One of the benefits of social media is the fact that it reminds you what was on your mind several years earlier. Today I was reminded of the horrific flooding in Ellicott City, Md., that occurred three years ago this week.
This event resonated for me because I had friends living there, and I lived in a similarly situated flood-prone town. The images from Ellicott City recalled for me the damage much closer to home, in Bound Brook, NJ, when Tropical Storm Floyd dropped over 13 inches of rain and the Raritan River crested at above 42 feet, inundating the downtown and sparking fires as electrical systems shorted out.
My little town of Dunellen had dodged a major bullet, I realized as I watched on TV as firefighters in boats responded to the devastation next door. Our basement, turned temporarily into an indoor swimming pool, seemed a minor inconvenience next to the losses in Bound Brook and elsewhere.
A few years later, my region would be visited by similarly shocking images in the aftermath of Hurricane Irene and Superstorm Sandy.
We’ve written a lot about flood risk, the flood protection gap, and the need for a resilience mindset to prevent damages and loss wherever possible and help families, businesses, and communities bounce back from unavoidable disasters. But sometimes a few images can persuade more eloquently and effectively than all the words in the world.
Caitlin Durkovich, special assistant to President Biden and White House National Security Council senior director of resilience and response, discussed the administration’s climate and resilience priorities at Triple-I’s National Town Hall (highlights video below. Click here to view full event).
She and Paul Huang, acting associate administrator of resilience for the Federal Emergency Management Administration (FEMA), met virtually with Triple-I CEO Sean Kevelighan and Michel Léonard, Triple-I vice president and senior economist.
“Resilience is a very important theme of this administration and of the priorities we have,” Durkovich said, elaborating that this includes preparation for and response to both natural and man-made events. The objective is to learn from every incident “so we don’t just bounce back but bounce forward.”
Referring to the administration’s infrastructure and clean-energy goals, she said, “We’re anticipating what the world is going to look like 20 to 30 years from now, given the life span of our built infrastructure.”
Durkovich noted that there are several longstanding hazard-mitigation and hazard-response programs spread across multiple agencies.
“I think we have the opportunity to bring at least the federal community together to look at some of those programs and think about how we can modernize them, just like we’re modernizing infrastructure,” she said.
This will help communities “build back better” after an event.
But it’s going to take more than federal government to bring this about. Communities will have to be very involved, she said, adding, “It’s not just state and local planners, but it’s infrastructure owners and operators, it’s the finance side of the house, who are needed to work through some of these hard challenges before, so after an emergency, when money becomes available, you’re ready to make some significant changes.”
And as we invest in electrified transportation infrastructure, she said, “we have to make sure that infrastructure is resilient to power outages, to storms, and when we’re in the middle of a mass evacuation it can accommodate hundreds of thousands of people.”
Despite having to think about everything that could go wrong (what she described as “healthy paranoia”), Durkovich was upbeat: “It’s amazing to be having these conversations about designing resilience in at the beginning, instead of bolting it on at the end.”
FEMA’s Paul Huang echoed Durkovich’s enthusiasm for a “whole of government” and “whole of community” approach to resilience.
“We’re going to have to rethink how we do things,” he said. “We have programs that have always been around. They’re good programs, but it’s not enough. We have to think bigger and more creatively.”
Huang talked about a new FEMA program, Building Resilient Infrastructure and Communities (BRIC), that support states, local communities, tribes and territories in developing hazard-mitigation projects, reducing the risks they face from natural disasters. “We’re hoping to see new ideas from industry, working with local and state government, to say, ‘This is something we can try together in partnership to get a bigger bang for our buck.’ “
Insured losses from March storms in the United States are likely to surpass $1 billion, Aon said in its monthly Global Catastrophe Recap.
Aon said multiple outbreaks – featuring tornadoes, hail, snow, and flooding – were to blame. The most notable included severe weather across the Central and Southern United States, with 122 tornadoes touching down during the month – the most since 2017. Alabama, Mississippi, Texas, Georgia, and Tennessee experienced the most damage.
This followed record-setting winter weather-related insured losses in February, following a prolonged Polar Vortex event, in which Arkansas, Kentucky, Tennessee, and Texas were among the hardest-hit states.
“The Polar Vortex generated record-breaking cold temperatures which extended as far south as the U.S./Mexico border,” Aon said in its February report. “Concurrently, a series of low-pressure systems produced rounds of hazardous snow, sleet, freezing rain, ice, and severe thunderstorms with impacts spanning from Washington state to the Mid-Atlantic.”
Texas was hard hit by the winter weather, which left dozens dead, millions without power, and nearly 15 million with water issues and could wind up being the costliest disaster in state history. Disaster-modeling firm AIR Worldwide says insured losses “appear likely to exceed $10 billion.”
