Deadly start to 2012 tornado season threatens availability of insurance coverage
Due to the deadly start to the 2012 tornado season, property insurance executives have warned that many reinsurers are pushing back on tornado coverage and have been forced to reconsider the risks of coverage, especially in the most storm prone parts of the country.
According to industry experts, following the high frequency and extreme tornadoes, wildfires and floods last year (all of which were higher than hurricanes, earthquakes and tsunamis) many reinsurers were uncomfortable including unrestricted coverage this year and have had to rethink how they handle the underwriting process should they reoccur. These risks are also often under modeled in insurer and reinsurer portfolios, meaning underwriters have less of an understanding of their aggregate exposure and causing them more concern when including coverage in contracts.
U.S. catastrophe losses in 2011 was $39.5 billion – nearly 70% of that amount, or $26 billion, was due to tornadoes, wildfires and floods. And to date in 2012, tornadoes have cost insurers $2 billion with the number expected to climb, as the peak of tornado season runs through July.
According to disaster modeler Eqecat, the total number of tornadoes recorded this year is twice the seven-year average. Consequently, the threat of these risks has caused some insurers to tighten underwriting standards, as well as pay closer attention to the amount of risk and aggregation of risk in a particular geographic concentration. Property insurers are also making changes to how risks are assessed and how policies are written, implementing higher minimum deductibles for weather and non-weather claims.
Now is the time for businesses in tornado-prone areas to take a closer look and determine how their current policies would respond in the event of a tornado from a coverage and deducible perspective. Ideally, tornado coverage should be part of the All Other Perils with no limitations. But if underwriting standards tighten, these rules could change. Keep an eye out for any attempts from insurers to include tornadoes in wind definitions, which would most likely impose a much higher deductible. Upon renewal, watch for any change in how terms have been quoted and defined, and negotiate to minimize any change in coverage.
About the Author
Mary Broderick is a Senior Vice President and Leader of WGA’s Property Practice. Ms. Broderick is responsible for the design and implementation of complex property insurance programs for WGA’s corporate clients’ and has many years of experience working with complicated Business Interruption (BI) and Contingent Business Interruption (CBI) issues.