Hailstorms Grow Less Predictable and More Expensive
Hailstorms increased in frequency and severity over the last 20 years, largely a result of climate change and more extreme weather conditions. Insurance costs are spiking as a result, too.
Hail causes about $1 billion in damage to crops and property in the United States every year, according to the National Oceanic Atmospheric Administration (NOAA).
In 2015, NOAA’s Severe Storms database recorded 5,411 major hailstorms. The worst affected area was Texas, with 783 hailstorms.
“The hardest part for some customers has been that there have been successive hailstorms.” — Jill Dalton, managing director, Aon Global Risk Consulting
This year, hailstorms in late March and April are expected to result in total losses to vehicles, homes and businesses in north San Antonio and Bexar County of more than $2 billion, according to the Insurance Council of Texas.
San Antonio’s first hailstorm on April 12 became the costliest hailstorm in Texas history, the council said.
Between 2000 and 2013, U.S. insurers paid out almost $54 billion in claims from hail losses, and 70 percent of the losses occurred in just the last six years, said a report by Verisk Insurance Solutions.
The average claim severity was also 65 percent higher during that period, than from 2000 to 2007, the report said. Most losses were from broken windows and roof damage.
Added to that, hailstorms are increasingly harder to forecast and are occurring in unlikely places, with reports of hail this year in warmer climates such as South Florida.
Trying to Better Understand How Hail is Produced
Now, insurers and scientists are trying to better understand how hail is produced and take steps to mitigate damage.
“The hardest part for some customers has been that there have been successive hailstorms,” Jill Dalton, managing director at Aon Global Risk Consulting.
“When it happens over such a short period of time, as in the case of the recent Texas hailstorms, it’s hard to deduce what was damage from the first storm versus the third or fourth storm.”
Steve Bowen, director at Aon Benfield’s Impact Forecasting team, said that the location and intensity of the hailstorm were the most important factors in determining the magnitude of hail damage.
For example, if a hailstorm hits a more densely populated area it is likely to cause more damage.
“It is really important to emphasize that the total number of hail reports does not necessarily correlate to either higher or lower level of losses,” he said.
He said that, overall, insurable damage resulting from severe convective storms in the United States increased by 6.5 percent above the rate of inflation annually since 1980, most of which was attributed to hailstorms.
“The research done will also enable us to characterize the event in order to forecast future storms more effectively.” — Ian Giammanco, lead research meteorologist, IBHS Research Center
The Insurance Institute of Business & Home Safety (IBHS), a consortium of insurers, has been working with the National Center for Atmospheric Research in Boulder, Colo., to find ways to strengthen homes and businesses against hail damage.
“Overall hail losses are going up and a lot of it is to do with that fact that we are simply putting a lot more stuff in the path of storms nowadays,” said Ian Giammanco, lead research meteorologist at the IBHS Research Center.
“So, moving forward now, risk mitigation strategies are going to become much more important and that can be achieved with improved product and testing to ensure that they are properly hail resistant.
“The research done will also enable us to characterize the event in order to forecast future storms more effectively.”
Take Steps to Reduce Losses
Lynne McChristian, Florida representative for the Insurance Information Institute, said that given the difference in quality of roofing materials in terms of impact resistance, it was paramount to invest in the proper type of covering.
Others steps include making sure that the roof is fully secured.
The insurance industry has an Underwriters Laboratory standard for roofing material with four classes of impact level. Class 4 is the most resistant. In some cases, insurers will provide a discount for roofs made with hail resistant materials.
After the event, it is important to assess any damage and protect property against further damage by covering broken windows and plugging holes in the roof.
Most property insurance policies will cover against hail damage, as will comprehensive auto coverage.
“A hailstorm is a typically covered loss included as a named peril,” said Dalton.
She added that usually there are no policy limits on hail and most coverage is subject to a deductible.
In hail prone areas, such as Texas and South Carolina, the deductible is higher than for other perils. However, both states have a fund to provide hail coverage in areas where it is not available in the private market.
After the event, it is important to assess any damage and protect property against further damage by covering broken windows and plugging holes in the roof.
It is also key to file claims as soon as possible and to keep any receipts for purchases made for immediate repairs and to then submit them to your insurer.
Basking in the Sun Once More
Bermuda is one of the world’s biggest and most successful offshore reinsurance markets, largely as a result of its tax advantages, strong regulatory system and its proximity to the U.S. and Europe.
But in recent years, many of the island’s reinsurers redomiciled to Europe, amid concerns over Bermuda’s international reputation, regulatory uncertainty and political instability.
The outflux started in 2010, when Flagstone Re redomiciled to Luxembourg and Allied World moved its holding company to Switzerland. The latest, Canopius, followed suit at the end of last year.
Companies are now returning to the island, though, after the announcement in March that the European Union granted it Solvency II equivalence.
Bermuda, along with Switzerland, is the only country that garnered Solvency II equivalence and was designated a “qualified jurisdiction” by the National Association of Insurance Commissioners (NAIC), allowing free cross-border trade with the U.S.
