While four Florida hurricanes in 2004 and the huge Gulf disasters of 2005 were unprecedented, insurers need to prepare for such inevitable anomalies over the long term, actuaries warned during their annual meeting last month.
Actuaries can't anticipate the next surprise, said Sean R. Devlin, chief actuary-Direct Reinsurance for GE Insurance Solutions in Newton, Pa., during the annual meeting of the Casualty Actuarial Society held in Baltimore. "And nine out of 10 surprises are bad," he said.
While actuarial work generally relies on using losses recorded from past events to understand the potential for future losses, panelists noted that some actuarial models already included even worse storms than those that actually occurred in their ultimate scenarios.
Still, potential loss costs from natural disasters have been underestimated frequently in the past, Mr. Devlin said. In reviewing the 2004 and 2005 hurricane seasons, insurers and reinsurers need to "alter the way they think of loss costs," he said. "Know what you are covering, what your models are covering and what your risks are," he warned.
But better knowledge could create other problems, another panelist, Alice Gannon, senior vice president of USAA in San Antonio, Texas, suggested.
Ms. Gannon observed that if the hurricane risk was priced accurately, resulting underwriting profits would be large enough to attract additional investment capital. Ironically, the capital increase could create marketplace competition which, in turn, might drive down prices for some individuals.
"There may never be enough discipline to assure you keep adequate rates in the highest risk places," she said.
Other speakers, while noting the strength of the industry to withstand this year's hurricane losses, stressed the need to focus on loss mitigation and pricing issues going forward.
Michael A. Walters, consulting actuary for Tillinghast-Towers Perrin, who is based in Savannah, Ga., said that while the insurance industry will ultimately pay out record claims of some $50 billion from Hurricane Katrina alone, the solidity of the industry remains strong because of worldwide risk-transfer and risk-spreading measures put in place after the last two mega-catastrophes–Hurricane Andrew and the 9/11 terrorist attack.
Still, there are future challenges, he said, including how best to apportion pricing so that those most at risk are not overly subsidized by those not at risk.
Much more needs to be done to mitigate the hurricane risk through construction improvements and retrofitting, he said. But without regulatory willingness to include the true expected cost of hurricanes in charged rates, insureds may have no incentive to invest in such upgrades, he said.
The Arlington, Va.-based Casualty Actuarial Society is an organization dedicated to the advancement of the body of knowledge of actuarial science applied to property, casualty and similar risk exposures.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.