MOST DANGEROUS EMERGING RISKS
Critical Coverage Gap
and rising property
values, combined with
an increase in high-severity catastrophes,
are pushing the
gap to a critical level.
By Michelle Kerr
Disaster resiliency requires increased insurance penetration combined with widespread mitigation efforts.
Amid discussion of presidential Tweets and Hollywood harassment, catastrophes dominated much of the news cycles of late 2017. It was a record-setting year. Irma was the longest-lived Category 5 storm in the past 50 years. Harvey set a new U.S. rainfall record for a tropical cyclone. October wildfires in California were
the most damaging ever endured by the state. Globally, the overall tally for
natural-disaster losses amounted to $330 billion, the second-highest figure on
record — 60 percent of it uninsured.
Climate change, sea level rise, increasing global temperatures … these factors
and more are increasingly impacting the frequency and intensity of catastrophe-level events. Growth in population and property values are exacerbating the
severity of the losses.
“These events, if anything, are getting stronger and more frequent,” said
Patrick Daley, Head of Large Property for The Hartford. Even normalizing for
increased property values, “any kind of bar chart you look at over the last 40 years
All of which makes the protection gap — the difference between total
economic and insured losses — an area of great concern, in terms of the country’s
ability to rebound from disasters, both physically and economically.
“You need look no further than some of the events we saw in 2017 to see
that when you have higher penetration rates for properties that are insured, the
recovery is significantly faster,” said Daley.
“That’s a very big deal, and it’s something we don’t talk enough about in the
industry, something we can bring to bear and should be talking more about.”
The property insurance protection gap has risen steadily over the past 40
years. In the past decade, cumulative total damage to global property as a result
of natural disaster events was $1.8 trillion. At least 70 percent of those losses were
not covered, according a 2015 Swiss Re study titled “Underinsurance of Property
Risks: Closing the Gap.”
In the U.S., the problem is felt most acutely for special perils such as flood
or earthquake coverage. In the event of a mega-earthquake along the San
Andreas fault, experts warn that only 9 percent to 13 percent of properties carry
A dramatic example of the flood protection gap is still playing out in Texas.
Less than 20 percent of homes in the Houston area were covered for flood when
Nationally, there are more than 29 million properties that are at moderate to
high risk of flooding, but are not subject to mandatory flood coverage because
they fall outside of Special Flood Hazard Areas, according to a CoreLogic analysis.
More than five million of those properties are in Florida — more than half ( 54
percent) of the state’s total properties. Texas and California each have three
million properties at risk. Arizona is far smaller, but 68 percent of its properties are
at risk, as well as 49 percent in Louisiana.
TROUBLE IN THE GAP
Some are tallying the combined losses of Harvey, Irma and Maria at up to $250
billion. Scientists are already predicting that the 2018 Atlantic hurricane season
will be a repeat of 2017 — or worse.
California mega-quake losses are more speculative. For an 8.2 quake, some say
a figure close to $300 billion isn’t out of the realm of possibility.
“Two or three times what happened in Harvey is a likely outcome,” said Tom
Larsen, principal of industry solutions at CoreLogic. “It’s tragic, it’s big numbers,
it will be very disruptive.”
Modelers have shown how an 8.2 quake could cause a length of the San
Andreas fault to rip open like a 300-mile-long zipper running from the Salton
Sea to Paso Robles, displacing the earth by 30 feet in a matter of seconds. All of
Southern California would be hit hard at the same time.
At particular risk is the Los Angeles basin, where millions live atop a surface of
mostly gravel and sand. The U.S. has never suffered a quake of that magnitude so
“I think most people figure, if
something that big happens,
either I’ll walk away from my
house and let the bank have it,
or I’ll take out a loan.”
—Michael Korn, managing principal and practice
leader for property and marine, Integro Insurance