Posted on Jun 07, 2011 by Sergio Ulloa
Insured losses from one unprecedented week of massive thunderstorms that struck the United States in May could cost insurers as much as US$7 billion, according to a statement from catastrophe modeling firm AIR Worldwide.
The Boston-based firm calculated that the severe storms that occurred throughout the country from May 20 to the 27, led by costs from the devastating tornado that struck Joplin, Missouri, will result in cumulative insured losses to residential, commercial, industrial properties and automobiles of between US$4 billion and US$7 billion. More than 500 people have been killed from tornadoes already this year, including at least 130 from the Joplin disaster.
AIR Worldwide loss estimates are based on insured physical damage to property, both structures and their contents, additional expenses from residential claims, business interruption losses and effects on demand change. They do not involve non-modeled losses or loss adjustment expenses.
Dr. Tim Doggett, principal scientist at AIR Worldwide, explained that the month of May is usually the most active for tornadoes in the United States. However, the month began quietly and "for three weeks, only a handful of isolated tornadoes were reported," he noted.
But on May 20th, large thunderstorms in eastern Texas, Arkansas and Oklahoma generated high winds, hail, and an initial five reported tornadoes. Through the following seven days, there were more than 150 confirmed tornadoes across the central United States, from Lake Superior down to Texas and on through to the East Coast, affecting more than 20 states in total. Thousands of buildings were damaged, hundreds more completely destroyed, and over a thousand people were injured.
AIR Worldwide reported that Missouri was most severely affected by the storms, particularly the May 22 tornado strike in Joplin. Kansas, meanwhile, saw 14 tornadoes touch down on May 21st alone, with the city of Reading being hit the hardest. Texas, Indiana and Minnesota were also significantly impacted by the storms.
Dr. Doggett revealed however that none of the meteorological elements that contributed to this outbreak of devastating thunderstorms were extraordinary. "Large, strong, jet stream disturbances happen occasionally; persistent low pressure frontal systems are common, especially in spring; and the storms that developed occurred where they are expected to occur at this time of year," he observed.
But, according to Doggett, what was unusual was for all the dynamics that help generate severe thunderstorms to have come together and aligned themselves in the same place at an opportune time. "To get optimal intense instability, shear, and lift all in the same place for a long period of time is a relatively rare circumstance," he concluded.
This year has so far produced nearly twice as many preliminary tornado reports as usual. AIR predicted that 2011 would soon surpass 2008's record of insured losses from thunderstorm activity. The two major storm outbreaks of this year, in late April and May, have become the costliest on record.
Individual insurance companies now involved in the storm aftermath are slowly emerging with their own loss estimates.
On Sunday, Bermuda-based reinsurer PartnerRe Ltd. said that it projected losses from the recent American tornado outbreak to total between US$50 million and US$70 million. The pretax loss would be recorded in the company's second quarterly report through June.
PartnerRe already reported a net loss of US$807 million for the three months of 2011 due to heavy catastrophe losses resulting from the Japan and New Zealand earthquakes and the heavy flooding in Australia. These disasters in the Asia Pacific region have significantly impacted the earnings targets for the global reinsurance industry.
PartnerRe has asserted however the strength of its balance sheet will enable it to absorb the losses. The rising frequency and severity of natural catastrophes globally will in fact become an earnings event for reinsurance companies as they will now be able to re-evaluate their clients' rates on more favorable terms.
A recent report issued by leading global reinsurance intermediary Guy Carpenter & Co. L.L.C. offers support for the reinsurance industry's continued positive outlook. According to the study, titled "Wide Range of Outcomes Seen in June 1, 2011, Florida Reinsurance Renewals," despite catastrophe losses that are already more than twice the amount most reinsurers budgeted for, the market still has capital in excess of US$165 billion to US$175 billion
Reinsurers thus still have adequate capital heading into the US hurricane season, often the year's biggest claims event for property and casualty (p&c) insurers. Market analysts estimate that additional sizeable hurricane losses could be the final straw that would force insurers to hike prices in an attempt to preserve capital and rebuild their balance sheet.
The Guy Carpenter report concludes that "the reinsurance sector's excess capital position has roughly halved, to about US$10 billion. This is still a significant excess capital position and must be considered within the broader context of overall dedicated reinsurance capital totaling US$165 billion to US$175 billion. Indeed, the reinsurance sector remains fully solvent, fully liquid and easily able to pay claims."
AIR Worldwide (AIR) is the scientific leader and most respected provider of risk modelling software and consulting services. AIR founded the catastrophe modelling industry in 1987 and today models the risk from natural catastrophes and terrorism in more than 50 countries. More than 400 insurance, reinsurance, financial, corporate and government clients rely on AIR software and services for catastrophe risk management, insurance-linked securities, site-specific wind and seismic engineering analyses, agricultural risk management, and property replacement cost valuation. AIR is a wholly-owned subsidiary of Insurance Services Office, Inc.
Guy Carpenter & Co. L.L.C.
Formed in 1923, reinsurance broker Guy Carpenter & Co has become a leading provider of intermediary services for insurance companies in the areas of property, life and annuity, health, worker compensation and professional liability. The company has 20 offices in the United States and over 30 international offices, employing thousands of brokers worldwide. Guy Carpenter is a subsidiary of insurance brokerage giant Marsh & McLennan Companies.
PartnerRe Ltd., through its subsidiaries, provides global reinsurance services. The company offers reinsurance coverage for all manners of property, assets and businesses worldwide. PartnerRe Ltd. was founded in 1993 and is based in Pembroke, Bermuda.