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  • Writer's pictureChris Burand

Breaking News! The sky is not falling!

The world is not ending!

Heresy: "Belief or opinion contrary to orthodox religious doctrine." Oxford Dictionary

My self-confessed heresy is that reality trumps the alarmist headlines propagated in the insurance industry that weather related events associated with climate change are serious risks to the viability of this industry. The only reason such events might be a serious challenge is if the key decision makers believe the religion without checking the facts and/or are unwilling to do the research and analysis.

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Example: A recent headline that spoke to the $2.6 trillion bill for weather and climate "disasters" topping $1 billion since 1980. That means there's an average of $65 million per year. This industry has approximately $1 trillion of surplus in the U.S. alone (as of 12-31-22 per A.M. Best, Aggregates & Averages, 2023). That is 6.5% of surplus and those losses are baked into, or should be baked into, the rates.

Last year, 2022, NPW was $780 million. $65 million is 8% of premium. Losses last year including LAE were $859 million. Therefore, the average climate and weather disasters that we should be so fearful of equal only 7.6% of all losses. Should we be more fearful of the 92% of losses or the 8% of losses? And after 40 years, if we haven't figured out how to deal with these losses, we're in a world of hurt due to incompetency, not weather changes.

In fact, SwissRe analyzed these "catastrophic" weather changes and identified that the pattern change began in 1992. Seriously, this is not new news and if we just now are dealing with it, then all the executives should be fired and more intelligent people hired. To solve the problem, one must analyze the situation and appreciate the context.

To truly understand the weather impact, you must isolate the cause of loss. Take all the flooding in New Orleans. The people who originally built and settled in New Orleans built on the higher ground. They were smarter. Other people moved there and high ground was no longer available. Rather than building intelligently or moving somewhere else, they built homes on slabs on low ground. Now we have weather events? No, we have floods where floods are to be expected.

Or take hail in Colorado and Texas. I personally did a hail study specific to Colorado in 1989. What did I find? That 99% of all areas on the eastern slope of Colorado had incurred hail events over the last 75 years. There was one small town with a unique weather pattern which protected it from hail, but that was the only exception. Now move forward 30 years and the population of the front range of Colorado has more than doubled. The claims should therefore at least double regardless of whether climate change is causing more hailstorms.

All these articles and people crying wolf, as heretical as it is to write, seem to be failing to analyze how much of these claims are due to increases in exposures versus changes in weather patterns. And if insurance industry decision makers and actuaries fail to analyze the situation correctly, the industry is in serious crisis due to incompetency, not climate change.

Another example relative to the insurance fiasco on the Gulf Coast. Years ago after Hurricane Andrew hit and literally wiped buildings from the face of this earth, a study was done. I don't remember the author or I would cite the source. The bottom-line of the study was how so many places in Florida that looked appealing for development, looked appealing because of hurricanes. No one had built there historically because those were places hurricanes hit. Like New Orleans, developers ran out of other places to build. Is this a weather issue or a development issue?

Another example involves building codes. To accommodate developers and increase property taxes, municipalities across the U.S. have allowed homes with extremely flammable exteriors to be built closely together. Large wildfires have moved from house to house to house (look it up if you don't believe me) because the houses were built too closely together. We have a housing crisis and the solution to preventing the spread of wildfires means more expensive housing whether with less flammable exteriors or more distance, but this is not a climate issue.

Another example specific to wildfires is that many have been sparked by power lines. Did the winds get worse or did the power poles get old?

Then how many people used to live in wildfire zones? Extremely few back in 1980. Now everyone wants to live in a forest and no one wants to cut the trees next to their houses (I've spent considerable time with foresters and researching fire prevention because I live in a forest). This is not a climate issue. It's an issue of wanting to be safe without giving up niceties that make you less safe, and then blaming climate for the loss.

And for all those who cite weather records, accurate weather records are often maybe 150 years old (this excludes the weather recorded in tree rings and ice cores, but those don't record the "record high for the day"). 150 years out of 10,000 years since the last Ice Age equals 1.5% of all years. It's nothing, not really even a rounding error.

My heresy is not in climate change denial (though climate by definition is always changing and acceleration is the actual issue). It's that writers and decision makers are not analyzing the situation and providing context so that better decisions are made. Go back and read history books for some excellent examples of weather. The Texas Big Freeze that is "obviously" proof of climate change really isn't. Read histories of early settlers and Native Americans. And then feel sorry for them trying to keep warm when a Northerner came down and all they had were buffalo chips for heat.

Property insurance is a mess partially because the industry's analytics are poor and actuarial models are poor, i.e. someone thinks flood histories are relevant without considering all the homes built in low lying areas. Or the models are built on the assumption the population stays in New York where catastrophes are rare versus the fact so many millions of people have moved to Texas where catastrophes happen every year. In New York you have frequency and not so much severity. In Texas you have severity (everything is bigger in Texas!). Actuaries are not that good at modeling severity.

The industry must address these realities instead of running from them. Forms need to be updated and rates adjusted to encourage risk management. In central New York these issues are not that important. But in Florida, Louisiana, Texas, California, Colorado, Idaho, and Utah, the assumption that the standard forms and rating models will work in high catastrophe prone areas is a really bad assumption. Insurance alone cannot be the solution in high severity areas. Insurance must be paired with risk management and then the rates adjusted downward for property owners completing the right risk mitigation actions.

Then we need underwriters to stop doing blanket underwriting so they recognize those properties with quality risk mitigation. When I was an underwriter writing high dollar property in fire zones, we built risk mitigation strategies that made risky property safe property. I never lost one of those properties to fire and simultaneously still could charge an elevated rate. No wonder the loss ratios were continually in the '40's, but it takes effort to see beyond the "Sky is Falling" headlines.

If this industry cannot handle an average of $65 million in catastrophe claims per year, this industry has way bigger problems. If it can't handle multiple billion dollar "nuclear" claims, it has way bigger problems. And never forget, for additional context, this industry was designed specifically to handle catastrophic claims, i.e., entire ships and their payloads sinking. It was not designed for small claims so catastrophes should be expected--or get out of the industry.


NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand Insurance Education, Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.

None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.


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