Intuition may tell you that “1‑in‑100 year” events like those listed above are occurring more frequently than that – and a recent study by the non-profit First Street Foundation (FSF) confirms it. Using early 21st century research data, FSF found that the U.S. will experience more occurrences of extreme precipitation (heavy rainfall) in the future and that the recent experiences of catastrophic events seen over the last few decades should be treated as the “new normal” for many areas.9 FSF also noted that flood risk will continue to worsen in the near and long term due to climate change; in some areas, a flood risk previously associated with a 1‑in‑100 year event may now occur as often as every ten years in the most severe case, and in the next 30 years, such events may be better characterized as even more frequent (a 1‑in‑5 year event for instance).10
Is a Warming Atmosphere the Cause?
As air temperatures increase, the atmosphere can carry greater amounts of water vapor and then discharge that moisture through heavy rainfall. To illustrate, for every 1°C increase (1.8°F) in temperature, the same air volume carries 7% more water vapor.11 As a result, increased temperatures have changed expectations for the Intensity, Duration, and Frequency (IDF) of rainfall events, with occurrences previously thought to occur only once every 100 years now taking place with greater frequency.12
Some scientists believe that warming air may be increasing hailstone size but advise that more research is needed.13 Other research suggests that a warming atmosphere may be more conducive to forming thunderstorms “with strong updrafts that can support the development of larger hailstones” that would hit the earth while also forming smaller hailstones that would likely melt before reaching the ground.14
At this juncture, it should be noted that much more needs to be learned as to what’s driving the increase in extreme weather events, whether society is in fact on the precipice of an ominous “new normal,” and the extent to which the frequency and severity of extreme weather events can be reliably predicted. Regardless, progress is being made through a new wave of modeling that attempts to meld the “general circulation models,” which base large-trend forecasts on physics with “catastrophe risk” models that use historical data to infer future probabilities of hurricanes, earthquakes and the like.15 Over time, the hope is that greater modeling precision that considers both human-caused climate change and seasonal weather patterns such as El Niño and La Niña will result.16
- Severe-event frequency is increasing.
While science and data analysis continue to establish patterns and forecast trends, carriers need to plan for a future filled with more severe weather events.
- Insurers should fund for these events over time.
Loss activity can decimate any given accident year. However, the period to recover those losses takes longer. Pricing needs to account for that reality, and the reality that more frequent severe events will occur going forward. In many regions, increasing the portion of rates allocated to weather will help manage volatility.
- Risk concentration needs to be managed.
Multiple data points tell us that risk-prone areas continue to experience significant and rapid population growth. As a result, carriers will need to closely monitor demographic changes and guard against concentration of risk.
- Risk quality matters.
Now more than ever, resiliency matters. This ranges from buildings constructed to withstand extreme weather events to robust business continuity plans to minimize disruptions when extreme weather events take place. As an example, risk inspections focused on roof quality and maintenance will help with risk selection. Coverage adjustments to deductibles, and types of roof coverage will help keep loss amounts manageable.
Many regions of the U.S. have experienced increased frequency of severe weather events, driving increased loss activity. While long-term trends on weather are difficult to predict, carriers will benefit from proactive risk and accumulation management. Insurance pricing and coverage also need to be adjusted to respond to increased risk and uncertainty. Please reach out to me or your Gen Re representative with questions or to learn more about this topic.