Anticipating Hurricane Matthew, 4 States Declare Emergency

matthew-map
Rebounding to Category 4 hurricane classification, Matthew now has winds up to 140 miles per hour and has caused at least 28 deaths in three Caribbean countries. It is heading for the southeastern U.S., where four states—Florida, Georgia, South Carolina and North Carolina—have issued a state of emergency and evacuation orders in coastal regions.

Matthew was a Category 4 hurricane through Tuesday, was downgraded to a Category 3 early on Wednesday, and has now returned to Category 4 strength today, according to the U.S. National Hurricane Center (NHC).

Florida Gov. Rick Scott issued a warning on Thursday urging those in evacuation zones to leave immediately. “Based on the current forecast, the heights of storm surge will be above ground. Waves will be crashing on roofs. Homes will be destroyed,” he tweeted in both English and Spanish on Thursday morning.

“Time is up, Hurricane Matthew is approaching Florida. If you are in an evacuation zone, leave now,” he said in a statement. “To everyone on Florida’s east coast, if you are reluctant to evacuate, just think of all the people the hurricane has already killed.  You and your family could be among these numbers if you don’t take this seriously.”

Scott said that so far more than 4,000 National Guard members have been activated to help with evacuations and sheltering. He tweeted that as of 6:00 a.m., more than 3,000 people were in about 60 shelters. The state offers a mobile app to help those in flood-prone areas find the nearest shelter and also avoid traffic congestion.

A state of emergency has been declared by Georgia’s governor for 13 coastal counties. South Carolina’s governor declared a state of emergency and has begun coastal evacuations that may affect up to 1 million people. Because of heavy traffic, lane reversals on some highways are in effect, and schools and government offices in 25 South Carolina counties are closed today. North Carolina’s governor has declared a state of emergency for more than 50 counties and issued a mandatory evacuation order for Ocracoke Island, AIR Worldwide reported.

The Federal Emergency Management Agency (FEMA) has sent personnel and supplies to all four states, and President Obama is meeting with FEMA officials coordinating the response to Hurricane Matthew at the agency’s headquarters in Washington, D.C.

According to CoreLogic, a Category 3 storm hitting Miami could potentially damage 176,000 homes at a reconstruction cost value (RCV) of about $3.8 billion.

CoreLogic’s Storm Surge Risk Report estimates that more than 6.8 million homes located along the Gulf and Atlantic coasts are at risk of storm surge damage, with a total RCV of about $1.5 trillion.The length of coastline, coastal elevation and density of residential development all contribute to the risk of storm surge flooding.
core-logic-1

According to CoreLogic, the total number and total value of residential properties for the four states currently bracing for Hurricane Matthew are:

Total Number and Total Value of Residential Properties by State

Small Villages Hit Hardest by Italian Earthquake

A strong 6.2 magnitude earthquake that stuck Central Italy in the early morning hours of Aug. 24 has caused about 250 deaths and hundreds of injuries. The temblor stuck 10km (6.2 miles) southeast of Norcia and 100km (62.13 miles) northeast of Rome. Areas with the most damage are smaller, older towns consisting of unreinforced masonry buildings. One such town was Amatrice, which the town’s mayor has said “no longer exists.”

Dozens of aftershocks have since occurred in the area—the strongest a magnitude 5.5. Because it was a shallow quake, occurring about six miles below the surface, it was more destructive, the New York Times reported.
Italy map

Map: USGS.gov

The vicinity of Wednesday’s temblor has also experienced significant earthquakes in the past, including one with a magnitude of 6.3 near the town of L’Aquila in 2009. According to the Times. That quake killed at least 295 people, injured more than 1,000 and left 55,000 homeless. Bloomberg reported that only about 2% of the economic loss from the 2009 quake was insured.

