Sandy, Insurance Companies and Catastrophe Models

Sandy - NWS

Perfect storms like Sandy cause immense harm to people’s lives and property.

Across the Eastern U.S. today, anyone that has the luxury of not being on the road or outside are staying put at home with generators, food and batteries, or have sought refuge at various shelters, and are waiting for the storm to pass.

Ever wonder what Insurance companies do at times like this?

They get ready too (AllState already sent me a couple of get-ready and here’s-what-to-do-for-claims emails) with claims processors on the ground and keep a close eye, a very close one, on data from the likes of Eqecat.

And in turn, what does Eqecat offer?

Catastrophe risk modeling provides essential data for global and regional insurers, reinsurers, brokers, financial markets and corporations to evaluate potential and the probability of risk and financial loss from natural hazards. 

EQECAT’s catastrophe risk models incorporate the latest scientific research, deep engineering knowledge, vast amounts of claims and exposure data, combined with advanced mathematics and statistics to produce a unique view of catastrophe risk. 

For insurance companies, this data is hugely important and can make or break them when catastrophes strike. That’s because home insurance, as we all know, exists to cover once or twice in a lifetime events. So the occasional flooding or mold or a lightning strike is easy to handle, but when millions or even tens of millions of homeowners suffer a devastating loss, insurance companies run the risk of a devastating loss as well:

After a 17-year lull in major landfalling hurricanes in Florida, Hurricane Andrew roared ashore in South Florida near Homestead on August 24, 1992. With insurance claims reaching almost $16-billion, several of the state’s insurance companies went bankrupt while many more lost large percentages of their equity.

This is bad for consumers (home owners) too because not only will existing policy owners not be made whole on their losses when their insurance companies go bankrupt, but in the future, they will not have anyone to buy insurance from.

As a result, the Federal Government or State Governments end up stepping into the vacuum and create “insurers of last resort”  or cooperative insurance agencies, as in the case of various East Coast states.

Still, because of various at-times-controversial moves like raising premiums steeply or not offering insurance in certain areas, an article in the WSJ (free just for today) thinks that the impact of Sandy on insurance companies is not going to be too high:

No matter the cost to the insurance industry, its impact is certain to be less than it would have been a few years ago. Insurers have been raising home-insurance rates and tightening underwriting standards in recent years as claims costs from severe weather have risen.

Those changes come on top of steps insurers have taken since the 1990s to scale back selectively sales of policies in hurricane-prone areas and require consumers to pay steeper deductibles in some instances.

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