In the wake of Hurricanes Harvey, Irma, and Maria, the 2017 hurricane season is projected to be the most expensive in history, with total estimated economic losses exceeding $200 billion.
According to a new report from MacKinsey & Company, each of these three major hurricanes are expected to rank among the 10 most costly insured natural catastrophes on record globally.
To make matters worse, the majority of the losses are uninsured. Going forward, determining who will pay for the recovery, along with how best to organize recovery funding, will be a major operation.
In their report, McKinsey & Company researchers Erwann Michel-Kerjan and Giambattista Taglioni focus on the economic impact the 2017 hurricane season will have on the insurance industry, and the industry’s role in this season’s and future natural disaster recoveries.
Anticipating the consequences
Based on their research, McKinsey & Company anticipates that these record-breaking disasters will have a number of effects on the insurance industry.
Here are the key effects of 2017's historic hurricane season, as outlined by McKinsey & Company researchers:
- These disasters will, for most insurers and reinsurers, be a story of earnings volatility and not of capital due to the record-high surplus of the U.S. property and casualty industry.
- Personal-auto and business-interruption insurance will be the biggest unexpected losses, given that flooding is typically not covered in homeowners' contracts.
- These consecutive disasters will stress insurance operations, including large-volume claim management and loss creeps, due to spikes in adjustment expense.
- In the coming months, insurers will likely face a significant consumer experience and public relations risk. Insurers need to go into crisis-management mode and deliberately and proactively address the risk, starting now.
- The long-term impact on premium rates will depend on the willingness of investors to recapitalize and continue to invest. If investors get scared by a new trend of increased losses in the wake of natural disasters, rate increases may be substantial and contribute to the ending of a prolonged soft cycle.
Reflecting on the consequences of 2017's string of natural disasters, McKinsey & Company researchers offer 3 key tactics for insurance professionals to consider going forward. (Photo: AP Images)
New tactics for the future
Tactic No. 1: Ensure resilient operations. As part of the fallout from Hurricanes Harvey, Irma and Maria, several carriers will face challenges regarding their operating models and claims organizations, McKinsey & Company explains. To build the resilience needed to convert an operational challenge into increased productivity and customer loyalty, insurers can utilize ever-advancing digital technology, process automation, and effective talent deployment.
Tactic No. 2: Seize the opportunity. The majority of the total economic losses from the 2017 hurricanes are uninsured or underinsured. In Texas, the majority of residents affected by the flooding from Hurricane Harvey did not have flood insurance for their homes, since Houston and the surrounding areas are not at-risk areas, according to FEMA. The figure for small-business owners is likely to be even worse, who statistically are even less likely to have flood insurance. Insurers would be wise to work to reach these underinsured and uninsured people and businesses.
Tactic No. 3: Review a public-private partnership structure of the flood market. There is an on-going national debate on the structure of the National Flood Insurance Program (NFIP), which is sure to intensify as Congress voted to forgive $16 billion of the program’s debt in October. McKinsey & Co. poses the questions, "Should flood insurance be mandatory for all who live in flood-prone areas, independent of their risk level? Can insurance — public or private — be risk-based to signal risk level and encourage better risk-management practices? What is the role of the private sector in increasing the market and ensuring more Americans are protected financially?"
With the right products and pricing strategy, researchers say insurers could seize $30 billion to $50 billion in untapped revenue just on flood risk insurance.
"The past year's virulent hurricane season highlights the need for a structural answer to the longstanding national insurance gap," the McKinsey & Co. report states. "Indeed, the increasing threat of catastrophe coupled with the large number of uninsured and underinsured individuals and businesses creates an opportunity, if not a responsibility, for insurers and policymakers to act."
Related: 5 keys to 'insuring' a safer 2018
Last year saw flooding in areas not on the federal flood map, like here in Houston, Texas after Hurricane Harvey. A majority of residents in these areas were uninsured or underinsured, making these natural disasters even more costly. (Photo source: Shutterstock)
10-point executive checklist
The historic 2017 hurricane season posed a question to the insurance industry and the country about its readiness for future large-scale catastrophes like Hurricanes Harvey, Irma and Maria.
Researchers of the McKinsey & Company report offer a 10-point checklist for insurance practitioners to reflect on in the wake of future natural disasters. They are:
- How fast did we have an accurate estimate of our losses? Were those aligned with our risk appetite and risk tolerance?
- Are we satisfied with our claims process after the most recent catastrophes? How satisfied are our customers about their claims experience with us? Have we actually measured it? How has it affected our retention rate? How could we improve further?
- Are we prepared for reputation risks? How so? Who is responsible and accountable for these risks?
- Have the catastrophes revealed surprises about our underwriting process and pricing models? Have our underwriters taken more risk than we are compensated for?
- What is the disaster’s expected impact on rates? How is that impact influencing our underwriting strategy for the coming year and our financial targets?
- How can we move our organization from “payer” to “partner” of our clients? What new services, capabilities, and organizational changes are required to do it at scale?
- Can the industry, including InsurTech, significantly innovate to reduce the insurance gap, whether on flood/earthquake risk for homeowners and small businesses or by developing new products dedicated to local or state governments?
- Would we support some states in establishing an opt-out policy for flood risk attached to homeowners and small-business property insurance?
- How can the industry act together more effectively to propose a new paradigm for private-public risk sharing?
- How can we engage our governing board (or equivalent) more proactively on these topics?