Catastrophe modeling firm AIR Worldwide said that Italy’s nonlife insurance market is the eighth-largest in the world and the fifth largest in Europe, and its property insurance market is the second-largest nonlife market in the country after automobile. Earthquake coverage, however, is often not included in standard homeowners’ policies and is typically issued as an extension of fire policies. Earthquake coverage for industrial and commercial structures may be offered for an additional premium, which varies by region.

Fitch Ratings said on Aug. 26 that it expects to see limited impact on Italian insurers. According to Fitch:

We estimate insured losses of EUR100 million-EUR200 million, arising mainly from property lines. Our estimate reflects the low density of population and businesses and limited insurance coverage in the region. Claims of this magnitude would not have a material impact on Italian insurers’ underwriting results or credit profiles. Italian non-life insurers wrote EUR2.3 billion of gross written premiums of property insurance in 2015.

Italy has declared a state of emergency in the region hit by the earthquake and the government has pledged EUR50 million for first aid. The declaration of a state of emergency means that certain losses will be covered by a state fund for emergencies, limiting losses for insurers.

We expect the insured losses to be EUR40 million-EUR80 million for primary insurers and EUR60 million-EUR120 million for reinsurers. A similar event that struck a nearby area in 2009, where the insurance exposure was higher, caused insured losses of around EUR250 million.

Fort McMurray Wildfire Insured Losses Up to $6.9 Billion

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NASA Fort McMurray wildfire map

Insured loss estimates from the wildfire in Fort McMurray, Alberta, Canada, are projected between $3.4 billion and $6.9 billion, catastrophe modeling firm AIR Worldwide reported. Officials are still in the early stages of assessing damage caused by the wildfire that began on May 1 and quickly spread from forests to neighborhoods, outpacing local firefighters’ capacity to contain it. According to AIR, the Fort McMurray wildfire is the costliest natural disaster in Canada’s history.

The fire had initially moved away from Fort McMurray, but shifted back toward the city this week, causing evacuations for the second time. About 500 to 600 people were evacuated from four small work camps, Alberta Premier Rachel Notley said in a news conference on Monday.

The fire is still uncontained and, as of May 14, had covered nearly 600,000 acres, mainly in wildlands and away from population centers. Winds are now calmer and temperatures have lowered, with considerable cloud cover and a possible shower expected—all of which are expected to help firefighting efforts.

The fire’s new threat reversed earlier efforts to return local oil sands projects to full operation, the New York Times reported. The highway through Fort McMurray was reopened several days ago to allow workers to return to the work sites, but was closed again on Monday.

Premier Notley said that five things need to be in place before residents may reenter Fort McMurray:

  • Wildfire is no longer an imminent threat to the community
  • Critical infrastructure is repaired to provide basic services
  • Essential services, such as fire, EMS, police and health care are restored to a basic level
  • Hazardous areas are secure—100 truckloads of fencing are being sent to Fort McMurray
  • Local government is re-established

Firefighting crews are still trying to put out fires in the northern part of the city. Fort McMurray’s airport, water treatment plant, municipal building, hospital and all functioning schools were safeguarded, according to AIR. The airport continues to be used only for wildfire aircraft operations, however, and is closed to commercial and private aircraft until further notice. Current information suggests that a total of more than 2,400 structures have been lost—roughly 10% of the total number.

AIR said its loss estimates capture residential, commercial and automobile losses, as well as business interruption losses, except those related to the oil industry. AIR derived its loss estimates based on high-resolution Industry Exposure Database (IED) for Canada and damage ratios estimated from satellite imagery and experience from claims adjustments for historical U.S. wildfires. IED exposure values included in loss estimates have been trended to Jan. 1, 2016.

The wildfires in Canada illustrate a continuing trend of increasingly severe wildfires that caused a record 10.1 million acres to be burned in the United States in 2015, surpassing the previous high of 9.8 million acres in 2006, Mark Crawford reported in last month’s issue of Risk Management. It was the fourth year in the past decade in which more than nine million acres burned. According to the U.S. Forest Service, the 2015 wildfire season was the costliest on record, with more than $2 billion spent fighting fires.

