Extreme weather battering insurance firms’ bottom line

Ohio’s low premiums at risk as storms, droughts increase

Uprooted trees have cut through a roof of a house in the 500 block of Favony Avenue in Holland. A storm swept through the area on Thursday, July 5 snapping trees, poles and power lines.

The Blade/Jetta Fraser
Buy This Image

William White, left, speaks to his insurance agent Rick Anderson, from USAA, right, to asses the damage to his home and property that was destroyed by the tornado. White's truck, behind, was blown into their backyard.

As a meteorologist for FirstEnergy Corp., Pete Manousos’ job is to keep the electric utility informed about any upcoming extreme weather that might cause outages, or hamper repair crews’ ability to restore power.

An overturned car in the field behind the home of Jerry and Myrna Montri on Ida Center Rd. in Ida Township,MI. The Monroe, MI area was hit by large storms, hail and a tornado last year.

But the last two years, that job has gotten harder and harder.

“You have to consider that part of the issue for FirstEnergy is our geographical footprint has gotten larger over the last decade. There’s more exposure to events as a result,” Mr. Manousos said.

“That said, for the portions of FirstEnergy that have been impacted since 2011, the frequency of the extreme events have been notable,” he added.

Whether the country is embarking on a pattern of annual extreme weather events, or merely going through a temporary phase, is impossible to know, the meteorologist said.

But one segment that has a large financial stake in figuring out if the weather is growing more violent and extreme is the insurance industry.

To be sure, the insurance industry knows more than a thing or two about calculating risk, and the industry has never been healthier financially, according to the New York-based Insurance Information Institute.

However, the increasing frequency of catastrophic weather events over the last three years — including some that affected Ohio in general and northwest Ohio in particular — are causing some in the insurance industry to adjust their climate-risk models and consider establishing a new baseline for weather events in the future.

It also is affecting some of the insurance policies that Ohio homeowners are purchasing and causing bigger increases in annual premiums, even though Ohioans continue to pay some of the lowest premiums in the nation for homeowner coverage.

“While many are expecting catastrophe events to return to a more normalized level in 2012, it is questionable what ‘normal’ is. In addition, it is clear insurers should prepare for the possibility that the event frequency of 2011 may be repeated,” A.M. Best Co. stated in a March briefing last year while warning about increasing extreme weather. The firm rates the financial strength of insurance companies and measures their ability to pay claims.

“There is no question the number of national disasters impacting the United States is trending upward, especially over the last 35 years or so. Those are mostly storm events, flooding events. drought, even wildfires,” said Robert Hartwig, president and an economist for the insurance institute.

“It’s the case that the number of events is increasing and the total cost is increasing and that’s going to mean premiums will increase. It’s just a reality,” he said.

Currently, Ohio homeowners enjoy some of the lowest costs in the nation for HO-3 policies, the most commonly purchased homeowners insurance policy.

As of 2010, the Ohio average of $614 for a homeowners policy was sixth lowest in the United States -- 48 percent lower than the U.S. average of $909. 

From 2004 through 2010, the average annual price increase in Ohio was just under 4 percent.

But in 2011 it rose 6.2 percent to $652, and last year it rose 5 percent to $685. Part of those larger increases relate to weather claims. The question facing Ohio homeowners now is this: How much will rates go up annually in 2013 and beyond if volatile weather increases and insurers are forced to adjust for increased risk?

Uprooted trees have cut through a roof of a house in the 500 block of Favony Avenue in Holland. A storm swept through the area on Thursday, July 5 snapping trees, poles and power lines.

“Many years ago, it seemed like everybody wanted to write homeowners policies, because that’s where the money was, and not write auto coverage. Now, it’s a complete reversal,” said Ben Brown, vice president in charge of personal and professional insurance at Brooks Insurance Agency, one of Toledo’s largest independent insurance brokerages.

“Many are making money on auto and losing money on homeowners policies,” he added.

By law, insurers cannot raise premiums to recoup past losses, but they can make premium increases based on potential future risk.

And from 2010-12, there were more storms that resulted in at least $25 million in insured losses in Ohio than there were in the entire previous decade, according to the Ohio Insurance Institute in Columbus.

Between 2010 and 2012, the Buckeye state had at least 12 storms near or over the $25 million loss mark, with preliminary losses totaling $1.1 billion. As claims are settled, losses will be adjusted and are expected to grow.

Among those storms was the F-4 tornado in Wood and Ottawa Counties that hit Lake High School in Millbury in June, 2010. Initial estimates put the losses at just $22.1 million, but in the 2 1/2 years since the storm, insured losses have reached $41.2 million.

The Ohio Insurance Institute measures losses in five-year periods, and the most recent period has been one of the costliest.

Disaster-related insured losses in 2007 through 2011 increased 187 percent and are approaching $2.5 billion. That compares to just $871 million for losses due to catastrophic storms from 2002 through 2006.

According to the institute, the September, 2008, storm in Ohio that was the remnants of Hurricane Ike caused $1.25 billion in damage and now tops the list for the costliest natural disaster in state history. The third-costliest disaster was just last summer when storms raked the state from June 28-July 4 and caused $440 million in damages.

