BUILDING IN BAD PLACES
Worldwide, insurers suffered at least ${esc.dollar}36 billion in catastrophe losses in 2010, according to Swiss Re <RUKN.VX> -- the fourth-highest total of the last decade, and the highest if years with major hurricane landfalls are excluded.
But this year, as with last year and the year before, what insurers are seeing is the unexpected. That means both storms going where they're not supposed to as well as a spate of totally unexpected losses at entirely unpredicted times of year.
"Some people believe that is because weather patterns have changed. I happen to be in that camp," said Tom Wilson, the chairman and chief executive of Allstate <ALL.N>, the largest publicly traded property insurer in the country. "I just don't think it should happen three years in a row."
One of the biggest problems for insurers is that they have to insure increasingly valuable properties in risky areas that, by and large, are not being built with disaster risk in mind. That in and of itself is driving their risk up dramatically.
When an insurer writes a policy for a property, it takes various factors into account, such as the property's location, its age, the propensity of the region it's in to be affected by weather events and the potential cost of replacing the property if it is damaged or destroyed.
Those criteria have largely stayed the same over the years, but what changed is the value of the properties to be insured and the volume of them. People around the world love beachfront houses and developers love selling them.
In most places, no one stopped to think whether building the houses was a good idea, or whether there were appropriate building codes in place, or how many billions of dollars would be at stake if a major hurricane blew through.
"Even if the baseline of activity from a natural hazards point of view stays constant, the level of losses you're going to see will certainly be increasing commensurate to the increases in economic activity and national wealth," said Bill Keogh, the president of Eqecat, another major global risk modeler.
Most people in the business of predicting risk agree with Keogh that the changes in the environment matter less now than the changes in the "built environment" -- the size, value and type of buildings being put in high-risk areas like Florida's coastal zone and geologically unstable areas of California.
Stringent building codes would overcome much of those risks, but such things either do not exist or are not strictly enforced in many parts of the world, and even in the United States they are a state-by-state patchwork. In many cases, it takes a disaster for them to be updated to reflect modern demands.
The lack of data on how homes survive disasters drove IBHS, the industry-sponsored research center, to create the South Carolina wind tunnel late last year to test how building codes and materials hold up under extreme duress. Nestled on a 90-acre plot abutted by cow pastures and hay fields, the site is located on a rural, two-lane country road.
"There has been research on wind damage to structures for several decades, but we as an industry hit a brick wall in not being able to do full scale testing," said Anne Cope, the center's director of research.
The wind tunnel has enough space to hold up to nine 2,300-square-foot (210-square-metre) homes. When fully operational, the center can test hurricane force winds, mixed with up to 8 inches (20 cm) of water per hour of simulated rain.
For heavily wooded areas, the tunnel has a fire pit, where hot embers can be sucked into the wind currents, simulating how wild fires spread from house to house.
Cope said the aim, in part, is to become the building code analogue for the Insurance Institute for Highway Safety, the group whose crash videos have become ubiquitous since it was founded in Arlington, Virginia in 1959.
"The goal is we open some people's eyes to construction standards," Cope said.
FEAR OF THE UNKNOWN
Weird weather has undermined many of the insurance industry's assumptions.
Some in the modeling business say the best they can do is to give their clients scenarios to pick from based on the client's own belief about the evolution of the climate.
"The uncertainties are so large that a lot of our clients focus on the uncertainty they can handle and manage to, which is today's risk," said Peter Dailey, director of atmospheric science at AIR Worldwide.
Dailey's firm, for example, offers a model of sea-surface temperatures -- sea temperatures being one of the most important factors in hurricane formation -- and an alternate model that assumes temperatures are warmer than usual.
Warm seas are hurricane fuel, so those who believe in global warming can plan accordingly. Other modelers agree that what is changing is not the mathematics behind modeling, but the willingness of clients to accept their conclusions.
"There's a lot of science involved and there's a lot of uncertainty involved. To the extent the models produce credible results, people use them. To the extent the models produce results that might not be consistent with peoples' view of risk, they might not use them," Eqecat's Keogh said.
But ultimately, no model, no matter how good, can really tell an insurer exactly what a storm means for its business. "We shouldn't kid ourselves that just capturing a better hurricane windfield gets you a better answer in terms of losses," said Robert Muir-Wood, chief research officer of Risk Management Solutions.
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