Pandemic could inflate hurricane industry losses by up to 20%: RMS

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Catastrophe risk modelling specialist RMS has said that a hurricane striking the United States while pandemic restrictions remain in place could end up inflating the ultimate insurance and reinsurance industry loss by up to 20%.

Reinsurance rate risesRMS looks at post-loss amplification as part of its normal catastrophe risk modelling process and in the case of the Covid-19 coronavirus pandemic warns that this could be significantly elevated.

It’s been widely discussed that a major catastrophe loss event hitting during the pandemic lockdown would likely significantly exacerbate the claims process and could inflate claims just due to the challenge of assessing and servicing insurance claims in a severely restricted environment.

But RMS has modelled out the potential impacts to insurance and reinsurance market losses much more fully, exploring how the Covid-19 pandemic could impact elements of post-loss amplification such as demand surge, claims inflation, coverage expansion, deterioration vulnerability (how damage can be exacerbated if left unattended) and secondary consequences of major disaster such as long-term evacuation orders and how that could affect the costs.

RMS analysed exceedance probabilities for hurricane events that coincided with a pandemic and associated restrictions, finding that, “The results show an escalation in impacts across all parts of the exceedance probability curve.”

“Overall, the RMS analysis suggested that, given a lockdown situation, a major hurricane making landfall in 2020 could result in costs 20 percent greater than in a typical hurricane season,” an article in RMS’ blog states.

Adding that, “Replicating this analysis for other geographies and other perils would likely yield similar results.”

It’s a moving target though, as the modelling outcome changes depending on the political approach to lockdown and pandemic restrictions it seems.

RMS said, “Any significant changes to the political response to a pandemic give rise to different increases in modeled losses. For example, a loosening of distancing measures results in a different set of assumptions and thus a different set of results.”

With governments beginning to loosen some restrictions in certain areas, including the United States, but the pace of the loosening and how effective it may be, or otherwise, still uncertain, it means there are very uncertain inflationary pressures that perhaps need to be layered on top of hurricane and other catastrophe loss assumptions over the coming months.

There is significant uncertainty over how long restrictions of any kind will remain in place and as well as the effects, in terms of claims inflation and loss amplification, there is the already well-documented other input of stranded assets such as aviation assets sitting in airports, or cruise ships moored in terminals, that could all get hit at once by major catastrophes or storms, to also consider.

The global Covid-19 pandemic has changed the profile of risk considerably, as well as adding inflationary pressures.

The exposure profile has been dramatically changed by the lockdown and related stopping of certain industries, all of which means elevated asset values at risk of catastrophes, or just a complete change to the way they were previously modelled.

Which means that as we approach hurricane season, the assumptions made in the past by insurance, reinsurance and ILS fund interests may not prove the same as the reality that could play out if a major landfall occurred.

The probability of a catastrophe occurring has not changed, but the potential costs emanating from it may have changed significantly at this time.

It’s something that is hard to model any definitive outcome for, but it could drive some to seek greater hedging protection for portfolios of catastrophe exposed risks, including in the ILS and catastrophe bond market.

As the loosening of lockdown restrictions proceeds, this risk should lessen. But with that set to take perhaps months, it looks certain a decent chunk of hurricane season will come with added pandemic related loss-inflationary risks.

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