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Texas Cold Crisis: Insurance Options for Severe Weather Disruption

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On February 15, a massive and unseasonal storm with frigid temperatures spiked the demand for power and outpaced the supply, severing power to 26 million Texans. Unpredictable weather patterns present risks for business owners, but also create an opportunity to improve their risk mitigation strategies to address future uncertainties. 

Power outages are not caused by storms alone. Heat waves, hurricanes and wildfires can also create power outages—and outages are more common than business leaders may think. S&C’s 2018 Commercial and Industrial Power Reliability Report found that one in four businesses experience at least one power outage per month. The Department of Energy estimates that these outages cost companies $150 million per year. Although companies may face spoilage-related losses, data centers often experience the most severe consequences. When a data center goes down, it can impact a business’s most vital proprietary assets. According to a Ponemon Institute study, the cost of an unplanned data center outage is $5,600 per minute with an average recovery time of 119 minutes resulting in a loss over $690,000.

The cost for businesses goes beyond damage. Litigation tends to run rampant, and with the recent Texas power outages, businesses are already facing lawsuits. The family of an 11-year-old boy who died of hypothermia is suing energy company Entergy and grid operator Electric Reliability Company of Texas. Multiple wrongful death lawsuits are predicted from incidents including carbon monoxide poisonings, house fires and shelter closings.

A range of insurance options can help businesses protect themselves from complex, evolving and completely unpredictable risks such as natural disasters and climate change.

Property insurance protects the building and physical assets like equipment, supplies, inventory, fixtures and computers. However, property insurance may not provide all the coverage needed. Exclusions like floods, sink holes, earthquakes, terror incidents, and chemical, nuclear, biological and environmental events are likely not covered. An unexpected policy exclusion can be devastating and result in a claim being denied, leaving business owners and leaders feeling helpless and infuriated.

Business interruption insurance is helpful but may not be enough. Typically, when damage obstructs business operations, it is covered by property insurance, and business interruption insurance covers losses from interruption. However, a natural disaster can create a perfect storm, so to speak. For example, if an establishment is forced to close due to lack of power, there can be a denial of claims. Business owners may be able to have property repaired, but cannot recoup the lost revenue through insurance.

Another option for businesses is to choose captive insurance and own their own insurance company. This establishes a more robust approach to risk management, and enables the business or business owner to own a profitable second business. This can help lower commercial insurance costs, build up assets and loss reserves, enhance critically needed cash flow and liquidity, and help prevent losses from hollowing out the total business entity. Importantly, successful captive insurance companies are filled with liquid assets that back the reserves for potential future losses, owned by the business or business owner. Liquid assets are often more desirable than durable assets that depreciate and may be difficult to sell. Finally, a captive insurance company is a regulated entity.

A captive primarily insures its parent company or related companies, so the parent company can purchase insurance from its wholly owned captive. Such purchases may replace all, or a portion, of its commercial insurance. Additionally, risks that are unable to be insured, are cost prohibitive, or are underinsured in the commercial insurance market can be placed in the captive insurance company. The captive can also insure gaps in third-party commercial insurance policies.

Benefits of Captives in Natural Disasters

While businesses with claims for property insurance or business interruption coverage are denied, a business with a captive insurance company would not face exclusions that leave them vulnerable. Since a captive insurance policy can be written to be broad and robust, it has more triggers than third-party commercial insurance, sos an event may covered where business interruption might not provide coverage.

Captive insurance also serves as a valuable financial strategy. When captives build up loss reserves, backed by corresponding assets, those assets are available for dealing with a catastrophic event. When a business has to restart or relocate their operations, assets are readily available to help it navigate the challenges and pursue big changes. The business owner can use the asset buildup in successfully managed captive insurance companies to help grow the business by funding acquisitions, growth strategies and enhanced risk mitigation strategies via a dividend from the captive insurance company to the business owner.

Before another crisis strikes, businesses should review insurance policies, determine whether current policies offer adequate coverage, and determine if a captive will help them face the next worst-case scenario.

Flurry-Down Economics: The Real Cost of Blizzards

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Winter Storm Juno New York City

Despite predictions of a “historic” snowstorm this week, the Northeast – and the insurance industry – largely dodged the blizzard bullet. Over the past 20 years, winter storms have caused an average of $1.2 billion in insurable losses every year, the Insurance Information Institute reported. Last year’s polar vortex and significant snow accumulations came with a price tag between $15 and $50 billion, and winter weather caused $3.7 billion in overall losses, of which an estimated $2.3 billion was insured, according to MunichRe.

