Category Archives: Catastrophes

The evacuation dilemma: stay or go?

As of Saturday evening, Hurricane Dorian is making a big right hand turn, moving the storm’s threat north.
So now it seems Georgians and South Carolinians are facing the evacuation dilemma: stay or go?
I’ve been there. In 1992, Hurricane Andrew was heading arrow straight for the border between Broward and Miami-Dade counties. We lived a mile north of that.
We boarded the house up as best we could, moved our valuable stuff (a lamppost, a stereo, a rocker we bought on our honeymoon) into the downstairs bathroom, where it would be best protected. And we sat on our couch and cried. We knew what we owned was junk, but it was our junk. It was everything we had, and we knew we would never see it again.
Then we left.
Too many people take the chance and stay behind. Travelers Insurance surveyed people living in hurricane-prone states. The survey found:

  • Men (23%) were more likely than women (11%) to ignore a mandatory evacuation order.
  • Millennials (21%) were more likely to ignore an order than Gen Xers (16%) or Baby Boomers (11%).
  • People in the most cane-prone states (Florida, Louisiana, Texas’ Gulf Coast) were the stubbornest. Georgians, Alabamians, Mississippians, Virginians and North Carolinians were most likely to heed the order.

Back in 1992, my wife and I were lucky. Hurricane Andrew drifted south, and we returned to a home intact.

Even so, we made the right decision, and I’d urge anyone in the same position now to leave. After all, insurance can help you recover the stuff you’ve lost. But no one can replace you.

I.I.I. has some tips for what to do when a hurricane threatens.

Earthquakes: More links from Insurance Information Instititute

We posted this look at insurance coverage and earthquakes earlier today. More important links about earthquakes and insurance:

 

Mexico’s coral reefs get insured against storm damage

iStock, Riviera Maya, Quintana Roo, Mexico

An innovative insurance product is being deployed to protect several miles of coral reef  around Cancun and Puerto Morelos, reports Business Insurance.  The government of Quintana Roo, Mexico, purchased a parametric insurance product that would pay up to $3.8 million to repair hurricane damage to the reef.

Parametric insurance works using a clearly defined parameter (a metric or an index) that triggers the payout. Up until recently, parametric insurance was used by reinsurers for catastrophe risks, but it has started to be used in the travel, retail and agricultural sectors Insurance Business reported a year ago.

The reef insurance will be triggered if wind speeds above 100 knots are registered within the covered area, with a payout split of 50 percent for reefs and 50 percent for beaches.

One of the advantages of parametric coverage is that it pays out very fast, which is crucial since reef repair will need to be done very quickly to avoid further damage, according to Mark Way, director of Global Coastal Risk and Resilience at The Nature Conservancy in Washington.

“We hope this insurance approach will serve as a scalable model to build new financial mechanisms for the protection of nature,” said Mr. Way.

The insurance policy is financed by the Coastal Zone Management Trust, an organization formed in March 2018 to promote the conservation of coastal areas in the Mexican Caribbean.  Partners in the development of the reef insurance concept include the Nature Conservancy, the state government of Quintana Roo, the Cancún and Puerto Morelos Hotel Owners’ Association, CONANP, Mexican Universities and insurance industry representatives. Swiss Re Ltd. was an early partner in the development of the concept.

How bad is the storm damage? Ask Waffle House

Some people keep an eye on the S&P 500 index. Others, on the Waffle House Index.

It all apparently began with former head of the Florida Department of Emergency Management, William Craig Fugate. Fugate would use the Waffle House diner chain as a proxy for how businesses and communities in the surrounding area were recovering after a disaster.

The Index (WHI) is pretty simple, as a FEMA blog post explains:

  • If a Waffle House is open and serving its full menu: green. That means the diner probably has power or is running on a generator.
  • If a Waffle House is open but serving a limited menu: yellow. The diner probably doesn’t have electricity or running water but can still cook on a gas stove.
  • If a Waffle House is closed: red. The disaster is bad enough that not even Waffle House is serving eggs and grits.

