AIR Currents

September 25, 2017

Editor's Note: Wind Mitigation Credits are widely available in the United States, but are most common in Florida. They provide owners whose homes have features that reduce damage during high wind events with discounts on their homeowners insurance. But how can insurers best develop viable mitigation credit programs?

Wind mitigation features demonstrably reduce losses, and credits are a great way to encourage their adoption. U.S. homeowners can save 40% or more on their insurance by demonstrating that their home has been built or retrofitted with a range of features that include improved roof shingles, strengthened roof decks, or protection for windows and external doors. The challenge for insurers is appropriately calculating the credits their wind mitigation program offers.
At its most basic level, calculating credits is simple. You divide the expected loss to a building with a particular feature (or combination of features) by the expected loss of an equivalent building without that feature(s). The resultant quotient gives you the amount by which expected loss has been lowered by the feature(s). When you look into the specifics of putting together a mitigation credit program, however, there are many complexities to consider.

Where’s the Data?

The first challenge is the lack of claims data that can be leveraged to generate experience-based credits. Even if you want to evaluate the performance of a single mitigation feature, no claims data set exists that would have a direct comparison to a book of business that has implemented that feature and an otherwise identical book of business that has not.

Second, the impact of mitigation features varies significantly by wind intensity. At moderate wind speeds, for example, the predominant source of damage is to roof coverings, so the impact of roof anchorage—which is designed to cope with much stronger winds—is small. As wind speeds increase, and the full roof system becomes stressed, the roof anchorage has a larger impact on the overall damageability of the structure.

Finally, a comprehensive incentive program must assess mitigation features across the full range of geographies being considered, with all levels of hazard being accounted for—not only attributes that are common in selected areas. The most efficient and comprehensive way to accomplish this is to run a notional exposure set comprising “hypothetical” properties with a uniform set of base characteristics (construction type, occupancy, replacement value, etc.) through AIR’s U.S. hurricane model. Individual mitigation features can then be turned on or off incrementally to generate unbiased estimates of their impact on modeled losses.

Supporting Multiplicative Effects of Mitigation Features

When a building has multiple mitigation features, one feature alters the mitigating impact of the others, which complicates the calculation of appropriate credits. For example, if a property were to use hurricane-rated roof shingles instead of standard ones, expected losses would be reduced. Similarly, there would be a reduction expected if the property were to use screws to attach those shingles instead of adhesive. Leveraging screws and hurricane-rated roof shingles will reduce the expected losses more than either feature individually. Although both features reduce damage to the same component of the building, their mitigating impact to the structure overall is not additive.

Because a comprehensive wind mitigation incentive program must assess all reasonable combinations of rating variables (such as territory, deductible, construction, etc.) and mitigation features, the AIR model’s Individual Risk Module (IRM) supports any combination of multiple building features and produces an integrated modification function to the vulnerability function. In other words, the IRM does not operate in a simple “additive” or “multiplicative” fashion; every combination is different. This allows the user to develop a comprehensive set of mitigation credits.

Alan FrithAlan Frith
Senior Manager, Consulting and Client Services

Edited by Jonathan Kinghorn, CEEM

 
 

Building Codes: Beware Double-Counting

Building codes frequently mandate mitigation features, especially in high risk areas, such as along the coast. The model will automatically account for these mitigation features; it will also take into account the enforcement of these codes for the region at the time of construction, if the user enters the building’s year of construction. If a user already has rating credits based on year of construction that are derived from the AIR model, then those credits are implicitly accounting for the building codes in effect for that construction and their enforcement level. If a user was to separately develop mitigation credits for those features using the model, without considering the building code requirements by year, then the combination of the mitigation credit and the year built credit would double-count the impact of the features required under the building code.

Table 1 shows how building codes have evolved in all hurricane-prone states, and how they are accounted for in the AIR model.

Table 1. Year of International Code Council building code adoption in the AIR U.S. Hurricane Model, by state and county*
Jurisdiction ICC Year Definitions for Non-Engineered Structures ICC Year Definitions for Engineered Structures
State County ICC1 ICC2 ICC1 ICC2

* N/A indicates that the region never implemented that version of the International Code Council building codes, so there would be no changes in assumptions about the features mandated under the building codes for properties in that region.

