Are You in the Path
of a Rate Increase Storm?
Gallagher
Property
Practice
Whenever a catastrophic weather event devastates a region, it has ripple Superstorm Sandy will no doubt carry this same impact.
Sandy brought unprecedented damage to an area of the country not accustomed to this type of severe weather event. Companies that sustained damage from Sandy will surely see increases in insurance costs, including some potentially large increases depending on increases in rates for certain specialty coverages like business interruption and storm’s path may also see rate increases, although not as large as those directly impacted by the storm.
Several factors account for these large increases. One factor is that insurers is much less common in insurance
programs designed for small- and midsized insurers face potentially huge claims from their larger clients and will likely increase premiums for such coverage. Insurers small- and midsized companies as well, but not of the same magnitude. insurance since Hurricane Andrew in 1992 — at the time the worst storm to hit U.S. coastal areas. Andrew wrecked much of South Florida, causing damages totaling $26.5 billion, and insurers covered the majority of those losses — about $20 billion in today’s dollars, or approximately 75% of the
Are You in the Path of a Rate Increase Storm?
Will commercial insurance premiums rise nationwide as a result of Superstorm Sandy?
In the aftermath, insurers rewrote their middle- market business coverages to limit their exposure to big-ticket natural events like hurricanes. As a result, business insurance policies available today typically include “anti-concurrent causation” clauses, which exclude coverage for damage caused by both a covered
by Superstorm Sandy if they argue that winds as would be bad news for the millions of people in New York, New Jersey and other East Coast areas that didn’t shield themselves from the ravages of Sandy however, given the uproar it would create.
However it plays out, the good news for businesses outside of the areas hit by Sandy is that insurers are well-prepared to handle claims resulting from the havoc the storm created, and aren’t likely to increase premiums substantially across the board.
To be sure, Sandy was a big storm, and New York and New Jersey got the worst of it — $32 billion in damages in New York, according to Gov. Mario Cuomo, including $19 billion in New York City
But it was not the worst natural disaster in recent years; Hurricane Katrina caused more than $108 billion in property damage along the Gulf Coast in 2005, according to the National Oceanic and Atmospheric Administration (NOAA). Superstorm Sandy also wasn’t the deadliest storm in U.S. history. It killed 149 people, whereas Hurricane Katrina killed
1,200 people and the Galveston Hurricane of 1900 killed perhaps 8,000. Additionally, other recent severe weather events such as the rash of catastrophic hail storms and tornadoes across the central and southern states have devastated local areas like Joplin, Mo. pressure across those regions.
With that said, the numbers for Superstorm Sandy New Jersey are among the most densely populated areas in the country, accounting for approximately 15% of the country’s total population. According to NOAA, 23 of the country’s 25 most densely counties make up only 17% of the country’s total land mass (excluding Alaska) but they are home to people in Superstorm Sandy’s path at landfall, exactly where the storm’s fury reached its peak.
Anti-Concurrent Causation (ACC) Provisions
An ACC provision, as it is commonly abbreviated, is a clause in a first-party policy which indicates that a loss caused by a combination of covered and excluded causes of losses will not be covered. These provisions generally apply in either sequential-causation situations, where the first event sets in motion a chain of events that causes a second event that causes the loss, or concurrent-causation situations, where two or more causes of loss happen simultaneously to produce the same injury or damage. If any cause of loss falls within the terms of a policy exclusion that is accompanied by ACC language, the loss will be excluded, regardless of whether another unexcluded cause of loss qualifies as the “proximate cause” under the jurisdiction’s common law rules.
In other words, if a loss has multiple causes (for instance, both wind and water damage) and one or more of the causes is excluded by a policy which includes an ACC provision, then the loss won’t be paid — even if one or more causes is covered.