The WHI is a good proxy because the Waffle House – open 24/7, 365 days a year – has excellent risk management procedures in place and often stays open during natural disasters. If even the Waffle House is closed, then you know the situation is bad and the broader community is likely severely impacted.

The I.I.I.’s own Lynne McChristian was once able to grab dinner thanks to a code yellow WHI. “During the 2004 hurricanes in Florida, the disaster response team I was leading lined up outside Waffle House for dinner, as it was the only place open,” McChristian said. She fed six people for $30. Not bad.

The WHI is so good a proxy, in fact, that even FEMA keeps an eye on the index during a natural disaster.

Back in 2016, the WHI went red before Hurricane Matthew hit Florida. As FiveThirtyEight reported, it sparked a, well, colorful reaction:

Waffle House announced Oct. 6 that it was pre-emptively closing some restaurants on a 90-mile stretch of Interstate 95 between Fort Pierce and Titusville in Florida. (In the next few days, as the storm churned up the coast and flooded North Carolina, it would close 98 all told.) And as soon as the announcement went out, media tracking the storm, and customers on social media, invoked the closings as a sign of the apocalypse.

The Miami Herald: “When Waffle House surrenders to a hurricane, you know it’s bad.” The Washington Post: “Hurricane Matthew is so scary even the always-open eatery is evacuating.” A faithful customer on Twitter: “GOD IN HEAVEN THIS IS THE END!”

For those in the path of natural disasters (including tornadoes): stay safe and keep close watch on the WHI to see if you can still get an All-Star Special after the storm is over.

All about pandemic catastrophe bonds

In previous articles, we discussed how communicable diseases and pandemics are (or are not) addressed in personal and commercial insurance policies. Today, we’ll talk about pandemic catastrophe bonds.

The Ebola outbreak between 2014 and 2016 ultimately resulted in more than 28,000 cases and 11,000 deaths, most of them concentrated in the West African countries of Guinea, Liberia, and Sierra Leone.

The outbreak inspired the World Bank to develop a so-called “pandemic catastrophe bond,” an instrument designed to quickly provide financial support in the event of an outbreak. The World Bank reportedly estimated that if the West African countries affected by the Ebola outbreak had had quicker access to financial support, then only 10 percent of the total deaths would have occurred.

But wait, what are “catastrophe bonds” and what’s so special about a pandemic bond?

“Traditional” catastrophe bonds

Like good old-fashioned insurance, catastrophe bonds are a way to transfer risk, often for natural disasters. They usually work like this: investors buy a high-yield bond issued by an insurance company. If a specific qualifying event occurs, such as if claims from a natural disaster exceed a certain amount (an “indemnity trigger”), the bond holders forfeit the principal of the bond, which goes to the insurer to help defray costs.

Catastrophe bonds are high-risk investments – hence the high yields they pay to investors to compensate for that risk. After all, there’s a pretty good chance a sizeable hurricane will hit in any given year.

Pandemic catastrophe bonds

Pandemic catastrophe bonds are similar. An entity (like the World Bank) sells a bond, which pays interest to the investors over time. If certain triggers occur, then the principal from the bond sale is quickly funneled to medical efforts to contain and quell the disease outbreak. That way, affected regions don’t have to wait for aid money to be raised and coordinated.

Pandemic bonds are somewhat different from traditional catastrophe bonds, though. Remember, traditional catastrophe bond triggers are usually based on insurance losses (indemnity triggers), which don’t make much sense in the context of a disease outbreak. Insurance losses can take quite some time to adjust and finalize.

There’s no time for that kind of thing when we’re dealing with a pandemic. Capital needs to move quickly to the affected region. So if a trigger can be quickly determined, then the capital payouts can be made quickly as well.

That’s why pandemic bonds are triggered by, for example, the number of patients or the speed of disease spread (a “parametric trigger”). Parametric triggers are usually objectively verifiable, such as how many cases of a disease have been reported in a given time. Once that trigger is activated, the bond gets to work. No further adjustment needed.

Why are catastrophe bonds useful for fighting pandemics?

And that’s what makes pandemic bonds attractive for addressing disease outbreaks: speed. Since pandemic bonds are not triggered by losses, but rather by the actual, real-time spread of the disease, capital can flow much faster than if it had to wait until insurance losses began rolling in. That means near-immediate financial support for health clinics, aid workers, containment efforts, and more.

