Lightning is a more complex peril than it is often given credit for being, according to Tim Harger, executive director of the Lightning Protection Institute (LPI). In a recent interview with Triple-I CEO Sean Kevelighan, Harger discussed the importance of preparing for and preventing damage from this risk, which is second only to flooding when it comes to costly weather events.
People typically think about fire damage when they think about lightning. But Harger said, “Beyond the fire is the destruction of electrical wires and infrastructure that supports everything we do to communicate and to conduct business.”
If lighting strikes any of these structures, he said, “Activity is stopped.”
Harger cited the case of an East Coast furniture manufacturer that was struck.
“That one lightning strike cost them just over a million dollars in damage,” he said. “Yes, there was the typical fire that caused structural damage, but what was impacted on the ‘inside’ was even more costly. They had damaged inventory, production downtime, and loss of revenue during the repairs.”
Investment in a lightning protection system could have saved this business owner – and his insurer – the million dollars lost and prevented business interruption. Nearly $1 billion in lightning claims was paid out in 2018 to almost 78,000 policy holders, according to LPI.
“Lightning strikes about a 100 times every second,” Harger said. “When installed properly, lightning protection systems are scientifically proven to mitigate the risks of a lightning strike.”
A lightning protection system consists of six parts:
Strike termination device,
Conductors,
Grounding,
Surge protection,
Potential equalization, and
Inspection.
Architects and engineers play an important role in specifying and designing these systems, and installation is completed by certified lightning protection contractors. When properly installed lightning is intercepted by the strike termination device and energy is routed through the conductors and into the grounding system, preventing impact to the structure or electrical infrastructure.
“Businesses already install fire alarms and sprinkler systems to mitigate greater risks of fires,” Harger said. “Lightning protection systems prevent a lightning strike from causing any damage. So the investment in a lightning protection system prevents personal injury and the costly impact of even one strike.”
Several insurers offer premium discounts for policyholders who invest in lightning protection systems. LPI invites insurance providers who are interested in sharing their customer incentives to contact them at lpi@lightning.org.
By Max Dorfman, Research Writer, Triple-I (06/08/2022)
Nearly three-quarters of property and casualty policyholders consider climate change a “primary concern,” and more than 80 percent of individual and small-commercial clients say they’ve taken at least one key sustainability action in the past year, according to a report by Capgemini, a technology services and consulting company, and EFMA, a global nonprofit established by banks and insurers.
Still, the report found not enough action is being taken to combat these issues, with a mere 8 percent of insurers surveyed considered “resilience champions,” which the report defined as possessing “strong governance, advanced data analysis capabilities, a strong focus on risk prevention, and promote resilience through their underwriting and investment strategies.”
The report emphasizes the economic losses associated with climate, which it says have grown by 250 percent in the last 30 years. With this in mind, 73 percent of policyholders said they consider climate change one of their primary concerns, compared with 40 percent of insurers.
The report recommended three policies that could assist in creating climate resiliency among insurers:
Making climate resilience part of corporate sustainability, with C-suite executives assigned clear roles for accountability;
Closing the gap between long-term and short-term goals across a company’s value chain; and
Redesigning technology strategies with product innovation, customer experience, and corporate citizenship, utilizing advancements like machine learning and quantum computing
“The impact of climate change is forcing insurers to step up and play a greater role in mitigating risks,” said Seth Rachlin, global insurance industry leader for Capgemini. “Insurers who prioritize focus on sustainability will be making smart long-term business decisions that will positively impact their future relevance and growth. The key is to match innovative risk transfers with risk prevention and assign accountability within an executive team to ensure goals are top of mind.”
A global problem
Recent floods in South Africa, scorching heat in India and Pakistan, and increasingly dangerous hurricanes in the United States all exemplify the dangers of changing climate patterns. As Efma CEO John Berry said, “While most insurers acknowledge climate change’s impact, there is more to be done in terms of demonstrative actions to develop climate resiliency strategies. As customers continue to pay closer attention to the impact of climate change on their lives, insurers need to highlight their own commitment by evolving their offerings to both recognize the fundamental role sustainability plays in our industry and to stay competitive in an ever-changing market.”
Data is key
The report says embedding climate strategies into their operating and business models is essential for “future-focused insurers,” but it adds that that requires “fundamental changes, such as revising data strategy, focusing on risk prevention, and moving beyond exclusions in underwriting and investments.”
The report finds that only 35 percent of insurers have adopted advanced data analysis tools, such as machine-learning-based pricing and risk models, which it called “critical to unlocking new data potential and enabling more accurate risk assessments.”
One of the benefits of social media is the fact that it reminds you what was on your mind several years earlier. Today I was reminded of the horrific flooding in Ellicott City, Md., that occurred three years ago this week.
Water rushes through Main Street in Ellicott City, MD, 2018
This event resonated for me because I had friends living there, and I lived in a similarly situated flood-prone town. The images from Ellicott City recalled for me the damage much closer to home, in Bound Brook, NJ, when Tropical Storm Floyd dropped over 13 inches of rain and the Raritan River crested at above 42 feet, inundating the downtown and sparking fires as electrical systems shorted out.
My little town of Dunellen had dodged a major bullet, I realized as I watched on TV as firefighters in boats responded to the devastation next door. Our basement, turned temporarily into an indoor swimming pool, seemed a minor inconvenience next to the losses in Bound Brook and elsewhere.
Firefighters battle a fire in flood-ravaged Bound Brook, NJ, 1999
A few years later, my region would be visited by similarly shocking images in the aftermath of Hurricane Irene and Superstorm Sandy.
