RMS Study Shows Risk From CAT Events for WC, Life, Health Insurers

Risk Management Solutions Inc. (RMS), a provider of products and services for catastrophe risk management, released the findings of an in-depth study that provides workers’ compensation, life, and health insurers with key benchmarks for the potential risk of human casualties from catastrophic events.

Among other findings, the study demonstrates that while many in the
insurance industry view the World Trade Center attack as a worst-case event, there are numerous natural and man-made events that could cause significantly higher casualties and associated insured losses.

The RMS study, “Catastrophe, Injury, and Insurance: The Impact of
Catastrophes on Workers’ Compensation, Life, and Health Insurance,” was conducted with the support and involvement of leading industry experts including representatives of ACE Tempest Re, Endurance, Guy Carpenter, Holborn Corporation, ING Re, John P. Woods, Swiss Re, and Willis. The complete report is available at http://www.rms.com.

“Our hope is that this study will improve the industry’s understanding of the potential level of risk from human casualty, and lead to the reduction of casualties from major catastrophic events in the future through increased awareness, preparedness, and risk mitigation,” noted Hemant Shah, RMS president and CEO.

The report shows that events capable of causing up to hundreds of thousands of fatalities are possible in the U.S., and that their
financial impact can be quantified and managed by an improved understanding of the magnitude, likelihood, and location of risk.

To this point, the modeling of catastrophic events has primarily focused on the risk to property and business interruption. A key goal of the study is to support better decision making about catastrophe risk underwriting and risk transfer for life and health insurers, a segment of the insurance industry for which catastrophe risk assessment is a relatively new exercise.

“Following September 11, the price of catastrophe reinsurance skyrocketed. At the time, most life and health insurance writers had no way of assessing the frequency and severity of their catastrophe risk, and thus were unable to make informed decisions about the cost/benefit tradeoffs of proposed reinsurance structures,” said Andrew Coburn, vice president of catastrophe research at RMS. “As a result, many chose not to buy reinsurance rather than pay a significant price for an unquantified risk – thus potentially leaving their
companies exposed.”

The RMS study considers the risk of mass casualties due to terrorism, earthquake, industrial accident, and contagious disease illustrated through a detailed analysis of seven extreme but plausible scenarios. For each scenario, the study estimates losses for workers’ comp, individual life, group life, accidental death and dismemberment (AD&D), and health insurance.

The seven scenarios examined are a magnitude 7.1 earthquake in Los
Angeles, a magnitude 6.0 earthquake in Chicago, a terrorist attack using three simultaneous truck bombs, terrorism-related anthrax attacks (major and medium-sized), an industrial rail accident and chemical spill, and a nationwide flu pandemic. The scenarios are not “worst case” events – in each case, losses could be significantly higher depending on such factors as event magnitude and location.

For the seven scenarios, estimates for total insured losses range from
$2 billion for the Chicago earthquake to more than $54 billion for the major anthrax attack; estimates for loss of life range from 2,100 for the Chicago earthquake to 200,000 for the influenza pandemic.

The attacks of Sept. 11 demonstrated that in extreme events, losses
are highly correlated across lines of business – meaning that catastrophe risk must be managed across multiple lines simultaneously. Illustrating this loss correlation, the report indicates that in the most costly scenario analyzed – the major anthrax attack – total insured losses of $54 billion would comprise losses of $32 billion in workers’ comp, $9 billion in group life, $7 billion in individual life, $4 billion in AD&D, and $2 billion in health insurance.

The scenarios also show that the total number of deaths or injuries from an event does not completely predict the costs to the insurance company or lines of business – other important factors include the penetration of insurance products among people affected, the severity of their injuries, and the time of day the event occurs.

The study shows that the threat of catastrophic events to workers’
comp, life, and health lines is substantive but manageable. “For
members of the life and health industry, the challenge is analogous to the one faced by the property insurance industry in the mid-1990s, following Hurricane Andrew and the Northridge Earthquake,” the report notes. “These events made it painfully clear that companies had to manage catastrophic risk proactively in order to succeed.”

For all insurers exposed to catastrophe risk, the report highlights the
importance of capturing detailed portfolio information and using catastrophe risk management tools as standard operating procedure.

“Investments in systems for data capture and risk quantification will readily pay dividends in the form of improved risk management decision making,” the report added.