Thursday, December 29, 2016

Global Hail: China

Hailstorms have been occurring for centuries across the globe. However, some regions of the world, particularly southern China, seem more prone to these destructive storms. High-impact weather (HIW) is defined as weather that can impact safety, property, or socioeconomic activity. Because of the complex topography and monsoon circulation, hailstorms are a prevalent HIW in China. One study analyzed HIW patterns throughout China by distributing meteorological stations in each region—Northeast China, North China, mid-lower Yangtze River valley, South China, Northwest China, and Southwest China. The study analyzed hailstorm occurrences from 1959 through 2014. Interestingly, the annual average days and spells of hailstorms decreased significantly in all regions except for South China. Theories seeking to explain weather patterns across the globe have varied over the years. Nevertheless, the scientists involved in the China HIW study stipulate that global warming is likely to increase the intensity levels of certain types of HIW—notably, thunderstorms and hailstorms.

Seemingly consistent with this prediction, southern China has experienced intense hailstorms over the last few years. In April 2011, Guangdong Province endured a hailstorm that affected 5,067.7 hectares of farmland and caused 50 million yuan (or 7.65 million U.S. dollars) of economic loss. This same hailstorm later hit the Guizhou Province of southwestern China and caused 75 million yuan in direct economic losses.

Another severe hailstorm pummeled southern China in March 2013, and the region suffered an economic loss of 357 million yuan (or 57.5 million U.S. dollars). At least twelve people were killed by this storm, and over 272 others were injured.

In April 2016, egg-sized hail stones showered over southern China and affected over 387,000 people. In particular, the Guilin and Liuzhou of the Guangxi region of southern China were hit by the hailstorms. The storm also damaged 5,010 hectares of crops and caused seventy-four homes to collapse, totaling an economic loss of 86.69 million yuan (or 13.4 million U.S. dollars).

Most recently, and only a few months after the April 2016 storm, another hailstorm wreaked havoc in southern China. An airbus, travelling from Guangzhou to Chengdu, was pummeled by a hailstorm in July 2016. While the aircraft landed safely, it was severely damaged during its descent.

The combination of South China’s potential for large, catastrophic hail events and China’s fast-growing insurance market could result in a large number of litigated hail claims.  However, because Chinese courts do not recognize tort liability for wrongful denial of claims, and because Chinese law generally requires judges to conclude civil lawsuits within six months upon acceptance of a complaint, hail claim litigation in China will likely yield distinguishable results from the current hail claim crisis insurers are currently experiencing in the United States. 

Posted by Jennifer Gibbs and Victoria Vish

Tuesday, December 27, 2016

Claims Journal Names Hail Top-Trending Story of 2016; Steven Badger Quoted

Claims Journal has named their top-five national trending stories affecting the property casualty claims industry in 2016, and hail tops the list. The video segment on the Claims Journal website notes: 

According to Steven Badger, a partner with Dallas-based Zelle LLP and the author of several articles on the subject, “The property insurance industry is under attack. The present battle has nothing to do with repairing roofs actually damaged by hail, but instead putting money in the pockets of individuals who can find a way to inject themselves into the insurance claims process. The individuals may be contractors, public adjusters and policyholder attorneys.” Badger said that more than 11,000 hail damage-related lawsuits were filed in just one county in South Texas after a hail storm. 

Click here to see the video detailing Claims Journal’s top-five trending stories of 2016.

Tuesday, December 20, 2016

Hacktastrophe: How cyber-attacks on critical U.S. infrastructure could lead to catastrophic property loss

Although cyber-attacks have traditionally implicated more liability-leaning coverages, several attacks in recent years should give property insurers cause for concern going into the future. Hackers have proven they can seize control over governmental and industrial computer systems and manipulate them to cause tangible—and substantial—real-world property damage. Armed with the ability to cause real-world property damage, sophisticated computer criminals will undoubtedly target the systems of critical, and vulnerable, U.S. infrastructure operations, looking to cause catastrophe-level property destruction. They could be successful.

Property damage from cyber-attacks is not only possible, it has already happened.

In 2000, a hacker infiltrated the computers of a wastewater management system in Queensland, Australia. Over the course of two months, the hacker broke into the system 46 times, instructing it to spill hundreds of thousands of gallons of raw sewage into rivers, parks, and public areas.

