September 2014 40 Bermuda:Re/insurance+ILS
The PCS team goes through some variation of this process as many as 50 times a year. On average, these inquiries lead to 29 events ultimately being designated catastrophes in the US and seven in Canada. Through the disciplined execution of our methodology, some events meet the related criteria, while others fall short, despite causing significant local damage.
For the insurance and reinsurance industries, understanding the process can be essential to optimised risk and capital management, effective claims handling and meeting return on equity targets.
As of early August 2014, PCS has designated 22 catastrophes in the US and three in Canada this year. However, the events that didn’t warrant designation can be the most instructive of how the process works. For example, this summer Hurricane Arthur and the Washington State wildfire activity garnered plenty of headlines, but no PCS catastrophe serial numbers.
Understanding how PCS designates a catastrophe—and why certain
events do not receive designation—can help insurers gain greater insight into the implications of catastrophe activity and make more informed decisions with their capital.
Chain of events
An event must have projected insured losses of at least $25 million for PCS to designate it a catastrophe, and it needs to affect a significant number of insurance companies and insureds. This last part of the requirement prevents single or small numbers of large losses from being mistakenly characterised as catastrophes. For example, a California wildfire could threaten a $30 million home (or, for that matter, several). While such losses are tragic for the people involved, they typically don’t require the same level of insurer resource coordination and mobilisation as an event of similar size impacting significant numbers of insureds and insurers.
Inbound inquiries from the claims community can lead PCS to take a look at an event, but in most cases, the process has already begun by the time the calls come in. Using a number of data and news sources, the PCS team monitors for forecasted and unforecasted weather events, earthquake reports, and man-made incidents that show the potential to become much larger and possibly meet the related criteria for catastrophe designation.
When our team identifies an event that could be designated a
catastrophe, it begins to contact insurers writing business in the affected states and provinces to understand their early claims experience and expectations for the event. For larger events, the PCS team may conduct an on-site inspection of the event within approximately 24 hours to observe the damage directly. If feedback from the community of affected insurers and other stakeholders suggests industry-wide losses could reach $25 million and affect a significant number of policyholders and insurers, PCS issues a catastrophe designation bulletin.
Once we’ve designated an event, the PCS team spends the next 15
days communicating with the affected insurers and other industry stakeholders to determine projected claim counts and ultimate losses (for personal, automobile and commercial lines) for the entire event— not just losses incurred at the time of our inquiry—in order to develop the event’s preliminary estimate.
If the estimate is below $250 million, PCS does not issue subsequent
bulletins and closes the event. For events with preliminary loss estimates of above $250 million, PCS continues the catastrophe estimation process, publishing updated bulletins every 60 days, until we consider the catastrophe estimate fully developed.
Arthur and Washington State—why not?
As the first hurricane to make landfall in the US or Canada since Hurricane Isaac in 2012, Hurricane Arthur attracted plenty of attention. A Category 2 storm at one point, it first made landfall in North Carolina near Cape Lookout before heading back out to sea and reconnecting with land in Canada, where it hit three provinces.
As the hurricane approached North Carolina, the PCS team prepared to execute its methodology, reaching out to key insurers with significant market share in the area to let them know we were watching the event develop. Shortly after landfall, we began to
LEONARD ZHUKOVSKY /
SHUTTERSTOCK.COM
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