Winter storm, 6-02-04 external with legal comment

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Issue No. 3 May 2004 2004 United States Winter Storm The winter of 2003/2004 saw significant snowfall and low temperatures. Many companies will experience above average claims and losses related to this winter weather. In this report, Guy Carpenter’s Property Practice provides a brief historical context describing the nature and impact of the peril of winter storms, offers insight into efforts underway to quantify losses from winter storms using cat models, and outlines risk transfer alternatives that insurers should consider to address the adverse financial consequences of severe winter weather. The Winter Storm Peril As defined by the insurance industry, a “winter storm” can involve extreme levels of temperature, precipitation and wind. The cold weather hazard from a winter storm can produce snow, ice, sleet, and extreme temperatures that result in: □ Collapse of structures from the weight of snow and ice □ Downed trees or large branches □ Water damage from freezing pipes that burst □ a ice dams in gutters as snow melts and refreezes □ Power outages □ Flooding □ Auto accidents A Brief History According to ISO’s Property Claims Service (PCS) estimates, since 1980 there have been seven years in the United States in which property losses from winter storms has exceeded $1 billion. (This amounts to once almost every three years.) This past winter was significant in several regions of the country, as is noted in the ...

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• Publié par: Thoov
• Nombre de lectures: 60
• Langue: English

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Issue No. 3

May 2004 2004 United States Winter Storm The winter of 2003/2004 saw significantsnowfall and low temperatures. Many companies will experience above average claims and losses related to this winter weather.In this report, Guy Carpenter’s Property Practice provides a brief historical context describing the nature and impact of the peril of winter storms, offers insight into efforts underway to quantify losses from winter storms using cat models, and outlines risk transfer alternatives that insurers should consider to address the adverse financial consequences of severe winter weather. The Winter Storm Peril As defined by the insurance industry, a “winter storm” can involve extreme levels of temperature, precipitation and wind.The cold weather hazard from a winter storm can produce snow, ice, sleet, and extreme temperatures that result in: □ Collapse of structures from the weight of snow and ice □ Downed trees or large branches □ Water damage from freezing pipes that burst □ Water damage from ice dams in gutters as snow melts and refreezes □ Power outages □ Flooding □ Auto accidents A Brief History According to ISO’s Property Claims Service (PCS) estimates, since 1980 there have been seven years in the United States in which property losses from winter storms has exceeded $1 billion. (This amounts to once almost every three years.) This past winter was significant in several regions of the country, as is noted in the graphic on the following page. In early January, the Pacific Northwest had heavier snow and ice than usual.By mid-January, extreme cold covered parts of the Northeast, bringing the January average temperature near 10 degrees below normal and snowfall as much as 200 percent above normal. Laterthat month, a severe ice storm affected parts of Georgia and the Carolinas.

While there are no reliable, predictive measures that explain what causes harsh winters, it is clear that companies must be prepared to confront the consequences of severe winter weather. Notall of the continental U.S. is subject to severe winter storms.The regions that are typically affected are in Mid-America and the East.Therefore, the peril of winter weather, from a catastrophe management perspective, is a regional phenomenon.The table below illustrates the PCS loss estimates for the past 22 years.You will note that there has been a dramatic increase in winter storm losses in the past decade compared to the prior 12 years.

Since1980,Winterstormshaveaccumulatedover$17BillioninLoss TM (OriginalDollars; PCS CatastrophescodedWinterstorm)

Note: PCS is a registered trademark of ISO Service Properties Inc.

