By Scott Holeman, Media Relations Director, Triple-I
Severe Weather Preparedness Week is here. Today we focus on tornado safety.
By Scott Holeman, Media Relations Director, Triple-I
Severe Weather Preparedness Week is here. Today we focus on tornado safety.
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.
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.
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.
Nevertheless, the industry remains financially strong, in large part because the bulk of insurers’ investments are in investment-grade corporate and governmental bonds. And it’s a good thing, too, because the conditions underlying that surplus decline preceded an extremely active hurricane season, atypical wildfire activity, and damages related to civil unrest approaching levels not seen since 1992 – involving losses that are not yet reflected in the surplus.
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.
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.
A new 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:
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.
Tornadoes in 2020 claimed 73 lives as of April 24, according to this article citing NOAA’s Storm Prediction Center. The tornadoes have all occurred in eight southern states, with Tennessee and Mississippi having the most. This is the deadliest year for tornadoes in the U.S. since 2011.
Forecasters had predicted that above-average temperatures in the Gulf of Mexico would lead to severe storms across the Deep South and Southeast, with the risk expanding into the Southern Plains and increasing dramatically before swallowing traditional “Tornado Alley” across the central United States by May.
According to Aon Benfield, the United States has recorded five billion-dollar economic loss events resulting from severe convective storms (which include tornadoes) so far in 2020. Insured losses from a March 27-30 outbreak are estimated at $1 billion.
Watch this video for tornado safety tips.
While COVID-19 is causing changes in some business practices, the nation’s insurers are open and helping customers who sustained tornado-related damage. Property damage caused by tornadoes is covered under standard homeowners, renters, and business insurance policies, and under the optional comprehensive portion of an auto insurance policy.
The Triple-I has these recommendations when property damage occurs for renters, home and auto owners:
Small Business Owners should follow the same advice as above when it comes to filing a property damage claim.
If your business is forced to close temporarily or relocate because of direct physical damage to its premises, file either a business income (also known as business interruption) or extra expense claim, if you carry these coverages.
Tornado forecasting and reporting
An upcoming Triple-I paper – Severe convective storms: Evolving risks call for innovation to reduce costs, drive resilience, scheduled to be published May 7 – discusses how improved reporting and forecasting and an apparent shifts in “Tornado Alley” affect the ability of businesses, communities, and insurers to mitigate tornado risks and prepare for resilience.
The devastating storms that ripped through central Tennessee on March 3 remind us that tornadoes continue to be one of the most destructive and costly natural disasters.
Tornadoes are more common in the central United States, though they can occur almost anywhere in North America, including in large cities. They can happen at any time of year or at any time of the day or night, though they occur most frequently between early spring and July.
Below are some of the basic precautions to take before, during and after a tornado.
The Red Cross recommends the following precautions:
When a tornado warning sounds or a tornado has been sighted, do not try to outrun it. Stay calm but quickly seek shelter in the safest place possible.
Damage caused by tornadoes is covered under standard homeowners and business insurance policies, as well as the optional comprehensive portion of an auto insurance policy.
If you sustain tornado damage:
More on how to file a claim following a disaster here
Facts & statistics on tornadoes and thunderstorms here
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.
We’re reading about the economic and insurance impact of severe thunderstorms in the United States in April 2015, as reported by Aon Benfield’s latest Global Catastrophe Recap report.
Five separate thunderstorm events in central and eastern parts of the U.S. caused expected insured losses of $2 billion, including more than $750 million from one event alone.
What was the $750 million event?
A widespread multi-day severe weather outbreak that hit central and eastern parts of the U.S. from April 7-10, leaving at least 3 dead and dozens injured.
Major damage was noted across the Plains, Midwest and the Mississippi Valley following 25 confirmed tornado touchdowns, grapefruit-sized hail, damaging straight-line winds, and flooding rains, according to Aon.
The April 9 EF4 tornado that devastated the communities of Fairdale and Rochelle, Illinois, is part of this event.
Total economic losses were estimated at $1 billion, while insurers put losses beyond $750 million.
Interestingly, Aon notes that much of the insured losses in this severe weather event were driven by claims resulting from hail.
The Insurance Information Institute (I.I.I.) has some useful facts and statistics on hail here.
It cites ISO figures that indicate events involving wind, hail or flood accounted for $16.1 billion in insured catastrophe losses in 2013 dollars from 1994 to 2013 (not including payouts from the National Flood Insurance Program).
The I.I.I. also notes that there were 5,536 major hail storms in 2014, per statistics culled from NOAA’s Severe Storm database. Nebraska had the largest number of severe hail events in 2014, followed by Texas, Kansas, Iowa and Missouri.
Over the 14 years from 2000 to 2013, U.S. insurers paid almost 9 million claims for hail losses, totaling more than $54 billion, according to a recent report by Verisk Insurance Solutions. That’s a hail of an impact.
