Cracking the CAT Modeling Code

Storm surge is one of the most ambiguous perils in insurance coverage because it involves both wind-driven water and flooding, blurring the lines between traditional definitions. Some insurers categorize storm surge as part of a “named windstorm,” making it eligible for windstorm coverage. Others classify it as “flood damage,” which may require separate flood insurance to be covered. This key distinction significantly affects a policyholder’s ability to make a claim.

Adding to this complexity is the constantly shifting nature of flood risk. Changes in infrastructure — like the construction of a new levee, dam, or large-scale development — can alter flood zones and render past models inaccurate. That’s why it’s so important to regularly reassess policies to make sure they align with current risks, a challenge Jencap is uniquely positioned to navigate.

Imagine This:

A hurricane strikes a coastal area, generating a powerful storm surge that inundates a neighborhood. A homeowner’s property sustains significant damage from the surge.

Policy A: Covers storm surge under named windstorm coverage, recognizing the role of the hurricane in creating the surge. The homeowner’s claim is approved.

Policy B: Classifies storm surge as flood damage, requiring separate flood insurance for coverage. The homeowner’s claim is denied because the property, originally in a low-risk Flood Zone X when the policy was written, was recently reclassified as Flood Zone A due to infrastructure changes in the area.

Mudslides and debris flows often result from heavy rainfall or flooding, but they are not universally categorized as “flood” events. Insurers may define them differently based on the peril’s specific triggers, leading to confusion about coverage eligibility. These events frequently fall into the gaps between risk models and real-world complexities, as CAT models often fail to account for nuanced scenarios like debris flows carrying additional hazards. The classification can vary widely, and without clear definitions, claims can become contentious.

Picture This:

A severe rainstorm causes property damage to a homeowner in a mountainous region. Mud carrying rocks, trees, and debris flows downhill, crashing into their garage and ultimately destroying part of their home. The event becomes even more complicated when a large tree swept up by the mudslide destroys an entire section of the house.

Policy A: Covers the event as a flood-related peril because the mudslide was triggered by heavy rainfall. The claim is approved.

Policy B: Denies the claim, arguing that the damage resulted from a landslide or “act of nature,” which is excluded under the policy. Additionally, the involvement of the tree creates further ambiguity, as the insurer might categorize it as structural damage unrelated to the flood event.

Tsunamis are unique catastrophes triggered by underwater earthquakes, yet their classification depends on how insurers define the event. Some policies treat tsunamis as “flood damage,” while others consider them part of “earthquake damage,” creating potential coverage gaps for businesses and homeowners.

What If:

A coastal resort is devastated by a tsunami caused by a powerful underwater earthquake. The damage includes both structural destruction from the initial wave and water damage from flooding.

Policy A: Categorizes the tsunami as part of an earthquake event, covering damages under an earthquake rider. The claim is approved.

Policy B: Classifies the tsunami as a flood event, requiring separate flood insurance to pay for damages. Without this additional policy, the resort’s claim is denied.