 2018, undercurrents of housing stressors were also at play. The number of natural disasters over the last few years has put pressure on the construction materials and labor markets. This pressure increased with recent tariffs on construction materials. As these factors inflated construction labor costs, housing prices and mortgage rates rose, leading more homeowners to focus on renovating their exiting property with larger remodels instead of re-entering the housing market.

How insurance carriers can prepare for extreme weather events

As weather events intensify, the insurance sector will likely see impacts across the policy lifecycle. More sophisticated technology and advanced data sets will be increasingly important for carriers to better mitigate risk and know more about the properties they insure. Take the claims process, for instance. Changes in weather will lead to increased claims costs as homeowners see the unexpected impact of rainstorms, hurricanes and fires – making it increasingly difficult for carriers to verify claims at scale. Yet, advances in AI and machine learning techniques are enabling carriers to extract robust, actionable insights from data to make more informed decisions.

It’s hard to predict how weather will change in the years ahead, but validating property condition and history data enables carriers to prepare for unexpected weather events that impact their book.

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