A surprisingly early US tornado season has caused panic in the reinsurance industry. Should it seek shelter or will the worst blow over?
Every spring, the US braces itself for a wave of tornado outbreaks and severe storm activity. But this year, the brutal and sustained force of an outbreak in late April took the country by surprise.
Between 22 April and 28 April, a mass of warm, humid air from the Gulf of Mexico moved into southern and south-eastern parts of the country. It was met by a cold air mass coming down from the northern plains, and the ensuing storm activity created the second deadliest tornado outbreak in US history.
Latest loss estimates from cat modelling firm AIR Worldwide place the damage bill in the region of $3.7bn to $5.5bn. The death toll from the events of April is currently estimated at 354 across seven states.
US-based National Weather Service reported more than 475 eyewitness tornado sightings over a four day period from April 25 to April 28. Of these, more than 200 tornado touchdowns were confirmed by NWS damage surveys, including two EF-5s, which are characterised by wind gusts of over 200 mph.
According to EQECAT’s senior vice president, Tom Larsen, this is an unusual level of activity. “The activity of tornadoes so far this year is running about 20% higher. May is when the active tornado season usually begins so what happened in late April was about a month early.”
AIR’s principal scientist, Dr Tim Doggett, says the stagnation of the storm cells was particularly unusual. “One unique aspect is typically this time of year we have active weather systems but they are progressive. They’re there for a day and then they move on. But this particular event really stagnated.”
Elements of surprise
Dr Doggett says while tornado outbreaks themselves are not unique, the aggregation of the events was surprising, therefore increasing the insured losses and fatalities.
“The large number of deaths is a breathtaking phenomenon,” he says. “We haven’t had that many deaths from a tornado outbreak in decades. The warning systems are well established and the public is used to responding. The large number of deaths shows how much the activity really caught people off guard.”
But what really sets this tornado outbreak apart from its most deadly predecessor in 1925 is how the changing layout of the US landscape has dramatically intensified risk for insurers.
“Twenty years ago there may have been activity but there were no houses in the area, just farm land,” says BMS senior vice president Stefano Nicolini. “A tornado would come through and only destroy crops. Now a lot of these locations are high-density housing and commercial developments, therefore we do have some very significant losses.”
The April outbreak couldn’t have come at a worse time for reinsurers, which have been slammed by first quarter catastrophe losses. “It’s definitely not good for the reinsurers. It is generating more losses and even more headaches for reinsurance companies,” says Nicolini.
The level of diversification in portfolios could prove to be a key factor in how claims are dealt with by the insurance industry. “Depending on how and where an insurer’s book of business is distributed, how dispersed and diversified they are, we may find some people will be particularly hard hit by this,” says Dr Doggett. “This is due to the number of events that occurred, claims to be paid and the fact that the activity is highly clustered.”
But Larsen argues reinsurers may not be hit at all by claims due to portfolio diversification. “It’s not really an event for reinsurers. The losses will be distributed over an enormous geographical area and an enormous number of companies. The typical mixture of types of losses includes one or two regional companies that will hit their reinsurance. Some companies will get a pinpoint hit in the heart of their company.”
“The bulk of the losses will go to the larger insurers that are geographically diverse so usually the losses will not hit the reinsurance industry because the insurers are so large. It is the law of big numbers,” Larsen adds.
A stormy forecast ahead
Dr Doggett says the US is not out of danger yet, with further severe storms predicted. “We have a good three or four weeks left where we expect activity to continue. Whether it’s going to be at the same level is unknown but we expect to see some level of activity through May.”
Larsen believes that despite the losses, the industry will take advantage of the timing in a hardening market. “Going forward, I would say many insurers are feeling comfortable, especially when exploring different types of policy covers. They might consider using more models and analytics to support their new product offerings.”
After a harrowing first quarter for catastrophe losses, reinsurers were hoping for a quiet US storm season. But if the April tornado outbreak is any indication, the worst is yet to come.