Indeed, the speed of capital flow to emergency response is crucial for pandemics. Global supply chains and interchange, not to mention the exponential growth in international travel, mean that disease outbreaks can spread much faster and can cause much more widespread damage than in the past. The faster a disease can be nipped in the bud, the fewer people infected – and the less disastrous the outbreak.

Pandemic bonds in the real world

In 2016 the World Bank developed the Pandemic Emergency Financing Facility (PEF), which created, in part, a pandemic catastrophe bond to help provide capital in the event of another disease outbreak in West Africa. The PEF is triggered by number of deaths, speed of disease spread, and the spread of disease across international borders, and provides coverage for six viruses, including Ebola. The program has been supported by private reinsurers as well, including Munich Re and Swiss Re.

You can learn more about the PEF here.

I.I.I. Joint Industry Forum: Two-Term New Orleans Mayor Mitch Landrieu and I.I.I. CEO Sean Kevelighan Discuss Current Issues

By Brent Carris, Research Assistant, Insurance Information Institute

Left to Right: Sean Kevelighan and Mitch Landrieu

The 2019 Joint Industry Forum concluded its speaker sessions with an informative discussion between Sean Kevelighan, CEO of the Insurance Information Institute and Mitch Landrieu, former Lieutenant Governor of Louisiana and two-term New Orleans Mayor.

Leading the city of New Orleans, post Hurricane Katrina, Landrieu learned the importance of building “social resilience” in addition to infrastructure for disaster preparedness, “it is very important to be able to talk to someone quickly after a disaster,” he noted.

Resilience and leadership came up as the discussion moved to national politics. “The country works well in partnership and collegiality”, something Landrieu believed was lacking amidst the government shutdown.  The collaborative rebuilding effort from neighborhoods to local governments was one of the most important aspects to the lengthy rebuilding period from Hurricane Katrina.

When asked about what he would focus on if he were president, Landrieu quickly responded that he, along with most mayors, would likely focus on infrastructure. While witnessing the failure of the levees during Hurricane Katrina, he saw firsthand the devastating affect that poor infrastructure can have. Such failures show the need to build resilience, so that when disaster strikes all parties are better prepared to respond.

 

I.I.I. Joint Industry Forum Panel: The P/C Industry has been doing well, but threats loom on the horizon

Left to right: Bill Donnell, David Wessel, Jay Gelb, John Huff

By Lucian McMahon

The 2018 financial results for the property/casualty (P/C) industry were strong. According to Verisk Analytics, private P/C insurers in the U.S. reported a nine-month net underwriting gain of $4.7 billion. The industry combined ratio was 97.3 percent – down from 104.1 percent in 2017.

“It’s unusual to have an industry-wide underwriting profit,” said Jay Gelb, managing director at Barclay’s, speaking at a geopolitical risks panel at the 2019 I.I.I. Joint Industry Forum. “But 4Q 2018 is going to be worse.” The insured losses from Hurricane Michael and the disastrous California wildfires will make a dent on industry underwriting results. And in the last two years the total global industry catastrophe losses were about $230 billion, the highest level for any two-year period, Gelb noted.

While the industry did well in addressing these catastrophe losses, greater threats may be looming on the horizon for the P/C industry and the economy generally.

Panelist David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy and senior fellow at the Brookings Institution, listed a few.

In the short term, he expressed concern about the ongoing government shutdown. He also pointed out that, while incoming economic data are strong, the markets are expressing continuing pessimism, assuming higher weight on downside risk for 2019. In the long term, Wessel listed the continuing productivity growth slowdown and climate change as serious threats.

John Huff, president and CEO, Association of Bermuda Insurers & Reinsurers (ABIR), added the continuing challenges facing global insurance regulations, particularly in light of recent political events that seem to suggest a souring attitude towards global interconnectivity. Huff did express some optimism, however: “people want to stay at the table for international regulatory standards because business is global. They don’t want conflicting regulatory standards.”

