Insurance and WeatherPaul PoulosActuarial Science

How Insurance Works• Insured pays premiums to insurance companies to

protect themselves in the event of a loss.• When an insured experiences a covered loss they

file a claim and the insurance company will pay the claim• Claims are often subject to deductibles

• Insurance companies collect the premiums from all of their clients monthly or annually and use that money to cover these losses.

• Insurance companies almost always have Reinsurance policies which help them cover losses of great scale (natural disasters).• Reinsurance company will pay a part of the loss if the

insurance company cannot cover the entire loss themselves.

How Insurance Rates Are Set• Insurance companies calculate their risk when

they determine an individual’s premium.• They use historical data to make an educated

estimate of the likelihood of a covered person experiencing a loss.• Health insurance: Smoker, Family medical history• Car Insurance: Age, Gender• Homeowners Insurance: Location (weather)

Car Insurance• 71% of all car accident-related deaths in 2012 were males.• The number of drivers who died in a fatal car accident was

50% higher for men than women in 2008.• Men are much more likely to have been under the influence

of alcohol in a fatal crash. In 2012, 38% of fatally injured male drivers had BACs of over 0.08%, as compared to 20% of fatally injured female drivers.

• Seat belt use was observed in 88% of female front seat occupants, as compared to 84% of male front seat occupants.

• In 2012, 23% of male drivers who were involved in fatal accidents were speeding at the time of the accident, while 14% of women involved in fatal crashes were doing the same

• For this reason, the premiums paid by a man will be greater than a woman• Given similar age, car, and driving history

• https://www.youtube.com/watch?v=Zml7qQpL8Yo

Weather as a Risk Factor• Extreme weather can be a huge source of risk for

insurance on a home or car.• Falling tree branches from high winds• Fires caused by lightning storms• Flooding caused by heavy rain• Hail damage

• For this reason insurance companies use historical weather data as a factor in determining premiums

Falling tree branches caused by high winds

Hail Damage

Flooding caused by heavy rainfall

Tornadoes

How does this affect your cost of insurance?• Depending on where you live you may be at a

higher risk for a loss simply due to the higher probability of an extreme weather occurrence.

State Monthy Premiums Annual Premiums % Change vs. AvgFlorida  $161.08 $1,933 97.60%

Louisiana  $139.33 $1,672 71.00%

Texas $131.50 $1,578 61.30%

Mississippi  $117.42 $1,409 44.10%

Oklahoma  $115.50 $1,386 41.70%

Alabama  $96.92 $1,163 18.90%

Rhode Island  $94.92 $1,139 16.50%

Kansas  $91.92 $1,103 12.80%

New York  $91.42 $1,097 12.20%

Connecticut  $91.33 $1,096 12.10%

States With the Highest Average Homeowners Insurance Costs

States With the Lowest Average Homeowners Insurance Costs

State Monthy Premiums Annual Premiums % Change vs. AvgIowa  $59.42 $713 -27.10%

Nevada  $57.42 $689 -29.60%

Arizona  $56.25 $675 -31.00%

Delaware $55.33 $664 -32.10%

Ohio  $53.67 $644 -34.20%

Washington  $52.17 $626 -36.00%

Wisconsin  $49.33 $592 -39.50%

Utah  $46.92 $563 -42.40%

Oregon  $46.58 $559 -42.80%

Idaho  $43.17 $518 -47.00%

How does this affect society as a whole?• Large scale natural disasters account for the

majority of the largest insurance losses in history.

10 Most Costly World Insurance Losses, 1970-2013

Rank Date Country Event Insured loss*1 Aug. 25, 2005 U.S., Gulf of Mexico,

Bahamas, North AtlanticHurricane Katrina, storm surge, levee failure,damage to oil rigs

$80,373

2 Mar. 11, 2011 Japan Earthquake (Mw 9.0) triggers tsunami, aftershocks

37,665

3 Oct. 24, 2012 U.S., et al. Hurricane Sandy, storm surge

36,890

4 Aug. 23, 1992 U.S., Bahamas Hurricane Andrew, floods

27,594

5 Sep. 11, 2001 U.S. Terror attacks on WTC, Pentagonand other buildings

25,664

6 Jan. 17, 1994 U.S. Northridge earthquake (M 6.6)

22,857

7 Sep. 6, 2008 U.S., Caribbean: Gulf ofMexico, et al.

Hurricane Ike, floods, offshore damage

22,751

8 Sep. 2, 2004 U.S., Caribbean; Barbados, et al.

Hurricane Ivan, damage to oil rigs

17,218

9 Jul. 27, 2011 Thailand Floods caused by heavy monsoon rains

16,519

10 Feb. 22, 2011 New Zealand Earthquake (Mw 6.3), aftershocks

16,142

• Values shown are in millions• Property and business interruption losses, excludes life and liability losses.

Includes flood losses in the United States insured via the National Flood Insurance Program.

• *Adjusted to 2013 dollars by Swiss Re

Future Problems• As climate change continues to be an issue, the

insurance industry will likely have to adapt its models

• Global climate models project an increase in the frequency of drought in normally dry regions and rainfall/flooding in normally wet regions

• A slight decrease in the frequency of tropical cyclones, but an increase in their average intensity and destructive potential

What does this mean for the insurance industry?• All signs point to the climate becoming more

volatile and therefore presenting a greater risk of loss.

• It would be reasonable to assume that this would lead to an increase in the average car/home insurance premiums.

• As the weather becomes more extreme, property will be damaged much more often or the value of the loss will likely be greater.

Works Cited• http://www.iii.org/fact-statistic/catastrophes-global• https://

www.soa.org/Research/Research-Projects/Risk-Management/research-2012-climate-change-reports.aspx

• http://www.valuepenguin.com/average-cost-of-homeowners-insurance

• http://www.dmv.org/insurance/how-gender-affects-auto-insurance-rates.php

Questions?