Potential impact of Oklahoma tornado on property insurance market
The tragedy in Moore, Oklahoma is the latest in a series of massive tornadoes that have ripped through the U.S. in the last two years, causing billions of dollars in losses. While property damage continues to be assessed, insurance companies initially believe this week’s storm caused at least $2 billion in insured losses, based on preliminary estimates from other big tornadoes and analysts at Morgan Stanley. Replacement value of property within a mile of where the tornado struck is around $6 billion, according to AIR Worldwide.
The trend is a major cause for concern among business and homeowners in hard-hit areas who may not be able to afford repairs due to changes in storm policy coverage. Consumer activists say that due to the increase in severe weather and storms, insurers have raised deductibles and reduced coverage amounts, along with other changes to policy terms that shifts risk to policyholders.
Industry analysts say insurers are also reacting to poor investment returns from very low-interest rates on high-quality insurance bonds. It has also been reported that investors in financial bonds that cover insurers against huge natural disasters are on alert for future events that could force them to pay out. Catastrophe bonds are often used to transfer risks of extreme events like earthquakes or hurricanes, to investors, who receive an annual return in exchange for agreeing to cover damages they consider very unlikely.
Standard homeowners and business insurance policies cover wind damage to the structure of insured buildings and their contents, if caused by tornadoes or thunderstorms. In addition, businesses usually purchase business-interruption coverage to compensate for some lost business income. It’s been reported that insurers had already received over 800 automobile and property claims as of Tuesday afternoon, and have been communicating with policyholders via social media sites like Facebook and Twitter until power in the area is restored.
Since 2011, tornadoes have caused $40 billion in U.S. insured losses, which includes two of the costliest tornado events in history (the 2011 Alabama storm and a May 2011 twister that hit several states.) Prior to Monday’s storm and insured losses, 2013 had been a relatively inactive year in terms of major storms and insured losses. Despite the severity of the storm, the number of tornadoes that have occurred this month (300) is well below that of previous years (1,100 in May 2011).
Industry analysts say the magnitude and frequency of these tornadoes is expected to continue, with the destructive weather patterns unlikely to end. However, given the healthy overall supply of capacity in the property market (with exception of Frame / Habitational risks), the lasting impact that these losses will have on the U.S. commercial property insurance market appear to be somewhat minimal.
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.