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2016 – The Good News

As 2016 natural catastrophe headlines funnel in from various media outlets and insurance publications, a theme of negative highlights quickly emerges. Few headlines point out the positives that occurred. In this post, I want to highlight a few of the 2016 insurance industry positives that might otherwise be lost in the sea of negative news as it relates to natural catastrophes.

Severe Weather
When the calendar flipped to 2017, a switch seemed to turned on for US severe weather season: severe weather impacted the Gulf Coast states with 31 tornadoes on January 2 (PCS 1711). Just two weeks into the year, 2017 already has 4.4 times more than the normal number of tornadoes. However, the great news is that 2016 ended with lower reported tornado numbers, and the preliminary numbers suggest that 2016 ended up as a year with the fewest tornadoes since 1954 (when records started).

2016InflationAdjustedTornado

NOAA plot of the annual running total of tornado reports compared to inflation adjusted values.

This might not seem remarkable given the US has experienced five years a row of below near term normal tornado reports (2005 – present year) since the near record high year of 2011. So the good news is the US continues to see lower tornado counts for several years in a row now and is currently in what some scientist call a “tornado drought.” The other good news is that, as a matter of luck, the tornadoes that did occur did not result in large insured loss events. There were many close calls like this major tornado that occurred just 3 miles south of Dodge City, Kansas.

Twin tornadoes are seen near Dodge City, Kansas, with Dodge City Raceway Park in the foreground on Tuesday, May 24, 2016. (Instagram/bradguay)

Twin tornadoes are seen near Dodge City, Kansas, with Dodge City Raceway Park in the foreground on Tuesday, May 24, 2016. (Instagram/bradguay)

Various reports point out that 2016 produced the highest severe weather-related losses since 2011, but along with the lower tornado count, 2016 also produced hail reports below the 11-year average. As a matter of a different kind of luck however, these hail events targeted several populated regions across the state of Texas which produced most of the 2016 severe weather-related loss. The overall good news is that hail events across the other states were at or below average.
2016SvWxLossWithTxLossPercent
Flood
It is easy to highlight devastating 2016 U.S. flood events, but given the current flood take-up rates, these events were mostly uninsured. But the good news is the federal government and uninsured homeowners and business are taking steps to protect themselves from future flood events. And there’s more positive 2016 flood news: Since 1965, 60% of U.S. measured locations have seen a decrease in flood magnitudes according to the newest EPA study. Finally, no significant trend in major flood events seems to be emerging when looking at historical major flood events as defined by FEMA.

FEMA_MajorFloodEvents
Named Tropical Storms
On average, 87 named tropical storms occur worldwide in any given year. 2016 saw 79 tropical storms, and just 42 were hurricanes (which is again below the average of 48). It should also be noted that so far for the 2016/2017 Southern Hemisphere named storm season (starts July 1), only 2 named storms and 0 hurricanes have formed to date (an average of eight named storms and four hurricanes occur at this point in the season), which equates one of the slowest starts to that basin in history.
However, what the insurance industry cares most about is landfalls, and in 2016 global landfalls were spot-on average: 14 hurricane-force storms made landfall, and five of them were major. Two of those 14 hurricane-force storms impacted the U.S. coastline: Hermine and Matthew both produced isolated impacts that could have resulted in much worse impacts for the insurance industry (considering that one cat modelling company estimates the average annual loss for U.S. hurricane is $15B). The modelling company’s average annual loss number might seem high due to the lucky streak the US has experienced in recent decades: a continued record period without a major hurricane making US landfall.

Image created by Roger Pielke Jr. who has been keeping track of the days between major hurricane landfalls.

Image created by Roger Pielke Jr. who has been keeping track of the days between major hurricane landfalls.

Undoubtedly there will always be major catastrophes in any given year, and the media will focus on these events. Undoubtedly some insurance and reinsurance companies suffered in 2016. But all in all, 2016 was a great year and could have been much worse for many more organizations within the insurance industry if the trends mentioned above were reversed. 2017 could likely change the trend of these natural perils which is why it’s best to understand exposures to all natural catastrophes.

For other great news in 2016, check out this tweet string by astronaut Chris Hadfield:

 

 

Bad Faith Claims Handling for Natural Disasters

BMS’ Vice President of Claims, Urban Friesz discusses bad faith claims handling for natural disasters. He will be establishing a regular client services and claims themed blog.

In light of the immense storm activity we experienced in the South and Midwest last week, I thought it might be timely to revisit an article titled 3 Steps Insurers Can Take To Avoid Class Action Litigation Stemming From Natural Disasters, which was published in October 2011 on Property Casualty 360°, a National Underwriter Website.

As a reinsurance claims specialist, the part of the article that drew my attention dealt with claims for bad-faith. Most treaty reinsurance agreements include coverage for the insurer’s liability for loss or damage arising because of certain failures of a company in handling a claim. Two of the three recommendations included in the article involve claims handling. As a general rule, claims handling methodology should satisfy fair claims handling practices as required by each state as well as meet the prescribed duty of care required of the relationship between policyholder and insurer. A handy 50 State guide for claims handling practices assembled by Lynch & Associates can be found at Claim-Handling Guidelines.

Insurance companies typically have claims handling manuals which set forth acceptable claims handling practices and procedures in the acknowledgement, investigation and settlement of claims. In addition to these standard elements of the claims process, these manuals often prescribe additional steps to be taken in the event of a full or partial denial of coverage or other claim dispute. So, as long as you have a sound claims handling manual and your claims staff adhere to these practices, you should be good right?

Well….what about the scores of independent adjusters and appraisers that get involved when disaster strikes? Because of the difficulty in planning and deploying claims resources for sudden catastrophic events, most insurance companies rely heavily on local or national independent adjusting firms to help adjust catastrophe claims. What happens when these adjusters don’t adhere to a company’s claims procedures or fail to operate within the scope of the service agreement between the insurance company and the adjusting firm? What happens if the “failure” in claims handling mentioned above is attributed to actions of an independent adjuster?

The Vermont Supreme Court stated in Hamill v. Pawtucket Mutual. Ins. Co., No. 2005-025, 2005 WL 3556694 (Vt. Dec. 30, 2005) that, because the conduct of an adjuster acting within the scope of his or her authority as agent for the insurer is imputed to the insurer, the insurer is subject to liability for the adjuster’s mishandling of claims in actions alleging breach of contract or bad faith. An action for breach of contract or bad faith stems from the terms of the insurance policy itself or the implied covenant of good faith and fair dealing which commonly exists in the contract between an insured and his insurer. Absent privity of contract with the insured, the independent adjuster does not owe an independent duty to the insured unless the insured is suing for an intentional tort such as fraud or deceit (Dumas v. ACCC Insur. Co., Eleventh Circuit Court of Appeals, Case No. 09-13027). As a result, the insurer is often on the hook for activities of an independent adjuster when they lead to bad faith allegations.

It’s hard to think about bad faith claims handling in light of the devastation and tragedy experienced across parts of the country last week. Insurance companies are diligently deploying resources and capital to help individuals and communities in need as a result of these storms. Nonetheless, taking a few moments to review your service agreements with independent adjuster firms and formalizing expectations may save you time and money later.

If you have any comments/questions about my blog or would like to contact me, please email: urban.friesz@bmsgroup.com

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