Not in Kansas Anymore…

Property and casualty insurers in Canada and the United States posted solid profitability and underwriting results in the past two years despite recurring losses from severe thunderstorms, hail and tornadoes. Although catastrophes such as earthquakes and hurricanes present the greatest threat to insurers’ financial strength and credit quality, large-scale thunderstorm events spawning tornado outbreaks and hailstorms have proven to be costly perils in their own right.

For their part, Canadian insurers are particularly concerned about earthquake risk. At the same time, the industry continues to be battered by a greater number of hailstorms, and the number of tornadoes appears to be increasing. It might be true that tornadoes tend to strike areas where property concentration is minimal (Canada’s prairie provinces of Alberta, Saskatchewan and Manitoba, for example, along with parts of Ontario). But the occasional tornado is capable of touching down near metropolitan areas. The 2005 tornado outbreak in Southern Ontario, for example, produced two F2 tornadoes and the highest insurance loss for the industry this decade.

At a time when rates for commercial and personal property coverage are under pressure, and investment results aren’t as robust as they’ve been in the recent past, Canadian and U. S. insurers find themselves paying out an increasing number of claims because of more frequent and severe weather events.

In the United States, tornadoes and related weather events routinely cost U. S. insurers billions of dollars in claims each year — with 2006 being the costliest, at more than US$8 billion. Losses of US$1 billion and more from single severe thunderstorm events that generate damaging tornadoes have been on the rise. In addition, when compared with the recent past, more tornadoes are occurring earlier than what’s considered the tornado season’s typical peak from April through June.

The first three months of 2008 already have demonstrated the destructive nature of these catastrophes. One event came close to breaching the billion-dollar threshold. In the United States’ deadliest tornado outbreak since May 1985, up to 82 twisters touched down in 10 states in the mid-South in early February. The so-called ‘Super Tuesday’ tornado outbreak generated as many as five EF4 tornadoes, or tornadoes with wind speeds ranging from 166 to 200 miles per hour.

The Super Tuesday outbreak and related severe weather resulted in US$955 million of insured losses, according to the Jersey City, New Jerseybased Property Claims Services (PCS) unit of the Insurance Services Office (ISO). In March, a tornado that struck in downtown Atlanta – believed to be the first to touch down in the city -and other counties, contributed to the US$610 million of insured losses in the state of Georgia during the first quarter.

In total, the first three months of the year resulted in about US$3.35 billion in catastrophe claims, according to PCS. Insured property loss was the largest in the past decade and the worst in terms of frequency of weather-related catastrophes since 1999, PCS says. The higher catastrophe losses have been a contributing factor to the subpar financial results that an increasing number of U. S. property and casualty insurers have reported for the first quarter of 2008.

Over the past 20 years, insured tornado losses in the United States have been on the rise. This is generally attributable to an increase in property values, greater building density in tornadoprone areas, more universal insurance coverage and possibly greater tornado frequency. Given the right conditions, insured damages from a severe tornado, wind and hail event could rival those of a moderate U. S. hurricane catastrophe.

LINKING TORNADOES WITH CLIMATE CHANGE

There is considerable debate today concerning climate change and its influence on catastrophic weather events. The ferocity of the Super Tuesday tornado outbreak in early February occurred following record-high temperatures in some areas of Arkansas, Mississippi and Tennessee. This prompted some observers to link climate change with an increase in tornado frequency and severity.

As noted above, more tornadoes have been occurring earlier than what’s considered the typical peak for the season. Figures from the U. S. National Oceanic & Atmospheric Administration demonstrate a rising trend of tornado activity in the first quarter of the last four years.

Linking tornadoes to climate change presents some challenges, though. For one, scientists and meteorologists aren’t fully aware of why some thunderstorms spawn tornadoes and others don’t.Also, tornadoes form on such a rapid and small scale that it becomes difficult to track their individual characteristics. Some meteorologists note the gap between linking trends in tornado frequency and severity with global climate models that tend to track long-term weather patterns on a broader scale.

Nevertheless, experience with extreme weather in recent years and its potential link to climate change is familiar to many Canadians and the country’s insurers. The number of severe weather events during 2007 in Alberta, Saskatchewan and Manitoba hit 410, eclipsing the previous record of 297 the year before, according to Environment Canada. For the first time ever, crop-related hail losses in 2007 exceeded the premiums that insurers collected, Environment Canada notes.

Although damages from tornadoes in Canada haven’t been on the scale of those experienced by U. S. insurers, the considerable threat tornadoes pose shouldn’t be minimized. Last year, for example, a tornado that touched down near Elie, Manitoba on June 22 was the country’s first-ever F5 tornado. These tornadoes are capable of generating wind speeds from 420 to 511 kilometres per hour.

STRAIN ON RESOURCES

The tornado near Elie raised another issue: natural disasters put a strain on the resources and finances of local and national governments. After original estimates of more than Cdn$1 million for cleanup following the tornado and windstorms last June, Manitoba province officials estimated earlier this year that the actual total costs were more in the range of Cdn$4 million.

Many Canadian insurers aren’t waiting for a definitive answer on whether climate change results in more frequent and severe extreme weather events. The Insurance Bureau of Canada has targeted improving the country’s water and sewerage infrastructure to offset claims from sewer back-up coverage on homeowner’s policies. Meanwhile, Canadian insurers spend millions each year on cloud seeding to help reduce the size of damaging hailstones.

The increased frequency and severity of hail and rain storms, particularly in 2005 and 2007, should be of concern to the industry. Since construction costs are rising and labour demand has picked up, frequent storms have led to an increase in claims severity on property coverage for Canadian insurers.

That is an unwelcome development, since the Canadian property and casualty industry appears to be in a stronger financial position than it was several years ago. According to A. M. Best, industry capitalization has benefited from more adequate pricing, stricter underwriting standards and improved expense management. However, the competitive market and regulatory factors, particularly in the auto business line, could diminish some of the gains the industry has realized. Canadian insurers also face uncertain investment markets along with higher claims costs and rising frequency trends. The prospect, then, of more frequent and severe extreme weather events would only add to the list of key challenges the industry faces.