Most actuaries know about projections that go awry, so we have quite a bit of sympathy for the weather forecasters who missed the mark early this week, says I.I.I.’s Jim Lynch:
Weather forecasts have improved dramatically in the past generation, but this storm was odd. Usually a blizzard is huge. On a weather map, it looks like a big bear lurching toward a city.
This storm was relatively small but intense where it struck. On a map, it looked like a balloon, and the forecasters’ job was to figure out where the balloon would pop. They were 75 miles off. It turned out they over-relied on a model – the European model, which had served them well forecasting superstorm Sandy, according to this NorthJersey.com post mortem.
There are lessons for the insurance industry from the errant forecast and the (as it turns out) needless shutdown of New York City in the face of the blizzard that wasn’t:
• Models aren’t perfect. Actuaries, like weather forecasters, have multiple forecasting models. Like forecasters, actuaries have to know the pros and cons of each model and how much to rely on each one given the circumstances. Actuaries and forecasters both bake their own experience into their final predictions.
Property catastrophe models are considerably cruder than the typical weather forecasting model. By crude I mean less accurate. Cat models project extreme events, where data are sparse and everything that happens has an oversize influence on everything else that is happening. Woe to the insurer that over-relies on cat models, something cat modelers themselves say regularly.
• It’s hard to pick up the flag once you have planted it. Forecasters suspected late Monday that New York City would be spared the brunt of the storm, but acknowledge now they were reluctant to make too big a change because it could hurt their credibility, particularly if the new forecast had proved too mild. This is a human failing both by the forecaster and its recipient, both of whom worry about crying wolf.
The tendency also helps explain why it is hard to project market turns, whether they are from growth to recession or from rising insurance rates to falling.
• Policymakers have egg on their faces today, but they appear to have been following sound risk management principles. It’s not unusual to prepare for disasters that don’t happen, something to think about next time you unbuckle a seatbelt or unlock a door. The scale this week was much larger, but the principle was the same. Needlessly closing a subway is better than stranding hundreds on it, and the occasional forecaster’s error is certainly better than the crude prognostication that gave us the Galveston hurricane or the Schoolchildren’s Blizzard.
As the blizzard of 2015 starts to hit hard across the Northeast, with several feet of snow, intense cold and high winds expected, utility companies are warning of widespread and potentially lengthy power outages across the region.
In New Jersey, utility companies say it’s the high winds, with gusts of up to 65 mph, rather than the accumulation of snow, that are likely to bring down trees or tree limbs and cause outages.
Consolidated Edison inc. which supplies electricity to over 3 million customers in New York City and Westchester county, told the WSJ that the light and fluffy snow expected in this blizzard should limit the number of power outages, but elevated power lines could come down if hit by trees.
In Connecticut, Governor Dannel P. Malloy said the state’s two major electric utilities are preparing for 120,000 outages statewide, the Hartford Courant reports. The governor has issued a travel ban for the entire state beginning 9pm Monday.
And in Massachusetts, where thousands of utility company workers have been mobilized, there are also concerns that high winds could delay repairs, with one utility spokesman telling the Boston Globe that this will likely be a multi-day restoration event.
In the event you lose power, you may be wondering about insurance coverage. Here are some points to keep in mind:
–If the power outage lasts for more than a day and you have perishable foods in your refrigerator or freezer, the good news is that food spoilage from the event may be covered under your standard homeowners insurance policy, up to a specified limit, usually anywhere from $500 to several thousand dollars. Typically, the policy deductible does apply to this coverage, however.
–A home would need to be severely damaged by an insured disaster for additional living expenses (ALE) coverage to apply under a standard homeowners policy. In other words, if there is no physical damage to your property but you can’t live at home because of the power outage, in general policies would not pay for you to live elsewhere.
–For businesses, basic property insurance does not cover loss due to power interruption or failure of power to the insured premises if the failure occurs away from the premises. So, if heavy snow topples a power line that is not on an insured’s premises, such as a grocery store, spoilage of food due to the outage would not be covered. If the power outage resulted in a disaster such as a fire at the insured premises, that would be covered.
The Insurance Information Institute (I.I.I.) reviews what winter storm damages are covered by your home and car insurance here. Check out more information on business insurance from the I.I.I. here.