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Understanding the peril Until recently, none of the commercially available catastrophe Snow models supported the simulation of hazards associated with winter Cold storms. Gutterice dams are a good illustration of the complexity associated with modeling winter storm perils.An ice dam occurs when snow accumulates on a roof.The snow starts to melt from the Water/Ice Dam Heat heat of the house, but as the water runs off the roof, it freezes. Eventually the ice accumulates and traps the water between the snow ICE and the roof, causing an ice dam.Once water backs up and gets Cold under the roof shingles, it can penetrate the roof sheathing and cause water leaks and damage inside the house. Ice dam claims are not timed to an “event,” but rather tend to build up over successive snowstorms, with the claim coming days or weeks later, when temperatures rise. Demand for modeling winter storm is growing.Many Northeast writers and smaller regional firms are concerned with the capital erosion caused by the harsh winters they have recently experienced. Whilethe impact of winter storms is not comparable to the devastating effects and magnitude of aggregate losses resulting from a major hurricane, its effects are similar to moderate weather events such as tornadoes or hail which have also recently had a negative impact on many companies’ balance sheets and reinsurance program costs. Therefore, an increasing number of insurers and reinsurers want to quantify this peril, which was previously considered one of the “non-modeled perils” for which reinsurers implicitly add a surcharge in their pricing. Modeling Winter Storm APOTH™ – Winter storm Guy Carpenter is currently researching the development of reliable and actuarially sound vulnerability functions for the winter storm perils of snow, ice, wind, and extreme low temperatures. Thisresearch involves relating the claims experience of specific risk types to the date, location, and severity of specific weather parameters during winter storm events. The model uses weather data from 1961 through 2002 to define and run winter storm events, focusing initially on personal lines.Past experience working with company claims data has shown a broad spectrum of possible formats and levels of detail—from only aggregate losses for certain large events, all the way down to daily individual policy claims. Althoughdetailed claims data are most useful, almost any level of real claims data can provide helpful information for model development and validation. As suitable exposure and loss data from other lines of business become available (e.g., commercial, auto, etc.), it will be possible to extend the model functionality to these other lines.The Instrat® group is currently validating the initial version of the model.

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Other Models There have been new offerings by certain modeling firms to fill the void in modeling winter storms. Inthe past few months both EQECAT and AIR have announced the development of winter storm models, but each has a limitation as to what components of the peril are included. For example, it appears that the EQECAT model does not include temperature as a variable.The models are expected to be commercially available for use for the 2004/2005 winter. Guy Carpenter will evaluate the models as they become available.The decision to license the models will be based on value, client demand and cost.Please contact your Instrat® regional manager with any questions or for additional information on these models. Reinsurance Coverage and Solutions Hour clauses Under the standard definition of loss occurrence, clause cover for winter storm losses are subject to a 168-hour limitation.Due to the nature of the peril and specifically the ice dam hazard, it can be problematic for companies to determine their losses from winter storms. Losses such as roof collapse, power outages, and damage from fallen trees and limbs are fairly straightforward.However water damage from burst pipes can go undetected when a home is unoccupied even for a short period, and flooding and ice damming incidents can occur weeks after heavy snowfall or severely cold temperatures. While we are careful not to prejudice the manner our clients present claims, we believe some general comments in this area might be of interest. PCS determines and assigns a catastrophe number to an event when there are more than 1,000 claims or losses greater than $25 million.PCS defines an event as one atmospheric system with no maximum length of time.For example, 2004 Catastrophe #13 was defined as a winter storm in 10 states from January 9 to January 12, 2004.Catastrophe #14 was defined as a winter storm in 9 out of the same ten states in #13 from January 14 to January 17, 2004.As mentioned above, with unnoticed burst pipes and ice dams, it will be difficult to determine the catastrophe number to which the losses are attributed.More importantly, since the standard hours clause does not contain any reference to PCS in defining losses, insurers have the option to pick a claim period that overlaps two PCS defined events to constitute its 168 hours for the purposes of making a reinsurance claim recovery. We must also be mindful of the fact that there is the possibility that large numbers of winter storm claims can occur throughout the winter and not be considered a catastrophe event as defined by PCS, while still adding up to substantial losses.Unless a company’s claim department monitors and separately codes these losses, they tend to get defined as non-catastrophes. Presentinga reinsurance claim based on the aggregation of winter storm claims over a long reporting period, such as 30 to 60 days, and assigning them to a single 168-hour period would clearly be a contentious matter with reinsurers.

