Storm & Security

PROTeCT/YOURSELF Loss Prediction: NEW risk modeling techniques along with tremendous property losses will lead to increased property premiums in 2012. The good news is there are several advances in hurricane protection that will allow property owners an opportunity to reduce their risk now and in the future. Wind Damage Shifts to Tornados From 1990 to 2009, hurricanes and tropical storms made up 45.2 percent of total catastrophe losses, followed by tornado losses at 29 percent and winter storms at 7.4 percent. In 2011, hurricane claims made up just 13.4 percent of the total property claims. Forecasting property losses using the statistical average of years passed, 2011 could have had $24 billion in losses compared with the $7.2 billion in losses from Hurricane Irene. So the United States dodges hurricane losses in 2011, but then runs into the busiest storm season in history with more than 1,800 tornados and 27,673 storms producing damaging winds or dangerous hail. If these numbers were not bad enough, there has been this disturbing trend: Over the last five years the insurance industry has seen a steady increase of tornados. In 2008 the number of twisters was 1,100, in 2011 the number peaks at 1,820. The property insurance carriers' profit margin of 6.4 percent in 2010 and 1.7 percent in 2011 represent the lowest percentages of profit since the statistics were first tracked by the insurance service office. Loss Amplification The increase in loss claims comes on the heels of a new | by Don Leggett | Going up! The record-breaking year is sure to push insurance premiums higher. Loss Amplification represents a broadening of previous efforts to model additional classes of economic damage. In the past, demand surge (the increase in prices for labor and materials immediately following a major event) drove replacement prices higher for repair of a building. Traditionally that cost increase averaged 17 percent, but studies of damage from hurricanes Wilma and Rita showed the true increase was 30 percent. In addition to labor and material price increases, Loss Amplification added three more components to show the actual increase in rebuilding costs. They are: delay to repair, claims inflation, and claims leakage—and they all play a significant part in increasing the replacement cost for damaged structures. Delay in repair includes additional damage from mold, spoilage, and contamination. Delays in drying out structures would increase the structure contents and the business income portion of the claim. Claims inflation is the human element that appeared in the forensic study. For instance, a 32-inch TV set before the storm became a 60-inch plasma TV set after the storm and an $800 dinette set became a $5,000 cherry banquet set. Claims adjusters, being overwhelmed by the volume of claims after a major storm, tend to write higher personal property checks per structure than for claims when the loss of the structure was from a fire. The insurance carriers ability to verify claims can be over- shadowed by the insurance carriers desire to restore economic\conditions to pre-storm levels. The Four Key Components The new risk model also identifies—and reorders in signifi- The increase in loss claims comes on the heels of a new version of the risk modeling programs used to predict the amount of losses after a hurricane. version of the risk modeling programs the insurance industry has used since Hurricane Andrew to predict the amount of losses after a hurricane. The new model predicts cost between 20 and 140 percent higher than the older version. The largest part of this increase is called Loss Amplification. cance—four key components that can be used to predict loss. They are: occupancy type, year built, construction type, and number of stories. A study used to create the new model found that insured properties with the worst combi- nation of these four components could generate a loss 18 times higher than previously predicted. Under the old risk model, the worst-case scenario only generated a claim three times above the expected loss. In reordering the significance of these four components, "occupancy type" moved to the top. What should have been 2012 DIRECTORY & RESOURCE GUIDE / STORM&SeCuRITy PROTeCTION 15

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