Natural disasters such as hurricanes and earthquakes have long wreaked havoc on regular citizens’ way of life and insurers that issue homeowners insurance policies. A single natural disaster can shift an insurer’s financial results from being on track to achieve a year of targeted or above-average profitability levels to significant losses that could take years to recoup.
Following the aftermath of Hurricane Andrew during the early 1990s, a segment of the Insurtech industry developed catastrophe modeling software to collect and analyze data pertaining to the impact of natural disasters.
Catastrophe modeling software vendors have teams of statisticians, actuaries, engineers, claims adjustors, and other professionals devoted to projecting the impact of natural disasters on an individual insurer’s book of business. Insurers have been diligent in entering policy-level details into the software and incorporating the software’s output in their policy pricing. Many insurers pay costly annual subscriptions for the use of these software packages.
However, there are several considerations to note when using this software. To begin, different catastrophe modeling vendors can have widely differing estimates of anticipated natural disaster claims for the same insurer’s book of business, making it hard for an individual insurer to decide which modeling output to give more weight to. The situation is exacerbated by many of these models’ “black box” nature. Another issue is that some insurers question the reliability of the software output since software packages labeled many weather occurrences as “one in 100-year” events and natural disasters are occurring more frequently.
Further Measures to Take
Moving forward, it will not be enough for insurers to simply run a catastrophe model. The 10 warmest years in the historical record have all occurred in the past decade (2015 to 2024).1 Rising global temperatures can contribute to increased hurricane and wildfire activity, making it imperative for insurers to change how they do business to help counteract the effect of increasing catastrophe-related insurance claims across the globe.
One area insurers can consider is limiting the effect of demand surge. Demand surge loosely refers to the effect of rising material and labor costs in the aftermath of a natural disaster. Insurers may reduce this by taking a page from future/forwards in finance and health maintenance organization (plans) in health insurance. They can offer contractors or suppliers partial payment before a natural disaster in exchange for a locked-in favorable fixed cost of certain services and/or materials in the event of a natural catastrophe.
On the surface, applying this type of measure may seem like a way to spread the cost of an event over different time periods. However, insurers cannot know the labor or material cost amounts for future catastrophes. Planning pre-negotiated labor and material amounts can be of great help.
Traditionally, insurers have focused on predicting overall losses from natural disasters and less on revisiting past natural disaster insurance claims (to illustrate the labor and materials most commonly used following a natural disaster). Even when armed with this information, applying pre-negotiated labor and/or materials costs is not an exact science. For example, an insurer would have to choose the network of would-be providers carefully to help ensure that a natural disaster did not impact them at the same time as the insurance organization.
How Forvis Mazars Can Help
Natural disaster management is broader than simply running catastrophe modeling software; it must be embedded in an insurer’s corporate strategy. Forvis Mazars has several strategic recommendations for mitigating insurance claims from natural disasters. Our multidisciplinary teams of actuaries, accountants, data scientists, IT developers, and other professionals can assist insurers with these strategies, as well as implementation and financial reporting challenges. We welcome the opportunity to help your organization attain a competitive edge and remain resilient in the wake of natural disasters. Transformation is never easy, but the right team can make all the difference.
For more information, please reach out to a professional at Forvis Mazars.
- 1“Climate Change: Global Temperature,” climate.gov, May 29, 2025.