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Winter Storm Covers Looking at the historical record, several insurers’ catastrophe loss budgets have been significantly impacted by severe winter storms. Generally, most companies include this peril and potential losses into their overall rating plan, due to the fact that their historical claim experience includes these losses.However, a severe winter can have a major impact on individual companies and thus will impact per risk treaty programs and lower cat layers. GuyCarpenter’s property brokers should be well versed on the essential features of the winter storm peril and have informed discussions with underwriting division heads, reinsurance managers and senior management to ensure that any potential winter storm claims covered under existing reinsurance programs are billed and recovered. It is important to note that reinsurers are anxious to work with us to customize solutions that address winter storm losses during the season as well as the potential aggregation of losses during a calendar year from winter storm and other catastrophes.The scenario of greatest concern to clients and prospects is the combination of losses from severe winter storm losses that affect first quarter profits and erode the cat budget in combination with another major cat loss that would materially expose their surplus. For clients looking to avoid the capital drain of another bad winter, one solution we could suggest is a specific winter weather aggregate cover.This would be a traditional st aggregate cover that would cover losses over a specified period (e.g. December 1to st March 31) for PCS events.The retention and limit would be a function of past losses and would be driven by how much of their cat budget they want to protect.Under most circumstances, this cover would inureto the benefit of the company, unless a quantifiable pricing benefit could be obtained from reinsurers. Double-Trigger Covers For larger carriers that have the premium volume or spread of business, and therefore choose to absorb losses from a bad winter, there may be a concern about the combination of significant net retained losses from a severe winter and a major hurricane or earthquake loss in the same year. The main cat cover would respond to the major cat loss, and there may not be serious consequences to adding a full retention loss. They may want to hedge this risk by purchasing a cover that only responds to the occurrence of both events in the same year. The pricing of the cover would benefit from the dual (trigger) probability and to enhance the utility of this cover any reinstatement premium paid on the main cat program could also be included. Index Covers In addition, there are non-traditional risk transfer products such as index-based weather covers. Index covers are based on the strong correlation between a company’s exposure and the event.Payout is agreed to and triggered only by the weather index, assuming the index is a good proxy for the company’s exposure.While this approach has its advantages, such as pricing based solely on the meteorological event, there are drawbacks. For example, few reinsurers offer this product and there are technological issues with the accuracy of weather stations and the basis ofnon-correlation risk.

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Depending on your client’s needs, there may be other risk management options to consider. We ask that as you investigate options in the market that you inform us of your activities and the market reaction so that others in the firm can benefit from your experiences. Conclusion Guy Carpenter produces a variety of report covering major topics of interest.These reports offer professional insights and perspective on property reinsurance.The objective of this report is to provide a framework to encourage an informed discussion that will lead to pursuit of appropriate measures to address the financial consequences of severe winter weather in the future. If you have any questions or require additional information regarding the concepts detailed in this report, please contact your Guy Carpenter broker of any member of the Property Specialty team listed below. Angela A’Zary1.917.937.3002 DavidPriebe 1.203.229.8820 Tim Gardner011.44.207.357.2454 KevinStokes 1.917.973.3258 Bert Golinski1.441.297.9717 PaulLittle 1.973.285.7958 Paul Knutson1.415.984.2806 JanStoermann 011.49.89.2866.0334 Richard Morgan011.44.207.357.2346 JohnTedeschi 1.973.285.7982 Lara Mowery1.952.832.2104 JillianWilliams 011.44.207.357.2489 James Nash011.81.3.5353.0448 Guy Carpenter & Company, Inc. is the world's leading risk and reinsurance specialist and a part of the Marsh & McLennan Companies, Inc.Guy Carpenter creates and executes reinsurance and risk management solutions for clients worldwide through more than 2,400 professionals across the globe.The firm's full breadth of services includes 15 centers of excellence in Accident & Health, Agriculture, Captive and Program Managers, Environmental, General Casualty, Investment Banking*, Life & Annuity, Marine and Energy, Professional Liability, Property, Retrocessional, Structured Risk, Surety, Terror Risk, and Workers Compensation. In addition, Guy Carpenter's Instrat® unit utilizes industry-leading quantitative skills and modeling tools that optimize the reinsurance decision-making process and help make the firm's clients more successful. Guy Carpenter's website address is www.guycarp.com. * Securities are offered in the United States through MMC Securities Corp., Member NASD/SIPC. MMCSecurities Corp. is an affiliate of Guy Carpenter & Company, Inc. Guy Carpenter & Company, Inc. provides this report for general information only. The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy, and it should be understood to be general insurance/reinsurance information only. Guy Carpenter & Company, Inc. makes no representations or warranties, express or implied. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such. Please consult your insurance advisors with respect to individual coverage issues. Readers are cautioned not to place undue reliance on any forward-looking statements. Guy Carpenter & Company, Inc. undertakes no obligation to update or revise publicly any current

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or forward-looking statements, whether as a result of new information, research, future events or otherwise. This document or any portion of the information it contains may not be copied or reproduced in any form without the permission of Guy Carpenter & Company, Inc., except that clients of Guy Carpenter & Company, Inc. need not obtain such permission when using this report for their internal purposes. The trademarks and service marks contained herein are the property of their respective owners. Specialty Practice Briefing ©2004 Guy Carpenter & Company, Inc. All rights reserved.

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