A Race against the Clock to Address TRIA Issues

Failure by the Senate to reauthorize the Terrorism Risk Insurance Act (TRIA) has left unanswered questions for insurance buyers facing renewals on terrorism coverage—which some in the insurance industry are scrambling to answer.

Because TRIA renewal was recently passed by a majority in the House of Representatives, the industry was optimistic about its renewal before its expiration. But at this point, the Dec. 31 deadline looms large.

AIR-Worldwide explained in an email notice that commercial insurers will no longer be required to offer terrorism coverage beginning Jan. 1. Without a federal backstop, they said, insurers may seek to limit underwriting for high concentrations of risks in major cities. This could cause terrorism insurance coverage to become unavailable or unaffordable.

AIR continued:

Insurers that do continue to offer commercial terrorism insurance would likely be required to maintain higher capital standards in order to avoid negative rating implications. Where coverage for terrorism-related events is still available, prices for this coverage will increase.

In the absence of TRIA, the workers’ compensation insurance market would be particularly vulnerable to terror attack losses. State workers compensation statutes offer insurers less flexibility to control terrorism risk through modifications such as policy limits or coverage exclusions. With or without TRIA, it is mandatory for U.S. employers to provide workers’ compensation coverage. If coverage is not available, employers may be forced to purchase insurance in the residual markets or self-insure. This could result in large amounts of risk being transferred to the residual market in a few states.

Allowing TRIA to expire would have widespread implications, not only for the insurance industry, but also for the broader economy. Construction and real estate business sectors may be unable to obtain financing without adequate terrorism coverage in place. If insurers limit underwriting following an expiration of TRIA, businesses with high concentrations of employees could have difficulty obtaining coverage for workers’ compensation, including higher education institutions, hotels, airports, hospitals, and financial services, among many others.

In an advisory to its clients, Willis addressed considerations and offered preliminary guidance.

The broker noted several scenarios, depending on how a company has organized its terrorism risk transfer program:

• For terrorism coverage that is currently embedded in all-risk property, liability and workers compensation programs there are three potential scenarios:

1. If there are no sunset clauses–contract provisions which may allow the insurer to exclude coverage for terrorism in the event that TRIA is not reauthorized–or reservation of rights clauses related to TRIA expiration, the program will run until its natural expiration. Market disruption may impact renewal pricing if no action has been taken on TRIA.

2. If there is a TRIA-related sunset clause, the terrorism coverage will expire after Dec. 31. Policyholders should assess the need for insurance coverage and seek stand-alone coverage or a sunset clause extension.

3. If there is a reservation of rights which allows carriers to modify the terrorism coverage as a result of TRIA expiration, a coverage extension should be negotiated if possible, and stand-alone alternatives should be sought.

Stand-alone Terrorism coverage – In this case, Willis said it does not anticipate immediate changes due to TRIA’s expiration. This is because most stand-alone placements do not have sunset clauses or reservation of rights endorsements related to TRIA expiration. While there may be market disruption to consider at renewal, for the time being, TRIA is a non-issue for these placements.

Captives – In all cases where it places terrorism reinsurance behind a captive program, Willis said the reinsurance arrangement this year has been organized to convert from quota share reinsurance of the captive—when a primary insurer and reinsurer establish a fixed percentage for sharing amounts of insurance, premiums and losses—to primary reinsurance of the captive (in anticipation of TRIA’s expiration). Reinsurance coverage agreements should be read carefully to determine the new limit. The new primary limits are likely to approximate their existing quota share capacity. Willis recommends that any capacity that does convert should remain as reinsurance of the captive. This would maintain captive involvement, should TRIA be reauthorized in early 2015, and avoid any direct self-procurement or frictional costs during the transition. A program may also include excess capacity which, in many cases, should drop down to provide excess over revised captive limits, Willis advised.