Cat models scrutinized as storm losses rise

A series of costly severe convective storms in the first five months of this year — on the back of record insured losses for such storms in the U.S. in 2023 — is prompting questions about whether catastrophe models are accurately estimating the peril. 

Most severe convective storm damage affects residential properties, but recent hail and tornado events have drawn attention to commercial properties and to aggregation exposures, experts say.

A tornado damaged a FedEx facility in Portage, Michigan, last month, and Dollar Tree Inc. disclosed that a tornado outbreak on April 27 caused significant damage to a 1 million-square-foot distribution center in Marietta, Oklahoma. Dollar Tree said it expected most of the damage to be covered by its property and inventory insurance. A tornado in Nebraska in April narrowly missed the Fort Calhoun nuclear power plant south of Blair.

Severe convective storms are generally understood to include a range of hazards, including large hail, tornadoes and derechos or straight-line winds.

Michael LaRocca, New York-based head property & specialty North America for Swiss Re Corporate Solutions, part of Swiss Re Ltd., said the reinsurer deploys a sophisticated severe convective storm model but that it has been challenged.

Globally, insured losses from severe convective storms in 2023 totaled a record $64 billion with 85% of the losses in the U.S., according to Swiss Re. Rising exposures due to economic and population growth and urbanization are driving the losses higher, and inflation has also been a prominent factor.

“That figure is tremendous. We’re now looking at the model and saying, ‘Is it accurate?’” Mr. LaRocca said, adding Swiss Re is reviewing the model to see what changes may be needed.

European countries, including France and Italy, were also hit by severe convective storms last year, he said. 

Some models may not capture all the damage caused by severe convective storm systems, said Karen Clark, founder and CEO of Boston-based catastrophe modeler Karen Clark & Co.

“Severe weather happens over wide areas every day and you still get damage even if you don’t have a tornado or even if you don’t have large hail,” she said.

KCC’s severe convective storm reference model incorporates 30 gigabytes of data daily and captures the damage outside of areas where tornadoes are reported, Ms. Clark said.

“You can have 40-mile-, 50-mile-an-hour winds. Trees fall over. Our models … account for all the loss,” she said. 

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There’s a lot of variability in severe thunderstorm losses from year to year, said Sarah Bobby, Boston-based principal engineer and senior manager at Verisk Inc. “Whenever we build our models, we do take into account the current view of risk,” incorporating the latest climate data and state of severity, she said. Verisk’s severe thunderstorm model was updated in 2022.

Two years of higher-than-average activity does not necessarily equal a “new normal,” said Suz Tolwinski-Ward, Boston-based assistant vice president and director of climate change research at Verisk. The industry ran into similar issues after the 2004 and 2005 hurricane seasons when there was record destructive landfall activity and extremely high losses, she said. 

“The next 10 years there was a so-called landfall drought. Humans are wired to have this bias” where their most recent experience is what they expect, Ms. Tolwinski-Ward said. “The purpose of catastrophe risk models is precisely to overcome this bias in decision-making,” she said.

Aggregation concerns

Severe convective storms are highly unpredictable making them difficult to prepare for, said Penni Chambers,
Dallas-based vice president of risk management at real estate developer Hillwood, a Perot company, and a Risk & Insurance Management Society Inc. board director. “We don’t know if it’s going to be an EF-1 or an EF-5,” she said.

Insurers are starting to look closely at aggregation exposures in certain regions, Ms. Chambers said. As a Texas-based company, Hillwood is susceptible to aggregation issues, she said. 

“When you have hundreds of millions, if not billions of dollars of total insured value within, say, 10 miles, this is going to create aggregation issues for insurers. So, we have a little difficulty walking our insurers through that,” she said.

At Hillwood’s May 1 property renewal, insurers had questions about whether it planned more building in the area and, if so, whether it would be an industrial, multifamily or hospitality build, Ms. Chambers said.

“Those are questions that we get from time to time in a renewal situation, but we got more of that this year around the significance of wind, hail and convective storm,” she said.

The impact area of severe convective storms has expanded, and a single storm can cut a wide swath over multiple states, said Jeff Buyze, Fort Lauderdale, Florida-based vice president, national property practice leader, at USI Insurance Services LLC.

“We have clients that are having a difficult time estimating their own exposure when they might be in a valley and have locations 10 miles apart and they’re wondering if they’re going to be impacted by the same storm,” Mr. Buyze said.

“Even straight-line winds coming through, like a derecho, can cause a massive industry event,” he added.

In the past, severe convective storm losses in the aggregate didn’t approach those of a major hurricane or earthquake, but now they are “on par with a Hurricane Ian-level single event,” said Jon Schneyer, Boston-based director of catastrophe response at CoreLogic Inc.

If there’s a $50 billion single loss event in addition to an aggregate $50 billion severe convective storm loss, that would hit insurers’ underwriting profitability, he said.

Exposure growth

Exposure growth, rather than climate change, is driving the annual increase in insured severe convective storm losses, experts say. Annual insured losses related to the storms in the U.S. have increased by about 8% a year since 2008, according to Swiss Re. 

The effects of climate change on the peril are not clear, Ms. Tolwinski-Ward said. “For flood, we know that a warmer atmosphere holds more water, and so floods are likely to increase. … For severe thunderstorm, there’s not quite such a clear science yet,” she said. 

Even though the residential line of business is the primary driver of severe convective storm losses, there are growing concerns about commercial exposures.

“When you have these big storm systems go across large parts of Nebraska, Oklahoma, and there’s hail and wind, it’s going to hit a lot more homes and more commercial properties, like big distribution centers,” Mr. Schneyer said. 

Distribution facilities are getting much larger, with massive roof areas, Mr. Buyze said. “They’re building a million square feet and up. That’s a really large footprint for a storm to hit, whether it’s hail or tornado. You’re just increasing the chances for the loss to go up in those areas,” he said.

Another factor that may be driving higher losses is that there is no standard meteorological definition of a severe convective storm event, and the industry’s definition of a catastrophe is arbitrary, Ms. Clark said.

“Plenty of companies get significant losses, even if it’s not officially a ‘catastrophe,’” she said.

Verisk’s Property Claim Services unit designates an event a catastrophe for the industry when claims reach a threshold currently set at $25 million. 

Ted Gregory, director of operations for PCS at Verisk, said in an email that PCS is exploring potentially modifying the monetary threshold for its catastrophe event designation.

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