In 2008, hackers used a program known as Stuxnet to access and disrupt the operations of an Iranian nuclear facility being used to enrich uranium. The uranium enrichment process required the operators to precisely control the speed of the centrifuges in order to produce viable uranium. Knowing that precise control over the centrifuges was absolutely critical to the enrichment process, the hackers used Stuxnet to manipulate the speed of the centrifuges, making them spin wildly out of control. At the same time, the hackers made it appear to the facility operators that the centrifuges were operating correctly, even though in reality they were tearing themselves apart. By altering the speed of the centrifuges, the hackers destroyed the operators’ ability to effectively enrich uranium. 

In 2014, German officials confirmed that hackers with advanced knowledge of both IT security and industrial processes seized control over a German steel mill, compromising components and systems, rendering the mill unable to shut down a blast furnace in a regulated manner, which resulted in “massive”—though unspecified—damage to the mill.

And in 2015, hackers infiltrated the controls of three regional electric power distribution companies in the Ukraine, shutting down a power grid and impacting more than 225,000 customers. Highly sophisticated, well-trained, well-funded hackers hijacked the credentials of workers at the control center and used those credentials to access the systems that controlled the breakers. In a coordinated attack, the hackers reconfigured the systems, blocking out the operators; turned off power to the grid, plunging customers into the dark; and launched a secondary denial-of-service attack against customer call centers, preventing customers from reporting the power outage. Although the power wasn’t out for long—between one and six hours—the control centers weren’t fully operational for months after the attack.

U.S. infrastructure is vulnerable to attack.

The Department of Homeland Security lists 16 critical infrastructure sectors “whose assets, systems, and networks, whether physical or virtual, are considered so vital to the United States that their incapacitation or destruction would have a debilitating effect on security, national economic security, national public health or safety, or any combination thereof.” Indeed, cyber-attacks on these sectors—which include dams, energy companies, chemical facilities, nuclear facilities, and water and wastewater facilities—could be catastrophic.

It is impossible to eliminate the threat hackers pose when a system is connected to the internet. (Even when a system is “air gapped” (having no direct connection to the internet) safety from hackers, is still not assured.) Protecting these facilities is critically important, since many of them are particularly susceptible to cyber-attacks. Over the past 25 years, hundreds of thousands of old analog control systems in these facilities have been replaced with digital systems connected to the internet. Any device that is computer-controlled and connected to the internet is vulnerable to hacking.

Not only are these systems vulnerable because of their internet connectivity, but many of these systems were built without cyber security in mind. Even where security measures, such as software firewalls, are used, the software can be misconfigured or circumvented by human error, allowing hackers access. 

These concerns aren’t overblown. Indeed, hackers have already targeted and accessed such systems in the U.S. Such hacks often require little more than Google searches and default passwords to succeed. Indeed, in 2013, Iranian hackers were able to access systems into the Bowman Avenue Dam in Rye Brook, N.Y. using nothing more than a simple, legal search engine that surfs for and identifies unguarded control systems online. Although hackers have not yet caused catastrophic property damage in the U.S., efforts to accomplish precisely that are clearly ongoing by various actors.

Cyber-attacks may lead to catastrophic property loss. 

It’s not hard to imagine the type of catastrophic property loss that could occur if hackers effectively took control over critical infrastructure. In the real world example of the Iranian hackers who broke into the control systems of the dam in New York, the hackers could have caused a flood by manipulating the dam, damaging or destroying homes in the area.

Attacks on industrial, nuclear, or chemical facilities—similar to those on the Iranian nuclear facility and German steel mill noted above—could cause unsafe conditions that lead to a chemical spill or explosion that, in turn, leads to large scale property loss. Similarly, an attack on a railway company could cause a train carrying explosives or hazardous or combustible materials to derail, causing substantial damage to property. Indeed, there are any number of scenarios where hackers could cause catastrophic property loss by seizing control over vulnerable infrastructure.

The takeaway is this: Insurers covering the risk of property loss from cyber-attacks should be aware that the risk of loss is very real given the vulnerabilities in critical U.S. infrastructure and the increasing sophistication of cyber criminals and that the scope of property loss from a well-coordinated attack could be akin to traditional catastrophes.

Wednesday, December 14, 2016

Return of the Polar Vortex??