The Electric Reliability Council of Texas (ERCOT) has been widely criticized for failing to require power facilities to be winterized after the last major storm that caused outages in 2011, thus contributing to damage incurred during the more recent one. Last week, the Cincinnati Insurance Company, headquartered in Ohio, filed suit asking a federal court for a declaratory judgment that would allow the insurer to decline paying damages in bodily injury or property damage lawsuits where ERCOT is found to be liable.
If the federal court doesn’t grant the declaratory judgment, Cincinnati Insurance would likely have to cover ERCOT under its current policy contract.
In February and into March, multiple rounds of heavy rainfall and severe weather generated flooding across parts of the Ohio and Tennessee Valleys. Parts of Kentucky, Tennessee, and West Virginia were most affected.
“Impacts were compounded by localized severe weather, including large hail, straight-line winds, and isolated tornadoes,” Aon reported. “Total economic losses were estimated to approach USD 100 million.”
A large portion of the residential flood damage was expected to be uninsured due to low National Flood Insurance Program (NFIP) coverage.
Perhaps the most emotionally compelling data point invoked by those who would compel insurers – through litigation and legislation – to pay business-interruption claims explicitly excluded from the policies they wrote is the property/casualty insurance industry’s nearly $800 billion policyholder surplus.
Many Americans hear “surplus” and think of a bit of cash they have stashed away for emergencies. And when you consider that nearly 40 percent of Americans surveyed by the Federal Reserve said they would either have to borrow or sell something to cover an unexpected $400 expense – or couldn’t pay it at all – that number may sound like overkill.
Not as much as you think
But policyholder surplus isn’t a “rainy day fund.” It’s an essential part of the industry’s ability to keep the promises it makes to policyholders. And although a number like $800 billion may raise eyebrows, when we look more closely at its components, the amount available to cover claims turns out to be considerably less.
Insurers are regulated on a state-by-state basis. Regulators require them to hold a certain amount in reserve to pay claims based on each insurer’s own risk profile. The aggregation of these reserves – required by every state for every insurer doing business in those states – accounts for about half the oft-cited industry surplus.
Call it $400 billion, for simplicity’s sake.
Each company’s regulator-required surplus can be thought of as that company’s “running on empty” mark – the point at which alarms go off and regulators start talking about requiring it to set even more aside to make sure no policyholders are left in a lurch.
By extension, $400 billion is where alarms begin going off for the entire industry.
It gets worse – or better, depending on your perspective.
In addition to state regulators’ requirements, the private rating agencies that gauge insurers’ financial strength and claims-paying ability don’t want to see reserves get anywhere near “Empty.” To get a strong rating from A.M. Best, Fitch, S&P, or Moody’s, insurers have to keep even more in reserve.
Why do private agency ratings matter? Consumers and businesses use them to determine what insurer they’ll buy coverage from. Also, stronger ratings can contribute to lower borrowing expenses, which can help keep insurers’ operating costs – and, in turn, policyholders’ premiums – at reasonable levels.
So, let’s say these additional reserves amount to about $200 billion for the industry. The nearly $800 billion surplus we started with now falls to about $200 billion.
To cover claims by all personal and commercial policyholders in a given year without prompting regulatory and rating agency actions that could drive up insurers’ costs and policyholders’ premiums.
Which brings us to today.
Losses ordinary and extraordinary
In the first quarter of 2020, the industry experienced its largest-ever quarterly decline in surplus, to $771.9 billion. This decline was due, in large part, to declines in stock value related to the economic recession sparked by the coronavirus pandemic.
Insured losses from this year’s Hurricane Isaias are estimated in the vicinity of $5 billion. Hurricane Laura’s losses could, by some estimates, be as “small” as $4 billion or as large as $13 billion.
And the Atlantic hurricane season has not yet peaked.
The 2020 wildfire season is off to a horrific start. From January 1 to September 8, 2020, there were 41,051 wildfires, compared with 35,386 in the same period in 2019, according to the National Interagency Fire Center. About 4.7 million acres were burned in the 2020 period, compared with 4.2 million acres in 2019.
In California alone, wildfires have already burned 2.2 million acres in 2020 — more than any year on record. For context, insured losses for California’s November 2018 fires were estimated at more than $11 billion.
And the 2020 wildfire season still has a way to go.
All this is on top of routine claims for property and casualty losses.
Four billion here, 11 billion there – pretty soon we’re talking about “real money,” against available reserves that are far smaller than they at first appear.
No end in sight
Oh, yeah – and the pandemic-fueled recession isn’t expected to reverse any time soon. Economic growth worldwide remains depressed, with nearly every country experiencing declines in gross domestic product (GDP) – the total value of goods and services produced. GDP growth for the world’s 10 largest insurance markets is expected to decrease by 6.99 percent in 2020, compared to Triple-I’s previous estimate of a 4.9 percent decrease.
