Not only did natural catastrophes in 2021 break insurance claims records, but they also highlighted the growing cost of non-modeled characteristics of disasters, which are altering the industry’s understanding of these risks, according to a report published by RMS.
“Secondary perils,” such as severe convective storms, floods, and wildfires, are occurring with greater frequency across the globe and have contributed a significant amount of industry loss in recent years, said the Newark, Calif.-based modeling company in its report titled “2021 Catastrophe Year in Review.”
Secondary perils, which are generally not modeled to the same extent as primary perils, are defined as smaller to mid-sized events, or the secondary effects that follow a primary peril, such as hurricane-induced flooding, storm surges, hailstorms, tsunamis, and fire following an earthquake.
“[T]he complex, non-modeled characteristics of the events makes loss more challenging than events in the past – not just for modelers but also for the insurance industry itself,” said Mohsen Rahnama, RMS chief risk modeling officer, who authored a chapter in the report, titled “2021 Proves to Be Another Game Changer.”
He cited the examples in recent years of Typhoon Jebi in 2018 and Hurricane Irma in 2017, when insurers saw sharp spikes in loss development in succeeding months, which “caught everyone by surprise.”
In addition, the report indicated that other non-modeled trends have gained prominence and increased the price tag for insurers, such as contingent business interruption, infrastructure damage, supply chain disruptions and demand surge.
Rahnama then turned to the examples of the winter storm in Texas in February 2021 and the July floods in western and central Europe.
These events “particularly highlighted the significance of contingent business interruption and additional expenses caused by infrastructure damage, such as the Texas power grid failure and the destruction of German roads and bridges,” Rahnama explained.
“For the second straight year, supply chain issues and high housing demand brought about by COVID-19 have driven post-event loss amplification and economic demand surge beyond normal expectations,” he added.
A separate chapter of the report, titled “Tropical Cyclone Ida Devastates Louisiana and Drenches the Northeast,” noted that Hurricane Ida was a complex event “that came amid a backdrop of the ongoing COVID-19 pandemic, rising construction costs, labor shortages, overlapping events, and property undervaluation – all of which are expected to influence the total financial cost of the event.”
RMS said that Hurricane Ida was one of the costliest landfalling U.S. hurricanes on record with an insured price tag ranging from $30.3 billion to $42.5 billion. This cost includes wind and storm surge losses in the Gulf of Mexico and the effects of rain-induced inland flooding in the Gulf, Ohio Valley, mid-Atlantic and Northeast regions.
“It reflects property damage and business interruption to residential, commercial, automobile, industrial, infrastructure, marine cargo and specie, watercraft, and other specialty lines of business,” said the report. “The estimate also includes factors to reflect impacts of post-event loss amplification and non-modeled sources of loss.”
RMS highlighted lumber costs as another unexpected factor that drove catastrophe losses.
In early 2021, high lumber prices were driven by “a combination of low mortgage rates, sharp rises in housing starts, COVID-19 stay-at-home orders, and global supply chain disruptions,” according to the Hurricane Ida-focused section of the report, which was authored by James Cosgrove, senior modeler, RMS Event Response, and Jeff Waters senior product manager, RMS Product Management.
“At the peak, prices rose five-to-seven times above normal. By the time Ida struck, prices had come down significantly but were still higher than the long-term historical average. Steel, copper, fuel, and other appliances also saw a rise in costs,” Cosgrove and Waters said. “The insurance industry’s tendency to undervalue many exposures and books of business may also exacerbate the overall cost of repairs for this event, thus compounding the rise in construction costs.”
These issues exacerbated other non-modeled trends that have gained prominence in recent years, said Rahnama. “For example, our industry is well aware of unique circumstances and building codes in Florida, such as the assignment of benefits and the ‘25% roof replacement rule’ that significantly add to cost of claims.”
(An AOB is an agreement that transfers the insurance claims benefits of a policy to a third party, which can inflate claims. The roof replacement rule states that if more than 25% of the roof is damaged in a hurricane, then the homeowner, in many cases, is entitled to a complete replacement of the roof under Florida building codes).
In their section that addressed Hurricane Ida, Cosgrove and Waters said, trends in the labor market, such as high unemployment levels in the construction sector, could lead to an uptick in AOB, which “could potentially raise costs of a claim and subsequent loss adjustment expenses.”
“Many areas in Louisiana including New Orleans suffered prolonged power outages following the event, as strong winds downed power lines and damaged parts of the state’s power grid. Extended business interruption claims could result from the extended power outages,” the report continued.
RMS noted that many of the areas hit by Ida in the Gulf Coast were still recovering from 2020’s storms – Hurricanes Laura, Delta, and Zeta – and approximately 35% of the claims filed from those storms had not been closed when Ida struck.
“The properties that had yet to be prepared were more susceptible to further damage from Ida, particularly through rainfall infiltration or where tarps had been poorly secured,” Cosgrove and Waters said in their commentary. “These open claims will make loss attribution and differentiation more complex and time consuming, which could lead to longer claim settlement periods.”
Further, the pressure to settle claims quickly could lead to inflated claim frequency and severity, which RMS refers to as “claims inflation,” they explained.
In addition to Hurricane Ida, other record-breaking natural catastrophes in 2021 were the winter storms in Texas, which cost insurers an estimated $15 billion, and the July floods in western and central Europe, which RMS estimates will cost the industry €10.0 billion to €13.2 billion (US$11.5 billion to US$15.1 billion).
“These events follow in the footsteps of Hurricanes Harvey, Irma, and Maria in 2017, Typhoon Jebi in 2018, the western U.S. wildfires of 2018 and 2020, and the hyperactive Atlantic hurricane season of 2020. The record books have been completely rewritten in just the last four years,” said Rahnama in the chapter of the report that describes 2021 as a game changer.
Photograph: Nathan Fabre checks on his home and boat destroyed by Hurricane Ida, Sunday, Sept. 5, 2021, in Lafitte, La. “We lost everything,” said Fabre about the destruction of his home. Photo credit: AP Photo/John Locher.