Alabama Baldwin 2007 N/A 2007 N/A
Mobile 2001 N/A 2007 N/A
Rest of State 2012 N/A 2007 N/A
Arkansas All N/A N/A N/A N/A
Connecticut All 2005 N/A 2005 N/A
Delaware Kent, New Castle 2001 2014 2001 2014
Sussex 2005 2014 2005 2014
Washington D.C. All 2001 2014 2001 2014
Florida All 2001 2012 2001 2012
Georgia All 2002 2014 2002 2014
Illinois All N/A N/A N/A N/A
Indiana All N/A N/A N/A 2014
Kentucky All N/A 2014 N/A 2014
Louisiana Cameron,
Iberia,
Jefferson, Lafourche,
Orleans,
Plaquemines,
St. Bernard,
St. Mary,
St. Tammany,
Terrebonne,
Vermilion
2006 2014 2007 2014
Rest of State 2007 2014 2007 2014
Maine All 2004 N/A 2004 N/A
Maryland All 2001 2012 2001 2012
Massachusetts All 2008 N/A 2008 N/A
Mississippi Coahoma,
DeSoto,
Humphreys,
Lafayette,
Leflore,
Marshall,
Panola
N/A 2014 N/A 2014
Hancock,
Harrison,
Jackson
2006 2014 2006 2014
Hinds,
Madison,
Rankin,
Sharkey,
Tate,
Tunica,
Washington
2014 N/A 2014 N/A
Pearl River,
Stone
2006 N/A 2006 N/A
Rest of State N/A N/A N/A N/A
Missouri All N/A N/A N/A N/A
New Hampshire All 2006 N/A 2006 N/A
New Jersey All 2004 2015 2004 2015
New York All 2003 N/A 2003 N/A
North Carolina All 2002 N/A 2002 N/A
Ohio All N/A N/A N/A N/A
Oklahoma All N/A N/A N/A 2015
Pennsylvania All N/A N/A N/A N/A
Rhode Island All 2004 2013 2004 2013
South Carolina All 2002 2013 2002 2013
Tennessee All N/A N/A N/A N/A
Texas All 2003 N/A 2003 N/A
Vermont All N/A N/A N/A N/A
Virginia All 2005 2014 2005 2014
West Virginia All N/A N/A N/A 2013

Based on the location and year of construction, the AIR model makes appropriate assumptions for which features are mandated in the codes, the year the codes were adopted, and their level of enforcement. This allows for accurate estimates for a comprehensive mitigation credit program that appropriately reflects the impacts of changes in building codes over time.

Regulatory Environment

As described in Improving Wind Mitigation Incentives, the use of mitigation discounts and how they are regulated varies significantly by state. In the past few years, there have been changes to the regulatory requirements. The details behind those variations are shown in Table 2.

