Hurricanes make the headlines—yet according to PCS data, hurricanes actually accounted for less than a quarter of all catastrophe losses in the United States in the five years from 2006 to 2010. Instead, routine but violent storms that don’t usually make the national news—severe thunderstorms, tornadoes, and hail, as well as snow and ice storms in winter—accounted for 75% of catastrophe losses in that five-year period.
So what does this recent past mean for the future impact of weather-related catastrophe? You and your business should be prepared for an increasingly rough ride, said meteorologist Jeff Masters, Ph.D., cofounder and director of meteorology at The Weather Underground. Dr. Masters reviewed historical weather events and offered his predictions of weather-related disaster for the next 30 years as the lead presenter during the July 10 PropertyCasualty360 webinar, “The Year-Round CAT Season.”
You should be concerned about severe weather regardless of your business location, as Dr. Masters’ first data slide underscored. Already in 2012, weather extremes have struck nearly 45 percent of the contiguous U.S. states, setting a new U.S. record for the broad distribution of beyond-the-norm weather events. One potential culprit in changing weather patterns, Dr. Masters said: summertime Arctic Sea ice loss, which now encompasses an area comparable in size to the eastern half of the U.S. He then listed a dozen U.S. weather disasters since 1980 that cost in excess of $15 billion each—with 2005’s Katrina ranking number one at $146 billion in damage (in 2012 dollars), and last year’s Hurricane Irene ranked 12th with $15.8 billion in damage to New York and New England.
2011: The Year of Year-Round Catastrophe
Irene, of course, made the national headlines—but severe weather earlier in 2011 actually eclipsed Irene (and most other named storms) in cumulative impact, pointed out Mark A. DeLawter, CIC, AFSB, and Zurich Commercial Markets practice leader for financial institutions and real estate. The spring tornado and storm season, taken as a single event, was the 4th most costly catastrophe in US insurance history, according to data from the Insurance Industry Institute. DeLawter, one of three presenters who followed Dr. Master’s introductory remarks, shared the final U.S. tally for 2011.
“We saw a record-setting 14 separate billion-dollar weather-driven loss events, including $2.2 billion in losses caused by the tornadoes that crossed Alabama and several other southern states,” DeLawter said. As a result, insured CAT losses in 2011 rose to $35.9 billion (compared to $14.1 billion in 2010), and the property and casualty insurance industry’s combined ratio leapt from 101.0% in 2010 to 107.5 percent in 2011, according to A.M. Best data.
“Mega-catastrophes worldwide caused an estimated $350 billion in economic losses, which shattered the previous record of $230 billion set in 2005,” he added, noting that approximately one-third of that total, or $108 billion, was insured, second only to the $123 billion recorded in 2005, according to Insurance Information Institute data.
2011’s Hard Lessons for Blauer Manufacturing
One of the many spring 2011 storms taught Boston-based Blauer Manufacturing the hard way how severe weather events can damage facilities and equipment, interrupt business operations, disrupt employees’ lives, and catch even the most conscientious companies and property owners overexposed and underprepared. At 2:30 a.m. on April 20, 2011, a tornado struck the company’s Oxford, Miss. distribution center responsible for shipping 85% of the company’s revenues. The tornado not only ripped off the distribution center’s roof, but also damaged a water main, causing the industrial park’s water tower to empty into what was left of the facility.
For Blauer’s Chief Financial Officer Michael A. Simons, the most surprising lesson was just how unprepared the midsized, family-owned manufacturer of protective gear was for a less-than-total loss.
“Our preparedness plan was for that wipe-you-off-the-map disaster—as a midsized company, the worst-case is what we were insuring,” Simons explained to webinar attendees. “With a total loss, you actually have more time to deal with the catastrophe.” Instead, with most of the company’s merchandise damaged but not destroyed, Blauer and its employees faced a mad scramble to secure a dangerously damaged facility, salvage as much of the distribution center’s contents as possible, and move the inventory to another location.
“We found ourselves drinking from a fire hose—working 20 hours a day for a couple of weeks in hot weather without air conditioning, using portable potties,” Simons recalled. He also cited other challenges, such as handling provocative questions from local media on too-little sleep, securing additional credit to pay for fuel, tarps, and other emergency purchases, and fending off opportunists—what he termed “the shucksters who showed up at my office in Boston and on site in Mississippi.”
“Ultimately, we managed to save 80 percent of the distribution center’s contents,” Simons said. “We found a temporary space 55 miles away, which meant we had employees commuting 110 miles daily for over a year. Fortunately, we didn’t lose a single employee.”
The Insurer’s Response to Catastrophe
The responsiveness of his insurance company was a critical factor in Blauer’s ability to cope with the chaotic aftermath of the tornado and water damage, Simons said. In less than 24 hours, he recalled, Bill Shenberger from Zurich’s catastrophe response team arrived on site with an engineer in tow. Immediately—after warning that the facility required scaffolding and other safety measures–Shenberger promptly acknowledged that this was a covered loss and was empowered to offer immediate financial support. This level of responsiveness helped Blauer “change our approach from ‘loss’ to ‘recovery,’” Simons said.
Rapid response is critical to minimizing the impact of severe weather events on business operations, noted Mike Cincinelli, national catastrophe team manager for Zurich North America. Especially in situations like Blauer’s, he told webinar attendees, rapid response times can mitigate losses and provide crucial advance payments to help the company shift to recovery mode. Preparedness obviously counts too, he said—in particular, the preliminary claims process is accelerated when companies maintain and can quickly produce redundant copies of their financial data and pre-loss asset inventory records.
Beyond providing a responsive CAT team, insurers also must develop new catastrophe models that anticipate and cope with the increasing frequency and severity of weather-related events.
“Due to the low frequency of severe catastrophes, traditional methods that rely on company claims data might not be a good predictor of possible losses,” DeLawter explained. “The constantly changing landscape of exposure data limits the usefulness of past loss experience.” For example, new construction continues in many areas of high hazard, but building materials and designs evolve, so some new structures may be less vulnerable to catastrophic events than older ones.
For insured companies as well as their agents and brokers, the year-round CAT season prompts other important insurance considerations, DeLawter said. In particular, he said, insureds should pay close attention to:
• Your named storm coverages and limitations versus your coverage and limitations for wind and hail damage,
• Coverage for business interruption and extra expense—as well as contingent business interruption, and
• Civil authority and ingress/egress coverages.
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