Hurricane Katrina's Specter Continues to Plague Risk Assessment Experts
In the world of insurance, understanding the potential risks posed by natural disasters is crucial. This is where catastrophe modeling comes into play. Karen Clark, co-founder and CEO of Karen Clark & Co., a leading catastrophe modeling firm, has highlighted the significant changes in the industry. What is built today, she notes, is not what was built 10 or 20 years ago, with a focus on larger structures like three-car garages and five marble bathrooms.
The advancements in technology have played a significant role in the evolution of catastrophe models. Increased computing power, the greater availability of granular asset-level data, and advances in AI have made today's models more powerful. However, challenges remain, particularly in the quality of exposure data for commercial properties. This poor quality can lead to inadequate loss estimates, potentially resulting in higher premiums in the event of another Katrina-like catastrophe.
One of the key issues with traditional catastrophe models is their focus on coastal impacts. For instance, they underestimated the potential for severe inland flooding, as seen with Hurricane Helene. This storm caused unprecedented inland flooding and landslides in elevated areas like Asheville, North Carolina, last year.
The failure of flood protection engineering, including walls, pumps, and levees, during Hurricane Katrina is another stark reminder of the limitations of these models. Insurers, who were responsible for assessing commercial property risk during Hurricane Katrina, including major companies like AIG and Zurich, underestimated the damage potential due to inadequate risk modeling and failure to fully account for flood and wind damage interactions.
Jencap, a wholesale insurance broker, has expressed concerns about the disconnect between catastrophe models and the reality of a disaster's destruction, such as that of Hurricane Helene. The Swiss Re Institute warns that some North Atlantic hurricanes from the early 20th century, if they were to strike today, would cause insured losses well above $100 billion in 2024 prices.
Thousands of people have moved to the coast and built more expensive homes, increasing the financial stakes from hurricane hits. The Swiss Re Institute also expects higher temperatures to increase hurricane intensity and rising sea levels to magnify storm surge in coastal areas, leading to a substantial impact on future insured losses.
Despite these advancements, insurers have faced difficulties in offering widespread coverage for flood insurance. This is partly due to the difficulty in calculating the risk at the level of individual properties. Current catastrophe models struggle to accurately model secondary perils like tornadoes, hailstorms, and floods compared to peak perils like hurricanes or earthquakes.
Karen Clark has pointed out the gap in loss estimates for commercial properties, especially due to incorrect coding of locations and understated values. Many homeowners also didn't purchase flood insurance because they weren't in an official flood-risk zone. The models have incorporated once-ignored outcomes such as storm surge, but the challenges remain in accurately predicting the impacts of disasters like Hurricane Katrina and Hurricane Helene.
In conclusion, while catastrophe modeling has come a long way, there is still a significant gap between the predictions of these models and the reality of natural disasters. Improvements in data quality, particularly for commercial properties, and the ability to accurately model secondary perils are key to bridging this gap and ensuring a more accurate assessment of risk.
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