Property insurers in the United States are grappling over how to manage the growing frequency and severity of losses tied to severe convective storms.
Once thought of as secondary perils, these storms — characterized by tornadoes, hail and straight-line winds (including derechos) — are now top-of-mind issues for insurers due to their astounding ability to cause catastrophic losses in short periods of time coupled with the increased frequency of these events.
In the first six months of 2024, severe convective storms caused $39 billion of insured losses in the U.S., according to Aon’s H1 2024 Global Catastrophe Recap, with four events in the central and southern U.S. generating insured losses totaling nearly $15 billion. This is a profound financial risk for insurers — especially for those operating in “Tornado Alley,” which includes Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, South Dakota and Texas — and it is growing ever more difficult to manage due to factors like climate change, economic growth, urbanization and higher repair costs.
One tactic insurers are using to stay resilient and maintain their financial stability in storm-prone areas is the increased utilization of wind/hail deductibles.
A wind/hail deductible is usually a percentage of an insured property’s value. This can range from 1% to 5%, depending on the insurance company and the location of the property. It is surplus to the traditional flat-dollar deductible on a property policy for common perils like fire and theft. For example, a commercial property worth $1 million and located in catastrophe-prone Tornado Alley could be subject to a 5% w/h deductible, meaning the insured would have to pay (or self-insure) the first $50,000 of any wind- or hail-related damages.
Contrary to popular belief, wind/hail deductibles are not simply an opportunity for insurance companies to drive more profit. They offer many advantages in high-risk areas, though directly improving loss ratios is not one of those benefits. When the property owner agrees to self-insure a larger portion of any wind or hail loss through a higher deductible, most insurers reduce their rates by a corresponding amount to reflect their lower exposure. It is more about catastrophe management and overall portfolio health. This is not always an easy message for insurance agents to relay, especially to clients in high-risk severe convective storm zones who are contemplating w/h deductibles in the tens of thousands of dollars.
Emphasizing these three key benefits of using wind/hail deductibles in high cat-prone areas may help the discussion along.
No. 1: Portfolio management
W/h deductibles are being used as a growth lever to help insurers manage the amount of business they’re writing in areas where they need to be intentional about exposure growth.
For example, if there are three insurance companies offering coverage in one storm-prone area and two of them decide to limit how much business they’re writing because they’ve suffered losses, their share of that w/h risk could quickly move to the third company in the local market. Although that influx of business might look positive from a growth perspective, it actually leaves the third insurer with potentially catastrophic risk concentration.
However, if all three insurers stay in that high-risk area and they all require comparable w/h deductibles (from 1% to 5%), the risk in the market is spread more evenly, allowing companies to continue writing business in SCS-prone areas without exposing themselves financially. In other words, this practice helps insurance companies avoid adverse selection in the marketplace.
In a similar vein, insurers can use w/h deductibles on renewals to manage their in-force mix of business. If they determine their portfolio is overweight with a certain building type, geographic concentration or poor conditions, they can either non-renew risks or require a much higher w/h deductible to manage their exposure.
No. 2: Hedge against storm-chasing contractors.
When severe convective storms pass through a region, they often have storm-chasing contractors hot on their heels and eager for work. Typically, these contractors will knock on doors after a storm, offer on-the-spot property inspections, and encourage home or business owners to file insurance claims for very minor or purely cosmetic damages. These nuisance claims add up over time, and they can distract vital resources from more serious claims.
Making insureds have some “skin in the game” by self-insuring the first portion of loss can mitigate the frequency of nuisance claims, allowing insurers to provide the utmost value when it really matters.
No. 3: Help insureds manage their cost of insurance.
As severe convective storms and other weather disasters increase in frequency and severity, the cost of property insurance in the U.S. continues to rise. But, in some areas, insureds may be able to manage their costs with the effective use of w/h deductibles. If they’re willing to take up to a 5% w/h deductible — even if a loss does not occur at their property’s specific location — they’ll gain access to more affordable property coverage overall.
Agreeing to self-insure certain risks also helps insurance companies feel more comfortable continuing to write business in high-risk areas, ensuring that customers who need protection the most against severe convective storms risks can get it.
The slideshow above illustrates three tips for insurance agents who are spreading the word about wind/hail deductibles.
Based in Naples, Fla., Troy Crawford (TroyCrawford@westfieldgrp.com) is head of commercial lines product management at Westfield Insurance. These opinions are the author's own.
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