P&C the October 2022 issue

Specialty’s Role in Weather Risks

Weather losses are driving innovative solutions in the specialty insurance market.
By Chad Levine Posted on September 29, 2022

According to Aon’s 2021 “Weather, Climate and Catastrophe Insight,” direct economic losses and physical damage resulting from global natural disasters were estimated at $343 billion in 2021—27% above the 21st century average.

In the United States, rainfall totals are increasing, hurricanes are affecting broader swathes of the population, and no one is immune. As insurers, brokers and agents look to help clients mitigate these weather risks, we’re noticing a few noteworthy changes in three specialty insurance areas.

Flood and Catastrophes

Flooding can happen anytime, anywhere and to anyone. We saw this play out last year when Hurricane Ida—a powerful Category 4 storm—rocked the Louisiana coast. But instead of dissipating as it moved inland, it gained strength and days later was ravaging communities more than a thousand miles away in the Northeast. These types of events are no longer anomalies; we can expect them. As they happen more often, home and property owners are facing greater flood risk. The flood insurance industry has reacted in a few ways. Until 10 years ago, the National Flood Insurance Program (NFIP) was the only source for flood insurance. In 2012, The Biggert-Waters Act enabled private companies to enter the market, paving the way for more personalized, tailored solutions based on more sophisticated flood risk models. 

Private flood insurance policies often provide higher limits compared to the NFIP—and some can offer other unique add-ons, including coverage for your swimming pool, additional living expenses in case a flood renders your home uninhabitable, and more. Last fall, the NFIP rolled out Risk Rating 2.0, completely overhauling how it calculates and prices flood risk. Some may argue that the NFIP introduced the change to keep up with the times, especially in this age of big data with advanced technology and more accurate mapping. But changing weather patterns also played a role in this innovation, pushing both the private and federal markets to design new programs that more adequately address the evolving risks.

Direct economic losses and physical damage resulting from global natural disasters were estimated at $343 billion in 2021—27% above the 21st century average.

Mortgage Banking

Natural disasters are putting mortgage portfolios held by financial institutions at higher risk. With that, there’s more pressure on these institutions to help ensure that the collateral properties in their portfolio are adequately insured against extreme weather risks. For example, some property owners in traditionally lower-risk areas may choose not to protect their property with a separate wind and hail insurance policy. However, we also know that about one in 35 insured homes has a property damage claim related to wind or hail each year. This disconnect between wind and hail insurance requirements and the reality of the peril is just one example that’s helping drive the desire for mortgage impairment insurance as lenders look to shield their businesses against weather catastrophes.

Special Events and Attractions

As indoor conferences, conventions and trade shows make a comeback after the pandemic, associations must also think about how severe weather conditions can affect their events. In fact, 50% of claims over the last decade for Aon’s Showstoppers event cancellation insurance are a result of a weather-related issue. And a venue doesn’t even need to be directly hit by severe weather for an association to see impacts in revenue. For example, there may be a hurricane in Florida. And while that’s a thousand miles away from Chicago where a convention is taking place, the storm may prevent people from being able to travel and, therefore, reduce attendance. We’re seeing associations with an increased desire for coverage that can help protect these marquee events against unavoidable travel disruption to attendees caused by natural disasters. 

Specialty’s Moment

Extreme weather is creating new challenges across all industries. The specialty insurance market, in particular, is well equipped to help solve these evolving risks. When a new insurance need emerges, specialty MGUs—because of their unique business model—can respond and adapt in a short time frame. They can assemble a team to design, test and deliver a product faster. This type of nimbleness will become increasingly important as all players within the insurance industry work to mitigate the risks of extreme weather events and impacts. It’s this speed that is propelling the specialty market forward and helping clients proactively manage their climate risks.

Chad Levine is EVP and chief strategy officer of Aon Affinity U.S.

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