Insuring Against The New Normal

Hurricane Sandy moving inland on October 30, 2012. (Photo by NASA via Getty Images)

Without wading into the public debate over global climate change, Munich Reinsurance America is quietly innovating both how and what it brings to the post-Sandy flood insurance market.

“We’ve been seeing changes in precipitation extremes for decades,” explained Mark Bove, Senior Research Meteorologist, who’s part of a 35-person global team of meteorologists, geologists and other scientists that crunch the numbers on the frequency and severity risks of natural events, like hurricanes Katrina and Sandy.

“When it rains, it’s raining harder, and the likelihood of severe flooding is greater.”

Historically, the Federal government has covered flood insurance, since the economics of insuring somewhat rare and usually catastrophic events made a private market unattractive to homeowners (too high cost) and insurers (too much risk). But the reauthorization of the National Flood Insurance program (NFIP) in 2012 came with some changes in how rates would be set, potentially opening the door to private insurance.

“We saw a business opportunity that appeared to take into account what we were seeing on the science,” said Mike Quigley, SVP, Property Underwriting.

“The politics behind it weren’t relevant.”

The innovation challenge was how, since Munich Re specializes in business reinsurance, and not selling policies directly to individuals, along with the fact that changes in weather rendered past predictive models somewhat moot.

So Quigley broke with tradition, and convened a first-ever brain trust from across the company’s affiliate companies, including residential flood experts from American Modern, business development specialists from Hartford Steam Boiler, commercial property underwriters from the U.S. Specialty Markets division, natural catastrophe/flood modeling experts from Munich, and a broad spectrum of participants from the project-leading U.S. Reinsurance practice.

The goal was to spend two days modeling what flood insurance looked like in countries where private markets exist, and then determine how to apply those ideas to the U.S.

The first idea out of the meeting was to develop a reinsurance product in Munich Re’s sweet spot, though it was quickly dismissed, in part because it would require depending on subsequent governmental actions to create an entire syndicated market from scratch.

“Our second idea was far bigger.”

“We decided to create a primary flood insurance product for people living outside coastal floodplains,” Quigley explained. “There had never been one before.”

Since there was no precedent within Munich Re for developing such a reinsurance product, Quigley embraced the spirit of his impromptu brain trust, and created a 4-person team with Tim Brockett, SVP, Strategic Products Manager, at the helm. Their task was to avoid inventing things from scratch, if possible, and instead reach across affiliate companies to pull together a product and sales plan.

“We needed to move fast,” said Brockett. “We knew where we needed to end up, and we had all of the company’s science and risk assessment tools at our disposal, but we really needed to fill in the blanks with passion.”

“We also kept our day jobs, so if we didn’t believe in the opportunity, we never would have been able to get the work done.”

The outcome of their efforts was announced early last month, in the form of an Inland Flood Coverage Endorsement. The offering is enabled with the participation of two of the affiliate companies that participated in its research and subsequent development.

“This project showed us that we need to be on our toes, and stay open to new ideas,” said Steve Levy, President of Munich Reinsurance America’s Reinsurance Division. He’s since begun institutionalizing the process, with Brockett leading it.

Already, there are brainstorms and/or development programs underway in emerging risk categories, such as autonomous machinery and cyber liability.

“We’re thinking more like a technology company, putting together products that address opportunities faster,” Levy explained. “Now that our flood insurance product is in the market, we’ll iterate it, making it work better for our clients, their customers, and for us.”

It’s a good bet that the weather will do its part to help Munich Re prove its case, irrespective of any agreement on its causes.