Insurers, Risk Managers Take Notice As Cat Losses From Torna

Saturday, Apr 25,2009, 10:14:42 AM Click:

Copyright 2009 Crain CommunicationsAll Rights Reserved Business Insurance

April 20, 2009

725 words

Insurers, risk managers take notice as cat losses from tornadoes surge; Risk concentration concerns increase as frequency rises

JEFF CASALE

On March 14, 2008, downtown Atlanta experienced its first tornado since records began, cutting a path through the city damaging skyscrapers and landmark buildings and showing just how catastrophic an urban twister can be.

But it wasn't just Atlanta that was hit in 2008. The U.S. property/casualty insurance industry experienced record losses from tornadoes and severe thunderstorms last year, according to an A.M. Best Co. Inc. report ``Another Year, Another Record: Tornado Threat Keeps Escalating,'' released last week. Insurers were hit with $10.5 billion in losses from twisters and related storms, including two events that each resulted in losses of $1 billion.

Last year marked the worst year for catastrophe losses from tornadoes, according to the National Oceanic and Atmospheric Administration, with preliminary statistics showing 1,691 tornadoes in 2008—second only to 2004, when there were nearly 1,820 tornadoes. Many of the storms broke out in the early half of the tornado season, with seven states in the southeastern United States experiencing more than 200% of their average annual tornado frequency in just the first half of the season, according to catastrophe modeling firm Risk Management Solutions Inc.

The tornado season in the southern plains typically is May and June, while in the Midwest it usually is June and July, according to NOAA. During the past decade, yearly insured losses from tornadoes and severe storms exceeded $10 billion three times, and the average annual insured losses from these events in the same time period is approximately $6.4 billion, according to RMS.

While tornado and severe storm losses have not eclipsed the insured loss totals of other catastrophic events, such as hurricanes and earthquakes, Oldwick, N.J.-based Best analysts said frequency and severity of the storms are up significantly, which is causing insurers and policyholders to take a hard look at their risks and vulnerability.

``No one can predict where a tornado is going to touch down, but overall, from a risk management perspective, companies are looking at their exposures and looking to see if they have concentrated exposures in the catastrophe-prone states,'' said Kevin Dorsey, senior financial analyst with Best. ``Insurance companies will look to see if they're overexposed in those areas and, if that's the case, they may reduce that exposure by buying reinsurance or getting off those risks altogether.''

On Feb. 5-6, 2008, known as the ``Super Tuesday'' event, 82 tornadoes carved through nine states, killing 57 and causing $955 million in insured losses, according to NOAA and RMS. On May 22-26, several areas across the Great Plains and Midwest were leveled by a series of twisters, including Windsor, Colo., which endured a tornado that measured EF3 on the Enhanced Fujita Scale, and Parkersburg, Iowa, which was shredded by an EF5 tornado, the most damaging type of tornado, with wind gusts exceeding 200 mph, according to RMS. Total insured losses from the tornadoes involved totaled $1.3 billion.

Then, there was Atlanta. An EF2 tornado ripped through the city at about 9:30 p.m., causing $560 million in insured losses, according to the Insurance Services Office Inc.'s Property Claim Services unit. Joe Niedzielski, senior business analyst with Best, said the Atlanta event should cause underwriters to examine the possibility of a tornado striking other major metropolitan areas.

``There's a misconception about tornadoes not hitting urban areas,'' Mr. Niedzielski said. ``They are low-frequency events, so when tornadoes do touch down in an urban center, it can be quite costly from an insured loss perspective.''

He said the Atlanta tornado raised underwriters' awareness. ``They will now ask themselves, as well as modelers, to give them various scenarios to see if a certain strength tornado were to hit a major city, what their exposure would be.''

Whether this year will be as bad as last year is uncertain. As frequency and severity of the storms continues to increase, insurers could be faced with a perfect storm if they try to raise capital after losses from tornados, other natural catastrophes and if the financial crisis continues, Mr. Dorsey said.

``The capital markets are not as open and flowing as they were in 2005 after Hurricane Katrina,'' Mr. Dorsey said. ``We don't know what will happen in 2009.''