Tag Archives: tropical storm

Where Have the Hurricanes Gone?

Last year’s hurricane season passed off relatively quietly. Gonzalo, a Category 2 hurricane, hit Bermuda in October 2014, briefly making the world’s headlines, but it did relatively little damage, apart from uprooting trees and knocking out power temporarily to most of the island’s inhabitants.

It is now approaching 10 years since a major hurricane hit the U.S., when four powerful hurricanes — Dennis, Katrina, Rita and Wilma — slammed into the country in the space of a few months in 2005.

There have been a number of reasons put forward for why there has been a succession of seasons when no major storms have hit the US.

It shouldn’t be so quiet. Why? Put simply, the warmer the Atlantic Ocean is, the more potential there is for storms to develop. The temperatures in the Atlantic basin (the expanse of water where hurricanes form, encompassing the North Atlantic Ocean, the Gulf of Mexico and the Caribbean Sea) have been relatively high for roughly the past decade, meaning that there should have been plenty of hurricanes.

There have been a number of reasons put forward for why there has been a succession of seasons when no major storms have hit the U.S. They include: a much drier atmosphere in the Atlantic basin because of large amounts of dust blowing off the Sahara Desert; the El Niño effect; and warmer sea surface temperatures causing hurricanes to form further east in the Atlantic, meaning they stay out at sea rather than hitting land.

Although this is by far the longest run in recent times of no big storms hitting the U.S., it isn’t abnormal to go several years without a big hurricane. “From 2000 to 2003, there were no major land-falling hurricanes,” says Richard Dixon, group head of catastrophe research at Hiscox. “Indeed, there was only one between 1997 and 2003: Bret, a Category 3 hurricane that hit Texas in 1999.”

There then came two of the most devastating hurricane seasons on record in 2004 and 2005, during which seven powerful storms struck the U.S.

The quiet before the storm

An almost eerie calm has followed these very turbulent seasons. Could it be that we are entering a new, more unpredictable era when long periods of quiet are punctuated by intense bouts of violent storms?

It would be dangerous to assume there has been a step change in major-land-falling hurricane behavior.

“Not necessarily,” Dixon says. “Neither should we be lulled into a false sense of security just because no major hurricanes — that is Category 3 or higher — have hit the U.S. coast.”

There have, in fact, been plenty of hurricanes in recent years — it’s just that very few of them have hit the U.S. Those that have — Irene in 2011 and Sandy in 2013 — had only Category 1 hurricane wind speeds by the time they hit the U.S. mainland, although both still caused plenty of damage.

The number of hurricanes that formed in the Atlantic basin each year between 2006 and 2013 has been generally in line with the average number for the period since 1995, when the ocean temperatures have risen relative to the “cold phase” that stretched from the early 1960s to the mid-1990s.

On average, around seven hurricanes have formed each season in the period 2006-2013, roughly three of which have been major storms. “So, although we haven’t seen the big land-falling hurricanes, the potential for them has been there,” Dixon says.

Why the big storms that have brewed have not hit the U.S. is a mixture of complicated climate factors — such as atmospheric pressure over the Atlantic, which dictates the direction, speed and intensity of hurricanes, and wind shear, which can tear a hurricane apart.

There have been several near misses: Hurricane Ike, which hit Texas in 2008, was close to being a Category 3, while Hurricane Dean, which hit Mexico in 2007, was a Category 5 — the most powerful category of storm, with winds in excess of 155 miles per hour.

That’s not to say there is not plenty of curiosity as to why there have recently been no powerful U.S. land-falling hurricanes. This desire to understand exactly what’s going on has prompted new academic research. For example, Hiscox is sponsoring postdoctoral research at Reading University into the atmospheric troughs known as African easterly waves. Although it is known that many hurricanes originate from these waves, there is currently no understanding of how the intensity and location of these waves change from year to year and what impact they might have on hurricane activity.

Breezy optimism?

The dearth of big land-falling hurricanes has both helped and hurt the insurance industry. Years without any large bills to pay from hurricanes have helped the global reinsurance industry’s overall capital to reach a record level of $575 billion by January 2015, according to data from Aon Benfield.

But, as a result, competition for business is intense, and prices for catastrophe cover have been falling; a trend that continued at the latest Jan. 1 renewals.

