Now Is No Time to Ease Up on Loss Prevention, Warns Risk Expert

The insurance industry and its customers must not let down their guard concerning loss prevention despite a mild hurricane season and a quiet time on the terrorism front in the U.S., advises an expert in risk and insurance.

“It’s part of our human psychology to only deal with those risks that are right there in front of us. If a risk is painted as imminent and then it doesn’t happen, our natural human instinct is to relax. Unfortunately, in this case, and we can talk about both extreme weather and terrorism, I think on both fronts we can say that these risks or hazards are not going away,” notes Dr. James Valverde, vice president of economics and risk for the industry’s Insurance Information Institute.

Valverde was responding to a question regarding what to tell the homeowners, business owners and community leaders who have spent time and money on loss mitigation and security measures only to have them go largely untested, in a wide-ranging interview with Insurance Journal. (The video interview with Valverde may be viewed in its entirety at www.insurancejournal.com/broadcasts.)

According to Valverde, the risks, natural or manmade catastrophes, remain real.

“On the weather side, regardless of whether you believe in global warming or not, we are in for a period of heightened hurricane activity in the North Atlantic. There is almost complete unanimity within the scientific community with regard to that issue. So this hurricane season past was a complete anomaly in that regard. The El Nino effect, the dust storms in Africa coming from the Sahara were both events deemed to be of low probability and were not factored into the forecast. We got it wrong this year from a forecasting dimension, but clearly the risk is not going away,” he said.

Similar vigilance is needed in relation to the threat of terrorism, he added.

“I don’t think that anybody believes that global war on terror has in anyway been won or otherwise influenced in a positive direction. We still live in a world where terrorism is very much alive. On the threat of the hazard side, this is still a reality so where that leaves us as a society, as a country, to say nothing about us as an industry, we have to take the loss mitigation, the loss prevention side of this equation, if you will, very seriously.”

Coastal communities and the insurance industry escaped serious destruction in 2006 and have taken advantage of the mild season to continue their rebuilding and recovery. But they shouldn’t expect the years ahead to be as kind as 2006.

“Certainly, if we look at everything that’s happened in this industry since 9/11, both man-made and natural, the industry has shown itself to be incredibly resilient in the face of these extreme events. So this brief respite that we have is, I think, an important one for the industry. But it is just that, a respite,” Valverde commented.

He maintained that investments in loss mitigation will prove to be worthwhile.

“It by no means is a wasted expenditure of capital that you might have used otherwise. It prepares you for a future which I think is more certain than we’re willing to admit at the current point and time, but that is the reality.”

In his interview, Valverde acknowledges that the science of weather forecasting is imperfect but improving.

“[W]hat this hurricane season past clearly demonstrates is that hurricane forecasting is still very much an art and some science, but more art than science. As a consequence, to be perfectly honest and candid about it, we’re going to get it wrong about as many times as we get it right. The real crux of the matter is trying to continually improve and build upon the knowledge and information that we bring to the forecasting task – trying to make that forecasting exercise as reliable and true to reality as possible. But that continues to be a fundamental challenge for the industry. And there’s very little the industry can do about it. Really, we’re talking about fundamental uncertainties that exist with regard to the science of what’s going on here. We’re talking about climatology, we’re talking about meteorology. These are difficult subject matters, and weather is, as most people know, is one of the hardest things to predict with any accuracy.”

He reported that the I.I.I. would soon be partnering with Harvard University to launch the I.I.I.-Harvard Catastrophe Modeling Forum. The planned multi-year forum will bring together all of those with an interest in catastrophe modeling with an emphasis on assessing how climate change in particular is being factored into the models. American International Group and Lloyd’s have agreed to back the forum.

The federal government has provided a backstop for the insurance industry against losses from terrorist activities since 2002. The current version of the Terrorism Risk Insurance Act is scheduled to expire at the end of 2007 unless Congress acts to renew it.

In his talk with Insurance Journal, Valverde notes that the insurance industry supports renewal of the federal backstop.

“The industry is still siding with the view that the need for a substantive federal program that forms the basis for a public private partnership between the private insurance markets and the federal government … is still as crucial as it was on Sept. 12, 2001. And I don’t think that’s going away,” Valverde said.

The industry supports TRIA because it still does not see itself in a position to adequately manage or price the terrorism risk, according to the I.I.I. expert, who points to a Government Accountability Office (GAO) study last year, which looked at the chemical, biological, radiological and nuclear risk dimensions of terrorist risk insurance and concluded that there is no way the industry could manage and price CBRN risk.

“On the frequency side, we have no idea where, when and how these things are going to transpire in terms of the acts of terrorism themselves,” Valverde commented.

“On the loss side, we have a long way to go before we’re able to assess the potential economic damages that might be associated with those kinds of scenarios.”

Thus, he said, the insurance industry still believes there is a need for a “long-term program” that creates a public-private partnership with regard to the risk of terrorism.

The video interview with Valverde may be viewed in its entirety at www.insurancejournal.com/broadcasts.