Karen Clark & Co. launches U.S. storm surge risk model

A new, comprehensive, high-resolution storm surge model for the U.S. has been released by catastrophe risk modelling and analysis firm Karen Clark & Company (KCC), which it believes will help ILS investors to get more comfortable with this risk.

According to KCC its new model offers some significant advantages compared to other currently available storm surge models, through its implementation with KCC’s RiskInsight open loss modeling platform.

“We’re very pleased to release this new model so our clients can capitalize on opportunities for writing flood insurance in Florida and elsewhere,” noted KCC’s Chief Executive Officer (CEO) Karen Clark.

That the storm surge model operates through KCC’s RiskInsight platform ensures all elements of the model are “fully transparent,” making it easier for insurers to adapt their loss estimates in respect of their total insured value (TIV) that is exposed to the peril.

Clients will benefit from a detailed collection of historical relevant footprints, accompanied by clearly highlighted storm surge-prone regions, providing the option to estimate losses with and without a storm surge event.

KCC continue to explain that the new platform goes beyond enabling basic storm surge portfolio loss estimates for re/insurers, by providing details of 100 and 250-year flood areas along the U.S. coastline.

Then, “the locations of individual policies can be tested to see if they’re in or out of the flood zones before the policies are written. This enables insurers to closely monitor and control their flood loss potential,” KCC said.

Storm surge risk is largely dependent on the severity of hurricanes and location of the surge occurrence, but research increasingly suggests that rising sea levels and other factors are now also contributing to this peril. That means the potential for losses from storm surge are increasing, threatening both traditional reinsurers and ILS fund managers.

Due to the risks involved, many catastrophe bonds that cover U.S. hurricanes typically include some protection for storm surge as well, but a growing understanding and realisation of just how damaging the storm surge element can be has caused a change.

2013 saw the issuance of the world’s first solely storm surge focused cat bond, the $200 million MetroCat Re Ltd. (Series 2013-1) deal, a sign that sponsors and investors are coming round to the potential severity of storm surge and are prepared to allocate capital to protect against such an event.

This is also a sign that the risk modelling is improving, giving ILS investors the confidence to allocate to a storm surge only cat bond. However, with the growth of collateralized reinsurance, the amount of storm surge risk in the ILS markets portfolios will be growing fast anyway making use of the best risk models imperative.

The insurance-linked securities (ILS), reinsurance linked investment and catastrophe bond market certainly has ample capacity to cater for the protection against storm surge. Seemingly it also has the appetite to allocate capital to storm surge risks, when they are well structured and the model used provides them with the confidence required to back deals.

Models like KCC’s help to show just how much of an impact the peril can have on the ILS market. Re/insurers and ILS investors alike could utilise the software to help maintain a disciplined and sensible approach to underwriting across their portfolios.

Karen Clark told Artemis; “As the ILS market expands into new perils and regions, greater transparency than is offered by the traditional models will be required. Storm surge flooding for example is such a localized peril, only by actually seeing the high-resolution surge footprints underlying the model can investors have confidence in the loss estimates coming out of the model. RiskInsight empowers investors to ‘trust but verify’.”

Storm surge is an incredibly damaging peril and one that is often underestimated in severity and with the potential losses it can incur. In some cases the damage from a surge can be so severe it can easily outweigh the actual hurricane event itself.

To offer clients the most detailed view of a storm surge’s impact on their portfolio before a policy is written or during its term, KCC’s model accounts for various influences on coastal flooding, including; the existence of inlets or bays, coastal bathymetry, radius of maximum winds, storm intensity and even storm surge mitigation tools, like sea walls.

As recognition of storm surge as a peril and the appetite to include it in ILS portfolios increases, models like KCC’s RiskInsight storm surge Reference Model become invaluable to this market.

KCC Senior Vice President, Glen Daraskevich, commented; “We’ve spent years developing the storm surge capabilities in RiskInsight, but what’s more important to our clients is that we’ve spent the past several months reviewing and validating every storm surge footprint in the model.”