CAT Modeling: The Ultimate Risk Management Solution for Portfolio Owners

By Justin Randall, HUB International

​With the impact of COVID-19 on the hospitality industry taking center stage since March 2020, it’s easy to overlook the more stealthy but growing threat that looms over businesses in today’s environment: climate.

Natural disasters have eaten up a significant portion of property insurance capacity country-wide, with 20 separate billion-dollar weather and climate disasters in 2021 causing owners to consider their real estate risk. Wisconsin alone experienced 41 tornadoes, the most since 2010. Other severe storms and heavy rains have increased Wisconsin’s average annual precipitation rate and caused major flooding.

Extreme weather doesn’t discriminate. And while these catastrophes are extreme, they are no longer rare. Real estate owners should expect more of the same in 2022.

The insurance industry has trouble factoring in climate change, and reinsurer experts forecast a 30%-63% rise in insured losses for natural catastrophes in advanced markets by 2040.

For this reason, many reinsurers, the companies that insure property and casualty (P&C) carriers, are pulling out of the market. Property owners and operators therefore have fewer coverage options and higher rates in today’s market, particularly in areas where weather catastrophes are more frequent.

For those who can secure coverage, risk management practices and tools are more important than ever. While old-fashioned, non-tech risk solutions and controls, such as water mitigation and disaster recovery planning, will never go out of style, hotel and lodging owners — especially those with large property portfolios — should consider catastrophe (CAT) modeling technology to better align with the practices of insurance companies.

CAT modeling has been around for decades, used by insurers and risk managers to determine accurate risk management strategies and ensure that the real estate owners they are providing coverage to are resilient enough to withstand a major disaster. It’s a crucial tool in their underwriting and pricing processes.

Hotel owners can also use CAT model- ing and probable maximum loss (PML) studies to gain insight into the risk profile of stand-alone buildings or chain of locations. Based on geographical location, and relying on data about the properties, CAT modeling can be used to evaluate the risk of catastrophic events in the region both in severity and frequency. Owners can then use this information to ensure they come in at the right insurance coverage amount.

While real estate insurance experts can identify the number of catastrophic events that have taken place in the area, from an average annual loss to a single occurrence perspective, CAT modeling takes this knowledge to another level by extending it across the total geographical spread of total insurable values.

Due to its advanced technology, CAT modeling is not inexpensive. For single location owners, this expense may not be feasible. However, for large portfolio owners with locations spread across multiple geographies, the cost of being unprepared when a destructive storm hits is much greater. Without the proper coverage, businesses may save on premiums every year but one catastrophic event could greatly exceed the coverage limit and leave the business unrecoverable.
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Unfortunately, escalating storms and a tight insurance market are part of the new normal for business and real estate owners in the 2020s. The only way to survive, yet alone succeed will be strict adherence to risk management. But they are not in this alone. Consult an insurance broker for guidance on what tools and systems can help establish a strong and thorough risk management plan for your portfolio.

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About the Author:

Justin Randall leads the Hospitality & Real Estate Practice for global insurance brokerage Hub International’s WI Region, focusing on leading client strategy in those verticals. Justin’s 10 years of experience encompasses leading client engagements, advising clients on all aspects of insurance, risk management and overall enterprise growth. Justin works with several different franchises including clients with more than nearly $2B in revenues. Justin is an active member of the Wisconsin Restaurant Association as well as a participant in the American Hotel & Lodging Association. Mr. Randall holds a Bachelor’s Degree in Business from Edgewood College in Madison, WI.

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