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Winter Weather and Hidden Issues for the Insurance Industry

It was not long ago that the insurance industry suffered a $2.4B industry loss from the harsh winter of 2013/2014, when “Polar Vortex” became a household word after the major cold snap of January 5-8, 2014 gripped the nation. Subsequent winters have totaled over $7B of loss, but there still appears to be a lack of awareness regarding the increased cost to the insurance industry due to winter weather. A number of the major catastrophe modeling companies have developed winter storm models to help understand the overall catastrophic nature of winter weather risk. However, as recent winters have shown, these losses are complex and often fall outside of typical event definitions observed in catastrophe models, which are largely focused on windstorm-related losses. At the RAA CAT Risk Management conference in 2015, I gave a presentation to my catastrophe modeling industry peers on winter weather and the hidden issues for the insurance industry. Given the cold that is currently descending on 90% of the nation, now is a good time to review the main talking points.

The forecast from the National Weather Service is above.  Any values on the forecast map through Thursday, January 31 that are circled are expected new record low temperatures and squared values represent new forecasted record low high temperatures for those weather stations. Source

As of 8AM January 30th, widespread new daily record cold temperatures have been set along with a few all-time and monthly record cold temperatures. We’ll probably see several more all-time records set this morning. The Midwest today is experiencing a truly historic event!

According to the Insurance Information Institute, winter weather makes up 6.4 -6.7% of U.S. insured loss, falling behind hurricanes and severe weather-related losses (pending adjustment due to wildfire losses). However, given that much of the insured loss is often not catastrophic in nature and results in a retained loss to most insurance companies, this percentage could be higher due to the overall lack of reporting. What might be more troubling to insurance companies is that, often, the insurance industry experiences a profitable first-quarter loss result. However, when severe winter weather hits in the first quarter, it can cause unexpected aggregated losses that fall below traditional catastrophe covers, thus negatively affecting insurance companies’ bottom line.

PCS Historical Losses (Not CPI adjusted) and number of Winter Storm PCS Events per year.  Winter storm losses are on the rise, but are likely nothing new to the insurance industry especially when you factor in socioeconomic factors.

In fact, just last winter the insurance industry experienced a situation where large insured losses across the northeast occurred without Property Claim Services (PCS) declaring a catastrophe bulletin for the major Arctic outbreak of cold weather. Between December 26, 2017 and January 8, 2018, record-setting cold descended across much of the East Coast of the U.S. and resulted in the first measurable snowfall in 28 years to reach all the way down to Tallahassee, FL. This cold along the East Coast resulted in claims of bursting pipes and auto accidents from snow and ice (normal and black). What complicated the insurance claims process for some companies is that PCS issued a catastrophe bulletin for the nor’easter (January 3-6) winter storm Grayson, or what the media referred to as a “BombCyclone” or “Bombogenesis.” This storm brought power outages from high winds and, in some cases, the lack of power for heating systems resulted in freeze-related losses. However, the fact that many of these claims were outside of the PCS date designation left some insurance companies wondering how to classify the cold air outbreak as an event. In fact, BMS has helped a few insurance companies with assessing claims that could be part of these winter storm events.

With some of the coldest air of the 2018/2019 winter season approaching, it is important for the insurance industry to be aware of the factors that could result in winter storm-related losses not reaching the attachment of a catastrophe program:

  • Number of occurrences/date of loss ambiguities
  • Specified perils and deductibles/sublimits and how they apply to winter storms
  • Property damage – freezing pipes can be very common with first and secondary homes
  • Business interruption deductibles/waiting periods
  • Contingent Business Income insurance losses and supply chain disruptions
  • Falling trees from winter storm can still occur (wind/ice storms)
  • Auto accidents increase drastically with black ice becoming more common in extreme cold
  • Ice damming, which can lead to water leakage (dates of loss are difficult to pinpoint)
  • Property liability – slip and fall on ice
  • Rare weight of snow roof collapses

Ice dam water leakage claims are the most difficult to determine the potential loss date, but here weather data can help determine a more exact date of loss between snow and freeze thaw cycles.

Another important thing to remember about winter storms is that they can be part of weather events that include other perils, such as severe weather. The U.S. can easily experience a winter storm that creates severe weather such as tornadoes and hail across the southern states while producing winter storm-like perils across the north. A classic example of this type of event is the March 12-14, 1993 Storm of the Century, also known as the ’93 Superstorm. The 1993 Superstorm still ranks as one of the costliest winter storm events of the 20th century, creating an  adjusted loss of nearly $3B. Meteorological data can often provide straightforward guidance to differentiate winter weather events from other perils, as needed to follow the “occurrence” definitions in the applicable policies or reinsurance contracts, which can vary. This is where it is important to be your own weather historian and understand how past winter weather has impacted your portfolio, which, in turn, can contribute to the efficient deployment of capital, and the alignment of rates and reinsurance capacity with risk profile and management of portfolio concentrations.   If you don’t want to be a weather historian, feel free to contact us or me personally so we can help you understand winter storm events.

