When discussing 100- or 200-year storm events, we are referring to the probability of the occurrence of an event so severe that it happens just once in one of those time frames. For example, for a 100-year flood, there is a 1% chance in any given year of having a flood event of that magnitude or larger occurring. For a 200-year flood, there is a 0.5% chance of having a flood of that magnitude or larger occurring, and for a 500-year flood event, the probability is at 0.2%.
We have built our cities and infrastructure and based insurance pricing on benchmarks for these storm events. For example, evaluating storms and floods based on their likely interval of recurrence was adopted in the 1960s to aid in the administration of FEMA’s National Flood Insurance Program.
But storms are now different than when these benchmarks were created. They have become more frequent and severe. Take a look at Hurricane Harvey as an example. When it hit Houston in 2017, Harvey dropped 30 to 40 inches of rain across the region and was the city’s third 500-year flood in three years. Aon estimated that Harvey cost $100 billion in economic losses, including $30 billion in insured losses.
In another example, according to a study published in PNAS in 2017, a 7.4-foot storm surge flood in New York City has progressed from a 500-year event before the industrial revolution to a 25-year event today, and it will be a five-year event in a few decades.
What Does This Mean for Properties?
There is a greater probability of recurring storms in any given year than once predicted, ushering in more property damage, lost income, and interruption of business operations. In addition to the destruction of property, the prediction of such 100- or 200-year events can also have an impact on property values. Potential buyers may not want to invest and build in areas that are at a higher risk of experiencing extreme weather events, leading to a decrease in demand and property values. Reinsurers may further scale back capacity in certain areas.
In addition, insurance premiums will also increase for properties located in catastrophe-exposed areas and beyond. As we discussed in a previous article, we are seeing the cost of secondary peril events, such as severe convective storms, winter freezes, flooding, wildfires, and mudslides, increase. This has contributed to a hard Property insurance market characterized by higher rates and less capacity.
Enhancing Catastrophe Models
Insurers have voiced concerns that predictive models are not keeping up with the acceleration in the frequency and severity of extreme weather caused by climate change. According to Moody’s, both insurers and reinsurers are focused on revising catastrophe models with up-to-date weather observations and advanced analytics. They are also focused on enhancing cat models for secondary perils that are more frequent but individually less costly than primary perils such as hurricanes. This focus is due to a rise in the share of total insured losses globally from secondary perils, reaching above 60% on average over the last three years, according to Moody’s.
Property owners also need to get more involved in risk mitigation, including implementing flood-proofing measures and investing in resilient infrastructure.
About Seneca Insurance Companies
Seneca Insurance Companies are known for having a broad appetite in writing property risks. We offer both admitted and non-admitted ISO-based policies, with catastrophe perils offered based on location and risk characteristics.