We certainly shouldn’t think that next year will necessarily be as quiet as the past few have been.

Meanwhile, the values at risk from an intense hurricane are rising fast. Florida — perhaps the most hurricane-prone state in the U.S. — is experiencing a building boom. In 2013, permissions to build $18.2 billion of new residential property were granted in Florida, the second-highest amount in the country behind California, according to U.S. government statistics.

“The increasing risk resulting from greater building density in Florida has been offset by the bigger capital buffer the insurance industry has built up,” says Mike Palmer, head of analytics and research at Hiscox Re. But, he adds: “It will still be interesting to see how the situation pans out if there’s a major hurricane.”

Of course, a storm doesn’t need to be a powerful hurricane to create enormous damage. Sandy was downgraded from a hurricane to a post-tropical cyclone before making landfall along the southern New Jersey coast in October 2012, but it wreaked havoc as it churned up the northeastern U.S. coast. The estimated overall bill has been put at $68.5 billion by Munich Re, of which around $29.5 billion was picked up by insurers.

Although Dixon acknowledges that the current barren spell of major land-falling hurricanes is unusually long, he remains cautious. “It would be dangerous to assume there has been a step change in major-land-falling hurricane behavior.”

Scientists predict that climate change will lead to more powerful hurricanes in coming years. If global warming does lead to warmer sea surface temperatures, then evidence shows that it tends to make big storms grow in intensity.

Even without the effects of climate change, the factors are still in place for there to be some intense hurricane seasons for at least the next couple of years, Dixon argues. “The hurricane activity in the Atlantic basin in recent years suggests to me that we’re still in a warm phase of sea surface temperatures — a more active hurricane period, in other words. So we certainly shouldn’t think that 2015 will necessarily be as quiet as the past few have been.”

Storm warning

Predictions of hurricanes are made on a range of timescales, and the skill involved in these varies dramatically. On short timescales (from days to as much as a week), forecasts of hurricane tracks are now routinely made with impressive results. For example, Hurricane Gonzalo was forecast to pass very close to Bermuda more than a week before it hit the island, giving its inhabitants a chance to prepare. Such advances in weather forecasting have been helped by vast increases in computing power and by “dynamical models” of the atmosphere.

These models work using a grid system that encompasses all or part of the globe, in which they work out climatic factors, such as sea surface temperature and atmospheric conditions, in each particular grid square. Using this information and a range of equations, they are then able to forecast the behavior of the atmosphere over coming days, including the direction and strength of tropical storms.

But even though computing power has improved massively in recent years, each of the grid squares in the dynamical models typically corresponds to an area of many square miles, so it’s impossible to take into account every cloud or thunderstorm in that grid that would contribute to a hurricane’s strength. This, combined with the fact that it is impossible to know the condition of the atmosphere everywhere, means there will always be an element of uncertainty in the forecast. And while these models can do very well at predicting a hurricane’s track, they currently struggle to do as good a job with storm intensity.

Pre-season forecasts

Recent years have seen the advent of forecasts aimed at predicting the general character of the coming hurricane season some months in advance. These seasonal forecasts have been attracting increasing media fanfare and go as far as forecasting the number of named storms, of powerful hurricanes and even of land-falling hurricanes.

Most are not based on complicated dynamical models (although these do exist) but tend to be based on statistical models that link historical data on hurricanes with atmospheric variables, such as El Niño. But as Richard Dixon, Hiscox’s group head of catastrophe research, says:  “There is a range of factors that can affect the coming hurricane season, and these statistical schemes only account for some of them. As a result, they don’t tend to be very skillful, although they are often able to do better than simply basing your prediction on the historical average.”

It would be great if the information contained in seasonal forecasts could be used to help inform catastrophe risk underwriting, but as Mike Palmer, head of analytics and research for Hiscox Re, explains, this is a difficult proposition. “Let’s say, for example, that a seasonal forecast predicts an inactive hurricane season, with only one named storm compared with an average of five. It would be tempting to write more insurance and reinsurance on the basis of that forecast. However, even if it turns out to be true, if the single storm that occurs is a Category 5 hurricane that hits Miami, the downside would be huge.”

