Increasing urban and suburban sprawl has resulted in a “bullseye effect,” causing storms to impact a higher number of properties within a concentrated area, resulting in greater property damage and losses, Megan McConnell, Executive Vice President of Gallagher Re, told Reinsurance News in an interview.
Reinsurance broker Gallagher Re points to damageability and exposure as the two main factors driving the annual increase in aggregate industry severe convective storm (SCS) losses.
“We find that older properties are particularly more vulnerable to hail claims. So, at even just 15 years old, a property or roof is three and a half times more likely to have a hail claim than a brand-new property,” McConnell commented on damageability leading to SCS losses.
“And even properties that are five years old are already two times more, so that curve is very steep. And we saw that after the recession in 2008, there was just less new housing stock being built, and so on average the housing stock in the US has gotten older, which is contributing to more claims.”
“In addition to that, we have seen hail claim severity outpacing general CPI inflation and we attribute that at least partially to the material costs and labor that go into roof housing repairs, which in general, have outpaced CPI.”
McConnell also highlighted how independent adjusters and an increasingly litigious environment are also driving up the costs of those claims.
“In addition to there just being more houses and those houses being worth more, we’ve generally seen a population shift towards areas that have more SCS exposure,” McConnell said regarding exposure contributing to more SCS claims.
McConnell pointed out that the northeast, with minimal tornado and hail risk, has experienced a comparatively slower population growth compared to regions like Texas, which has seen a significant increase in population over the past few decades. This trend of a broader movement towards areas with higher SCS exposure is also contributing to elevated losses from these events.
The initial six months of 2023 are projected to be one of the costliest first halves in terms of US SCS activity. This includes significant economic losses estimated to be at least $35 billion and insured losses of at least $29 billion, as stated in Gallagher Re’s Natural Catastrophe Report for Q1 2023.
The first quarter was notably active, with 47% of global natural catastrophe losses attributable to SCS, and this figure is expected to increase as losses continue to unfold.
“We can say that typically about 75% of PCS loss associated with severe convective storm happens in the first half of the year. The spring is the peak time for tornado and hail activity. So, while we don’t know exactly what the second half of the year has in store, hopefully we’re through the worst of it. But certainly April, May, and especially June were unusually active, with some pretty big events.”
McConnell observed that there has been significant pressure and a notable rise in rates and retentions. In the past, smaller regional companies in the Midwest commonly purchased aggregate catastrophe protection, primarily exposed to severe convective storms. Reinsurers have increasingly shouldered a larger portion of these losses over time.
Now, though, reinsurers are moving away from frequency risks in response to higher losses from these types of events and other secondary perils, and this trend has been evident throughout the 2023 renewals, which during the current hard market cycle has proved a challenge for some primary players.
“However, there’s been more pressure on companies to increase the retentions on those kinds of programs and the prices have gone dramatically up. So, the smaller companies are paying significantly more premium for less coverage. And that’s because, collectively, everyone’s view of how much loss we should expect from these kinds of events has increased over the last decade,” McConnell said.
McConnell emphasised that, from a reinsurer’s perspective, the most crucial aspect is for a company to demonstrate active underwriting and the ability to assess and quantify their risks using appropriate tools. Larger carriers might possess enough data to independently evaluate vulnerabilities, such as the susceptibility of the properties they insure. However, smaller regional companies lack sufficient data, and their actual experience often deviates from vendor models, making it challenging for them to establish a comprehensive view of risk.
“Reinsurers are really looking for carriers to be either using a vendor model and making adjustments that will align it more closely to the loss history that they actually have, or working with a scoring tool, like what Gallagher Re has, to develop a ground up, customised view,” McConnell said.
“If a carrier can’t communicate with the reinsurance market about how they’re underwriting and pricing the risk and how they’re managing it, the reinsurance market will generally apply a punitive blanket uplift to the vendor model view in order to get to an aggregate number that represents the risk,” she concluded.