If insurers were required to pay business-interruption claims they never agreed to cover – and, therefore, didn’t reserve for – the cost to the industry related to small businesses alone could be as high as $383 billion per month.
This would bankrupt the industry, leaving many policyholders uninsured and insurance itself an untenable business proposition.
Fortunately, Americans seem to be beginning to get this. A recent poll by Future of American Insurance and Reinsurance (FAIR) found the majority of Americans believe the federal government should bear the financial responsibility for helping businesses stay afloat during the coronavirus pandemic. Only 16 percent of respondents said insurers should bear the responsibility, and only 8 percent said they believe lawsuits against insurers are the best path for businesses to secure financial relief.
Severe convective storms—tornadoes, hail, drenching thunderstorms with lightning, and damaging straight-line winds—are among the biggest threats to life and property in the United States. They were the costliest natural catastrophes for insurers in 2019, and this year’s tornado season is already shaping up to be the worst in nearly a decade.
Triple-I paper describes how population
growth, economic development, and possible changes in the geography, frequency,
and intensity of these storms contribute to significant insurance payouts. It
also examines how insurers, risk managers, individuals, and communities are
responding to mitigate the risks and improve resilience through:
damage detection and remediation, and
risk sharing through wind and hail deductibles and parametric insurance
The 2020 tornado season coincided with most of the U.S. economy shutting down over the coronavirus pandemic. This could affect emergency response and resilience now and going into the 2020 hurricane season, which already is being forecast as “above normal” in terms of the number of anticipated named storms.
On May 11-16 a series of wind, hail and rain storms struck most states east of the Rocky Mountains. Karen Clark & Co. a catastrophe modeling firm, estimates that the storms will cost insurers $2.5 billion.
Most of the damage occurred in the Midwest, Northeast and Mid-Atlantic regions. Karen Clark predicts that insured losses higher than $100 million will be seen in: Colorado, Connecticut, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, New York, Ohio, Pennsylvania and Virginia.
The weather system (referred to as a ‘ring of fire’) led to over 600,000 power outages in the Mid-Atlantic and Northeast states. Wind gusts over 58 miles per hour were reported as well as hundreds of hail storms and 28 tornadoes.
Although tornadoes can happen at any time during the year, on average, May is the expected peak of tornado activity.
More than $14 billion. That’s the expected insured loss from severe convective storms, thunderstorms, tornadoes, large hail and associated damaging winds in the United States in the first six months of this year.
From the Artemis blog, via Impact Forecasting, the catastrophe risk modeling center at Aon Benfield:
Every year the Insurance Information Institute (I.I.I.) and State Farm recognize Lightning Safety Awareness Week (June 18-24) by estimating the toll of lightning claims in the United States, writes the I.I.I. research team. Last year insurers paid out nearly $862 million in lighting claims to more than 100,000 policyholders, a 4.5% increase from 2015.
Damage caused by lightning, such as a fire, is covered by most homeowners insurance policies.
Florida—the state with the most thunderstorms—remained the top state for lighting claims in 2016, with 10,385, followed by Texas (9,098), Georgia (8,037) and Louisiana (5,956).
Homeowners Insurance Claims and Payouts for Lightning Losses, 2007 – 2016
The Lightning Protection Institute (LPI) encourages homeowners to install a lightning protection system in their homes. Per Kimberly Loehr, communications director for LPI: “Lightning protection systems that follow the guidelines of NFPA are designed to protect your home by providing a specified path to harness and safely ground the super-charged current of the lightning bolt.”
To learn more about an LPI-certified lighting protection system, click here or visit lightning.org/find-an-installer.
Severe weather across the United States in May resulted in combined public and private insured losses of at least $3 billion.
Aon Benfield’s latest Global Catastrophe Recap report reveals that central and eastern parts of the U.S. saw extensive damage from large hail, straight-line winds, tornadoes and isolated flash flooding during last month’s storms.
Check out I.I.I. facts and statistics on hail here. The National Weather Service has detailed information on severe storm events, including hail, tornadoes and wind. 2016 data on the number of hail events are posted online.
Total aggregated economic losses from U.S. severe weather in May were in excess of $4 billion, Aon Benfield said.
Damage to vineyards following several years of severe hailstorms in the famed wine-growing region of Burgundy, France, is prompting greater prevention efforts.
London’s Daily Telegraph reports that producers are protecting their entire grape harvest with a cloud-seeding system—a hi-tech hail shield that is designed to modify storm clouds and suppress hail formation.
The system works by releasing tiny particles of silver iodide into the clouds where they stop the formation of hail stones, thereby reducing the risk of damage.
A monster hailstorm that pounded Colorado’s Front Range on May 8 is on pace to be Colorado’s most expensive insured catastrophe, with an estimated preliminary insured loss of $1.4 billion, according to the Rocky Mountain Insurance Information Association.