The complexities surrounding the development of an ultimate of insurance and reinsurance market losses from the recent US winter storm event are set to be significant, with broker Aon warning to expect a prolonged period of loss creep.
Currently, estimates for the insurance and reinsurance market loss range from low double-digit billions up to $20 billion, with some sources suggesting creep could even take it higher.
However, the only official modelled estimate of losses from the winter storms and related freezing weather between February 12th and 20th, which includes the named event storm Uri, is the early estimate of an $18 billion industry loss for the insurance and reinsurance market from Karen Clark & Company.
Insurance and reinsurance broker Aon’s catastrophe modelling and weather forecasting unit Impact Forecasting has explained why the winter storm loss development will likely drag on for some time, which will heighten uncertainty over where the ultimate industry loss will settle.
Scale is a factor, in the unprecedented number of winter storm claims expected.
Texas, as the state expected to shoulder the brunt of the losses, is anticipating a hurricane-level of winter storm claims to be filed, a significant amount of which are likely to be due to burst pipes.
“Historically, building practices in Southern U.S. states offered less protection to pipes from extreme winter weather events. This can often aid in more incurred losses from burst pipes during prolonged cold events,” Impact Forecasting explained.
While Aon’s unit also noted that, “Given the considerable area of Texas which endured temperatures below the 20°F (-6.7°C) threshold – in combination with the prolonged period of electricity outages – it is not surprising that so many instances of frozen and/or burst pipes and indoor fire sprinklers were reported.”
Burst pipes can result in complex losses, which require significant repair and remediation.
We’re hearing from sources that there are demand surge concerns related to the availability of plumbers and the costs of pipework repairs in Texas, given the number of incidences of burst pipes.
Aon’s Impact Forecasting highlights another element that may amplify losses and result in loss inflation and creep.
The costs of lumber have been high and rising in the United States for some months, partly due to the effects of the pandemic, but also due to people spending more time in and doing more work to their homes.
“Additional enhanced losses may further result from the price of lumber. At the end of January 2021, the price of lumber was the highest seasonally adjusted level on record (dating to the late 1960s). Given how much repair work will be required to homes and businesses across Texas and elsewhere in the U.S. within the ongoing COVID-19 environment – in addition to elevated home construction projects throughout the country – this has led to heightened demand for limited supply,” Impact Forecasting said.
Another factor is the business interruption caused by the freezing weather and also, perhaps more importantly, the power outages experienced in Texas.
“The combination of extended business interruption that may last into the late spring or early summer will aid in this lengthy loss development, plus there is an expectation of numerous liability cases to involve litigation. Such a scenario may be similar to what was seen in California following the 2017 and 2018 wildfire seasons,” Impact Forecasting warns.
All of this is adding up to another catastrophe loss event that looks set to creep higher over time and that may take months, or even years, for a final industry tally to be settled on.
Loss amplification, claims inflation and loss creep have beset the insurance, reinsurance and insurance-linked securities (ILS) market in recent years, with a number of catastrophes around the world seeing particularly significant increases in loss estimates over time, translating to higher ultimates for carriers and knock-on loss creep effects for reinsurers and retrocessionaires.
The US winter storms look set to be the latest, following in the heels of hurricane Irma, typhoon Jebi, the California wildfires, to name a few of the events most responsible for driving loss creep through to the ILS fund market.
Impact Forecasting commented, “There remains considerable uncertainty around the eventual overall direct economic cost from the February winter weather outbreak, including how much will be covered by insurance.
“The expectation of a “hurricane-level” of insurance claims in Texas alone remains anticipated, including the potential of the volume of claims filed surpassing the 700,000+ during Hurricane Harvey in 2017.
“The final industry cost is not likely to be known for many months, if not longer, as a period of prolonged loss development (loss creep) is likely to come into play.”
Given aggregate reinsurance, retro and some catastrophe bond contracts are exposed to the winter storm, a creeping ultimate can set up some uncertainty over potential losses, especially for arrangements that are nearing the end of their risk periods and where trapping of collateral may become an issue.
An expectation of loss creep will motivate cedents to retain ILS collateral where they can, especially for aggregate contracts (cat bonds or reinsurance) where there are other loss events still in development as well. Something to watch out for over the coming months.