Sandy Politics Trumps Reinsurance Catastrophe Models

The rapid rise of insured loss estimates following Superstorm Sandy is a warning to reinsurers not to become too reliant on catastrophe models because they don’t take into account significant loss driver following major catastrophes: politics.

In a report released Monday by Willis Re focused on the January 1st reinsurance renewal season, industry participants are warned that scientific methods of measuring the financial impact of catastrophes does not include the importance of the political arena.

“[Superstorm Sandy] has yet again demonstrated the danger of overreliance on catastrophe models, due to the complexity of the original loss as well as the emergence of a new and as yet unmodeled uncertainty: the politicization of policy form interpretation,” said Wills Re Chairman Peter Hearn and CEO John Cavanaugh in an introduction to the report. “Current loss estimates stand in the region of US $20 billion to US $25 billion. These estimates are likely to change due to vendor model uncertainty driven by the complexity, scope and coverage of the loss which may take many years to settle.”

Although not specifically mentioned in the report, the “politicization of policy form” likely refers to efforts made by Sandy-hit state leaders warning off carriers from enforcing hurricane deductibles.

Almost immediately following Sandy’s October 29th U.S. landfall, New York State Governor Andrew Cuomo and New Jersey Governor Chris Christie directed their respective insurance regulators to make sure carriers did not enforce higher cost hurricane deductibles.

““We have informed the insurance industry that hurricane deductibles are not triggered because Sandy did not have sustained hurricane-force winds when it made land in New York,” said New York’s Superintendent of Financial Services Benjamin Lawsky in press release, with New Jersey making similar pronouncements.

The result of the political impact on Sandy losses has yet to be realized, but the report adds that reinsurance buyers that relied on covers with “indexed, non-indemnity triggers may yet find their reinsurance protections do not respond to Superstorm Sandy loss recoveries in the way they had planned.”

Overall, the Willis report explains that current estimates for Superstorm Sandy put 2012‘s overall natural catastrophe losses at about half the $120 billion total in 2011 and and that most reinsurers will fall within their annual catastrophe budgets

“Modest risk-adjusted rate reductions have been achieved by buyers with good records, while rate increases have been targeted on buyers with specific loss or exposure issues; there are no signs of attempts at blanket rate increases,” the report concludes.

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