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.
Electronic Waste Risks Piling Up
The latest electronic devices today may be obsolete by tomorrow. Outdated electronics pose a rapidly growing problem for risk managers. Telecommunications equipment, computers, printers, copiers, mobile devices and other electronics often contain toxic metals such as mercury and lead. Improper disposal of this electronic waste not only harms the environment, it can lead to heavy fines and reputation-damaging publicity.
Federal and state regulators are increasingly concerned about e-waste. Settlements in improper disposal cases have reached into the millions of dollars. Fines aren’t the only risk. Sensitive data inadvertently left on discarded equipment can lead to data breaches.
To avoid potentially serious claims and legal action, risk managers need to understand the risks of e-waste and to develop a strategy for recycling and disposal that complies with local, state and federal regulations.
The Risks Are Rising
E-waste has been piling up at a rate that’s two to three times faster than any other waste stream, according to U.S Environmental Protection Agency estimates. Any product that contains electronic circuitry can eventually become e-waste, and the range of products with embedded electronics grows every day. Because of the toxic materials involved, special care must be taken in disposing of unwanted equipment. Broken devices can leach hazardous materials into the ground and water, creating health risks on the site and neighboring properties.
Despite the environmental dangers, much of our outdated electronics still end up in landfills. Only about 40 percent of consumer electronics were recycled in 2013, according to the EPA. Yet for every million cellphones that are recycled, the EPA estimates that about 35,000 pounds of copper, 772 pounds of silver, 75 pounds of gold and 33 pounds of palladium can be recovered.
While consumers may bring unwanted electronics to local collection sites, corporations must comply with stringent guidelines. The waste must be disposed of properly using vendors with the requisite expertise, certifications and permits. The risk doesn’t end when e-waste is turned over to a disposal vendor. Liabilities for contamination can extend back from the disposal site to the company that discarded the equipment.
Reuse and Recycle
To cut down on e-waste, more companies are seeking to adapt older equipment for reuse. New products feature designs that make it easier to recycle materials and to remove heavy metals for reuse. These strategies conserve valuable resources, reduce the amount of waste and lessen the amount of new equipment that must be purchased.
Effective risk management should focus on minimizing waste, reusing and recycling electronics, managing disposal and complying with regulations at all levels.
For equipment that cannot be reused, companies should work with a disposal vendor that can make sure that their data is protected and that all the applicable environmental regulations are met. Vendors should present evidence of the required permits and certifications. Companies seeking disposal vendors may want to look for two voluntary certifications: the Responsible Recycling (R2) Standard, and the e-Stewards certification.
The U.S. EPA also provides guidance and technical support for firms seeking to implement best practices for e-waste. Under EPA rules for the disposal of items such as batteries, mercury-containing equipment and lamps, e-waste waste typically falls under the category of “universal waste.”
About half the states have enacted their own e-waste laws, and companies that do business in multiple states may have to comply with varying regulations that cover a wider list of materials. Some materials may require handling as hazardous waste according to federal, state and local requirements. U.S. businesses may also be subject to international treaties.
Developing E-Waste Strategies
Companies of all sizes and in all industries should implement e-waste strategies. Effective risk management should focus on minimizing waste, reusing and recycling electronics, managing disposal and complying with regulations at all levels. That’s a complex task that requires understanding which laws and treaties apply to a particular type of waste, keeping proper records and meeting permitting requirements. As part of their insurance program, companies may want to work with an insurer that offers auditing, training and other risk management services tailored for e-waste.
Insurance is an essential part of e-waste risk management. Premises pollution liability policies can provide coverage for environmental risks on a particular site, including remediation when necessary, as well as for exposures arising from transportation of e-waste and disposal at third-party sites. Companies may want to consider policies that provide coverage for their entire business operations, whether on their own premises or at third-party locations. Firms involved in e-waste management may want to consider contractor’s pollution liability coverage for environmental risks at project sites owned by other entities.
The growing challenges of managing e-waste are not only financial but also reputational. Companies that operate in a sustainable manner lower the risks of pollution and associated liabilities, avoid negative publicity stemming from missteps, while building reputations as responsible environmental stewards. Effective electronic waste management strategies help to protect the environment and the company.
This article is an annotated version of the new Chubb advisory, “Electronic Waste: Managing the Environmental and Regulatory Challenges.” To learn more about how to manage and prioritize e-waste risks, download the full advisory on the Chubb website.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Chubb. The editorial staff of Risk & Insurance had no role in its preparation.