Further evidence of the island’s resurgence is borne out by the fact that 64 new reinsurance companies incorporated in Bermuda last year, according to the Bermuda Monetary Authority (BMA).
Meanwhile, seven of the island’s biggest reinsurers merged or were acquired over the last four years, with more deals expected, according to the Association of Bermuda Insurers and Reinsurers (ABIR).
Bermuda is also firmly established as one of the leading offshore domiciles for captive insurance, as well as an alternative capital market.
“Bermuda was always a leading reinsurance domicile,” said Brad Kading, president and executive director of ABIR. “These two bilateral agreements [Solvency II and NAIC qualified jurisdiction status] further cemented its position as a reputable domicile for reinsurance.”
Movers and Shakers
XL Catlin’s proposed move from Ireland back to Bermuda made the biggest headlines this year and will be accomplished in the third quarter, subject to shareholder approval. Bermuda was a stronghold for both companies before their merger. XL moved its main operations there 30 years ago, and Catlin incorporated its holding company in Bermuda in 1999.
XL Catlin’s CEO Mike McGavick said the fit with Bermuda is a natural one, given that a significant part of the company’s business and its largest operating subsidiary are already there. He cited Solvency II equivalence as the main reason behind the move, adding that it would benefit clients, partners and shareholders alike.
“These two bilateral agreements [Solvency II and NAIC qualified jurisdiction status] further cemented its position as a reputable domicile for reinsurance.” — Brad Kading, president and executive director, Association of Bermuda Insurers and Reinsurers
“With the recent determination of full Solvency II equivalence in Bermuda, it has been concluded that the BMA is best situated to serve as XL’s group-wide supervisor and to approve XL’s internal capital model,” McGavick said.
Qatar Re also announced at the end of last year that it would relocate its main operations from Dubai to Bermuda after its merger with parent Qatar Insurance Co.’s Bermuda-domiciled reinsurer Antares Reinsurance.
CEO Gunther Saacke cited Bermuda’s “decades of proven reliability” and said that the move would enable the company to consolidate its capital and move closer to its brokers and clients in the U.S.
Ross Webber, CEO of the Bermuda Business Development Agency (BDA), said the decision by all of these companies to redomicile to Bermuda sent a “very positive message.”
“No doubt Solvency II equivalence played a big part in all this, but Bermuda’s improving economic outlook and growth in business confidence is also a factor,” he said.
“Our company register is growing across all sectors at present, while consolidation only strengthened the physical presence of companies such as XL Catlin here on the island.
“As a result of all this, we are already seeing companies looking to set up new operations, to merge or to expand their operations here in Bermuda.”
Webber said that the main reason behind companies leaving Bermuda in the first place was a move from U.S. and European regulators to bring companies back onshore.
Being offshore “was perceived as somehow being unpatriotic and somewhere you shouldn’t be,” he said.
“Some left simply because the CEO and leadership wanted to physically move themselves back onshore, along with the corporate structure that goes along with it.”
David Brown, a retired insurance industry veteran and former CEO of Flagstone Re, which redomiciled from Bermuda six years ago, said there was no single trigger for the exodus.
“I think that people were almost hedging their bets — not knowing if Bermuda was going to get Solvency II equivalence — by moving to jurisdictions in the EU that were considered more likely to succeed,” he said.
“Another factor at the time was the political risk associated with an unsustainable public debt growth, as well as a negative political climate against international business and expat employees generally.”
But he added that since the government started to tackle the debt problem and make the island more welcoming to international business, companies now are taking another look at the island.
Solvency II Equivalence
Gaining Solvency II equivalence means that Bermuda is now better positioned to meet the regulatory standards being redrawn by the International Association of Insurance Supervisors, said Kading, as well as to provide more capacity for markets like Asia and Oceania.
Being offshore “was perceived as somehow being unpatriotic and somewhere you shouldn’t be,” — Ross Webber, CEO, Bermuda Business Development Agency
“All this means is that the Bermuda Monetary Authority is now recognized as a global group supervisor for targeted insurance groups and reinsurance can be conducted on a cross-border basis without market barriers,” he said.
“For Bermuda insurers, this means an efficient rather than redundant layer of group supervision and for reinsurers, it means cross-border trade without individual jurisdictional restrictions.”
Susan Molineux, senior financial analyst at A.M. Best, who was based on the island for more than a decade, said that achieving Solvency II equivalence was a “big win” for Bermuda.
“Bermuda expended a lot of effort to really explain to Europe what they do and how they do it, and it paid off in the long run,” she said.
Despite the positives, Bermuda still has a way to go to convince everyone that it is on the rise.
Saddled with a $2 billion debt after seven years of deep recession, the government is under pressure to rein in costs and to find new revenue sources, mainly through tax collection.
A.M. Best said last year that it maintained a negative outlook for the island’s reinsurance industry. In response to this, the BDA is setting up industry focus groups. It is promoting Bermuda as a domicile in conjunction with ABIR members to attract new business from emerging markets such as Latin America and China.