Russia appears to be in a giving mood this holiday season.  As the allegations of Russian election tampering escalate, Russia has been kind enough to send the United States another gift – the return of the Polar Vortex.  But, what is the Polar Vortex anyway?  According to the National Weather Service, the Polar Vortex is a large area of low pressure and cold air surrounding both poles.  The term “vortex” refers to a counter-clockwise flow of air that helps keep much colder air near the poles.
For some time, meteorologists have noted the build-up of ultra-cold air in Siberia, which now seems destined to hit the U.S. over the next several weeks.  Apparently, forecast models of the upper atmosphere are very similar in scale and magnitude as the now infamous January 2014 Polar Vortex and are hinting at formidable shots of cold weather hitting vast stretches of the U.S. during mid to late December and through the remainder of winter.
If the forecast models prove accurate, parts of the Midwest, East and Southeast could see temperatures plummet to more than 30 degrees below their historic averages – meaning high temperatures in only the single digits and lows well below zero.  On the bright side, these forecast models could also mean significant needed rain in California and possibly huge snowfalls in the Rockies.
It is currently unclear what the impact would be to the U.S. economy from this latest chapter of the Polar Vortex franchise.  If the forecast models are even close to being accurate, which is always debatable, the potential cost to the U.S. economy could approach the $5 billion level experienced in 2014. During our most recent experiences with the Polar Vortex, many in the insurance industry considered the Polar Vortex to be a weather catastrophe as a result of the extensive property damage and business interruption throughout the U.S.  Of course, the impact of a 2016-17 Polar Vortex would vary by region and industry.  However, many industries could certainly expect greater than normal incidents of freezing pipes along with the potential for power outages.  As in 2014, there is also the potential for losses in energy, tourist and transportation sectors as a result of the ultra-cold weather.
Similar to the potential impact to the U.S. economy as a whole, the insurance industry can reasonably expect to experience a significant rise in claims if the Polar Vortex in any way mirrors the levels in 2014.  As experienced in 2014, there were a plethora of coverage issues resulting from the Polar Vortex including number of occurrences, freeze/thaw damage, deductible/waiting periods, civil authority, ingress/egress and many others.  Of particular interest were the positions taken by many policyholder representatives in 2014 that the entire Polar Vortex was actually one occurrence.  While no two policies are exactly alike, one can anticipate that policyholder representatives will again trot out the one occurrence argument asserting that the 2016-17 Polar Vortex is one occurrence that encompasses any loss or series of losses arising out of this one alleged event.
Consequently, people should not only plan accordingly for these potential gifts from Russia, but the insurance industry in particular should also leave room under the tree for prospective claims that could likewise be forthcoming this holiday season.

Friday, December 9, 2016

A Recipe for Disaster

Since November 23, 2016, the Chimney Tops and Cobbly Nob fires have wreaked havoc on Sevier County, Tennessee. These fires have burned through an estimated 17,000 acres and 2,400 properties. This disaster has taken the lives of 14 people and reportedly injured another 175 people. Adding to the emotional devastation and turmoil of this expansive threat, local authorities in Tennessee just announced that the arson investigation led to the identification and detainment of two juveniles whom they believe ignited the first blaze. While the news of the responsible parties for this horrible fire may have been surprising to many, the breadth of destruction that these fires left behind is not unexpected when examining basic facts about fires in the United States. Wildfires, along with their associated events (heat waves and drought), were responsible for the third highest rate of losses in the U.S. in 2015.

From 1995 to 2014, fires accounted for 1.5% of insured catastrophe losses, totaling about $6.0 Billion. The majority of wildfire-related costs are suffered in the State of California.
While California has reported the largest amount of estimated insured losses and number of wildfire-related incidents, other states have been identified as wildfire prone states. All in all, in the U.S., about 38 states are identified as wildfire risks.
The figures showing the frequency, severity and cost of these fires will likely continue to rise. The risk of wildfires is likely to continue to grow as temperatures rise, lengthening the fire season, and more people move into steep forested areas once largely uninhabited. Additionally, there is the human element.  According to the U.S. Department of Interior, as many as 90% of wildland fires in the United States are caused by humans. The confluence of causal factors is perfect kindling and a recipe for disaster.
Posted by Anaysa Gallardo Stutzman