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Population Growth in Cat-Prone Areas Contributes to Insured Losses

By Michael Buck
A.M. Best Company
Growing populations and higher densities in areas of the U.S. prone to severe weather, coupled with a potential shift in the risk landscape due to climate change, have been contributing to a rise in insured loss tabs.

Growing populations and higher densities in areas of the United States prone to severe weather, coupled with a potential shift in the risk landscape due to climate change, have been contributing to a rise in insured loss tabs, according to a panel of experts.

Those trends are also happening at a time when insurers are backing away from writing U.S. coastal business in favor of inland areas, where companies have been greeted by hailstorms, wildfires and tornadoes, said Andrew Castaldi, a Swiss Re senior vice president and head of catastrophe perils for North America.

The inland perils, particularly tornadoes in 2011, generated large and unprecedented losses, said Megan Linkin, a Swiss Re vice president and meteorologist. She said the 2011 storms were the result of a perfect setup of weather conditions that were "completely separate from climate change."

"That's not to say that climate change can't change the risk landscape down the road," Linkin said. "I think there is definitely the potential for that risk landscape to change."

Linkin said areas that are more arid will see increasingly less rainfall and wetlands will see more intense rain. Linkin and Castaldi, along with a panel of experts, spoke recently during a Best's Review webinar focusing on lower-severity, higher-impact catastrophes.

"We're looking at a situation where the drought that occurred in 2012 might no longer be a 1-in-75 or a 1-in-100-year event," Linkin said. "That could move if the precipitation patterns shift due to climate change to a 1-in-25 year ... event."

This year's drought brought with it not just dry land and bad farming, but massive wildfires, some of which occurred in areas that have seen population explosions in the past decade. Linkin said that was the case with the Colorado wildfires. Two large wildfires this summer in Colorado — one near Fort Collins and the other near Colorado Springs — destroyed hundreds of homes (Best's News Service, July 5, 2012).

Putting more wealth in front of catastrophic weather has also been a factor in the Dallas area, according to Kevin M. Simmons, an Austin College professor of economics. He said areas of the country a generation ago that had tornadoes and hailstorms tearing through farm fields are "now going through major subdivision and damaging very expensive property."

Simmons said baseball-size hail accounts for only 5% of hailstorms, but make up about two-thirds of the damage. He said damage is a function of hail size and where a storm of that severity hits. He pointed to a hailstorm earlier this year that pummeled the Dallas metropolitan area with baseball-size hail during rush hour (Best's News Service, June 21, 2012). He said that storm racked up "hundreds of millions of dollars in damages."

Kathleen Tierney, director of the Natural Hazards Center at the University of Colorado at Boulder, said the country needs to implement better hazard mitigation and preparedness programs to reduce total losses. She cited studies that found for federal every dollar spent on mitigation there was about $4 in savings.

A simple solution to help mitigate losses from hailstorms comes from using better products on roofs. Simmons said impact-resistant shingles came to the market about 10 years ago, but haven't garnered a large following. He said preliminary data from an ongoing study of better building codes shows that helps to reduce losses.

Timothy A. Reinhold, senior vice president of research and chief engineer for the Insurance Institute of Business and Home Safety, said there are solutions right now that can be implemented to help cut down the footprint of damage from storm, but there needs to be incentives to use those because they typically cost more. He said the vulnerability of roofs needs to be addressed and that point shows up across a variety of peril studies, from wildfires to windstorms and hail.

"Because roofs are replaced on a regular basis, there is an opportunity there to impact the stock of properties ... and make a difference," Reinhold said.

Some insurers are eyeing roofs as a way to help control losses by tightening up policy terms and conditions. Tennessee Farmers Insurance Cos. earlier this month starting offering actual cash value only for roofs instead of the replacement coverage it had been offering (Best's News Service, Oct. 17, 2012).

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