Covid-19 to increase hurricane losses, widespread events the most: KCC

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Hurricane loss events that impact a particularly widespread area, even with lower wind speeds, could be the catastrophes that see a much greater degree of loss amplification and inflation due to the ongoing Covid-19 pandemic, according to Karen Clark & Company.

karen-clark-logoThe catastrophe risk modelling specialists highlighted in a report that even where wind damage is of a lower-level, the more widespread a hurricane industry loss event is, the greater the chances of the costs being inflated by Covid-19 for the insurance, reinsurance and insurance-linked securities (ILS) sectors.

With hurricane season officially beginning as of June 1st, Karen Clark & Company (KCC) has opined on how the Covid-19 coronavirus pandemic could impact losses.

“The coronavirus pandemic will influence hurricane preparedness and response and will likely impact hurricane losses if there are landfalling events,” the company said.

One major reason and a potential driver of higher losses for lower return-period hurricane losses for the insurance and reinsurance industry, is the fact that the Covid-19 lockdown, social distancing and relatively low inventories at supply stores, could all exacerbate the ability of property owners to properly protect their structures, leading to greater wind damage occurring.

This could even be the case in the lower return-period hurricanes, especially if they are particularly widespread and cover a large and populated area.

As ever, many more claims that are inflated could be more costly for insurers than fewer larger claims, due to where deductibles sit and retentions. The impacts for the reinsurance sector could also be higher, given their contracts largely pay out on rising cedent ultimates and proportional claims experience.

Another area of potential hurricane claims inflation for the 2020 season is in business interruption, as great uncertainty exists over how active businesses are at this time.

Business interruption claims could be higher, KCC notes, as businesses incur additional costs to prepare for and respond to hurricanes under Covid-19.

“Calculating business interruption losses will be challenging for all types of businesses this season due to the uncertain impacts of COVID-19 on revenues and income,” the company explained.

Loss adjustment expenses are also likely to be a factor during the hurricane season, as long as Covid-19 effects persist.

Mid to large sized claims will likely see loss adjustment expenses increase, as the challenges of assessing and reporting claims under still relaxing lockdown conditions could inflate claims.

But for smaller claims this could actually be reduced, KCC says, as technology may be able to play a significant role and reduce the need for human assessment.

Reconstruction costs are another area of potential claims inflation, as “In general, repairs to damaged buildings are likely to cost more in the COVID-19 environment due to increased expenses and longer repair and reconstruction times.”

On the other hand there could be a larger pool of available contractors to respond to hurricane loss event damage, which could reduce demand surge, KCC notes.

But overall the company expects that, “Proportionately, smaller losses will increase more than the larger losses due to impacts on the construction industry.”

On balance, KCC expects that hurricane industry losses will increase because of: hampered preparations and mitigation activities; more complicated business interruption claims; remotely settled claims; and increased contractor costs.

That corresponds with the recent report from risk modeller RMS, that said major hurricane landfalls could drive inflated insurance and reinsurance industry losses.

KCC concluded, “The losses from events causing widespread low-level wind damage will increase proportionately more than the losses for more damaging events. For the exceedance probability (EP) curves, this means larger increases for the lower return period losses.

“Claims adjusting costs are likely to increase significantly for the more complex claims, but with new technology these costs can be minimized for small, remotely-settled claims.”

Track the 2020 Atlantic tropical storm and hurricane season on our dedicated page and we’ll update you as new information emerges.

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