U.S. Gulf Coast residents from Louisiana to Florida should prepare for Tropical Storm Sally, which is forecast to strengthen into a hurricane before making landfall on Tuesday.
There is uncertainty over the specific timing and location of Sally’s landfall, as well as its ultimate intensity level. Severe weather conditions will last, however, for several days in multiple states.
The NHC warns Sally will generate destructive hurricane-force winds; torrential rain; life-threatening storm surge; flash flooding; isolated tornadoes; and widespread power outages.
Sally will be the eighth named storm to make landfall in the continental U.S. this hurricane season. Previous 2020 landfalls include Hurricanes Hanna, Isaias and Laura as well as Tropical Storms Bertha, Cristobal, Fay and Marco.
Louisiana, Mississippi, Alabama and Florida residents in the path of Sally should take the following precautions:
Review your evacuation plan and, if you have a pet, your pet’s evacuation plan.
Make sure you have a minimum seven-day supply of non-perishable food and drinking water (one gallon per person, per day) for all family members and pets, as well as a one-week supply of medications for everyone in your household.
Write down the name and phone number of your insurer and insurance professional and keep this information either in your wallet or purse.
Purchase emergency supplies, such as batteries and flashlights.
Prepare your yard by removing all outdoor furniture, lawn items, planters and other materials that could be picked up by high winds.
Fill your car’s gasoline tank because long gas lines and fuel shortages often follow in areas impacted by a tropical cyclone.
Perhaps the most emotionally compelling data point invoked by those who would compel insurers – through litigation and legislation – to pay business-interruption claims explicitly excluded from the policies they wrote is the property/casualty insurance industry’s nearly $800 billion policyholder surplus.
Many Americans hear “surplus” and think of a bit of cash they have stashed away for emergencies. And when you consider that nearly 40 percent of Americans surveyed by the Federal Reserve said they would either have to borrow or sell something to cover an unexpected $400 expense – or couldn’t pay it at all – that number may sound like overkill.
Not as much as you think
But policyholder surplus isn’t a “rainy day fund.” It’s an essential part of the industry’s ability to keep the promises it makes to policyholders. And although a number like $800 billion may raise eyebrows, when we look more closely at its components, the amount available to cover claims turns out to be considerably less.
Insurers are regulated on a state-by-state basis. Regulators require them to hold a certain amount in reserve to pay claims based on each insurer’s own risk profile. The aggregation of these reserves – required by every state for every insurer doing business in those states – accounts for about half the oft-cited industry surplus.
Call it $400 billion, for simplicity’s sake.
Each company’s regulator-required surplus can be thought of as that company’s “running on empty” mark – the point at which alarms go off and regulators start talking about requiring it to set even more aside to make sure no policyholders are left in a lurch.
By extension, $400 billion is where alarms begin going off for the entire industry.
It gets worse – or better, depending on your perspective.
In addition to state regulators’ requirements, the private rating agencies that gauge insurers’ financial strength and claims-paying ability don’t want to see reserves get anywhere near “Empty.” To get a strong rating from A.M. Best, Fitch, S&P, or Moody’s, insurers have to keep even more in reserve.
Why do private agency ratings matter? Consumers and businesses use them to determine what insurer they’ll buy coverage from. Also, stronger ratings can contribute to lower borrowing expenses, which can help keep insurers’ operating costs – and, in turn, policyholders’ premiums – at reasonable levels.
So, let’s say these additional reserves amount to about $200 billion for the industry. The nearly $800 billion surplus we started with now falls to about $200 billion.
To cover claims by all personal and commercial policyholders in a given year without prompting regulatory and rating agency actions that could drive up insurers’ costs and policyholders’ premiums.
Which brings us to today.
Losses ordinary and extraordinary
In the first quarter of 2020, the industry experienced its largest-ever quarterly decline in surplus, to $771.9 billion. This decline was due, in large part, to declines in stock value related to the economic recession sparked by the coronavirus pandemic.
Nevertheless, the industry remains financially strong, in large part because the bulk of insurers’ investments are in investment-grade corporate and governmental bonds. And it’s a good thing, too, because the conditions underlying that surplus decline preceded an extremely active hurricane season, atypical wildfire activity, and damages related to civil unrest approaching levels not seen since 1992 – involving losses that are not yet reflected in the surplus.
Insured losses from this year’s Hurricane Isaias are estimated in the vicinity of $5 billion. Hurricane Laura’s losses could, by some estimates, be as “small” as $4 billion or as large as $13 billion.
And the Atlantic hurricane season has not yet peaked.
The 2020 wildfire season is off to a horrific start. From January 1 to September 8, 2020, there were 41,051 wildfires, compared with 35,386 in the same period in 2019, according to the National Interagency Fire Center. About 4.7 million acres were burned in the 2020 period, compared with 4.2 million acres in 2019.
