KCC’s Clark: Climate change means more $20bn-$40bn industry loss events
Karen Clark has said that while scientific consensus has determined climate change is not impacting hurricane frequency, it is driving severity higher and that the industry should be prepared to absorb more loss events ranging between $20bn and $40bn.
The founder of Karen Clark & Company (KCC) was speaking in an interview to The Insurer TV, where she said that September’s Hurricane Ian was “a quite typical Category 4 hurricane”.
“Nothing was really atypical about this storm. You saw the most extensive damage along the coast, and then it got more spotty going inland,” she observed, adding that the wind field and storm surge from the event were largely within expectations.
However, what Clark said was notable about Ian was that it marked the third-straight year a hurricane made landfall in the US with wind speeds topping 150mph, the first time that has occurred in the historical record.
“And it is a clear signature of climate change,” Clark explained.
KCC’s founder also noted that there have been four Category 4 storms and a Category 5 hurricane to hit the US in the last six years, another development that is unprecedented.
“We're seeing a lot more frequency of $20bn, $30bn, $40bn losses – these should not be a surprise [to the industry] in the current climate regime,” Clark said.
She added: “Losses of this magnitude should be expected with greater frequency.”
Industry has “dodged a bullet” for several years
Clark also made the point that the scope of industry wind losses from a season is driven by the severity of storms as opposed to frequency.
“And location is really key. I think everybody knows that we were actually lucky with Hurricane Ian. If Ian would have hit further north and made a direct hit on Tampa, which it was projected to do, at one point, the insured losses would have been well over $100bn. So we actually dodged a bullet with Ian.”
“And we've actually dodged a bullet for the last several years, because the major storms have not made a direct hit on our highest populated areas along the coast,” Clark said.
Clark noted that while the 2022 storm season had been predicted to be highly-active with above-average storm activity, it ended up being only about average based on a number of metrics.
However, because of Hurricane Ian – a major Category 4 storm that hit Florida’s West Coast at the end of September – insured losses on the year are expected to be well above average.
Clark reiterated a point she has previously made publicly, that the rising severity of hurricanes hitting the US represents an upward shift in catastrophe models’ exceedance probability curves.
“The EP curve is changing,” Clark said. “So the 1-in-10 year losses and 1-in-20 year losses are increasing faster than the PML.”
KCC says litigation costs add $13bn to $63bn Ian estimate
Clark acknowledged that one of the challenges in modeling Florida hurricane losses especially has been the “excess litigation” that has occurred under the state’s assignment-of-benefits regime.
That environment, Clark said, has added about a 50 percent increase to single-family homes in the state, where the percentage of litigated claims is much higher than the rest of the country, and litigated claims cost four to five times as much as those that go uncontested.
“And our model is very transparent with respect to our assumptions,” Clark commented, explaining that the 50 percent load KCC has put on residential losses for litigation contributes about $13bn to the firm’s overall $63bn loss estimate for the storm.
The Florida legislature passed its second major property insurance reform package of the year in a special session last week. One of the measures that was passed includes a complete repeal of one-way attorney fees for property insurance claims and eliminates the controversial practice of assignment of benefits (AOB).
“So it is quite large. And now there is a feeling of belief that recent legislation in Florida could tamp down on the excess litigation, so ideally, we won't have $13bn, but we really don't know the impact.”
Clark noted that four months after Hurricane Irma hit Florida in 2017, the Florida Office of Insurance Regulation (FLOIR) tabulated claims from the storm at $7bn, well short of the storm’s $22bn ultimate cost.
“You've got so much storm surge [losses] mixed with wind loss in Ian and there's a fruitful field there for attorneys to get in and drive up the claims.”
KCC says use of real-time data “big distinction” from rivals
This August marked the 30th anniversary of Hurricane Andrew in 1992 – a storm that is widely regarded as having accelerated the advancement of catastrophe models – and when asked to comment on the evolution of modeling since then, Clark pointed out that different modeling vendors are “advancing the technology in different ways”.
KCC has generally focused on the more difficult-to-model frequency perils of severe convective storm, wildfire, and winter storm.
“In order to accurately model all types of weather-related claims, we've had to advance the models in terms of the techniques we use,” Clark said, noting her firm makes greater use of radar data, numerical weather prediction, and real-time data in the development of its predictions.
Clark said her firm’s leveraging of real-time data in its live event modeling was a “big distinction” between KCC and other firms.
“We put a lot of emphasis on our real-time modeling capabilities, which is very helpful for our clients,” she said.
The executive said that wasn’t just the case for hurricanes, but also for severe convective storms, where KCC produces a hail and tornado wind footprint every day.
“These are the types of applications at KCC we are very much pushing and advancing, because this is where our clients find value,” Clark said, at a time when other modeling firms have moved to diversify into other perils, like cyber.