Storm Frequency Becomes a Frequent Problem

Chris Westfall
Chris Westfall

As the cost of frequent but smaller storms becomes a larger part of insurance industry losses, both reinsurers and catastrophe modelers expect to expand their offerings.

Last week, global reinsurer Munich Re announced it was rolling out a new product dubbed Nat Cat Frequency Cover.

Peter Raab, senior vice president and head of property underwriting for regional clients at Munich Re America, says the Nat Cat Frequency program is a “tailored” approach to provide reinsurance coverage for losses from an extraordinary frequency of weather related ‘local’ events.

The product is targeted at the accumulation of losses resulting from frequent weather events including thunderstorm, tornado or hail and wildfire, according to Raab.

“In the past we have written only a few of these products as the structure and scope of cover often did not meet our risk appetite,” Raab says. “This product now is targeted more toward the small and mid-sized carriers that write in particular regions with large accumulation risks from such weather events, as demonstrated by losses in the last 18 months in the Midwest.”

Local storms are becoming a significant issue for U.S. carriers. Severe thunderstorms caused more than $6 billion in insured damages for the first six months of 2009, according to the Insurance Information Institute.

Besides reinsurers, catastrophe modelers are also attempting to address the frequency issue.

Raab says that Munich Re America models the exposure using Risk Management Solutions’ (RMS) model with additional input from in-house experts about the perils.

The RMS model — the Winterstorm and Severe Convective Storm 9.0 — was launched in 2008 and was created specifically for local convective storms that happen frequently in the Midwest

“In a hurricane model, pretty much any landfall that you have will be considered a catastrophe,” says Matthew Nielsen, product manager at RMS. “But there are so many severe convective storms and winter storms that take place over a year, and not all of them create large industry losses.”

Nielsen says that although a Midwest carrier may have a billion dollars in severe convective storm loss, it often will not hit its reinsurance layer because the loss is coming from an accumulation of small instances rather than a single occurrence.

He adds that the contribution of high frequency events — while small to overall annual loss tends — can be huge in real dollars. Nielsen said some Midwest insurers’ frequent storm losses can be up to 15 to 30 percent of its total annual loss.

For Munich Re, however, modeling is not the only tool needed when addressing the frequency issue.

“The more important aspect of modeling the Nat Cat Frequency cover is the use of the individual clients’ loss experience,” Raab says, adding that losses in the Midwest since 2008 have given the reinsurer particular insight into how to structure the program.

Munich Re America is open to expanding the frequency cover into other regions and will be looking for market opportunities, Raab adds.