Catastrophe models

That’s not to say that there is no useful information about hurricane frequency that underwriters can use to inform their underwriting. Catastrophe models provide the framework to allow them to do just that. These models have become the dominant tools by which insurers try to predict the likely frequency and severity of natural disasters. “A cat model won’t tell you what will happen precisely in the coming year, but it will let you know what the range of possible outcomes may be,” Dixon says.

The danger comes if you blindly follow the numbers, Palmer says. That’s because although the models will provide a number for the estimated cost, for example, of the Category 5 hurricane hitting Miami, that figure masks an enormous number of assumptions, such as the expected damage to a wooden house as opposed to a brick apartment building.

These variables can cause actual losses to differ significantly from the model estimates. As a result, many reinsurers are increasingly using cat models as a starting point to working out their own risk, rather than using an off-the-shelf version to provide the final answer.

Lessons Learned From Hurricane Sandy

Hurricane Sandy is said to have been the most damaging hurricane recorded in U. S. history. There appears, however, to be some dispute as to whether Hurricane Katrina holds that dubious honor. The loss estimates and concerns are changing daily. The cost of the storm, estimated by private firms including PricewaterhouseCoopers and the PFM group, points to the fact that Hurricane Sandy destroyed or damaged more units of housing, affected more businesses and caused more customers to lose power. Here is the breakdown provided on November 26, 2012: http://www.governor.ny.gov/press/11262012-damageassessment.

  Sandy in New York ALONE Katrina & Rita in Louisiana
Housing units damaged or destroyed 305,000 214,700
Power Outages (peak) 2,190,000 800,000
Businesses Impacted 265,300 18,700
  • Number of deaths is more than 110 from Hurricane Sandy http://articles.latimes.com/2012/nov/03/nation/la-na-nn-hurricane-sandy-deaths-climb-20121103
  • The official death toll from Katrina was 1,723. http://robertlindsay.wordpress.com/2009/05/30/final-katrina-death-toll-at-4081/
  • 7.5 million power outages throughout Hurricane Sandy's two day assault on land
  • Moody's Analytics estimates the loss in the vicinity of the storm to be $50 billion, of which $30 billion will be directly from damage to property and the remaining $20 billion from economic activity, not all of which is going to come from an insurance policy.
  • 60% of the losses in economic activity, or about $12 billion, will come from the New York City metropolitan area.
  • Because of the storm's intensity and the breadth and scope of the damage, President Obama declared New York and New Jersey federal disaster zones without waiting for any damage estimates.
  • As of 12/3/2012, the Federal government has already issued $180 million in federal contracts related to Sandy.
  • The President has declared several areas as disaster areas, which means that federal funds will now be available to storm victims. (This is not limited to those without flood insurance.) This federal disaster assistance usually takes the form of low-interest loans to help home and business owners rebuild, which you can learn more about on the Disaster Loan page.

The statistics are staggering as are the losses (both covered and not covered) that are emerging from the storm. We will attempt to discuss some of the unique and troublesome issues that are arising from the storm.

Article Discussion Points:

  • Definition of “Storm” and its impact on insurance
  • Flood or NOT Flood?-that is the question (or the hope)
  • Personal Auto salvage concerns
  • The Lawyers are out to get you

Definition Of “Storm” And Its Impact On Insurance

A storm reaches tropical storm status by reaching sustained winds of 39 miles per hour. The National Hurricane Center creates annual lists of names from the database of names maintained and updated by the World Meteorological Organization. If a storm causes significant damage and /or loss of life, the name is retired from the list permanently. Thus, there will be no Katrina II or Sandy II.

1. What Does The Definition Of “Storm” Have To Do With Insurance? There May NOT Be Coverage On The DIC.
Thousands of businesses were affected by Sandy. Many times those larger clients have flood and wind coverage, but written on a large property or DIC (Difference in Conditions) policy.

In those policies there may be restrictions, sub-limits or different deductibles that apply to “Named Storms.” Those policies will define what that is, and should include flood, wind, wind gusts, storm surges, tornadoes, cyclones, hail or rain into this category once the storm has been declared by the National Weather Service to be a hurricane, typhoon, tropical cycle, tropical storm or tropical depression, thus bringing into focus the entire life cycle that a storm may go through.