NATURAL DISASTER LOSSES IN THE UNITED STATES, 2014

Ahead of what could have been record snow, seven states preemptively declared a state of emergency for what some dubbed Winter Storm Juno. Authorities shut down many major cities, canceling thousands of flights and closing major roads and mass transit systems.

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Though Boston was pummeled by about two feet of snow, New York City and most of the region emerged relatively unscathed.

“We think the economic impact of the storm is going to be relatively small,” said Evan Gold, senior vice president at weather advisory firm Planalytics. “We’re estimating at about 0 million, and that’s simply based on the duration of the storm, the timing of the storm and the population centers that are impacted.”

Others estimate the cost may be closer to $1 billion, considering the lost business, wages and taxes, and snow removal costs. According to a new report from City Comptroller Scott Stringer, in the past 12 years, every inch of snow cost New York City an average of $1.8 million to remove. From 2003 through 2014, the city spent $663.2 million just to clear the snow. Lighter snowfall actually takes a greater toll per-inch. “It’s a lot more expensive on a per-inch basis when we get a little snow because we have startup costs and we have fixed costs. We have to have plows and salt,” Stringer said. As a result, the city saw 55.5 inches of snow in 2003 and paid $740,000 per inch in cleanup costs, while the city had 6.8 inches of snow in 2012 and paid $4 million per inch.

In a press conference on Tuesday, New York Governor Andrew Cuomo shrugged off the financial implications of preparations for and recovery from Juno, calling it one of the “costs of doing business.” He explained, “We factor that in—things like snow removal, salt purchases, overtime for crew to handle storms, these are factored in the budget and this was not exceptional to that process.”

The cost of overpreparation is hefty, however, and it primarily falls upon the public. A one-day storm in Massachusetts costs the state economy about $265 million, while the total cost in New York is around $700 million, according to the Boston Globe. A significant portion of that is due to lost wages for hourly workers, who tend to be hit the worst by snow-related shutdowns.

Travel cancellations have a similar impact.

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According to research firm masFlight, it costs an airline about ,000 to cancel a typical domestic flight on a full-size jet, but the total tab for all the passengers who were supposed to be on board is about ,000, due to the additional costs of lodging and meals.

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More than 4,700 flights were cancelled Tuesday after about 2,800 on Monday ahead of the storm, CNN reported. Amtrak also suspended service between New York and Boston because of the weather.

Snowfall’s Impact on the Economy

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blizzard

Snow days are fun for most everyone and maybe that’s because people don’t immediately realize the economic impact of snowfall on the areas hardest hit. Let’s take D.C. for example. The area is still digging out from snowstorms that dumped a total of 54.9 inches of snow (as measured at Reagan Airport) — breaking a record last set in 1899.

As one could imagine, when a major city shuts down almost completely for more than four days, the financial repercussions are far-reaching. Washington, D.C.’s Office of Personnel management has said each snow day costs taxpayers $100 million in lost productivity from federal workers, not to mention lost productivity for state and local governments.

Then there’s the cost of removing the snow.

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Maryland, Virginia and D.C. will likely ask for emergency federal aid to cover the cost of the massive cleanup. Though it’s too early to put a number on the cost of the cleanup, we can compare it to the 1993 blizzard that struck the East Cost and cost more than $6 billion. As for New York City, Mayor Michael Bloomberg has said that each one inch of snowfall this week cost the city $1 million.

And as thousands of flights were cancelled due to the storm, an untold number of business meetings were also nixed, representing a loss of potential business. And it almost goes without saying that grounding planes for an extended period of time also hurts the airline companies’ bottom line.

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These points have been floating around the news since the snow began to fall on the East Coast in December. But what has not been mentioned quite as much is what happened recently at Dulles airport that has the potential to severely affect the aircraft insurance market. Saturday’s heavy snowfall in the D.C. area caused a roof collapse at a Dulles Airport hangar.

The bill to general aviation from last weekend’s massive snowstorm on the east coast could hit tens of millions of dollars and most of that could come from the partial collapse of one building at Dulles International Airport. As we reported Saturday, part of the roof of Dulles Jet Center came down under the weight of the snow. At the time, all that was known was that there were aircraft inside but photos provided to AVweb by a reader show a scene that is enough to make any insurance executive shiver. Two Bombardier Global Express jets and a Gulfstream 550 appear to be in takeoff attitude inside the hangar, their tails pushed to the floor under the weight of the crushed structure of the building. It’s not immediately known whether they can be repaired and it might be tricky getting them out from under the twisted steel.

For an already tight and volatile aircraft insurance market, the incident at Dulles will undoubtedly severely affect premiums as millions in claims are paid out for this incident.

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And as more snow is expected to blanket the East Coast once again early next week, the total economic loss continues to add up.