Tornado Hail: Impact on the Industry

Data suggests some worrying trends in tornado frequency. Christina Cronin, SVP, Standard Lines, PartnerRe gives a reinsurer’s perspective on the impact of the $25 billion losses of 2011 from tornado, hail and thunderstorm events on the re/insurance industry.

Over the last few years, severe tornado and hail events across the U.S. have significantly impacted the results of U.S. insurers, leading clients to reevaluate coverage and pricing considerations and look for products that specifically address these risks. Christina Cronin, SVP, Standard Lines, PartnerRe, takes a deeper look at these Tornado Hail issues.

Should we be concerned about an increasing trend in tornado frequency?

The data available definitely suggests some worrying trends. According to NOAA, the total number of tornado reports has been steadily climbing over the past several decades (Figure 1), most likely due to improved forecasting and better reporting. In fact, data from the National Weather Service shows that, in the last decade, the average number of tornadoes per year has increased by more than 10% over the previous decade. And although the historical data does not necessarily show an increase in the number of severe tornadoes (EF3-EF5) (Figure 2), there’s no denying the industry has seen a significant number of large tornado events in recent years that have resulted in a devastating loss of life, as well as widespread economic damages. Contributing to the increase in loss severities is the on-going development of rural areas with increasing populations and exposed values.

Figure 1: Total number of Tornadoes per annum over the last 50 years (source: NOAA)

Figure 2: Severe Tornado Count from 1950 to 2010 (source: NOAA)
*Beginning in 2007, NOAA switched from the Fujita scale to the Enhanced Fujita scale for rating tornado strength.

What’s the financial impact on insurers?

For the industry the uptick in tornado activity has meant record catastrophe losses in 2011 with over $25B in severe storm losses (including tornado, hail and thunderstorm) in a single season. According to the Insurance Information Institute, this figure is more than twice the previous high. In fact, tornado/hail events were the most costly type of U.S. natural disaster in 2011 – including the weather system that produced the Tuscaloosa tornadoes ($7.3B in losses) and the Joplin tornado ($6.9B). These types of events resulted in significant erosion of earnings for P&C insurers in 2011, hitting both large and small carriers alike and leading to poor overall results for the industry, particularly in the homeowners segment (Figure 3).

Figure 3: Combined Ratios by Product Line from 2007 through to 2012 (source: A.M. Best Co.)

How is the industry addressing this erosion of earnings?

We see our clients addressing the problem in a variety of ways. While some have elected to withdraw from a particular line and/or geography, others are addressing the issue via rate and deductible increases. We’ve already seen a number of carriers implement mandatory percentage wind deductibles in certain non-coastal areas. Others are introducing more restrictive underwriting guidelines or excluding outbuildings and other structures. And some are changing the valuation provisions for roofs from a replacement cost basis to actual cash or agreed value, or excluding coverage for cosmetic (non-structural) roof damage. In many cases, these coverages can be added back or expanded for an additional premium.

How do reinsurers view the problem?

The more frequent, smaller tornado/hail events have typically been retained within the primary market. And this has increasingly been the case in recent years as cedants continue to raise retentions on their catastrophe programs. But following the heavy losses in 2011, we’re definitely seeing greater demand for aggregate protections, as well as significant interest in quota share structures. Clearly, clients are looking for reinsurance products that help manage concentrations and effectively implement the transfer of risk via our assumption of volatility. In some extreme cases, we have seen clients looking to lay off exposures within certain geographies or for specific perils only (e.g., tornado/hail).

The difficulty reinsurers face is how to properly price the tornado/hail exposure within our reinsurance products. The random nature of tornadoes makes them difficult to model and vendor catastrophe models are generally considered to be less reliable for pricing the tornado peril than for other perils such as hurricane and earthquake. Typically, the industry relies heavily on a company’s actual loss experience to develop a loss load, rather than on vendor models. But given the rise in industry losses in recent years, it is difficult to forecast whether this trend will continue or whether it will revert to previous norms.

Given the recent activity, how is PartnerRe reacting?

Actually, we continue to maintain a consistent risk appetite and are actively looking for opportunities to deploy our capacity at the right price and terms. Given the difficulties in pricing the tornado/hail peril, we look to have open discussions with our clients and are willing to consider the impact of reunderwriting and other portfolio improvements when pricing their reinsurance covers. The bottom line is, we remain committed to our clients and are willing to work closely with them to better understand their view of risk.

Story Highlights

  • Total number of tornadoes has been climbing, most likely due to improved forecasting and better reporting.
  • Significant number of large tornado events combined with on-going rural development has led to an increase in loss severities.
  • Tornado/hail events of 2011 led to significant erosion of earnings for P&C insurers, particularly in the homeowners segment.
  • Carriers are addressing the issue in a number of ways including withdrawal from lines, implementation of wind deductibles and restricting guidelines or excluding certain structures.
  • The random nature of tornadoes makes them difficult to model; for reinsurance pricing, the industry relies heavily on a cedant’s loss experience to develop a loss load.
  • PartnerRe continues to maintain a consistent appetite and is looking for opportunities to actively deploy capacity at the right price and terms.

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