The dramatic confluence of climate change, an historic supply chain crisis, and inflation has had a significant impact on the underwriting and pricing of commercial property exposures.
Property insurance rates have increased countrywide as insurers attempt to manage their portfolios in a challenging risk landscape. Losses are being driven by several factors, including the increased frequency and severity of extreme weather events and severe insured water, rainfall, and flood losses; supply chain disruption causing higher costs for construction materials like lumber and steel; and, significant inflation.
To explain the complex circumstances causing pricing pressures and guide commercial property owners, risk managers, and insurance brokers around how to alleviate some of these challenges, Chubb has released a new whitepaper, entitled ‘Why Commercial Property Insurance Prices are Higher, And What Can Be Done About It’.
The whitepaper, which was developed as a collaboration between Chubb’s retail business and its wholesale excess and surplus lines division Westchester, elaborates on the confluence of factors – climate change, the supply chain crisis, and inflation – and their respective and combined impacts on commercial property insurance underwriting and pricing. It also highlights some of the difficulties that exist around risk modeling, determining property replacement costs, and developing proper valuations of insureds’ assets.
“This is a very comprehensive paper [which is] needed and timely,” said Matt Booker, EVP, property and inland marine at Chubb. As one of the authors of the whitepaper, Booker admitted the team didn’t set out to write something quite so long, but upon delving into some of the core factors impacting the property market, they felt it was “a good time to pause” and really produce some detailed analysis of what’s going on.
According to the Chubb report, from January through September 2021, rising global
temperatures possibly contributed to 18 weather-related disasters with losses exceeding $1 billion each in the United States - a record high, according to NOAA National Centers for Environmental Information. The disasters included nine severe storms, four tropical cyclones, and one drought, wildfire, and winter storm.
While the industry has grown adept at modeling and responding to some weather catastrophes like hurricanes, it’s the secondary perils, like tropical cyclones, wildfires, and winter storms, that are “causing a lot of concern,” according to Booker. For example, the extratropical cyclone, Winter Storm Uri – which is expected to leave insurers with a bill of approximately $18 billion, according to catastrophe modeling company Karen Clark & Co. – was an atypical and unmodeled event which left more than 4.5 million homes and businesses, the majority in Texas, without power for several days.
“We do have models for secondary perils, but they’re newer [than the well-established models for earthquake and wind] and they’re not perfect. And it’s important to recognize that these models are just tools,” said Booker. “The output from those models is the basis by which we come up with pricing, sublimits, deductibles, [and it helps] with managing risk accumulation.
“Agents and brokers need to recognize that these models are tools, and then they can work with their clients on what they can do to improve and mitigate their risks. A lot of organizations don’t have access to these advanced natural hazards computer models and whatnot, but brokers and carriers like Chubb do, and we can help to fine-tune business continuity plans. That’s key to helping clients protect their most exposed and critical assets, and helping them focus resources and capital expenditures to mitigate those exposures that can impact their physical properties.”
Of key importance as the property insurance industry relies more heavily on risk modeling, is the quality of data that’s being fed into the models, Booker stressed. Agents and brokers can play a critical role in determining and providing accurate property replacement costs (especially in the current supply chain crisis and economic inflation), developing proper valuations of insureds’ assets, and feeding underwriters comprehensive data with the characteristics of insureds’ properties and their locations.
As the quality of available data improves, insurers and brokers must also ensure that the weather models they’re using reflect the current state of climate, and don’t overly rely on historical data from periods that may not match current conditions, said Booker. It is possible with today’s modeling technology to simulate long-term (10,000 year) views and short-term (five-year) views, and the property insurance expert encouraged firms to use both.
“Carriers have to make sure modeled output aligns with our actual client experience,” he added. “We have to identify causes of the loss which are unmodeled or even non-modeled for a region peril. For example, windstorm models generate no loss for locations that experienced wind below a certain threshold, even though, in reality, we might still have claims at low winds. We’ve recognized that and are taking action to address those deficiencies.
“In summary, it’s tough to ignore what’s happening out there. We have to keep looking at these models, recognizing that they are tools, and making sure that we’re working on the data we’re putting into those tools. We also have to be cognizant and looking at the current state of the climate and not rely too heavily on historical data from periods that may not match today.”
