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 Weathermodels.com

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.