Natural catastrophes and man-made disasters cost insurers $34 billion in 2014, down 24 percent from $45 billion in 2013, according to just-released Swiss Re sigmapreliminary estimates.
Of the $34 billion tab for insurers, some $29 billion was triggered by natural catastrophe events (compared with $37 billion in 2013), while man-made disasters generated the additional $5 billion in insured losses in 2014.
From 1993 to 2012, winter storms resulted in about $27.8 billion in insured lossesâ€”or $1.4 billion per year, on average, according to Property Claims Service for Verisk Insurance Solutions (see chart below).
Dr. Robert Hartwig, president of the I.I.I. and an economist, notes:
The I.I.I.Â offers additional facts and statistics on winter storms here.
INFLATION-ADJUSTED U.S. INSURED CATASTROPHE LOSSES BY CAUSE OF LOSS, 1993-2012 (1)
(2012 $ billions)
(1) Adjusted for inflation through 2012 by ISO using the GDP implicit price deflator. Excludes catastrophes causing direct losses less than $25 million in 1997 dollars. Excludes flood damage covered by the federally administered National Flood Insurance Program.
(2) Excludes snow.
(3) Includes wildland fires.
(4) Includes losses from civil disorders, water damage, utility service disruptions, and any workers compensation catastrophes generating losses in excess of PCS’s threshold after adjusting for inflation.
Source: The Property Claim Services (PCS) unit of ISO, a Verisk Analytics company.
At least four separate winter storms affected the United States during February causing widespread damage, but insured losses resulting from these events were lower than expected, according to Aon Benfield.
The most deadly of the winter storms was a powerful Nor-easter which killed at least 15 people and affected more than 60 million citizens. A state of emergency was declared in six states.
The storm brought heavy snowfall of 40 inches in Connecticut, and coastal flooding in Massachusetts â€“ including the city of Boston. Total economic losses were estimated at roughly $100 million, with only a modest number of insurance claims filed.
The report also makes mention of the meteor explosion above Russiaâ€™s Urals region that injured 1,491 people. Aon Benfield says:
A major winter storm, with blizzard conditions,Â is bearing down on the Northeast and New England, with between one and even up to three feet of snow expected in certain areas Friday night through Saturday.
Here in New Jersey the snow is already falling and blizzard warnings are in effect from here to southern Maine, including the New York City metro area and Long Island, Boston, Hartford, Providence, and Portland, Maine.
The National Weather Service warns that in addition to the snowfall amounts, wind gusts as high as 60-75 mph will have a significant impact on transportation and power. Coastal flooding is also possible from Boston northward.
As CNN reports, the storm is on a trajectory similar to that taken by superstorm Sandy.
From 1992-2011, winter storms resulted in about $28 billion in insured losses, according to ISO. Insured annual U.S. winter storm losses in 2012 totaled $38 million, following losses of over $2 billion in 2011, according to Munich Re.
For more facts and statistics, including the 15 costliest U.S. winters by insured losses click here.
Dr. Masters adds that word on the street is that NOAAâ€™s National Climatic Data Center will probably end up classifying last yearâ€™s October 30-31 Norâ€™easter as 2011â€™s 15th billion-dollar weather disaster.
Hereâ€™s NOAAâ€™s animation of the stormâ€™s movement April 20-23 from the GOES-13 satellite:
The Insurance Information Institute (I.I.I.)Â reportsÂ that winter storms are historically very expensive and are the third-largest cause of catastrophe losses, behind only hurricanes and tornadoes. From 1991 to 2010, winter storms resulted in about $26 billion in insured losses, according to ISO.
In the first six months of 2011, insured U.S. winter storm losses totaled $1.4 billion, according to Munich Re. That figure does not include losses arising in the second half of the year, for example from the October snowstorm which caused significant damage in the Northeast.
This large, sprawling winter storm impacted many central, eastern and northeastern states leaving at least 36 dead and causing insured losses greater than $1 billion.
The city of Chicago was brought to a virtual standstill as up to 2 feet of snow fell in the area.
As a result of that blizzard the city is now taking a more hi-tech approach in its snow-response. The New York Times reports that a new city web site ChicagoShovels.org includes among other thingsÂ a snowplow trackerÂ that mapsÂ Chicagoâ€™s approximately 300 snowplows making their way in real time through the city.
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