Could AM Best's review provide a grim forecast of weather losses to come?
Anyone attempting to predict catastrophe losses for the year ahead will take no comfort from AM Best’s latest review of US tornado claims. It says the number of tornadoes in the first quarter of 2008 surpassed the previous four-year average and that losses of more than $1bn have already been recorded.
The report also says losses in excess of $1bn from single weather events are becoming more frequent and are approaching the levels of loss incurred from hurricanes. While hurricanes and earthquakes tend to generate a higher loss per event, tornadoes and related weather events have caused an average of 57% of all US insured catastrophe losses every year since 1953. Indeed, in 2007, losses from these perils generated 69% of total insured catastrophe losses.
AM Best’s US tornado catastrophe review also found that smaller insurers, particularly single-state writers with exposure concentrated in tornado-prone states, are facing increasing pressure on profitability from several years of high back-to-back losses.
Already in 2008, insured losses from severe weather systems have surpassed $1bn – about $850m stemming from the Super Tuesday Tornado Outbreak in the US mid-South on February 5 and 6. Early damage estimates from a March 14 tornado that struck in downtown Atlanta and surrounding counties are at $340m. For policyholders in tornado-prone regions, this may mean increased premiums and deductibles, and coverage interruptions.
To assess the historical impact of catastrophe losses on the financial strength of the US insurance industry, AM Best measured insured losses against industry policyholders’ surplus (PHS). PHS is essentially the statutory net worth of the industry – the cushion available to insurers for handling the unexpected losses. AM Best found that, in general, the higher the level of insured loss relative to surplus, the greater has been the financial damage to the insurance industry. Only in 1992 did total insured catastrophe losses top 5% of PHS, when losses from tornadoes added onto the insured losses from hurricanes Andrew and Iniki for a total of 14.5% of PHS.