After years of departures and uncertainty, Bermuda is seemingly restoring its position as a leading reinsurance market. &
Technology to the Rescue
The growing scale and severity of natural and man-made catastrophes makes it increasingly difficult for insurance companies and claims handlers to access affected disaster sites. It can take weeks or even months for loss adjusters to see the true extent of damage caused by events on the scale of Hurricanes Andrew and Katrina.
But that’s changing with the development of technology such as drones, satellites and 3D imaging, which allow insurers to gather data and images quickly and efficiently, ultimately better protecting their clients against future risks.
There are still hurdles for insurers to overcome, starting with Federal Aviation Administration requirements for operating drones in U.S. airspace, as well as privacy issues, and the potential for property damage or civilian death in the event of a crash.
But uptake is still rising because of affordable hardware as well as increasing onboard instrumentation and offline data processing improvement.
“A lot of this new technology is great at assessing and understanding potential risks in a pre-loss scenario, as well as when an event happens,” said Sheri Wilson, national property claims director at Lockton.
“In some cases, there will always be the need for boots on the ground before the check is written, but this technology can certainly be used to get a more complete picture of what’s going on.”
Rise of the Drones
Jimmy Johnson, assistant vice president of commercial property claims at Zurich North America, said the main advantage of drones is the ability to provide access to difficult-to-reach disaster sites, allowing insurers and their customers to understand losses in greater detail.
“Being able to obtain information almost in real time, whether it’s taking pictures or communicating those losses, is a huge advantage not only to the insurer, but to their clients as well,” he said.
“The app allows them to record and send pictures and videos to the insurer to show them the extent of the damage and it is then uploaded to their server for them to assess.” — Andreas Shell, global claims executive of new technologies, Allianz Global Corporate & Specialty
Helen Thompson, director of commercial marketing at Esri, a geographic information system provider, said that another benefit is the speed of response, as well as use in hazardous situations, such as the port of Tianjin explosion last year.
“Drones are able to quickly assess large areas and identify, with human observation, the scope and scale of the disaster,” she said.
The main sticking point remains that only a handful of insurers, including State Farm, USAA and AIG, have obtained FAA approval to test drones for commercial use.
Gary Sullivan, vice president of property and subrogation claims at Erie Insurance, which was granted a license by the FAA last year to use drones for claims and in catastrophe situations, said that the biggest advantage is safety, as well as the time and cost efficiencies gained.
“It means the difference between keeping our employees on the ground versus the time and risk associated with having them climb a ladder to get onto a roof, and, ultimately, the imagery we obtain from a drone is just as good, if not better than we would otherwise be able to take,” he said.
Among the disadvantages, he said, were the need for a pilot’s license and having to get clearance to fly in no-go zones, for example, near airports and military bases.
Andreas Shell, global claims executive of new technologies at Allianz Global Corporate & Specialty, said one problem is that drones can only be used if the operator is in close proximity and maintains visual contact.
On top of that, he said, there are a host of legal and regulatory requirements.
“Right now, government agencies are tightening up these requirements more than ever due to the number of private operators currently out there,” he said.
Varying Image Formats
Video technology such as Skype and FaceTime has allowed insurers to develop smartphone apps that can be used to record property damage.
“[They can] send pictures and videos to the insurer to show them the extent of the damage.”
Such technology could be used in low value cases where sending out a loss adjuster may be more costly than paying the claim.
David Passman, national director of property claims for North America at Willis Towers Watson, said that when it comes to assessing wide areas of damage, satellites are often the best technology because they can capture a lot of data quickly.
The downside, he said, is that the picture quality may not be as good as a drone or 3D imaging.
“It enables you to take pictures before and after the event, and compare them side by side to determine not only what has happened to the property concerned, but also to the terrain around it,” he said.
“This can also help clients to put into action their business interruption or continuity plan, for example, by knowing what transport routes are open and putting in place an appropriate logistics strategy.”
Future of Technology
Thomas Haun, vice president of strategy for PrecisionHawk, an aerial data provider, said that as with all of these technologies, being able to quickly quantify the extent of damage and understand how safe something is, is critical in the response effort.
“Drones give you that ability to respond quickly and effectively to these types of disaster, but also to prevent or mitigate against future events,” he said.
However, Bud Trice, vice president of catastrophe services at Crawford, warned that despite the many advantages, the biggest challenge with this type of technology is fragmentation, with the possibility of each insurer deciding to go its own way with a different solution, many of which may be incompatible with one another.
Randall Ishikawa, vice president of property risk solutions at EagleView, a 3D imaging company, said that in the long run, technology could help expedite claims handling and reduce operational and claims costs for insurers.
“At the end of the day it can save money for the insurance carriers, and from an underwriting perspective it can determine the viability of the risk concerned as to what action needs to be taken at renewal,” he said.
Erie’s Sullivan added that the potential benefits are huge.
“From an industry standpoint there’s enormous potential because in the future you might be able to fly the drones much more often and to assess the risks on your books in order to identify potential hazards before they happen,” he said. &