Related Items
  FREE Insurancenetworking.com Site Registration!
Sign up today and access the leading source of Insurance I.T. information on the Web.

Your FREE site registration entitles you to

FREE Insurance Networking eNewsletters

Search more than 7 years worth of archived data

White Papers and Industry Research that provide valuable insights on a variety of technologies and implementation issues

Access our Web Seminar series

   

Do Insurers Grasp Catastrophe Risk?

Pat Speer April 2007

It may not have started with the vehement criticism logged by Sen. Trent Lott, R-Miss., and Rep. Gene Taylor, D-Miss., against Bloomington, Ill.-based State Farm over hurricane damages to their respective homes, but the negative press that's ensued in Katrina's aftermath is still haunting the insurance industry.

Shortly after Lott's brother-in-law, high-profile plaintiff attorney Richard "Dickie" Scruggs, filed a federal lawsuit, however, a flurry of additional actions, some of which are being played out by state and federal regulators, thrust the P&C insurance industry into defense mode.

Those studying the popular press might say that in some ways Katrina created a different type of perfect storm. Lott's suit preceded class action litigation, cries of foul play concerning faulty science and inadequate loss payouts mixed with news of excessive renewal rates and P&C carriers making an abrupt exit from coastal areas. All of this activity has created a perception of bad business.

The public's perception aside, the question remains: In the face of growing risk management complexities, are carriers able to properly understand, analyze and manage catastrophic risk? State Farm, the most visible carrier in the recent press reports, defends its ability to comprehend catastrophic risk in coastal areas but admits it is "always learning."

"Some of the issues that have come out of the press, [such as] not knowing what our exposure was, I wouldn't say I agree with that," says Jeff McCarty, executive vice president of State Farm's P&C actuarial division. "There may have been some differences or change in terms of how you measure [risk]. Now that we know we are in a high-frequency hurricane period, it will be an evolving process."

A good example, says McCarty, is the theory that the industry is in a period of high hurricane frequency because of the sea surface temperatures' warmth.

"Granted, we've been in this period awhile, but that whole concept hasn't evolved until the last couple of years, so yes, there are some areas we don't have a good handle on but we are trying to learn from it and trying to develop that. It will be an evolving process, ever-changing," he says.

MODELS PLAY A ROLE

McCarty maintains that CAT models have already performed well for the company.

With an eye on identifying strengths and weaknesses in each model, State Farm, like many large carriers, employs data from all three major risk management service providers; Risk Management Solutions Inc., (RMS) Newark, Calif.; Eqecat, Oakland, Calif.; and Boston-based AIR Worldwide, and combines it with its own homegrown model.

"If there is any business that models were developed for, it would be State Farm's, because we have an extremely homogenous book of business," he says.

Quantifying insurers' and major corporations' exposure to natural catastrophic risk, the model makers are stepping up their consulting, data gathering and distribution efforts.

For more information on related topics, visit the following channels:


Agent Network

Claims

Enterprise Technologies

Risk Management

Vendor Spotlights