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Cat-Risk Preparedness, Overland Flood Clarity, IT Basics for Insurers

Posted By Thom Young, November 17, 2015

Cloudy with a 50% Chance of a 5.5 or Greater Earthquake in the Next 10 Years

In our technologically advanced world, we are often underwhelmed by our ability to predict natural events with any degree of certainty yet overwhelmed when experts predict calamities and trends. Meteorological predictions beyond three days in the future retain little more than a 50% accuracy rating, which, as any statistician will tell you, has the same certainty as flipping a coin in the air. As I’ve often noted, the science of weather modeling really only began in the 1970s when the first weather satellites were launched and began collecting rudimentary data that advanced the understanding of weather in general and, particularly, of hurricanes. As modern technology has exponentially increased the amount and type of data upon which the science is based, the science continues to evolve. New data sometimes contradict the old hypotheses and provoke new insight. The National Oceanic and Atmospheric Administration (NOAA) and its one of its partners, the U.S. National Weather Service, meet to determine warnings and updates about the upcoming hurricane season.

The accuracy of this information may depend on perspective. A statistical review from a Houston newspaper claims NOAA’s predictive analysis is accurate “6 out of 10 times, or twice as often as chance would predict” based on the average number of hurricanes per year, and the NOAA website confirms this ratio of around 50%. Further, the Houston article indicates that the accuracy assessment was affected by the small sampling. All that considered, the information seems about as helpful as standing at the edge of the ocean and reading the Farmer’s Almanac.

Seismologists are predicting a catastrophic earthquake and tsunami in the Pacific Northwest—much like the 2011 event that occurred in Japan—is inevitable, could happen at any time, and would involve the heavily populated areas of Seattle and Vancouver. They opine that the magnitude of such an earthquake is indeterminable but that the area is long overdue for a “big one” and calculable pressures along known fault lines are the highest they’ve ever seen. References abound to the specter of a disaster along the lines of that portrayed in the movie San Andreas, but saying that a major earthquake is inevitable is no more useful than forecasting another eventual ice age. The motivation to prepare is substantially reduced if the inevitability has no sense of urgency or expiry date. Inevitability also evokes fate: if nothing can be done to avoid the disaster, getting ready for it won’t be the number one item on a list of things to do “someday.”

The governments charged with protecting us from disasters are allocating money to build shelters and create emergency resources. Emergency protocols are being practiced. I predict these efforts will not be enough. The “big one” will overwhelm the infrastructure in place and the ensuing chaos will include devastating personal suffering and economic turmoil, much like that we’ve seen in Japan and Indonesia. These countries are still trying to recover from the effects of earthquakes and tsunamis. I advise everyone to be prepared! Put together a survival kit. Make sure to have at least 12 liters of water and three days’ dry food per person in your household. Have a heat source available that isn’t dependent on the probably crumbled infrastructure. Hope that after 72 hours either you have been evacuated or the infrastructure will be available for use. Your cell phone and lights will not likely work very well if at all when the floors collapse, so plan for the worst. Those who consider the contingencies and possible responses will have a better chance of survival.

Enough of the doom and gloom! Chances are the big one won’t happen in the next 100 years. Toss that coin often enough and you’ll eventually be right!
 

Confusing Overland Water (Used To Be Called “Flood”) Coverage

These past weeks have seen several announcements and a number of reports from various insurers on their participation in this coverage for personal-lines risks. If those of us in the industry are confused, we won’t likely be able to assist our customers in understanding their options for coverage. If your clients are insured with company A, they have coverage for sewer backup so long as a flood doesn’t occur either 72 hours before or 72 hours after (I think). With company B, as long as they are outside of the red zone by any waterway, we might be able to cover them for sewer backup—unless the overland water reaches a point higher than the imaginary line, but maybe not for overland water (I think). Company C is putting together another new wording that doesn’t match the wordings of Company A or B but has the same intent. Company D is considering their options. What a mess this has become! Without standard wording, how do we develop an informed recommendation to the buying public? The confusion is getting worse with every new wording announced in the competition for personal-lines business. Can anyone say E&O nightmare? Am I the only one who is looking to the horizon in anticipation of the next serious water event in Alberta? What kind of claims mess will we be sorting out as a result? Need I remind everyone that three days of rain such as we had in 2013 can produce a similar event? Sure, mitigation efforts are underway, but the assurances are coming from the same engineers that approved the construction of numerous housing developments impacted by the July 2013 event.

The deviations from a norm cannot be sanctioned in package wordings. For the process to work, all industry players must offer a similar promise to respond to a similar event. They cannot limit or exclude things that are covered by the wordings already in place. The differences lead to confusion in the marketplace and undermine the confidence of consumers in the advice they receive from agents and brokers.

Package policies were developed to provide consumers a common and expected minimum coverage and to provide insurance companies with a basis for competition. The rule in the development of standard IBC package policy wordings was that everyone would build from the same basic wording so every consumer could be assured that the basic coverage was identical from company to company. Beyond that, each company was free to enhance its coverage and provide all the extras it wished to consumers, excluding modification to the Statutory Conditions, which were still required. This rule of consumer protection seems to have changed with overland flood coverage. Since definitions and limitations are all over the place, brokers are in a precarious situation (E&O risk, as well as professional reputation) when trying to advise their clients, and the public may be unsure of what is covered and the value of their premium dollar.

We need to act now. Broker and consumer associations must call for clarification of this matter. IBC should be looking for consistency among its members on the wordings in use to define overland flooding and the limitations of its availability. The public properly expects that what they are buying from an insurer is defined the same way no matter how it is packaged or which  insurer they choose.
 

Should Insurers Buy an IT Company?

I was amused by a recent article in which the author suggested that an insurer should purchase an IT company. The headline caught my eye as I determined that finally someone was on the right track to resolving the IT nightmare that we endure. The archaic legacy systems that the insurers continue to use are inefficient, slow, and limited. The continued attempts to improve accessibility and efficiency by introducing unworkable “portals” that offload inefficiencies onto the broker cost the industry millions of dollars in administrative costs and stress. Since I was hot under the collar before I even started to read the article, imagine my surprise when I found that the article was only suggesting that such a purchase would help insurers understand and mitigate cyber risk. The author’s view that risk mitigation would be the main benefit certainly suggests he doesn’t understand the issues, at least those at stake from my perspective.
 

In Closing

I have followed the geese and am writing this column from the side of my pool. Please send me a note about things you’d like to hear about. It’s hard to stay focused on insurance issues without your feedback.

The opinions expressed in this blog are not necessarily those of IBAA.
Comment on this post below or email Thom Young privately. Thom also encourages suggestions for topics.

Tags:  catastrophic risk  consumer protection  E&O  earthquake  hurricane  IT  overland flood insurance 

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