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.
Insurer Coal Holdings Challenged
The California Insurance Commission, citing concerns about global warming, is asking all insurance groups doing business in that state to voluntarily divest their stakes in thermal coal. The commission also wants companies to submit annual reports disclosing any additional holdings in oil, gas and coal companies.
California’s request applies to about 1,300 insurance companies doing business in the state, the largest U.S. insurance market.
The state agency is concerned the investments insurance companies make in fossil fuel companies may decline in value as energy users reduce carbon emissions and shift to renewable energy sources.
The insurance industry is a big investor in fossil fuel companies, the second largest only after pension funds, according to studies. Declines in the value of fossil fuel companies overall could have an impact. But coal represents a small percentage of carriers’ overall energy holdings.
The top 40 insurers hold more than $459 billion in fossil fuel investments, according to a new study by Ceres, a nonprofit organization that promotes action on climate change, water scarcity and other global sustainability challenges. That includes $237 billion in electric/gas utilities, $221 billion in oil and gas companies, and just under $2 billion in coal companies, Ceres said.
This is sort of like turning an ocean liner; it’s going to take a while to change direction. But you can’t sit on the sideline on this one. — Cynthia McHale, director of the insurance program at Ceres
Ceres believes an insurer’s balance sheet can be eroded by global warming on two fronts. First, warming temperatures cause more severe events requiring insurance claims payouts. Second, the insurers are heavily invested in the fossil fuel companies that produce the carbon emissions blamed for causing global warming.
California Insurance Commissioner Dave Jones also believes global warming poses risks.
That’s why he’s asked insurers to voluntarily divest from their thermal coal holdings and is also requiring detailed financial disclosures of investments in the carbon economy including coal, oil and gas.
Insurers doing business in the state who do not intend to comply must submit a request for exemption by July 1.
“I believe that climate change presents risks that insurance companies should consider with regard to their business operations, investment portfolio, and underwriting,” Jones said.
“We should all be concerned about the impact climate change will have on the future availability and affordability of insurance coverage.”
Jones is the first U.S. insurance regulator to make such a request.
It is unclear whether U.S. insurers have taken any action to identify and evaluate their potential investment exposure, Ceres said. In Europe, some insurers have already announced plans to shed their coal holdings.
“Regulator scrutiny has a real impact on insurers,” said Alex Bernhardt, principal, head of responsible investment, U.S., at Mercer.
“And fossil fuel divestment campaigns are gathering speed.”
Some charge Jones with overstepping his authority but he defends his actions.
“There’s growing risk that investments in coal, oil and gas will become stranded assets of diminishing or no value,” Jones said.
“This is of great concern to me as an insurance regulator and should be of concern for insurance companies as well.”
His request, while a first in the insurance industry, is not unique in California. Two of the world’s largest pension funds — CalSTRS and CalPERS — are under orders from the state legislature to divest their thermal coal holdings by July 2017.
Climate change is a potentially material risk to investors of all types, and in particular to insurers, who have exposure on both sides of their balance sheets.– Alex Bernhardt, principal, head of responsible investment, U.S., at Mercer.
Thermal coal is coal used in heating. Coal for the coking process in steel making is another use for the carbon-based substance.
“I do not want to sit by and then discover in the near future that insurance companies’ books are filled with stranded assets that have lost their value because of a shift away from the carbon-based economy, jeopardizing their financial stability and ability to meet their obligations, including paying claims to policyholders,” Jones said.
“The writing is on the wall, the world is shifting away from fossil fuels,” said Mindy S. Lubber, president and a founding board member of Ceres.
The rating agency A.M. Best regularly analyzes what would be higher risk assets as a percentage of an insurance company’s total capital and in general is not concerned about insurance company investments in coal.
“A.M. Best does not currently have a specific concern regarding insurers’ investments in fossil fuel companies,” said Ken Johnson, vice president in the life/health ratings division at A.M. Best.
“As a whole the insurance industry remains somewhat diversified across and within the energy sector, including fossil fuel companies.”
“Although climate change overall may provide an increased risk through the energy sector, A. M. Best believes exposures remain well managed, even for the larger concentrations, and more importantly, companies should be able to absorb increased impairments for this sector over time if they were to materialize,” Johnson said.
Should Carriers Divest?
Cynthia McHale, director of the insurance program at Ceres, said the nonprofit isn’t strictly advocating for divestment. Realistically, changes can’t happen right away as many bonds are not due for years and companies don’t want to sell at a loss.
“This is sort of like turning an ocean liner; it’s going to take a while to change direction. But you can’t sit on the sideline on this one,” McHale said.
As big institutional investors, insurers have a lot of leverage they can exercise, she said.
Insurers need to know how the fossil fuel companies they are invested in—and particularly energy company boards, which are accountable for overseeing these companies— are evaluating the future of demand and the potential for their assets to become stranded, Ceres said.
It is likely that most insurers will need to develop or consult with experts on their carbon asset risk so investments can be evaluated. Expertise from underwriting and risk management functions should be shared with the investment function and vice versa, Ceres said.
Mercer developed the TRIPTM climate risk assessment methodology as part of its 2015 report “Investing in a Time of Climate Change,” which allows investors to quantify the impact of four climate change risk factors on investor portfolios, asset classes, and equity sectors over 35 years.
“Climate change is a potentially material risk to investors of all types, and in particular to insurers, who have exposure on both sides of their balance sheets,” said Mercer’s Bernhardt.
