Beyond the extensive devastation and tragic loss of life following the tornado outbreak that saw a reported 70 tornados tear across Arkansas, Illinois, Kentucky, Mississippi, Missouri, and Tennessee late December 10 and the early hours of December 11, Kroll Bond Rating Agency (KBRA) believes the insured property losses from the storms will be manageable for insurers.
However, this latest weather event adds to already high cumulative catastrophe (cat) losses from 2020 and 2021 and will generate further headwinds for property insurers. In addition, smaller, regionally concentrated insurance companies should expect to face another challenging reinsurance renewal.
Billion-Dollar Tornado Outbreak Losses
Preliminary reports from the National Oceanic and Atmospheric Administration (NOAA) and National Weather Service (NWS) indicate that around 70 tornados hit the six states between December 10 and December 11 (see Figure 1). According to the NWS, the largest of the tornados, which tracked between 200 and 250 miles[1] and caused significant damage and loss of life in western Kentucky, was categorized as EF4 (wind speeds between 116 mph and 200 mph).
Insured Losses Manageable
Around 12,000 residential structures were impacted and likely destroyed due to the tornado events, according to CoreLogic estimates, which valued reconstruction costs at approximately $3.7 billion. Insured loss estimates from catastrophe modeling firm Karen Clark & Company are also expected to be around $3 billion. However, a survey from Reinsurance News projects this figure could be more than $5 billion, which would place it in the five costliest tornado events in the U.S. (see Figure 2). On May 22, 2011, the costliest single tornado in history devastated Joplin, Missouri. Damages at the time were $2.8 billion, while the storm system caused close to $7 billion in insured losses. As a result, three insurers were declared insolvent: Barton Mutual Insurance Co., Gateway Mutual Insurance Co., and Cape Mutual Insurance Co., which in total had about 41,000 homeowners policyholders. The three companies had combined premiums of $29 million in 2010 but reported claims of $48 million related to the Joplin tornado. The three companies were ordered into receivership on December 1, 2011, placing them under the management of the Missouri Department of Insurance.[2] KBRA believes risk concentrations, which are a leading cause of insurer insolvency, are integral elements of a well-constructed enterprise risk management framework.
Cumulative Cat Losses Creating Headwinds
Although the current estimates of insured losses from the recent tornado outbreak appear manageable, the cumulative catastrophes losses in recent years create challenges for insurers. The Swiss Re Institute on December 14 released a preliminary estimate of $105 billion for 2021 global insured catastrophe losses. This will likely be the fourth highest year since 1970. The U.S. accounted for the two costliest insured loss events related to Hurricane Ida ($30 billion-$32 billion) and winter storm Uri ($15 billion) both in 2021.
The 2020 Atlantic hurricane season saw a record-breaking 30 named storms, including 13 hurricanes and six major hurricanes, which far outpaced the historical average (see Active Hurricane Seasons are the New Normal). This trend continued into 2021, which now ranks in the top three active hurricane seasons, following 2020 and 2005.
This elevated catastrophe activity over the past five years has steadily driven reinsurance pricing higher and some primary insurers with unfavorable loss experience chose to restructure their reinsurance programs to manage sharply rising costs. In some cases, retentions were increased and total limits were reduced. If the recent pattern of elevated catastrophes losses continues, property/casualty insurers (especially smaller regional companies) will face headwinds that may challenge financial strength and solvency.
[1] Midwest tornado reconstruction value estimated at $3.7 Billion: CoreLogic - Reinsurance News
[2] https://insurance.mo.gov/news/newsitem/uuid/d38d3f9a-4b10-42f9-bd9e-6ba265cbfbe8
Contacts
Fred DeLeon, Senior Director
+1 (646) 731-2352
Carol Pierce, Senior Director
+1 (646) 731-3307
Peter Giacone, Managing Director
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William Cox, Senior Managing Director
+1 (646) 731-2472
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