We have found a number of articles written by law firms that are already taking on the issue of “named storm,” claiming that even though the National Weather Service had named the storm, it was not at hurricane strength when it reached landfall. A comprehensive definition of “named storms” would be helpful to clarify coverage. The fact that the meteorologists are discussing the attributes of this storm to be more like a winter storm rather than a tropical storm may end up on the chopping block of justice in a civil court or two and test the insurance policy coverages.

2. What Is Unique About Hurricane Sandy?

  • Sandy has defied normal storm behavior by moving east to west; it acted both like a hurricane and a cyclone simultaneously.
  • The result of this last odd wind pattern was the root cause of the flood tides and the inundation of the New York subway system.
  • The storm qualified as a hurricane at the time of landfall and its wave “destruction potential” reached a 5.8 on the National Oceanic and Atmospheric Administration's 0 to 6 scale.

3. One Storm or Two Storms:
Bad memories of the World Trade Center came immediately to mind when I read about this potential concern relating to Hurricane Sandy in the Daily Report. You might remember there was a significant concern that a second storm, following the initial impact of Sandy, was going to hit which would have further devastated the area.

Richard Mackowsky, a member of the Cozen O'Connor's global insurance group, said “new damage from a second storm could result in a separate occurrence, potentially requiring a separate set of deductibles.”

“If there is damage caused by a second storm but related to the first storm, issues arise as to whether there were one or two occurrences. A second storm could impact causation as to what is really driving the loss. If the only reason the second storm caused damage was because of damage from Sandy, the question then becomes whether that is a covered cause of loss,” Mackowsky said. “A second storm could trigger a separate limit of liability if it's a big enough situation,” he said.

But even one storm can create causation questions. Was the damage from wind or flooding? Not a simple question to answer, litigation stemming from previous storms has shown.

Excerpted from the Daily Report

Saved by the bell on this one — the second storm never hit, but the insurance pundits were armed and ready.

Flood … Not Flood? — That Is The Question

This appears, at first glance, to be Insurance 101 — most of this damage was either directly or indirectly caused by the condition of flooding. That is sure what it looked like to me and that is not a very popular observation. Why? Because most people did not have flood insurance and if they did, the flood insurance policy has limited amounts of insurance and significant restrictions such as no business income coverage.

1. Dilemma Of The Federal Flood Insurance Program — It's A Problem:
Even if it is covered on the flood insurance policy, there is real concern about the overall program. See this article from Reuters for more information.

2. Flood Or Not Flood
Whether talking about homeowner's insurance (including renters and condominium owners) or commercial property insurance, those forms most often include an exclusion for flood. So, here is where it gets a little tricky:

  1. Did the property owner sustain damage from storm surge?
  2. Was the loss due to rising flood waters?
  3. Was the loss due to too much rain that entered into the building because the wind removed the roof, blew out the windows or knocked a part of the building down?

“It is an ongoing saga,” says insurance lawyer Frank Darras, who has worked extensively on litigation scenarios following Katrina. “If you are a homeowner, you are going to argue that you have damage caused by wind and wind-driven rain. If you are the carrier, you are going to say the damage was caused by flood, tidal surge or a hurricane, which requires hurricane coverage.”

Excerpted from The Street

In a unique twist, New York has a specific website that contains a regularly updated scorecard on insurance company performance. Here's the link. For example, State Farm has had 48,109 claims; 6,363 closed with payment; 5,229 closed without payment.

3. Problems With The Flood Insurance Solution
FEMA says that less than 15% of homeowners nationally carry flood coverage. Federally backed lenders have been lax in enforcing the obligation to purchase flood insurance (that may change due to higher penalties being imposed upon the banks as of July, 2012).

The National Flood Insurance Program anticipates claims between $6 and $12 billion but has borrowing power at $2.9 billion. Reauthorization from Congress would be required, and Homeland Security is expected to request appropriation soon. Those current and new policyholders of National Flood Insurance Program coverage will be getting a scheduled rate increase that predates Sandy.

Even if the person or business purchased flood coverage, there are still problems and concerns.

  1. The limits of insurance available through the National Flood Insurance Program are small.
  2. Replacement cost coverage applies only to a dwelling and not to commercial structures.
  3. There may be wind damage to the building that the flood insurer will not pay but is covered in the homeowner's policy.
  4. The insured will get to pay two deductibles for those two separate policies.
  5. What kind of coverage is there if the first layer of property coverage is the NFIP coverage and the insured purchases excess layers of flood coverage above that policy?