And just as A.M. Best predicted in March a year ago, Ohio suffered nearly $292 million in losses last October when the western edge of Superstorm Sandy sent high winds and rains into northeastern Ohio and cut power to more than 250,000 residents, according to ISO Property Claim Services, an insurance information clearinghouse.

Mr. Brown, of Brooks Insurance Agency, said that over the last few years the increase in extreme weather has prompted changes in the policies that insurance providers write for northwestern Ohio homeowners. “They are developing new tactics. Some of the strategies are also designed to avoid raising premiums,” he said.

For example, some newer policies increase deductible limits for damage caused by high winds. “In Ohio, that’s something that’s brand new,” Mr. Brown said.

High winds have been a major source of damage in Ohio of late. Last June and July, a powerful wind storm, known as a derecho, sent gusts of 80 to 100 mph across much of the Buckeye state, coming as far north as Findlay, where it uprooted trees and downed power lines.

Extreme winds also were responsible for storms in March, 2012; April, 2011; September, 2010, the 2010 storm that hit Millbury, and a May, 2010, storm that caused damage in Wood and Sandusky Counties. Combined, those high wind storms caused $228.2 million in damages.

“Wind or even hail claims, the amount insurers are paying is astronomical lately,” Mr. Brown said. “If the roofs are older, the damage hail will do on it is an appreciable amount.”

In Florida, where high winds and hurricanes are becoming frequent, policies now include a wind mitigation form. It gives policy holders a break in their premiums depending on the type of window glass they use in their homes, whether their roof is bolted down, and the type of wind-resistant construction used to build their house.

“When a home is built with those standards in Florida, they find there’s very little damage,” Mr. Brown said. “We haven’t got to that point in Ohio, but hurricanes are now starting to reach us even up here. In 2008, in 84 of the state’s 88 counties, there was damage caused by Hurricane Ike coming up from the Gulf.”

Mr. Brown said insurers “are not at a panic stage” over the increasing number of weather-related claims. But given the results for 2012, it wouldn’t be uncommon to think some insurers might have lost money or just broke even on the homeowners policies they sold in Ohio, he added.

Last September, Ceres, a Boston-based nonprofit coalition of businesses that advocates for sustainable business practices, issued a report on the growing costs of extreme weather events. It noted that in 2011, property-casualty insurers shouldered a whopping $32 billion in losses due to extreme weather events and indicated that while the 2012 total was lower, extreme weather and associated economic costs were continuing.

The report said the threat was not just from volatile events, like hurricanes and tornadoes, but also extreme heat, which caused last year’s severe drought — affecting both farmers and insurers who provide private crop insurance — and was responsible for an outbreak of destructive wildfires in the western United States.

Ironically, the report was issued before Superstorm Sandy, which caused an estimated $18.7 billion in damage in the East Coast and inland states, including Ohio.

“Given that weather peril losses have been trending upward for years, due to a combination of higher concentrations of property in vulnerable areas and increasingly more severe and frequent extreme weather events, there is strong reason to believe that 2011 and 2012 are not anomalies,” the report warned.

But Karen Clark, an expert in catastrophe risk assessment and management and the president of Karen Clark & Co., a company that helps insurance firms refine their data gathering to better understand catastrophe risk, said that looking at the United States as a whole, it doesn’t appear to her that there is a trend of increasing extreme weather events.

Ms. Clark, who founded the first catastrophe-modeling firm, AIR, in 1987, said that from a meteorological point of view storms of much greater intensity occurred in the 1930s, 1960s, and other eras than what we are seeing currently. But what is different now is the increasing amount of developed property in areas frequently exposed to extreme weather events.

The growth of “more expensive targets” — larger, more elaborate dwellings and businesses — are driving up insured loss totals, she said.

As the losses mount, the insurance industry has tried hard to develop risk models to predict the number and severity of extreme weather events, but those models have failed miserably, Ms. Clark said.

“At this point we obviously can’t control the weather, so we have to assume that an upward trend will continue,” said Mr. Hartwig, of the information institute.

In 2011, violent storms caused $15 billion in damages to the non-coastal areas of the United States, the largest losses ever for those geographical regions. “It’s also the case that Ohio has seen losses from Sandy and losses from Hurricane Ike. So it seems that Ohio increasingly seems to be at the crossroads of disaster, even though Ohio doesn’t really have a coastline other than Lake Erie,” Mr. Hartwig said.

However, “People are not helpless against that violent weather,” he said. “You can mitigate the cost of, say, hurricanes, with measures like roof tie-downs, stronger windows and doors, and for hail damage with hail-resistant shingles and better roof designs,” he said.

To that end, three years ago in South Carolina the insurance industry built a research center akin to the Highway Safety Institute where it can study climactic effects on homes and buildings and learn how certain kinds of events, such as high winds, lead to high insured losses.

“We are learning about things like roof design,” Mr. Hartwig said. “Something like this can pay dividends even if there’s no change in the weather,” he added.

Contact Jon Chavez at:
jchavez@theblade.com
or 419-724-6128.