Rollercoaster at Seaside, NJ, after Superstorm Sandy, 2012
We’ve written a lot about flood risk, the flood protection gap, and the need for a resilience mindset to prevent damages and loss wherever possible and help families, businesses, and communities bounce back from unavoidable disasters. But sometimes a few images can persuade more eloquently and effectively than all the words in the world.
Caitlin Durkovich, special assistant to President Biden and White House National Security Council senior director of resilience and response, discussed the administration’s climate and resilience priorities at Triple-I’s National Town Hall (highlights video below. Click here to view full event).
She and Paul Huang, acting associate administrator of resilience for the Federal Emergency Management Administration (FEMA), met virtually with Triple-I CEO Sean Kevelighan and Michel Léonard, Triple-I vice president and senior economist.
“Resilience is a very important theme of this administration and of the priorities we have,” Durkovich said, elaborating that this includes preparation for and response to both natural and man-made events. The objective is to learn from every incident “so we don’t just bounce back but bounce forward.”
Referring to the administration’s infrastructure and clean-energy goals, she said, “We’re anticipating what the world is going to look like 20 to 30 years from now, given the life span of our built infrastructure.”
Durkovich noted that there are several longstanding hazard-mitigation and hazard-response programs spread across multiple agencies.
“I think we have the opportunity to bring at least the federal community together to look at some of those programs and think about how we can modernize them, just like we’re modernizing infrastructure,” she said.
This will help communities “build back better” after an event.
But it’s going to take more than federal government to bring this about. Communities will have to be very involved, she said, adding, “It’s not just state and local planners, but it’s infrastructure owners and operators, it’s the finance side of the house, who are needed to work through some of these hard challenges before, so after an emergency, when money becomes available, you’re ready to make some significant changes.”
And as we invest in electrified transportation infrastructure, she said, “we have to make sure that infrastructure is resilient to power outages, to storms, and when we’re in the middle of a mass evacuation it can accommodate hundreds of thousands of people.”
Despite having to think about everything that could go wrong (what she described as “healthy paranoia”), Durkovich was upbeat: “It’s amazing to be having these conversations about designing resilience in at the beginning, instead of bolting it on at the end.”
FEMA’s Paul Huang echoed Durkovich’s enthusiasm for a “whole of government” and “whole of community” approach to resilience.
“We’re going to have to rethink how we do things,” he said. “We have programs that have always been around. They’re good programs, but it’s not enough. We have to think bigger and more creatively.”
Huang talked about a new FEMA program, Building Resilient Infrastructure and Communities (BRIC), that support states, local communities, tribes and territories in developing hazard-mitigation projects, reducing the risks they face from natural disasters. “We’re hoping to see new ideas from industry, working with local and state government, to say, ‘This is something we can try together in partnership to get a bigger bang for our buck.’ “
Insured losses from March storms in the United States are likely to surpass $1 billion, Aon said in its monthly Global Catastrophe Recap.
Aon said multiple outbreaks – featuring tornadoes, hail, snow, and flooding – were to blame. The most notable included severe weather across the Central and Southern United States, with 122 tornadoes touching down during the month – the most since 2017. Alabama, Mississippi, Texas, Georgia, and Tennessee experienced the most damage.
This followed record-setting winter weather-related insured losses in February, following a prolonged Polar Vortex event, in which Arkansas, Kentucky, Tennessee, and Texas were among the hardest-hit states.
“The Polar Vortex generated record-breaking cold temperatures which extended as far south as the U.S./Mexico border,” Aon said in its February report. “Concurrently, a series of low-pressure systems produced rounds of hazardous snow, sleet, freezing rain, ice, and severe thunderstorms with impacts spanning from Washington state to the Mid-Atlantic.”
Texas was hard hit by the winter weather, which left dozens dead, millions without power, and nearly 15 million with water issues and could wind up being the costliest disaster in state history. Disaster-modeling firm AIR Worldwide says insured losses “appear likely to exceed $10 billion.”
The Electric Reliability Council of Texas (ERCOT) has been widely criticized for failing to require power facilities to be winterized after the last major storm that caused outages in 2011, thus contributing to damage incurred during the more recent one. Last week, the Cincinnati Insurance Company, headquartered in Ohio, filed suit asking a federal court for a declaratory judgment that would allow the insurer to decline paying damages in bodily injury or property damage lawsuits where ERCOT is found to be liable.
If the federal court doesn’t grant the declaratory judgment, Cincinnati Insurance would likely have to cover ERCOT under its current policy contract.
In February and into March, multiple rounds of heavy rainfall and severe weather generated flooding across parts of the Ohio and Tennessee Valleys. Parts of Kentucky, Tennessee, and West Virginia were most affected.
“Impacts were compounded by localized severe weather, including large hail, straight-line winds, and isolated tornadoes,” Aon reported. “Total economic losses were estimated to approach USD 100 million.”
A large portion of the residential flood damage was expected to be uninsured due to low National Flood Insurance Program (NFIP) coverage.
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.
Severe convective storms—tornadoes, hail, drenching thunderstorms with lightning, and damaging straight-line winds—are among the biggest threats to life and property in the United States. They were the costliest natural catastrophes for insurers in 2019, and this year’s tornado season is already shaping up to be the worst in nearly a decade.
A new
Triple-I paper describes how population
growth, economic development, and possible changes in the geography, frequency,
and intensity of these storms contribute to significant insurance payouts. It
also examines how insurers, risk managers, individuals, and communities are
responding to mitigate the risks and improve resilience through:
Improved
forecasting,
Better
building standards,
Early
damage detection and remediation, and
Increased
risk sharing through wind and hail deductibles and parametric insurance
offerings.
The 2020 tornado season coincided with most of the U.S. economy shutting down over the coronavirus pandemic. This could affect emergency response and resilience now and going into the 2020 hurricane season, which already is being forecast as “above normal” in terms of the number of anticipated named storms.