    1. Will it drop down to pick up the replacement cost difference? No.
    2. Will it drop down to pick up business income, extra expense coverage? It should. Check the policy language.

4. The Future Of Flood Insurance
The future of the entire program is bleak enough. Add to that the impact of Hurricane Sandy on the future purchase of flood insurance. Homeowners in storm-damaged coastal areas who had flood insurance, and many more who did not, still now may be required to carry flood insurance and will face premium increases for flood from an estimated 20 to 25 percent per year beginning January. This is due in part to legislation enacted in July to shore up the debt ridden National Flood Insurance Program and is exacerbated by Hurricane Sandy.

“Because private insurers rarely provide flood insurance, the program has been run by the federal government, which kept rates artificially low under pressure from the real estate industry and other groups. Flood insurance in higher-risk areas typically costs $1,100 to $3,000 a year, for coverage capped at $250,000; the contents of a home could be insured up to $100,000 for an additional $500 or so a year,” said Steve Harty, president of National Flood Services, a large claims-processing company.

Excerpted from The New York Times)

Lenders, in addition, will be affected by Hurricane Sandy if they fail to enforce the requirement for their lenders to carry flood insurance. They will face even higher penalties then they have in the past.

5. Ordinance Or Law

  1. Many of those properties damaged by Hurricane Sandy had been built a number of years ago. So here are the questions:

    1. Does the Homeowner's Policy, Commercial Property Policy or Difference in Conditions include contingent ordinance or law coverage, demolition coverage and increased cost of construction coverage?
    2. What about the loss of use for the homeowner as well as the business interruption coverage?
  2. The National Flood Insurance Program policy is out as there is no coverage for the indirect loss.
  3. Many Difference in Conditions policies do not include ordinance or law automatically and many more do not include ordinance or law — increased period of restoration to cover the additional down time due to code or law enforcement.

6. Power Loss
Earlier we quoted the statistic of there being approximately 7.5 million power outages throughout Hurricane Sandy's two day assault on land. Many of these outages lasted days and weeks. There are several issues relating to insurance in terms of the power outages:

  1. Requirement Of An Off Premises Endorsement: In order for businesses to have coverage for either direct or indirect losses relating to power outage, the insurance would first have “off premises” or “utility coverage” on the policy. Typically, losses stemming from off premises situations are excluded on property insurance policies.
  2. Causation Of The Power Outage: If there was coverage on the property policies for the off premise loss, the situation that occurred off premises would have to be covered. For example, if the off premises loss were caused by a windstorm, that cause of loss is typically covered on a Commercial Property Policy or personal form. If the loss were caused by flooding, then that cause of loss is excluded and the off premises endorsement would not apply.
  3. Off Premises Deductible: Off premises coverage oftentimes has a “time” deductible or waiting period of 72 hours unless endorsed. This waiting period would have eliminated coverage for many of the properties that had their power back in three days or less.
  4. Direct vs. Indirect Loss: An Off Premises Endorsement would have to cover both direct damage and indirect to pick up a loss for Business Income.
  5. Other Perils such as Equipment Breakdown (EB): The cause of off premises loss may be due to a power surge that results from the storming. If the Equipment Breakdown policy has off premises coverage and business income coverage, then recovery can be sought under that policy.
  6. Some Off Premises Policies Have Distance Limitations: It must be ascertained if there is any distance indication on the policy to which the off premises is being attached. For example, some policies have a 500-foot distance radius which means the source of the off premises loss must be within 500 feet of the insured's premise.
  7. Spoilage: It may be that the loss the insured sustained while the power was out was spoilage, such as loss to refrigerated items and the business income that stems from that loss. This could be covered on either an Equipment Breakdown Form depending on whether there was a “breakdown” or on a Commercial Property Spoilage Form. Some Homeowners have limited coverage built in for refrigeration loss but not for the peril of flood.

