TARA is tougher now

Supply Chain Resilience actions can often be characterized by one of four risk-oriented choices: Transfer, Avoid, Reduce, and/or Accept (TARA). Risk abundantly unfolds. We will experience bruising or worse. But with forethought and action, most risks can be mitigated.

For example, potential loss-of-life from storm surge can be avoided by evacuating surge-prone places. Potential property damage from hurricanes can be reduced by purposeful location, architectural, engineering, and construction choices. Property insurance can sometimes (in some places) be purchased to transfer the risk of financial loss to the insurance carrier and their underwriters. We often make decisions — explicit and implicit, commercial and personal — to accept some level of risk. With enough free cash-flow some can self-insure, which is basically a more-thoughtful-than-usual approach to risk acceptance.

Risk transfer is increasingly expensive — and treacherous . Over the last decade underwriting losses have accumulated. According to A.M. Best, “In 2023, the [US] industry recorded a net underwriting loss of $21.6 billion, following a $25.8 billion loss in the prior year.” The marginal improvement was due to 2023’s comparatively light hurricane season. Overall global losses — not just insured losses — have continued to exceed historical averages (see chart below).

Insured losses are especially acute in homeowners and vehicular insurance lines (more), but the commercial property insurance market is also morphing as disasters increase in frequency, virulence, and cost.

According to Travelers Insurance, “In the last four years, these [catastrophic] events have caused annual insured losses of more than $100 billion globally. In 2023, total insured losses globally were an overwhelming $118 billion. Severe convective storms (SCS) represented 58% of the losses globally, and in the U.S., six of the 10 most expensive events were SCS events.”

With more destruction and higher claims, the cost of insurance has increased. This increased expense has — as surging demand often does — tended to result in system-shedding of the most vulnerable or peripheral potential consumers. The Consumer Federation of America reports, “One in thirteen homeowners across the United States are uninsured (7.4 percent), equivalent to 6.1 million homeowners. Homeowners making under $50,000 a year are twice as likely as the general population to be uninsured (15 percent).”

Inflation is a contributing factor for increased losses (and another common outcome of demand surges). A 2022 Harris Poll found that, “only 43% of U.S. business owners have increased their business insurance policy limits to account for inflation. These updates were influenced by things such as increases in the costs of goods and services, higher wages, and increased interest rates for loans, all of which may impact the cost to rebuild or resume operations after a claim.”

Reinsurance News reports, “Over the past five years, commercial insurance lines have faced challenges due to adverse prior year loss reserves, latent liabilities, and increased competition in longer-term coverage areas… Increasing reinsurance costs, particularly for catastrophe-exposed lines, along with tightened capacity in affected property markets, have necessitated higher account pricing that contributed to higher calendar-year premium totals.” In an admittedly self-interested comment published by Risk&Insurance magazine, a truth was nonetheless articulated, “Driven by natural catastrophe and extreme weather, a surge in inflation, inaccurate property valuations and more, the commercial property insurance market has seen several consecutive years of increasing premiums. The world is a risky place. Protecting assets and reducing risk in today‚Äôs volatile and uncertain environment can feel like a daunting task for any business.”

As risks increase and transfer costs follow, network resilience is stressed by relative decreases in overall risk management investments which can be hidden until an amplified shock hits the under-invested place and people waaay too hard.

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July 11 Update: Hurricane Beryl did extensive damage across the Caribbean (more and more). Reuters is reporting a wide range of damage estimates related to the hurricane’s hit on Texas. Reinsurance News has highlighted the Karen Clark & Company estimate of $2.7 billion for Texas-specific insured losses. [Cost-related — but not Beryl related — residential insurance analysis from the NYT.]