In California alone, wildfires have already burned 2.2 million acres in 2020 — more than any year on record. For context, insured losses for California’s November 2018 fires were estimated at more than $11 billion.
And the 2020 wildfire season still has a way to go.
All this is on top of routine claims for property and casualty losses.
Four billion here, 11 billion there – pretty soon we’re talking about “real money,” against available reserves that are far smaller than they at first appear.
No end in sight
Oh, yeah – and the pandemic-fueled recession isn’t expected to reverse any time soon. Economic growth worldwide remains depressed, with nearly every country experiencing declines in gross domestic product (GDP) – the total value of goods and services produced. GDP growth for the world’s 10 largest insurance markets is expected to decrease by 6.99 percent in 2020, compared to Triple-I’s previous estimate of a 4.9 percent decrease.
If insurers were required to pay business-interruption claims they never agreed to cover – and, therefore, didn’t reserve for – the cost to the industry related to small businesses alone could be as high as $383 billion per month.
This would bankrupt the industry, leaving many policyholders uninsured and insurance itself an untenable business proposition.
Fortunately, Americans seem to be beginning to get this. A recent poll by Future of American Insurance and Reinsurance (FAIR) found the majority of Americans believe the federal government should bear the financial responsibility for helping businesses stay afloat during the coronavirus pandemic. Only 16 percent of respondents said insurers should bear the responsibility, and only 8 percent said they believe lawsuits against insurers are the best path for businesses to secure financial relief.
The Los Angeles office of the National Weather Service predicted prolonged, potentially record-setting heat and dangerous weather conditions throughout California this summer – and, some experts expect it to continue for some time beyond.
“If you like 2020, you’re going to love 2050,” said Michael Gerrard, director of Columbia University’s Sabin Center for Climate Change Law, in a recent Los Angeles Times article.
These conditions can only exacerbate this year’s atypical wildfire activity in the state. So, it should be no surprise that California is grappling with how to stop insurers from abandoning fire-prone areas, leaving countless homeowners at risk.
“Years of megafires have caused huge losses for insurance companies, a problem so severe that, last year, California temporarily banned insurers from canceling policies on some 800,000 homes in or near risky parts of the state,” The New York Times reports. “However, that ban is about to expire and can’t be renewed, and a recent plan to deal with the problem fell apart in a clash between insurers and consumer advocates.”
Insurers are widely expected to continue their retreat.
“The marketplace has largely collapsed” in high-risk areas, said Graham Knaus, executive director of the California State Association of Counties. “It’s a very large geographic area of the state that is facing this.”
California, where regulations lean toward consumer protection, is particularly challenged. The state doesn’t let insurers set premiums based on what they expect in future damages. They can only set rates based on prior losses. They also aren’t allowed to pass along reinsurance costs to policyholders – costs that are expected to rise as fire risks worsen.
State lawmakers introduced a bill to let insurers writing coverage in wildfire-prone areas incorporate climate predictions and other costs into their rate requests in return for making coverage more available and offering discounts to people who take steps to reduce their home’s vulnerability.
Insurers supported the change, as did the counties association and the union representing firefighters. But the bill faced strong opposition from consumer groups, who ultimately prevailed. Last month, the state senate stripped most of the provisions from the bill and directed the insurance commissioner to review the current rules and report back to the legislature in two years.
The legislature ended its session without acting on the revised version. Insurance Commissioner Ricardo Lara said his focus now is working with high-risk communities to reduce their wildfire risk enough that insurers will keep offering coverage without big rate increases.
“If Californians do our part to protect homes from wildfire,” Lara said, the industry should respond by agreeing to insure those homes.
Janet Ruiz, Triple-I’s director of strategic communications, said, “Insurers in California are working with legislators and the California Department of Insurance to find solutions to keep homeowners insured in wildfire risk areas. The industry supports mitigation efforts, the California FAIR Plan, and the proposed IMAP program.”
This blog post has been updated based on new information received since it was first published on September 4, 2020.
Hurricane Laura may have caused as little as $4 billion of insured damage or as much as $13 billion, according to early estimates.
Property information, analytics and data provider CoreLogic said residential and commercial insured losses from Hurricane Laura in Louisiana and Texas will come in at between $8 billion and $12 billion. Most of the property damage occurred in southwest Louisiana, where Laura made landfall early as a Category 4 hurricane with 150 mph winds.
Catastrophe risk modeler RMS puts the range between $9 billion and $13 billion. This includes wind and storm surge losses of between $8.5 billion and $12 billion, inland flood losses of $100 million to $400 million, and National Flood Insurance Program (NFIP) losses of $400 million to $600 million.
Catastrophe risk modeling firm Air Worldwide said it expects losses related to Laura to fall in the $4 billion to $8 billion range. The combination of the storm’s track through less-populated areas and its relatively small “Rmax” – the distance from the center of the storm to the location of the maximum winds – should keep insured losses down somewhat, the company said.
