In a new report based on research from UK national weather service the Met Office, Lloyd’s has found that extreme weather events may be modeled independently. While extreme weather can be related to events within a region, these perils are not significant correlated with perils in other regions of the world.
Met Office research found that the majority of perils are not significantly correlated, but identified nine noteworthy peril-to-peril teleconnections, most of which are negatively correlated
Lloyds’ modeling finds that these correlations were not substantial enough to warrant changes to the amount of capital it holds to cover extreme weather claims
Even when there is some correlation between weather patterns, it does not necessarily follow that there will be large insurance losses. Extreme weather events may still occur simultaneously even if there is no link between them
An assumption of independence for capital-holding purposes is therefore appropriate for the key risks the Lloyd’s market currently insures
The methodology released in the report enables scenario modeling across global portfolios for appropriate region-perils
“This important finding supports the broader argument that the global reinsurance industry’s practice of pooling risks in multiple regions is capital efficient and that modeling appropriate region perils as independent is reasonable,” the report concluded.
According to Trevor Maynard, head of exposure management and reinsurance at Lloyd’s, “This challenges the increasingly held view among some regulators around the world that capital for local risks should be held in their own jurisdictions. Lloyd’s believes this approach reduces the capital efficiency of the (re)insurance market by ignoring the diversification benefits provided by writing different risks in different locations and, in so doing, needlessly increases costs, to the ultimate detriment of policyholders. Insisting on the fragmentation of capital is not in the best interests of policyholders.”
Check out the map below for further insight from the Met Office about large-scale weather perils that do demonstrate statistically significant correlation:
“Businesses that plan for a disaster have the best chance of surviving, and that starts with identifying the potential risks,” said Loretta Worters, a vice president with the I.I.I. “Large businesses have risk managers, but small business owners have to be their own risk managers and, working with their insurance professional, determine the right type and amount of insurance to be able to recover from a disaster.”
“It is also critical for small business owners to create and/or update their business continuity plan and work with employees so they are prepared for the potential effects of a disaster,” said Gail Moraton, business resiliency manager at IBHS. “Taking time to do this now will save money and time later.”
In anticipation of the 10th anniversary of Hurricane Katrina next week, the Insurance Information Institute collated data on the range of damage it caused, including insurance claims by coverage and state, National Flood Insurance Program losses, and other sources of recovery funds. The costliest hurricane in U.S. history, Katrina killed 1,800 people and cost $125 billion in total economic losses. Such catastrophic losses do not just demonstrate the impact of megadisasters, however. As the III points out, while “awareness of flooding due to coastal storms rises, so too does the population of coastal communities.”
Check out the infographic below for a look at Hurricane Katrina’s total toll and key takeaways:
In the wake of a natural disaster, about a quarter of businesses never reopen. Whether due to primary concerns like a warehouse flooding, secondary complications like supply chain disruption, or indirect consequences like transportation shutdown that prevents employees from getting to work, there are a broad range of risks that can severely impact any business in the wake of a catastrophe that must be planned for.