Worst Ever Tornado Losses Won’t Affect Property Rates Yet

A series of severe thunderstorms and tornadoes that ravaged the country’s mid-section in early May is not likely to send property insurance rates soaring again, but the surprising weather pattern has caused insurers to take a second look at their underwriting assumptions in non-coastal areas.

Forty lives were claimed by some 412 tornadoes and over 1,400 hailstorms, which hit more than 300 counties in 19 different states. It was the highest number of tornadoes for the first 10 days in May since the National Oceanic and Atmospheric Administration began keeping records in 1950.

The computer modeling program developed by AIR Worldwide estimates insured loss damages of $2.2 billion across 31 states, while an Insurance Services Offices Property Claim Service survey of at least 70 percent of insurance carriers writing business in the most heavily affected 18 states has tallied $1.55 billion in actual claims so far.

Insurers are resurveyed every 60 days by PCS until the number of new claims related to the event becomes statistically insignificant, according to ISO spokesman David Dasgupta, so it will be some time before a final insured loss figure is reached. PCS estimates insurers will receive 429,000 property claims relating to the storms.

The $2.2 billion figure would be a record-setter, as the worst tornado-related loss on record is $1.93 billion in April 2001, when 16 states including Missouri, Nebraska, Texas, Kansas, Illinois and Pennsylvania were hit by tornadoes and storms.

“That’s really not enough to shake up the market,” said Gary Marchitello, managing director of Aon’s National Property Practice Group. “You really need to see a $10-billion event for that to happen.” Aon released a report in April showing the property market was beginning to soften after 2002 saw rates go up 70 percent, deductibles double and limits cut in half.

“There is a certain amount of catastrophic loss already built into rates,” said Robert P. Hartwig, chief economist for the Insurance Information Institute. “This will keep pressure on the homeowners market longer than would be the case. Insurers did well for one quarter because of the absence of catastrophic losses, but that’s not enough. This line is plagued.”

The combined ratio for homeowners improved to 115 percent last year from the 118 percent high during the 1990s, Hartwig said, but there’s still a long way to go.

A number of insurers reported heavy estimated losses from the May storms. Cincinnati Financial Corp. reported losses of about $48 million due to the storms, while Ohio Casualty Corp. and Midland Co. both set their estimates at about $12 million. Seattle-based Safeco Corp. said that the tornadoes along with earlier hailstorms in Texas added up to about $90 million in catastrophic losses in the second quarter.

The storms hit Tennessee hardest, according to PCS, which estimated $310 million in insured property damage there. PCS also estimated Missouri had insured property losses of $275 million, Oklahoma, $245 million, and Nebraska, $175 million. A tornado that hit Moore, Okla., just outside Oklahoma City, injured 100 people and tore through a General Motors Corp. plant, tossing GM cars about as if children were playing with Hot Wheels toy cars.

“We anticipate catastrophe losses for the year in the range of about $75 million,” said Kenneth W. Stecher, chief financial officer for Cincinnati Financial. “This wouldn’t necessarily be way outside a normal year.” Stecher said his company also reported $47 million in catastrophic losses last year. Storm losses could add up to as many as three points on the insurer’s combined ratio, he added.

The biggest impact of the May tornadoes and severe thunderstorms may be to force insurers to change some previously held notions.

“This was just an unprecedented number of tornadoes that were spawned in a week or two week period,” Marchitello said. “It was very rare.

“This has heightened underwriters’ awareness of tornadoes and the fact they can hit industrial America. It is making them scrutinize tornado impact and underwrite it a little more carefully. Insurers traditionally have been concerned if you will with the two coasts: wind on the East Coast, earthquake on the West Coast. Midwest business was reasonably benign, the kind of business they like to write, not catastrophe prone. This will clearly change their perception a little bit.”

Insurers have traditionally expected most catastrophic losses to come during the hurricane season, which is coming around the bend. While the May storms may set records for loss severity of tornadoes, they don’t stack up to the damages usually done during hurricane season. If AIR’s $2.2 billion estimate is correct, the May 2-11 tornadoes would only rank ninth on a list of the top 10 costliest catastrophes, according to the ISO.

Seven of the other nine catastrophes were hurricanes or tropical storms, which is why the latest hurricane news should have insurers sweating.

A prominent hurricane forecaster has predicted that 14 named storms will form this hurricane season (which lasts from June through November) and eight of them are expected to become hurricanes. William Gray, a professor of atmospheric science at Colorado State University in Fort Collins, said El Nina conditions in the Pacific Ocean are contributing to the high estimate.

Gray said he expects three of these hurricanes to be major events, with winds blowing more than 111 mph. The average hurricane season sees 2.3 major hurricanes; last year two major hurricanes developed.

AIR Worldwide’s computer model estimates are used by insurers to “get an immediate idea of magnitude of event so they can start planning on the number of insurance and claims adjusters they need to send out and what kind of resources they need to devote to aftermath of this thing,” said Beverly Porter, an AIR spokeswoman.

“Insurance-linked securities, so-called cat bonds, might be triggered by the actual loss of an event,” Porter added. “Insurers can determine the likelihood of a security being triggered by this event. But a lot of it is curiosity. Insurers want to know as soon as possible what they’ll be facing in terms of loss ratio and other considerations.”

Topics Catastrophe Natural Disasters Carriers Profit Loss Windstorm Hurricane Property