7. Business Income
Now we are talking about one of the bigger claims that will result from Hurricane Sandy and much of it will not be covered. Here are some of the pressure points of this coverage:

  1. Cause of Loss — back to that one. Flood is excluded on the Commercial Property form so there will be no response for business income.
  2. The Flood insurance policy does not cover business income.
  3. If the cause of loss is determined to be “windstorm” and the insured has Business Income insurance, then the policy should respond from the causation point of view assuming they had direct damage.
  4. The insured will have to prove that their income loss is directly attributable to Hurricane Sandy.
  5. The policy has a waiting period for coverage typically 72 hours unless endorsed.
  6. The policy would have to be endorsed with Off Premise coverage for the Business Income stemming from loss of power to apply.
  7. There is no building ordinance for the business income — it would have to be endorsed.
  8. Civil Authority: Many of the businesses did not sustain direct damage but were closed by civil authority.

    1. There is limited coverage on the Business Insurance form
    2. There may be distance limitations
  9. Ingress/Egress: A bigger problem is the ingress/egress issue which basically means “because of the condition, itself, access to an area is affected or unavailable.” For example, if a road is flooded out so that there is no access to a grocery store, the grocery store will be able to demonstrate they are losing customers. However, if the store was not directly affected by the physical loss, there will be no trigger on their business income form. Civil Authority did not close down the area — it was closed due to natural events in this case.

Traditional Business Income Policies require that there be direct damage to the premises by a peril insured against for there to be any business income insurance response. However, there is talk, in the aftermath of Hurricane Sandy, of what is referred to as Non-Damage Business Interruption or Non Physical Business Interruption Insurance. It is referred to as NDBI. While articles are referring to these coverages, as if they are readily available, I believe they are truly exceptional in availability and accessibility. Sometimes these forms are part of a “supply line coverage” for very large businesses that often have an international component. There is also the TDI or CDI coverage — Trade Disruption which could come into play — however, that coverage has a very limited market. Bottom line, the average business that sustained damage as a result of Hurricane Sandy had neither one of these types of coverage. Liberty International apparently has a program.

8. Automobile Losses From Hurricane Sandy
Autos are the easiest part of this equation: whether wind, flood or a combination, all are covered under the “Other Than Collision” coverage. The salvaging of these autos is where it gets interesting. Canadian officials are now bewailing the fact that thousands of autos — some estimates are as high as 250,000 — are likely making their way to Canada. Those storm-damaged vehicle are classified in Canada as “non-repairable” and are illegal to sell. But, in the aftermath of Katrina, Canadian citizens were buying these vehicles in the thousands, and they expect the same thing to happen again. What I wonder is, who is selling those vehicles? The original owner? The salvage company the insurer uses?

The Lawyers Are Out To Get You

Errors And Omissions Litigation
Well, as if all the foregoing isn't depressing enough, we cannot end this article without a little nudge to the insurance agent and broker.

If you are relying upon “conversations” with your client along the lines of “Do you want flood insurance? No. OK, then,” you are going to be sadly mistaken that your client is not going to enjoin you in litigation over your standard of care. Your client is going to claim an increased standard of care, yes including New York residents, and that you had a duty to advise and quote coverage for them or at the very least, tell them in writing of the limitations of coverage in the policies they purchased and that they relied upon you for your expertise. Many agents simply renew, year after year, their direct bill homeowner's and small business clients without any documentation of coverage offers. Even those handling larger accounts somehow rely upon the client's memory and good will not to sue you. So, again, for the millionth time already, please, please document your file, in writing, to the insured, with a rejection signature every year or, for larger accounts, an authorization to bind affirmation from the insured.

As we were all glued to the TV, watching reporters being blown around reporting the devastation, my insurance brain immediately went to “flood exclusions.” I saw the wind ravaging the houses, the uprooted trees blocking the roads, but also saw the rising waters in the streets, along the shores, in the housing areas.

The question will come down to that simple reality — was the damage due to flooding or not? The attorneys are out in force, fighting for first page on the Google search engine so you get to them first. It reminds me of an old Gun Smoke movie — ready, aim, fire. Barrels are being loaded against the insurance companies.

There is no easy way to end this article, although I am sure all of you who reached the very end are hopeful that I will. The storm was one of the biggest ever, and the insurance story will not end soon. There is so much more we could say but best end this with a heads up to watch and see how these claims unravel; and, for those of you who did not insure any of these damaged properties, I say a toast of champagne is in order.