Should risk-sharing consider geographic exposure?

If catastrophe damage losses continue to escalate as expected, the insurance industry may have to re-evaluate its model for risk-sharing, panelists told an audience attending an Ontario Risk and Insurance Management Society meeting in Toronto.A new model may, for example, have to take into account the geographic distribution of risk exposure.Swiss Re stats show a record US$78 billion in insured natural cat losses in 2005, compared to only US$5 billion in man-made disasters, panelists noted. The damages include those caused by Hurricane Katrina (accounting for about US$50 billion of the total), as well as Hurricanes Rita and Wilma. All of the above hurricanes caused extensive damage along Florida and southern states including Louisiana, Alabama, and Texas.Colorado State University stats show the probability of a major hurricane (Category 3, 4, and 5) making landfall somewhere on a U.S. coast in 2006 is 81%. The chance a major hurricane will hit the east U.S. coast in 2006 is 64%.And yet, a disproportionate value of insured exposure is located along the eastern U.S. seaboard, panelists told the ORIMS seminar. AIR Worldwide figures show total insured U.S. east coast exposure at US$7.2 trillion. Florida (at US$1.94 trillion) and New York (at US$1.9 trillion) account for almost US$3 trillion of the total.Future models for risk-sharing might have to become more regional to take these disproportionate geographic exposures into account, panelists suggested. Others noted insurers and reinsurers might also compensate by resorting to policy limitations on windstorm damage, thereby potentially creating a windstorm capacity scarcity.