Summary of Loss Trends

It’s nearly that time of year again when report after report will be issued summarizing the insured losses and economic impact that we saw in 2018. In fact, just last week Munich Re released its annual Natural Catastrophe Review showing that 2018 saw substantial disasters with large costs. However, global insured losses from natural catastrophes were at $80 billion USD according to Munich Re, which, depending on context, may not be as bad as it sounds. According to AIR Worldwide, the global insured average annual loss is about $86 billion USD and the 1% aggregate exceedance probability insured loss (or the 100-year return period loss) from catastrophes worldwide is nearly $271 billion. The 2018 named storm season will be seen as statistically unusual though. Named tropical cyclone activity levels across the world’s different ocean basins were all above the long-term average counts, including a higher number of typhoons that hit Japan and two direct major impacts to the U.S. mainland. There was also the often overlooked but major impact of Super Typhoon Yutu on the U.S. Territory of Saipan. The destruction resulting from the 2017 and 2018 named storm seasons, along with so many other catastrophic events often seen in the media, are raising questions on how trends in extremes are changing and impacting losses.

Well, another paper, yet again, has been published on this very topic. With so many questions about the overall weather/climate variable and hurricane impacts in today’s warmer world, there is one thing that is not changing – the communities sitting in the path of the wind and water are not getting any smaller. That is likely the main reason why storms are more destructive today than before.

This new paper released in Nature Sustainability in late November, 2018 has many of the names that are familiar in this line of research, such as Chris Landsea, Ryan Crompton, Philip Klotzbach, Roger Pielke Jr. and up-and-coming researcher, Jessica Weinkle, who is the lead author in this newly updated normalized hurricane damage paper (Weinkle et al., 2018).

Similar to what other papers have expressed in the past, it is clear that a shift toward vulnerable regions, but not necessarily an increase in storm frequency or severity, is what is causing the rapid increase in apparent destructiveness. The key word here is “apparent.” When one normalizes losses, rather than simply doing a basic inflation adjustment, the trends are different. A true normalization study adjusts for societal changes such as increases in housing or population over time. In fact, in the latest study by Weinkle et al., 2018, an apparent trend in destructiveness is nonexistent. Normalization studies like this one should not be used to determine trends in weather and/or climate. To get a better understanding of whether hurricanes are getting any worse, it might be best to understand the official stance of the NOAA from its overview of global warming and hurricanes:

“It is likely that greenhouse warming will cause hurricanes in the coming century to be more intense globally and have higher rainfall rates than present-day hurricanes.”

However, these expected increases in more intense storms and rainfall have been limited in studies that try to address the future frequency increase in intense hurricanes due to natural variability, which includes the Atlantic Multidecadal Oscillation, the dominant cause of the warming trend in the Atlantic since the 1970s. Storm surge is also likely to become worse as sea levels rise, but, again, it is difficult to find studies that account for this without factoring in other geological changes to storm surge impacted areas. An example of this would be the removal of wetland areas and other natural shoreline changes. Although data suggests that there is a small rise in the number of high-category storms, this is probably due to how the observation of such storms has changed over time. In fact, NOAA’s summary says, “there’s only low confidence that the increase in major hurricanes within the Atlantic basin is of statistical significance.”

The bottom line is that the link between hurricanes, ocean temperatures and a changing climate is complex. Clearly, if there are changes in climate and ocean temperatures, there is the possibility of changes to hurricane tracks and where they ultimately strike land, which is of greatest importance to the insurance industry.

Now that we have discussed hurricanes specifically, let’s highlight another publication that was recently published: “Loss and Damage from Climate Change” (Mechler, R. et al., 2018).

In Chapter 3, Lauren Bouwer from the Climate Service Center Germany (GERICS), Hamburg, takes a look at the current understanding of how observed and projected extreme weather events impact loss and damage. Much of the publication references past work by the Intergovernmental Panel Climate Change (IPCC), as they are still the most trusted body in the aggregation of the latest research in this area. Within the publication, two tables best sum up the current knowledge around observed changes in weather extremes, damage/losses, and attribution that will occur in a warmer world caused by humans, shown in Tables 3.1 and 3.2 below.

One noticeable feature is that much of the research above generally ends around 1999 or the early 2000s, so there may be new questions as to whether recent events have influenced the trend. However, generally a new decade of data should not drastically alter the trend in extreme events since they are, due to their nature, extreme and likely need a longer period of record to determine trend.

In Bouwer’s review of the loss trends, he illustrated similar findings to Weinkle et al., 2018 – most studies that found increasing trends in loss from past extreme weather events determined that the most important drivers in the increasing exposure are socioeconomic factors and climate change. This would include both anthropogenic climate change, as well as natural climate variability that could play an additional role, but this role was not substantiated according to Mechler, R. et al., 2018.

Table 3.2 provides a comprehensive overview of scientific studies on types of extreme weather and the trends of normalized losses associated with them. As the IPCC has stated in the past, there could be some detected trends at regional or national levels, but the overall conclusion is that very few studies show upward trends in loss after normalizing for changes in socioeconomic factors.

One thing pointed out by Lauren Bouwer that is often overlooked is how vulnerability changes play an important role and can ultimately complicate the historical loss adjustments. As a general rule, as societies become wealthier, they are likely to start investing more in risk reduction and adaptation, thereby reducing impacts from weather-related hazards. This should result in reduced losses over time. However, the question is just how significant these changes in vulnerability are when compared to the very rapid increase in exposure. There are very few of these types of studies over time to pinpoint these impacts.

In summary, the book is still being written on just how a warmer climate influences hurricanes and other types of extreme weather events. We do know, however, that extreme weather events are much worse in terms of resulting damage to the coastal United States because of an increase in exposure. Maybe vulnerability changes are not keeping up with the exposure. Ultimately, one should not solely rely on loss data to determine a trend in weather/climate as it is extremely complex. However, all of the latest research suggests that we can’t blame nature solely for the increase in losses, as we also need to factor in human involvement – where we are building and, perhaps, how we are doing it.