The states hit hardest are also among the most highly developed areas in the country, so the monster storm had a very concentrated target in terms of both people and property. The latest figures project that insured damages due to Sandy will be in the $20 billion to $25 billion range, of which 34% accounts for damages in New York, 30% for damages in New Jersey, and 20% for damages in Pennsylvania. However, due to the complexity of business interruption claims, the extensive loss to infrastructure, and the vast amount of flood damage, many insurers and reinsurers believe that it is still too soon to make an accurate assessment of the total cost of the storm. Another issue that will further complicate the claim process is that policy forms are not standardized and coverage may vary widely
In relative terms, these estimates put insurers on the hook for, at most, one-third of the total damage caused by Sandy, well below the 75% share borne by insurers after Hurricane Andrew in 1992. The worst-case estimates for insurers is that they will pay out around $25 billion in claims, which assumes total damages of approximately $75 billion — a big number but well within their ability to pay.
Costliest U.S. Hurricanes
The following chart from the Property Claim Services (PCS) unit of ISO, a Verisk Analytics company, ranks historic hurricanes based on their insured losses, adjusted for inflation. Current estimates by modeling companies put insured losses from 2012’s Hurricane Sandy between $20 billion and $25 billion, not including NFIP claims. This would place Sandy as either the second or third costliest U.S. hurricane based on insured losses.
Anticipated Rate Pressure in U.S. Property Insurance Markets
The map below shows the geographic regions most likely to experience upward rate pressure in 2013 as a result of recent severe weather events.
As mentioned earlier, a significant part of that $25 billion will go for business interruption claims from companies sustaining direct damage caused by Superstorm Sandy. Business interruption insurance, sometimes sold as business income insurance, covers financial losses suffered by a business hit by a disaster such as a hurricane, including lost profits, the costs of moving to and from temporary operating facilities, and fixed costs such as rents, leases and other
operating expenses. Typically, however, insurers sell business income insurance only as add-on coverage to property insurance policies, and some policies promise to pay benefits only when the overarching policy covers the cause of the loss. Insurers could find safe harbor against business interruption claims if they argued that flooding — a risk not covered by the overarching policy — caused the loss.
Upward rate pressure resulting from tornado, wind and hail events. Upward rate pressure resulting from hurricane, wind and flood events.
Joplin 2011 Katrina 2005
Sandy 2012
On the other hand, other factors can also trigger claims under business
interruption policies — for example, evacuations mandated by local authorities. As Sandy approached the East Coast, city officials in its path ordered mass
evacuations, closed down roads, cordoned off residential areas, closed down public transportation systems, and ordered hundreds of thousands of business enterprises to close their doors. Business interruption policies typically contain “ingress and egress” and “civil authority” clauses promising to pay benefits under circumstances such as these.
Exactly how these matters will sort themselves out will become clearer as the recovery efforts along the East Coast continue. Given the magnitude of the damage, all eyes are on the parties engaged in the recovery efforts, including the nation’s insurers, which have sent armies of claims adjusters into the damaged residential and industrial areas in an effort to speed up the process of getting things back to normal.
The likelihood is that insurers will strive to be flexible in assessing claims resulting from Sandy over the coming months. Once carriers have adjusted premiums for the companies generating claims as a result of Superstorm Sandy, they may nudge premiums for property insurance upward nationwide. Carriers may also look to encourage business owners to purchase the insurance necessary to guard against losses from future disasters like Superstorm Sandy.
Should they succeed, business owners everywhere will rest more easily the next time Mother Nature delivers big-ticket trouble.
Superstorm Sandy — Preliminary Estimates of Losses*, by Insurer
AIG $ 2,000,000,000 (pretax)
Lloyd’s of London $ 2,000,000,000 (pretax)
Travellers $ 1,140,000,000 (pretax)
Allstate $ 1,080,000,000
Swiss Re $ 900,000,000 (pretax, net of retro)
Chubb $ 880,000,000 (pretax)
Zurich $ 700,000,000 (pretax, net of re)
Ace $ 380,000,000 (after tax, net of re)
Hartford $ 370,000,000 (pretax)
XL $ 350,000,000 (net)
Arch $ 170,000,000 (net of re)
Montpelier Re $ 95,000,000 (pretax, net of re)
Maiden Holdings $ 25,000,000 (net of re) *various sources
