Adapting to a catastrophe-prone market

Catastrophic events are on the rise. Since 1980, 338 weather and climate disasters have each resulted in a billion-dollar-plus loss, adding up to a staggering $2.295 trillion, according to The National Centers for Environmental Information, an arm of the National Oceanic and Atmospheric Administration.¹

"As a result, insurers are paying out bigger claims more often, which is having a significant impact on the insurance industry," explains Amber Stobel, director of Nationwide E&S Wholesale in Contract Personal Lines.

With no end to this concerning trend in sight, insurers are taking various approaches to riding out the proverbial storm.

How changing trends are putting modeling tools to the test

Insurers have long relied on modeling to project potential catastrophe-related losses. Historically, agencies have looked at 100,000 years' worth of storm data and taken the average to develop future models.

"As climate trends become more severe, the forecasting models are under-predicting catastrophic events, and therefore have become less reliable," notes Stobel. "This shift has led to a need to look at predicted CAT risk differently."

In addition, there has been a change in which areas are most populated. Today, there are more homes in vulnerable areas from the Gulf region extending up the east coast than there have been previously.

"From an insurance company's perspective, more people living in catastrophe-prone areas equals greater risk," she adds.

The increase in people living in exposed coastal areas means that newer models must also take population density into account, as well as proximity to areas with the greatest catastrophe risk, if they hope to make more accurate projections.

A more granular approach

With greater risk comes the need for more strategic pricing as opposed to a one-size-fits-all solution.

"From a saturation perspective, we want to make sure that for any given storm or fire, we can withstand that loss," explains Stobel. "To accomplish this, we must make sure we carefully distribute our geographic risk and price it accordingly."

With this in mind, insurers are taking a more granular approach to pricing than they have in the past rather than setting a single price for a city or county.

"Many insurers are turning to sophisticated modeling tools that use counties, zip codes and proximity to the coast to ensure they are charging the appropriate premium based on exposure," says Stobel.

This information can be used to divide coastal areas into landfall gates, which are small sections of coastline that are assigned a specific risk in the event of a catastrophe. Using this more sophisticated modeling of smaller geographic areas can help insurers make informed decisions about their risk appetite and pricing strategy.

The evolution of pricing

Some insurers are using these insights to determine caps for how much risk, or total insurable value (TIV), they are willing to assume along a hurricane-prone coastline or in an area where wildfires frequently occur. This data is also used to help insurers diversify their risk and decide where they should expand capacity in other locations where major events are less likely to occur.

Although modeling—and external variables—will continue to evolve, the data available today is helping insurers creating sustainable pricing strategies.

"In the end it's quite simple," notes Stobel. "Insurers charge more where the risk is higher and less where the risk is lower. Newer modeling tools help make this pricing approach more efficient and accurate."

Enduring protection

Challenging conditions have led many insurers to abandon the market, leaving insureds in wildfire- and hurricane-susceptible locations with dwindling options.

"A lot of companies have decided that it is not possible for them to remain in catastrophe-prone areas," explains Stobel. "At Nationwide, our goal is to continue to be that catastrophe coverage provider where we're needed, and we're taking measures to make sure we're offering competitive risk-to-price matches so we can remain solvent."

By aligning pricing with exposure, Nationwide is able to continue to offer protection for insureds in high-risk areas.

"By taking proactive measures, we can ensure we'll be here to help protect insureds for the long run," sums up Stobel.