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P&C industry prepared to cover manageable cost of tornado outbreak: DBRS Morningstar

15th December 2021 - Author: Luke Gallin

Analysis from DBRS Morningstar finds that while the December severe convective storm (SCS) event and subsequent tornado outbreak was severe, the loss is expected to fall within historical levels for the U.S. property and casualty (P&C) insurance sector.

TornadoAlthough the U.S. experiences more tornadoes annually than any other country in the world, it’s unusual for the type of outbreak witnessed on December 10th to occur this late in the year.

Last Friday, devastating tornadoes broke out across the states of Arkansas, Illinois, Kentucky, Mississippi, Missouri, and Tennessee.

As well as causing significant damage to property, it’s believed that the catastrophic event has claimed the lives of more than 100 people.

Soon after the event, insurance and reinsurance broker Aon said that insurers and reinsurers should expect a multi-billion hit.

This was followed by an initial insurance industry loss estimate from KCC of $3 billion for the tornado impacts.

More recently, catastrophe risk modeller CoreLogic said that the reconstruction value of residential buildings that were potentially destroyed in states hit by the series of tornadoes is $3.67 billion.

According to DBRS Morningstar, the insurance industry loss from this event will be between $2 billion and $5 billion, which it notes would be in line with historical experience for severe tornado events.

It’s been another year of above-average losses from natural catastrophes for the re/insurance industry, with Swiss Re stating recently that insured losses in 2021 would hit $112 billion, and this excludes any losses from the December tornadoes.

But despite the already heavy toll from catastrophes throughout 2021, analysts expect the recent tornado outbreak to be an earnings event for companies, rather than a capital event.

“While severe, this event is expected to produce insured losses within historical levels for the U.S. property and casualty (P&C) insurance industry, which is sufficiently prepared to cover these claims without significant capital impact,” says DBRS Morningstar. “Overall, we expect that P&C insurers with substantial business in the affected states will incur a moderate earnings impact.”

DBRS Morningstar shares the view that the majority of the loss will fall to the primary insurance market, with reinsurers expected to take a lesser hit from the tornado event.

It is worth highlighting though that there will be some impact for reinsurers on aggregate covers given the accumulation of losses this year.

“The P&C insurers with the largest operations in the most affected states are mostly large, well- capitalized and diversified national carriers. In general, these insurers have strong balance sheets and capitalization levels as well as solid earnings so far in 2021.

“Considering manageable 2021 catastrophe claims, they are in a strong position to absorb additional insured losses,” says DBRS Morningstar.

While the December event went against the historical trend, analysis by DBRS Morningstar finds no obvious increase in tornado occurrence, but shows that more property is at risk.

Data from the U.S. National Oceanic and Atmospheric Administration’s National Centers for Environmental Information (NCEI) “suggests that the occurrence of severe tornado events has been relatively stable over time with this storm likely to be the first to include an EF-5 category tornado since 2013.

“However, with growing population and urban development in the Tornado Alley over the years, tornadoes are causing more in damages”.

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