Cat risk modeler Karen Clark & Co. estimates insured onshore property losses from wind and storm surge will likely amount to $8.7 billion in the U.S. and $200 million in the Caribbean. Its estimate includes the privately insured wind and storm surge damage to residential, commercial, and industrial properties and automobiles but not losses covered by the NFIP or losses to offshore assets.
All estimates are subject to change as more information becomes available.
Under the best of circumstances, the Atlantic hurricane season is a challenging time. Despite improved forecasting and analytical tools, pre-storm communication, and engineering, hurricane-related losses continue to climb.
But the 2020 season hasn’t come during the best of circumstances. This extremely active season arrived on the heels of a pandemic that hasn’t ebbed, accompanied by civil unrest and atypical wildfire activity that could draw attention and resources away from preparation and post-storm aid.
And, as if that wasn’t enough, it falls in the middle of what is arguably the most contentious, chaotic U.S. election year in modern history.
To say these new variables complicate resilience would be a gross understatement in a year whose (to use the technical insurance phrase) “general weirdness” would be difficult to overstate.
So, in a paper published today we review the current state of hurricane resilience – how forecasting, modeling, preparation, and mitigation have evolved – and how the insurance industry is working to help communities bounce back from hurricanes.
Demographics more than climate change
Nine of the 10 costliest hurricanes in U.S. history have occurred since 2004, and 2017, 2018, and 2019 were the largest back-to-back-to-back insured property loss years in U.S. history. Many would instinctively chalk up such numbers to climate change. But a careful look at the data suggests climate change isn’t the predominant driver of losses.
U.S. Census Bureau data indicate that the number of housing units in the United States increased most dramatically since 1940 in areas that are most vulnerable to weather-related damage. They also show that new homes are bigger and more expensive than in past decades.
Bigger homes full of more valuables, more cars and infrastructure in disaster-prone locales – these, more than climate trends, seem to be the dominant factors driving losses.
Not more, but wetter
Hurricanes may not be more frequent or significantly more intense due to climate change, but they seem to be getting wetter. Inland flooding has caused more deaths in the United States in the past 30 years than any other hurricane-related threat.
Early in the 2020 season, Tropical Storm Cristobal made landfall along southeastern Louisiana and triggered flash flooding as far inland as northwest Wisconsin.
“As the atmosphere continues to warm, storms can hold more moisture and bring more rainfall,” said Triple-I non-resident scholar and Colorado State University atmospheric scientist Dr. Philip Klotzbach. This trend could be exacerbated if, as some experts expect, storms begin traveling more slowly, adding to the moisture they would pick up from the ocean and drop over land.
Our paper also looks at the evolution of hurricane modeling and forecasting, as well as developments in preparation and mitigation.
Better data and improved modeling have made private insurers comfortable writing coverage, like flood insurance, that was previously considered “untouchable” and enabled the creation of entirely new types of insurance products.
But challenges remain. Experts disagree as to which models are best, and the proprietary nature of these models can make it hard for regulators to determine whether filed rates based on them are unfairly discriminatory.
Hurricane preparation and damage mitigation have benefited from improved communication and public planning.
“Many people still don’t evacuate the way they should,” says Todd Blachier of Church Mutual Insurance, “but states like Louisiana, Florida, Alabama and Mississippi have gotten much better in terms of shutting down inbound roads and creating one-way egress to facilitate evacuation.”
He says officials are acting much more quickly and communicating more effectively, thanks in large part to improved information from the National Oceanic and Atmospheric Administration (NOAA) and other resources.
One area in which improvements could boost resilience is building codes and standards. A recent Federal Emergency Management Agency (FEMA) study quantified the losses avoided due to buildings being constructed according to modern, hazard-resistant codes and standards. In California and Florida — two of the most catastrophe-prone states — FEMA found adopting and enforcing modern codes over the past 20 years led to a long-term average future savings of $1 billion per year for those two states combined.
With another catastrophic wildfire season again underway in California, join this press conference to hear from fire science and insurance experts on practical steps homeowners and renters can take to reduce their risk from wildfires. Learn where to start and what actions communities need to take first to continue to adapt to wildfire and stay protected.
Register now to join experts from the American Property Casualty Insurance Association, the Triple-I, the Insurance Institute for Business Home and Safety and the National Fire Protection association on September 3, 2020, 10:00 a.m.-11:00 a.m. PT. Register now
Damage reports from Hurricane Laura are coming in. Lake Charles, La., was especially hard hit, and there are reports of a chemical leak nearby.
Laura made landfall near Cameron, La., as an “extremely dangerous” Category 4 hurricane. The National Hurricane Center (NHC) said in an early-morning bulletin that Laura had weakened to a Category 3 hurricane, with rapid weakening forecast, and the storm has since been downgraded to a Category 1 as it heads northward.