Political uncertainty in the U.S. are also reasons for insurers to be concerned, per Huff. There has long been a push to “de-risk” government liabilities and move some of them into the private market, including the National Flood Insurance Program (NFIP), crop insurance, the Terrorism Risk and Insurance Act (TRIA), and earthquake insurance. How this will play out in the current political climate remains to be seen.

Gelb included flood and wildfire risks to the equation – both of which may increase in frequency and severity due to climate change.

Despite these possible threats, the panelists are keeping a mildly positive outlook for the future. “I think nothing is permanent, fortunately,” Wessel said regarding the current political and economic tensions.

If anything, this could be a time of opportunity for insurance leadership. Insurance has always led the way forward for economic growth. Said Wessel: “We’re in a moment when business leaders can be a more prominent voice to deal with tension […] The world is yearning for leadership.”

Roundup: How the federal government shutdown is affecting its agencies

By Jennifer Ha,  Head of Editorial and Publications, Insurance Information Institute

According to the New York Times, the current shutdown is one of the longest ever. While there have been 21 gaps in government funding since 1976, the level of shutdown has varied. Before 1981 most agencies could continue operations by cutting non-essential functions. In the media, various reports have emerged how different agencies have been affected.

While some agencies also receive funding from elsewhere, and have limited operations, others have mandated employee furloughs. On January 9 Dr. Scott Gottlieb, commissioner of the Food and Drug Administration, announced that the agency had ceased routine food safety inspections of seafood, fruits, vegetables and many other foods at high risk of contamination, such as clams, mussels, oysters and other bivalves. The seafood inspection program is run by the National Oceanic and Atmospheric Administration, whose inspectors are working without pay, as are meat and poultry inspectors. 

The National Transportation Safety Board has been unable to investigate 10 new crashes in which 22 people died, and the circumstances of seven plane crashes in which 13 people were killed, two fatal railroad crashes, a highway crash in which seven people died and an incident in which a school bus collided with a tractor-trailer, injuring 15. According to the Transportation Security Administration, there has been “no degradation in security effectiveness” and staffing is adequate, amid warnings from U.S. airport security workers and air traffic controllers that security and safety could be compromised and employee call-outs.

On Dec. 28 the Federal Emergency Management Agency (FEMA) reversed its decision to halt the issuing and renewal of federal flood insurance plans, which could have disrupted up to 40,000 new home sales each month, according to the National Association of Realtors (NAR). However, rural and suburban homebuyers who depend on mortgage loans from the U.S. Department of Agriculture through private lenders have been stymied by the shutdown. The post-Hurricane Maria recovery will be unaffected, according to a FEMA spokesperson.

The newly created Cybersecurity and Infrastructure Security Agency will be unable to protect against cyber and physical threats to infrastructure, according to a report. Another report from NBC News provides an overview of how other agencies are being affected.

 

Why insured loss numbers for the “HIM” hurricanes are delayed

Port Arthur, Texas after Hurricane Harvey

Hurricane Harvey hit Texas in August 2017. Just weeks later, Irma made landfall in Florida, followed by Maria in Puerto Rico. The so-called “HIM” storms struck the U.S. 16 months ago, but final insured loss numbers have yet to be finalized.  Why?

There are at least two reasons: the storms happened in rapid succession, wreaking havoc on the claims settlement process; and the storms caused significant business interruption losses, which can take time to settle.

The storms happened in rapid succession. Three major hurricanes hit the U.S. within a month of each other. This put a serious strain on insurers’ ability to adjust losses – basically, investigating and settling claims. There weren’t enough local adjusters, so others had to be brought in from other states. But despite the reinforcements, there weren’t always enough adjusters to go around as storm followed storm. Claim reports were therefore delayed and the expenses for adjusting losses increased. (Similar issues cropped up during the 2005 season, when hurricanes Katrina and Rita hit Louisiana only three weeks apart.)