Handling Heavy Equipment Risk with Expertise
What happens to a construction project when a crane gets damaged?
Everything comes to a halt. Cranes are critical tools on the job site, and such heavy equipment is not quickly or easily replaceable. If one goes out of commission, it imperils the project’s timeline and potentially its budget.
Crane values can range from less than $1 million to more than $10 million. Insuring them is challenging not just because of their value, but because of the risks associated with transporting them to the job site.
“Cranes travel on a flatbed truck, and anything can happen on the road, so the exposure is very broad. This complicates coverage for cranes and other pieces of heavy equipment,” said Rich Clarke, Assistant Vice President, Marine Heavy Equipment, Lexington Insurance, a member of AIG.
On the jobsite, operator error is the most common cause of a loss. While employee training is the best way to minimize the risk, all the training in the world can’t prevent every accident.
“Simple mistakes like forgetting to put the outrigger down or setting the load capacity incorrectly can lead to a lot of damage,” Clarke said.
Crane losses can easily top $1 million in physical damage alone, not including the costs of lost business income.
“Many insurers are not comfortable covering a single piece of equipment valued over $1 million,” Clarke said.
A large and complex risk requires a sophisticated claims approach. Lexington Insurance, backed by the resources and capabilities of AIG, has the underwriting and claims expertise to handle such large claims.
“Cranes travel on a flatbed truck, and anything can happen on the road, so the exposure is very broad. This complicates coverage for cranes and other pieces of heavy equipment. Simple mistakes like forgetting to put the outrigger down or setting the load capacity incorrectly can lead to a lot of damage.”
— Rich Clarke, Assistant Vice President, Marine Heavy Equipment, Lexington Insurance
Flexibility in Underwriting and Claims
Treating insureds as partners in the policy-building and claims process helps to fine-tune coverage to fit the risk and gets all parties on the same page.
Internally, a close relationship between underwriting and claims teams facilitates that partnership and results in a smoother claims process for both insurer and insured.
“Our underwriters and claims examiners work together with the broker and insured to gain a better understanding of their risk and their coverage expectations before we even issue a policy,” said Michelle Sipple, Senior Vice President, Property, Lexington Insurance. “This helps us tailor our policies or claims handling to suit their needs.”
“The shared goals and commonality between underwriting and claims help us provide the most for our clients,” Clarke said.
Establishing familiarity and trust between client, claims, and underwriting helps to ensure that policy wording is clear and reflects the expectations of all parties — and that insureds know who to contact in the event of a loss.
Lexington’s claims and underwriting experts who specialize in heavy equipment will meet with a client before they buy coverage, during a claim, or any time in between. It is important for both claims and underwriting to have face time with insured so that everyone is working toward the same goals.
When there is a loss, designated adjusters stay in contact throughout the life of a claim.
Maintaining consistent communication not only meets a high standard of customer service, but also ensures speed and efficiency when a claim arises.
“We try to educate our clients from the get-go about what we will need from them after a loss, so we can initiate the claim and get the ball rolling right away,” Clarke said. “They are much more comfortable knowing who is helping them when they are trying to recover from a loss, and when it comes to heavy equipment, there’s no time to spare.”
“Our underwriters and claims examiners work together with the broker and insured to gain a better understanding of their risk and their coverage expectations before we even issue a policy. This helps us tailor our policies or claims handling to suit their needs.”
— Michelle Sipple, Senior Vice President, Property, Lexington Insurance
Leveraging Industry Expertise
When a claim occurs, independent adjusters and engineers arrive on the scene as quickly as possible to conduct physical inspections of damaged cranes, bringing years of experience and many industry relationships with them.
Lexington has three claims examiners specializing in cranes and heavy equipment. To accommodate time differences among clients’ sites, Lexington’s inland marine operations work out of two central locations on the East and West Coasts – Atlanta, Georgia and Portland, Oregon.
No matter the time zone, examiners can arrive on site quickly.
“Our clients know they need us out there immediately. They know our expertise,” Clarke said. “Our examiners are known as leaders in the industry.”
When a barge crane sustained damage while dismantling an old bridge in the San Francisco Bay that had been cracked by an earthquake, for example, “I got the call at 6 a.m. and we had experts on site by 12 p.m.,” Clarke said.
In addition to educating insureds about the claims process and maintaining open lines of communication, Lexington further facilitates the process through AIG’s IntelliRisk® services – a suite of online tools to help policyholders understand their losses and track their claim’s progress.
“Brokers and clients can log in and see status of their claim and find information on their losses and reserves,” Sipple said.
In some situations, Lexington can also come to the rescue for clients in the form of advance payments. If a crane gets damaged, an examiner can conduct a quick inspection and provide a rough estimate of what the total value of the claim might be.
Lexington can then issue 50 percent of that estimate to the insured immediately to help them get moving on repairs or find a replacement. This helps to mitigate business interruption losses, as it normally takes a few weeks to determine the full and final value of the claim and disburse payment.
Again, the skill of the examiners in projecting accurate loss costs makes this possible.
“This is done on a case-by-case basis,” Clarke said. “There’s no guarantee, but if the circumstances are right, we will always try to get that advance payment out to our insureds to ease their financial burden.”
For project managers stymied by an out-of-service crane, these services help to bring halted work back up to speed.
For more information about Lexington’s inland marine services, interested brokers should visit http://www.lexingtoninsurance.com/home.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.