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PHILADELPHIA — Severe convective storm activity is on the rise in the United States, and the insurance industry and other stakeholders need to incentivize owners to invest in making their residential and commercial properties more resilient and discourage them from building in risky areas, according to experts.
In the first half of 2017, the United States experienced several severe convective storm losses, Carl Hedde, head of risk accumulation for Munich Reinsurance America Inc. in Princeton, New Jersey, said during the National Association of Insurance Commissioners summer meeting in Philadelphia on Sunday. Of 49 weather events as of July 5, 28 were severe thunderstorms that accounted for an estimated $13.5 billion in insured losses, according to Property Claim Services data cited by Mr. Hedde. Overall, 49 weather events resulted in $21 billion of in estimated economic losses, about $14.2 billion was insured.
Severe convective storms have “gotten a lot of attention in my organization,” he said. “We haven’t had a large number of tropical cyclones making landfall over the last 10 plus years, but severe convective storm damage — tornado, hail damage to insured properties — has caused a lot of issues within our industry. We at Munich Re do think there is a signal of climate change in severe convective storms losses in the United States over time. We’re seeing an increase of frequency pattern.”
Meteorological events such as tropical and convective storms are responsible for 44% of the 21,400 fatalities experienced in the 1980-2016 time period, the second-largest source of fatalities after the 49% attributed to climatological events such as drought and forest fires during the period. But these meteorological events were responsible for 83% of the $680 billion in insured losses during that time frame, according to Munich Re’s Geo Risks Research data.
“We’ve seen too many communities either lose their residential stock or lose their commercial stock and people have to move away,” Mr. Hedde said. “Do they come back? In some cases yes, and in some cases it’s no. We have a community resilience issue.”
In addition to education, “we have to support stronger building codes, stronger building practices, better incentives,” he said. “Naturally, we will see some insurance savings related to insurance deductibles, insurance premiums.”
The Tampa, Florida-based nonprofit Insurance Institute for Business and Home Safety, which Munich Re supports, is conducting research on how to make homes and businesses more resilient to these types of events, he said.
“Ultimately, it’s going to change the way the house is built,” he said. “It’s nice to see we have ways to make the house stronger, but people are not making the decision to make the house stronger. How do we change behavior? Incentives. Education. One of the things I feel strongly about is a true risk-adequate price signal would be very helpful in that decision-making process. If we continue to incent bad behavior by subsidizing due to affordability issues some of these risk pricing decisions, people have no incentive to make the investment.”
Hurricanes Katrina, Ike and Andrew and Superstorm Sandy have been responsible for the biggest insured losses in the United States, with the Northridge earthquake of 1994 in Southern California rounding out the top five.
“We’ve been lucky that we haven’t had one of those severe events making landfall in the U.S. in a number of years,” he said. “One of the things that concerns me is … we have teams of executives running companies that haven’t experienced a large loss. How do they respond?”
Land use and zoning decisions are the first step toward resilience, Mr. Hedde said.
“If you site buildings in the right place, it solves some of our problems right up front,” he said.
Dave Jones, California’s insurance commissioner and vice chair of the NAIC’s climate change committee, pointed a finger at his own state for allowing new building in risky locations.
“We continue to make very irrational decisions at the local level, but then externalize the costs of risks associated with putting homes in flood plains,” he said. “We make those decisions at local and city county level without much if any attention of the costs associated with any losses when the fire comes, let alone the costs associated with the state having to try to fight the fires, or deal with the floods.”
Mr. Jones urged the IBHS to specifically study the issue of zoning decisions, a suggestion Mr. Hedde said he would bring to the organization.
“I would submit that (zoning decisions) may be at some level equal to or more important than fortification,” Mr. Jones said. “Price signals are incredibly important. But the problem is when you send the price signal with regard to the risk, you’re sending it to people that are already there. They’ve made the decision to purchase the home in this area where there is risk of climate-related loss, or they’ve made the decision to locate their business there, and now they’re trying to find insurance.”
Former Pennsylvania Insurance Commissioner Michael Consedine took over as CEO of the National Association of Insurance Commissioners in early 2017 and immediately turned his attention toward helping his former commissioner counterparts manage critical issues such as the uncertainty surrounding President Barack Obama’s signature health care law. He is also overseeing the organization as it moves toward adoption on a cyber security model law and engages with federal officials on issues such as reauthorization of the National Flood Insurance Program and the covered agreement between the United States and the European Union. He discussed those issues with Business Insurance Deputy Editor Gloria Gonzalez on the sidelines of the NAIC’s summer meeting in Philadelphia on Saturday.