This problem was especially acute in Puerto Rico after Hurricane Maria. As the Property Claims Services (PCS) unit of ISO noted, loss adjusters and contractors had to be flown in from the mainland – but not nearly enough of them were available, since many were still working on damage from Harvey and Irma. Fewer adjusters and contractors meant that, in many cases, only emergency repairs could be completed. As these temporary repairs deteriorated, buildings were further damaged, and more repair payments had to be made. Additionally, PCS noted that mainland adjusters may have been unfamiliar with the insurance policies typical in Puerto Rico, leading to insurers having to reopen some claims.

Claims were also reopened in Florida after Hurricane Irma, but for different reasons. In April 2018 Florida’s Citizens Property Insurance Corp. announced that it had reopened about 37 percent of its Irma-related claims since the storm. Citizens stated that many claims required additional payments or needed more information.

A high volume of reopened claims could be due to insurers paying out losses too quickly. Some have argued that insurers in Florida had acted so quickly in an attempt to avoid dealing with assignment of benefits (AOB) claims. (Check out the I.I.I.’s recent report on Florida’s AOB crisis for more information.) Several insurers have noted that insured losses for Irma continue to rise because of AOB claims, reopened claims, and higher adjustment expenses.

Business interruption issues continue. “Business interruption” usually includes losses that result from a business’s lost revenue and increased expenses caused by property damage following a hurricane. Sometimes these policies will also cover losses from utility outages. Depending on how severe the damage is, business interruption claims can be quite large – and they can take a long time to settle.

Consider Puerto Rico: Unfortunately, Hurricane Maria slammed the island’s fragile infrastructure and energy grid. The pharmaceutical industry, which has a large manufacturing footprint on the island, was particularly affected. The commissioner of the U.S. Food and Drug Administration (FDA) noted at the time that damaged factories weren’t nearly as big a problem as an unstable electric grid. There were shortages of some drugs and medical devices for months after Maria struck.

Because of these issues, we can’t expect the final insured losses for the HIM storms until maybe mid-2019, almost two years after the fact.

The 2018 Hurricane Season: A Retrospective

Hurricane Michael

The 2018 hurricane season officially ended on November 30. The National Oceanic and Atmospheric Administration’s (NOAA) storm counts for the season were: 15 named storms, including eight hurricanes. Two of these were “major” hurricanes (Category 3, 4 or 5).

To put that into perspective, the average hurricane season has 12 named storms, including six hurricanes, of which three are major. That makes 2018 a little worse than a “normal” year, and well within NOAA’s predictions before the start of the season on June 1.

Fortunately, these numbers are down from the especially destructive 2017 season, which included the so-called “HIM” storms (Harvey, Irma, and Maria). In 2017 there were 17 named storms, including 10 hurricanes, of which six were major.

But that is little comfort to the people affected by the two major hurricanes, Florence and Michael.

Hurricane Florence: Florence reached Category 4 status on September 10, making landfall on September 14 in North Carolina as a Category 1. Because the storm moved very slowly, Florence dumped at least 30 inches of rain in parts of North Carolina, setting a record in the state for rain from a hurricane.

Catastrophe modelers have estimated that insured losses from Hurricane Florence could range from $2.5 billion to $5.0 billion, excluding National Flood Insurance Program losses. Worryingly, it’s been estimated that somewhere between 70 percent and 85 percent of flood losses are uninsured (get flood insurance, everybody).

Hurricane Michael: Michael became a strong Category 4 storm on October 10 and made landfall shortly afterward in the Florida panhandle. The storm registered wind speeds just under Category 5-level speeds, making Michael perhaps the strongest hurricane to ever hit the Florida panhandle.

Catastrophe modelers estimated that insured losses from Hurricane Michael could range from $6 billion to $10 billion.

(The loss numbers for both hurricanes are subject to change, since losses are still being adjusted and paid out.)

In comparison, the Property Claims Services (PCS) unit of ISO estimates that insured losses from Hurricane Harvey will top $14 billion. PCS estimates that insured losses from Hurricane Irma will be more than $20 billion.

At a high level, the 2018 season was bad – but compared to last year, it could also have been a whole lot worse. Not that that’s any comfort to people who lost homes or family members. Hopefully 2019 will be calmer.

For more information on the 2018 season, see the I.I.I.’s Facts + Statistics: Hurricanes page. And again, get flood insurance.