“Lake Charles experienced severe wind damage but seems not to have seen the amount of storm surge that was feared,” said Triple-I non-resident scholar and Colorado State University atmospheric scientist Dr. Philip Klotzbach.
Despite the downgrade,
the hurricane still had sustained winds of more than 100 mph. Heavy rain is
predicted to be widespread across the west-central Gulf Coast, with five to 10
inches falling over a broad area, and locally up to 18 inches, leading to flash
flooding.
The storm is now tracking inland
across western Louisiana with damaging winds and is an inland flood risk as far
north and east as Arkansas and the Ohio and Tennessee valleys.
“The threat of tornadoes today and
even tomorrow also exists as the storm recurves into the Tennessee
Valley,” Klotzbach said.
The National Hurricane Center forecasts Hurricane Laura to reach Category 4 intensity later today. A ‘life-threatening’ storm surge of 10 to 15 feet is predicted, one of the worst in years, along with destructive winds. The storm is poised to strike the upper Texas coast and western Louisiana. Hurricane and storm surge warnings have been issued for much of this zone.
If you live in an area ordered to evacuate, leave now. Do not attempt to ride out the storm. Take your insurance contact information and home inventory with you.
In an analysis based on the assumption that Hurricane Laura would come ashore on the Louisiana coast as a Category 3 storm, CoreLogic, a catastrophe modeling firm, warns that nearly 432,000 single-family and multi-family homes along the coasts of Texas and Louisiana could be damaged from storm surge. According to the analysis, Laura threatens approximately 431,810 homes with a combined reconstruction value of approximately $88.63 billion.
Said Tom Larsen, principal, insurance solutions at CoreLogic, “The coincidence of two catastrophes—a damaging hurricane season and the ongoing global pandemic—underscores the importance of the correct valuation of reconstruction cost, one of the core tenets of property insurance.”
Tropical Storm Laura has been upgraded to a hurricane and is tracking northwest across the Gulf of Mexico. The system is likely to make landfall Wednesday evening or Thursday morning, possibly in eastern Texas or western Louisiana. High winds, heavy rain and storm surge are expected.
If you live along the northern Gulf Coast you are encouraged to prepare now, as conditions will deteriorate during the day on Wednesday.
Those of us who aren’t directly affected may have become jaded enough to think, “More fires in the West. That’s normal.”
But as Janet Ruiz, Triple-I’s California-based director of strategic communications, explains, “We’ve had a significant number of large wildfires since 2015, but this year is anything but normal.”
Your first clue might be the alphabet soup of names applied to this year’s blazes: LNU, CZU, SCU. You might remember Northern California’s major wildfires in recent years — the Camp Fire, the Carr Fire, Tubbs, Ferguson — and wonder why this year’s don’t have similarly straightforward names.
According to California fire officials, it’s because the number of fires has required them to be grouped together in “complexes”:
The LNU Lightning Complex in the northeast Bay Area, including Sonoma, Napa, Solano, and Lake counties.
The CZU Lightning Complex in the western and southern Bay Area, including San Mateo and Santa Cruz counties.
The SCU Lightning Complex in the eastern and southeastern Bay Area, including Santa Clara, Alameda and Contra Costa counties, and neighboring San Joaquin and Stanislaus counties.
“We only group fires like that when we have a lightning siege as such,” Brice Bennet, a public information officer for the California Department of Forestry and Fire Protection (Cal Fire), told the San Francisco Chronicle.
The last major lightning siege was in 2008.
“Once the fires are grouped into a complex,” the Chronicle explains, “they’re managed so fire managers can assess all the different fires within each one and share resources across the greatest need — life being first, and property second. That’s where the prefixes come in. Those monikers are geographical locators based on Cal Fire administrative unit codes.”
Ruiz explained that many of the fires since 2015 were caused by human activity, rather than nature.
“Authorities have worked hard and invested a lot of money to mitigate those causes,” she said. “Then along comes this unpredictable, unpreventable abundance of lightning strikes.”
Fewer firefighters: Thanks, COVID-19
The daunting number of blazes coincides with a reduced availability of firefighters, courtesy of the coronavirus pandemic.
“In past seasons, a lot of help came from inmates recruited to assist in firefighting,” Ruiz said. “Many of these have been released because of COVID-19 and therefore aren’t available.”
Less warning, preparation paramount
Lightning is a universal metaphor for random ill fortune, and the chaotic causation of California’s 2020 fires has affected how authorities communicate with residents about impending threats.
“Normally you’d get warnings about approaching fires, followed, if necessary, by a mandatory evacuation order,” Ruiz said. But last week, when Ruiz was evacuated, “We didn’t get an advisory – we were just told to go.”
Wisely, she and her husband keep “to go” bags near their front door and were able to leave within 10 minutes of receiving the order.