Table 2. Insurance premium incentives for states along the Atlantic and Gulf coasts.
Alabama Mandates that insurers provide the Department of Insurance (DOI) with an actuarially justified rating plan containing appropriate discounts. The DOI’s latest bulletin mandates that the discounts be made available for both residential and commercial properties within Mobile and Baldwin counties with an effective date no later than June 1, 2017. In addition, the DOI mandates that insurers file their discounts to be rolled out to the rest of the state by October 1, 2017, with an effective date no later than January 1, 2018. The credits should be made available for insureds who add mitigation features to their properties to reduce potential losses from hurricane or other catastrophic windstorm events such as severe thunderstorms.
Florida Requires insurance companies to offer discounts, promulgated by the Office of Insurance Regulation, for features demonstrated to reduce windstorm losses. These discounts apply only to the windstorm (including non-hurricane wind) portion of policies.
Georgia The Georgia Underwriting Association Mitigation Program (the FAIR plan) offers wind mitigation discounts of up to 10% for homeowners who have obtained the IBHS certifications.
Louisiana Mandates that insurers provide an actuarially justified premium discount for residential properties that are built or retrofitted to comply with the State Uniform Construction Code and/or have mitigation improvements installed or have been retrofitted by using construction techniques demonstrated to reduce the amount of loss from a windstorm or hurricane. Discounts can vary by company but are subject to the Commissioner’s approval.
Maryland Requires insurers to offer at least one actuarially justified premium discount to policyholders who submit proof of improvements made to mitigate loss from a hurricane or other storm. Premium discounts can total 45% of the original policy's premium.
Mississippi Mandates that insurers provide mitigation discounts or insurance rate reductions for homeowners in the five coastal counties—Harrison, Hancock, Jackson, Stone, and Pearl River—who build, rebuild, or retrofit an insurable property to better resist hurricane or other catastrophic windstorms according to the building codes recommended by Mississippi Windstorm Mitigation Coordination Council, standards established by the Institute for Business and Home Safety (IBHS), or other programs approved by the Commissioner. Discounts can vary by company but are subject to the Commissioner’s approval. The Mississippi Windstorm Underwriting Association (MWUA), which is the state wind pool, also offers discounts for mitigation that can go up to 40%.
New York Mandates that insurers provide premium discounts for homeowners who have installed hurricane/storm shutters or hurricane-resistant laminated glass windows or doors on all exterior wall openings, which meet the prescribed minimum standards and are installed properly according to the manufacturer’s specifications.
North Carolina The FAIR Plans (North Carolina Joint Underwriting Association and North Carolina Insurance Underwriting Association) offer mitigation credits, as does the North Carolina Rating Bureau.
Rhode Island Insurers are required to waive the hurricane deductible for an insured who voluntarily implements mitigation measures that are specified in the insurance regulation.
South Carolina Insurers are required to file rating plans for properties in the coastal and seacoast areas, with mitigation discounts and credits or surcharges and debits for rating factors, including the use of storm shutters, roof tie-downs, having flood insurance, and elevation. Discounts vary by insurer. In addition, the South Carolina Safe Home program, which is administered by the SCDOI, provides grants to homeowners who intend to retrofit their properties to be more hurricane and high-wind resistant.
Texas The state's hurricane insurance pool, the Texas Windstorm Insurance Association, offers premium discounts of 19% to 33% for building code compliance. Windstorm insurance discounts are available for qualifying new homes or for existing structures on which exterior openings have been retrofitted with windborne debris-resistant products.

It is important for insurers to consider these requirements as they design their mitigation credit programs. Not only is offering mitigation credits required in most hurricane-prone states, but the availability of wind mitigation grants for homeowners (currently only available in South Carolina), can make the premium incentive even more viable for consumers looking to reduce their insurance premiums.

Developing a Viable Mitigation Credit Program

The AIR model allows users to consider all aspects of how the impact of different mitigation features varies with geography and year of construction, both in isolation and in combination with other mitigation features. In addition, AIR’s expertise in the regulatory space enables us to guide you toward a viable mitigation credit program.

 

Mitigation Credit Programs for Other Perils

The focus of this article has been on hurricanes, for which wind mitigation credit programs in the U.S. are most common. However, the same principles can be applied to a wide range of perils globally.

Severe Thunderstorm

Most of the considerations for hurricane wind apply equally to the straight-line winds from severe thunderstorms. To the extent that hurricane wind is rated in combination with other wind, it’s important that the impact of severe thunderstorm winds is also considered. This has particular importance in many areas of the southeastern United States, where both hurricane and severe thunderstorm are prominent perils. Alternatively, the impact of wind mitigation on severe thunderstorm winds can be considered in isolation, so that mitigation credit programs can be developed in non-hurricane states, or in areas where the two perils are rated separately.

In addition, the AIR Severe Thunderstorm Model for the United States accounts for the impact of mitigation features on hail and tornado damage as well. Applying mitigation incentive programs for these sub-perils can help further incentivize consumers to apply the mitigation features that will have the greatest impact.

Flooding

Both inland flooding and storm surge flooding damage can be mitigated with appropriate building features such as custom flood protection and service equipment elevation. These features can have a significant impact on the damage from flooding, and AIR’s models allow insurers to account for these impacts comprehensively. Being able to appropriately rate policies on structures that are well mitigated can provide a competitive advantage, which is especially important for companies looking to enter the private flood insurance market and compete with a subsidized National Flood Insurance Program (NFIP).

Earthquake

Earthquake damage can be greatly reduced by mitigation features. Seismic building codes are complex and have changed dramatically over an extended period of time to include various mitigation features. AIR’s earthquake models allow for comprehensive analysis of the impact of features such as retrofit measures and building foundation connection.

 

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