In a webinar discussing the increasing frequency of natural catastrophes, panellists explained how supply chain issues and rising inflation has created a challenging environment for insurers to navigate, with the claims estimating process taking much longer than usual.
According to Swiss Re, the two costliest natural disasters in 2021 were both recorded in the US.
Hurricane Ida reached US$30-32 billion in estimated insured damages and winter storm Uri saw US$15 billion in insured losses.
Markel global executive underwriting officer for property Guenter Kryszon explained weather events in the US for the first half of 2021 were significantly different when compared to the first part of 2022.
At Markel we've taken a lot of steps to de-risk our portfolio and position our portfolio for the volatility from hurricanes and making sure that we're generating the appropriate returns in our capital where we are deploying that capital for the peak volatility risk.
Kryszon said: “Storm Uri occurred last year and was pretty impactful to insurers profits and losses in the first half of 2021.
“The first half of 2022 is what we've seen throughout the first half of every year, which has been convective storm activity. In the first half of 2022 we’ve had about 25 convective storms, followed by three winter storms, and we had one wildfire in the first half of 2022.
“We saw 70% of the property and casualty (P&C) industry was reporting about a 5% year-over-year improvement in loss ratio. This was primarily because it did not see the impacts from Winter Storm Uri.”
He added: “We also saw our first hurricane in May this year in Mexico that regenerated into tropical cyclone one before it hit Florida and then exited Florida, before making its way to Bermuda.”
The majority of loss activity in the US has been driven by secondary perils.
Raghav Maheshwari, senior client partner, global P&C business at EXL Service said: “If you were to look at the insured loss activity for the last 10 years and look at the total insured losses in the US, there's roughly about US$600 billion of reported loss activity, and on the international side, roughly about $350 billion of loss activity.
“In the US, if you look at this loss activity, 62% was driven by secondary perils, and 33% was driven by tropical cyclones. Secondly, if you dissect that 62%, the majority of that activity is coming from severe convective storms.”
Kryszon highlighted other extreme weather events across the globe that have brought destruction and financial losses to the insurance industry.
He explained: “The first quarter of 2022 saw three significant windstorm events in Europe. They consecutively generated about US$5 billion of industry losses within the first quarter.
“In Australia, we saw some significant flooding activity to the tune of about US$4 billion.”
Kryszon added: “At Markel we've taken a lot of steps to de-risk our portfolio and position our portfolio for the volatility from hurricanes and making sure that we're generating the appropriate returns in our capital where we are deploying that capital for the peak volatility risk.”
From the perspective of an independent adjusting firm, the volatility of pricing and sourcing materials, can at times delay the claims estimating and rebuilding process.
While the loss activity has in the past focused on peak perils, losses from secondary perils are rising due to urbanisation.
Maheshwari said: “Traditionally, the focus primarily has been on what we call peak perils. These are typically cyclones and earthquakes. However, since 2017 there have been more conversations around independent secondary perils, as the loss activity attributable to these has significantly increased.
“Having spoken to a lot of our clients, a lot of this is happening as a consequence of urbanisation globally. Secondly, unlike peak perils, there is very limited data around them.”
According to Maheshwari, when underwriters assess natural catastrophe risks there is too much reliance on the output coming from predictive modelling.
Maheshwari said: “Our experience at EXL suggests that organisations should not be just relying on stochastic or predictive modelling for managing the exposures. They should be focusing on looking at the risk and the underlying exposure on an underlying risk basis. And they should focus mostly on the hazard of the peril rather than focusing on the broad aggregation.
“Underwriters should not blindly rely on the model output and instead focus on the quality of inputs and ensure that they're connecting the dots between their understanding of the risk, the price, the structure and the attachment.”
While rising inflation will result in losses in both personal lines and commercial lines, on the supply side personal lines have a lot more commoditized products that are easier to obtain.
Roberto Stewart, chief operating officer at Engle Martin said: “There has been some improvement on the supply side and probably a slight benefit on personal lines losses versus commercial type losses, as with commercial you start getting into the more complex specialty type construction and you're seeing increases and delays on those specialty type products and materials. When we say personal lines there is also the high-net worth space, which many times is viewed as commercial as well, with complex properties that have unique building materials and face similar challenges as commercial properties.”
Adriana Belli, managing director of property, marine, and personal lines claims at Markel explains that supply chain issues are having a significant impact on the time it takes for claims to be processed.
She said: “We have seen supply chain disruptions and the impact that has had on claims.
Traditionally, the focus primarily has been on what we call peak perils. These are typically cyclones and earthquakes. However, since 2017 there have been more conversations around independent secondary perils, as the loss activity attributable to these has significantly increased.
“A claim that historically we may have been able to resolve in under a year or within six months can now extend out to a year and a half or even two years. As claims stay open longer, this increases the cost of adjudicating the claim. It also makes it a lot more difficult to pinpoint what the ultimate loss cause is going to be.”
Stewart added: "From the perspective of an independent adjusting firm, the volatility of pricing and sourcing materials, can at times delay the claims estimating and rebuilding process.
“After meeting with the contractor and the building consultant and you agree on scope and have conversations around pricing. Now you have subcontractors and even policyholders who hesitate when they know the lifecycle of that project could be six months or nine months and they are having to make a commitment.
“Contractors have said the turnaround time for getting quotes takes a large amount of time and effort. Unlike in the past, it is not just a case of requesting a quote and having a 24-48 hour turnaround from a supplier or a subcontractor, as product and material availability is simply not there.
Stewart added: “You have to find a secondary product, a product that's the right kind and quality. The struggle of sourcing materials and getting the right pricing for specialised labor can delay the claims estimating process.”
Belli highlighted that litigation is having a significant impact on how long claims are staying open, as well as the settlement amount.
She said: “Since the court systems reopened in 2021, following the Covid-19 pandemic, we have had to work through a large backlog of cases.
“In addition to that, inflation and supply chain issues have resulted in a lot more cases going into litigation. That has posed challenges to us in terms of how we effectively manage all of that.
“To help tackle and address many of these challenges, Markel has made a significant investment in claims. Throughout 2021 we increased the size of our claims organisation by 20%.”
Belli added: “At Markel, claims is continuously meeting with underwriting and feeding data that we are capturing on claims, so that they can make underwriting decisions and react what is happening in the industry quickly.
“We are making investments in technology as well. For example, we are in the process of unplugging 13 old legacy systems and bringing in one cohesive claims system, which is going to improve the quality of our claims data going forward.
As the property insurance sector faces significant disruptions, from political, economic and social factors, this is an opportunity for the insurance industry to better understand the impact supply chain issues and inflation are having on the claims estimating process and to leverage data within organisations to better evaluate risks and make informed underwriting decisions.