Capital Weather Gang cites a weather.com report that not a single tornado has been reported to the National Weather Service in March, typically the first month of severe weather season in the Plains and Southeast.
The only other year since 1950 that there have been zero tornado reports in the first half of March was 1969, according to the Weather Channel’s severe weather expert Dr. Greg Forbes.
Per Dr. Forbes’ report from January 1 to March 12, only 27 tornadoes had been documented across the nation — the slowest start to the year since the 21 tornadoes recorded through March 12, 2003.
Sure enough a glance at the latest U.S. tornado statistics recorded by NOAA’s Storm Prediction Center shows 28 preliminary tornado reports so far in 2015 — 26 in January and 2 in February and 0 in March (to March 13).
Here they are:
As insurers know, a slow start to any catastrophe season is not something to hang your hat on.
In an average year, about 1,000 tornadoes are reported nationwide and tornadoes are among the largest causes of insured losses in any given year, accounting for 37.2 percent of insured catastrophe losses from 1994 to 2013, according to I.I.I. facts and statistics on tornadoes and thunderstorms.
Meanwhile, Climate Central reports that an experimental forecast team has put together the first seasonal outlook for tornadoes in the U.S. That forecast suggests the highest chances are for an average tornado season.
The researchers from Columbia University looked into how cyclical climate patterns known as El NiÃ±o and La NiÃ±a influence the larger atmospheric environment that sets the stage for tornado activity.
In a new study published in the journal Nature Geoscience they show that while El NiÃ±o tends to dampen tornado activity, La NiÃ±a can give it a boost.
Because the El NiÃ±o declared by forecasters earlier this month is a very weak one, the Columbia team is limited in what they can say about this year’s season, Climate Central says.
But based on their findings, the team gives a 60 percent chance that the 2015 tornado season will see normal levels of activity, a 30 percent chance that it will be below normal and a 10 percent chance it will be above normal.
A major severe weather outbreak continuesÃ‚ across parts of the southern and eastern U.S.Ã‚ today,Ã‚ as insurersÃ‚ rush to multiple states hit Sunday and Monday by a total of more than 90 tornadoes, some of which caused fatalities.
Here areÃ‚ the NOAA Storm Prediction Center’s (SPC) storm reports for Sunday, April 27 and Monday, April 28:
A fact that often goes unreported is that tornadoes are among the largest causes of insured losses in any given year, accounting for 36 percent of all insured losses since 1983, according to the I.I.I.
Increasingly dense suburban development across the U.S. is putting more people and property in areas at riskÃ‚ of tornadoes than ever before.
Eighty percent of U.S. natural disaster related insurance claims payouts in 2013 were attributable to tornadoes and severe thunderstormsÃ¢â‚¬”$10.27 billion out of total estimate of $12.79 billion, according to remarks made in February 2014 by I.I.I. president Robert Hartwig, at the National Tornado SummitÃ‚ in Oklahoma City, Oklahoma.
Hurricanes get the headlines, but tornadoes are stealing their thunder. The economic toll of tornadoes and severe thunderstorms is adding up – to the tune of an average $9.6 billion per year payout in insurance claims. I.I.I.’s CEO/President Dr. Robert Hartwig made that point clear at the National Tornado Summit held this week in Oklahoma City.
Dr. Hartwig’s presentation on tornadoes and the insurance trends for severe convective events noted that tornadoes account for 36 percent of all insured losses since 1993; hurricanes losses over that time period were a just over 40 percent. He pointed out that areas in the heart of “Tornado Alley” may have 20-25 severe weather days each year. But, it’s not the number of storms that matters most. It’s all about where they hit.
Tornadoes are part of the landscape in many areas of the U.S., and the landscape has changed. If a tornado touches down on farmland, there may be little to no structural damage, and no witnesses to record the event. Today, what was once farmland is dense suburban development, putting more people and more property in a twister’s path — and bringing more devastation.
Average insured losses from thunderstorms are up seven fold since the 1980s. Historically, Oklahoma is second to Texas in terms of losses from tornadoes, thunderstorms and hail. The tornado that hit Moore, Oklahoma in May 2013 was the costliest storm of the year. At the Tornado Summit, Moore’s Mayor said he expects 85 percent of Moore residents will rebuild. That’s insurance at work!
To help spearhead the rebuilding of schools in Moore, Dr. Hartwig presented the Moore Public Schools with a check for $10,000 following his presentation at the Summit. He reminded the audience that knowing the numbers associated with natural disasters is a small part of the story. It’s helping the people impacted that matters most to the insurance industry. The I.I.I.’s contribution on behalf of the insurance industry underscored the human factor of disaster recovery, and that reminder earned a standing ovation.