31 December 2012

Politics: A New Catastrophe Reinsurance Risk

In a new report out today on the state of the catastrophe reinsurance industry, Willis Re has this interesting passage (here in PDF):
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. Buyers who have 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.
What is "the politicization of policy form interpretation"?

This is of course the issue of the "hurricane deductible" that I have discussed recently on this blog. The way for reinsurers to address the politicization of policy form interpretation is to develop covers that rely on indexed, non-indemnity triggers which are robust to political meddling. Such risks are not ever going to be usefully modeled by cat modelers (who have a hard enough time as it is).

In plain English this means that the industry should rely on triggers that are unambiguous, verifiable and, ideally, independent from governmental decision making.

5 comments:

  1. The Hartford insurance company has started to offer additional insurance for "extreme weather" citing major weather events of 2012. I quote you.

    http://wattsupwiththat.com/2012/12/31/over-insuring-the-gullible-hartford-offers-extreme-weather-insurance/

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  2. Yes, but what a shame. I remember when the decisions of government agencies like NOAA were considered to be unimpeachable, and the last word.

    How long will it take to rebuild that trust? Can it ever be rebuilt?

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  3. -2-The Right Wing Professor

    Thanks for the comment, I'll be discussing such themes a lot in 2013 in parallel with finishing the 2nd edition of The Honest Broker.

    I don't think that the issue here is so much a loss of trust, but rather a loss of authority. The loss of authority stems from many reasons (including the abuse of that authority by some in authoritative positions), and on balance is probably a good thing.

    We've moved from an era of Witenagemot science to democratized science, with all of the pluses and minuses that entails!

    Happy 2013!

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  4. Keep in mind two that these 'after the fact' fixes by either government (disaster aid) or government meddling in insurance coverage, as here, have a most serious side effect that, from the perspective of the politicians, is perhaps the real intent.

    That distract us for blaming politicians and their kin from not preparing for events that can easily be anticipated: tunnels being flooded, commuter trains being left on low ground and in some cases the lack of dikes.

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  5. Or simply refuse to cover in places that taste the Kool Aid such as Florida and North Carolina.

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