Winter is Coming

Winter is coming! So says the time-honored long-range weather prognosticator, the Farmer’s Almanac. Following a mild winter in 2015-2016, weather forecasters from the Farmer’s Almanac are expecting a colder than average winter, at least in the East. Although the rest of country may skate by with milder than average temperatures brought on by a weak La Niña in the Pacific, the insurance industry should be prepared for an "avalanche" of claims in the Northeast.

It bears noting that catastrophic winter storms occur every year, even during mild winters. From 1995 to 2014, winter storms caused about an average of a $1 billion of catastrophe losses each year. The 2015-2016 winter was the warmest December-February period in 121 years and it still caused more than $1.5 billion in insured losses and spawned Winter Storm Jonas (aka Snowzilla), which was one of the heaviest snowstorms ever in several Eastern cities. So, even if the 2016-2017 winter is milder than expected, it is little guarantee against the threat of devastating winter storms.

Interestingly, scientists predict that climate change will, perhaps counter-intuitively, increase the severity of winter storms. Warmer ocean surface temperatures can result in higher levels of moisture in storms and greater intensification. Not only that, snowfall during higher temperatures closer to the freezing mark produces wetter and heavier snow than snow that falls during more frigid temperatures. Heavier, wetter snow causes more roof collapses and damage from downed tree limbs than dryer, lighter snow that forms at colder temperatures. Indeed, there were around twice the number of extreme snowstorms in the second half of the 20th century than the first. 

Roof collapses are probably the most common claims caused by winter storms. The weight of snow and ice produced by a winter storm invariably causes such collapses. Additionally, wind combines with the snow and ice to bring down tree limbs, often on structures and other property.   By definition, a blizzard – winds in excess of 35 mph with visibility less than ¼ mile for at least 3 hours – unleashes high winds.   

Of course, it does not always take a storm to produce winter-related claims. Cold temperatures cause damage to frozen pipes and create ice dams every winter, especially when temperatures plummet in the Midwest and Northeast. Policies often exclude damage from burst pipes unless the insured has taken reasonable measures to protect the building from heat. Even fires are more likely during the winter. So get ready now because winter is coming!!!!

Posted by Seth Jackson and Jeff Gordon

Space Weather Events – From Post-Apocalyptic Fiction to Executive Order for Catastrophe Preparedness

Has anyone taken note of the recent proliferation of novels written in the genre of post-apocalyptic fiction?  Apparently, the U.S. government has.  On October 13, 2016, President Barrack Obama issued an executive order aimed at preparing the nation’s infrastructure for space weather events that could potentially wreak havoc on society as a whole.

But what are space weather events?  Space weather events are normally thought to include solar flares, solar energetic particles and geomagnetic disturbances to mention a few.  These space weather events according to NASA and echoed in President Obama’s recent executive order occur regularly with some measureable effects on critical infrastructure systems and technologies, such as global positioning systems (GPS), satellite operations and communications, aviation, and the electrical power grid.  Extreme space weather events – those that could significantly degrade or entirely destroy critical infrastructure – could disable large portions of the electrical power grid resulting in cascading failures that would affect key services such as water and food supply, healthcare, transportation and even the financial system.

As noted in President Obama’s October 13, 2016 executive order, the key to staving off the effects of extreme space weather events would be the state of national preparedness for such events.  In this regard, the recent executive order indicates that successfully preparing for space weather events is an all-of-nation endeavor that requires partnership across governments, emergency managers, academia, the media, the insurance industry, non-profits and the private sector.

But has the insurance industry given much thought to preparing for potentially societal disrupting events such as these?  The quick and unfortunate answer appears to be NO.  If the insurance industry had given any thought to preparedness for such space weather events, they would now be including such space weather events in their general policy exclusions and treating them much like the exclusions for “hostile or warlike action” or “nuclear reaction, nuclear radiation or radioactive contamination.” In most instances, property insurance policies specifically and unequivocally exclude loss, damage or expense caused by or resulting from these perils regardless of any other cause or event that contributes currently or in any sequence to such loss or damage.

The obvious question is why should the insurance industry treat “space weather events” with such absolute exclusion status?  Well … because nothing is immune from such a space weather event.  First and foremost, due to the interdependencies of modern society, the insurance industry could face potential claims across all sectors of society including power generation, transportation, financial services, agricultural, communications and the list goes on and on. 

Source: Department of Homeland Security, National Infrastructure Protection Plan.

Additionally, the potential loss or damage from space weather events could range from no physical loss or damage to complete societal breakdown.  So, the only logical way for the insurance industry to prepare is to exclude such space weather events from all aspects of insurance coverage.

With that said, if no such all-encompassing exclusion is added to current insurance policies, what could the insurance industry anticipate and how would it respond to such an event?  In a worst case scenario, no one need worry because life on Earth would cease to exist.  In a less extreme example, such as a super solar flare or extreme geomagnetic storm, society would likely face a loss of the electric power grid for some unforeseen period of time.  In this situation, there would likely be covered physical loss or damage to which most property insurance policies would respond.  There is also the potential for such space weather events to produce an electromagnetic pulse (EMP), which could cause the loss of most unhardened electrical systems and components.  Or, during a geomagnetic storm, induced ground currents could potentially melt copper windings of transformers, crippling the power grid.  And, as you undoubtedly recall from the massive power outage on August 14, 2003, our national power grids are more vulnerable than people want to contemplate.

The loss of our national power grids, however, is only the tip of the iceberg.  The loss of the power grid as result of a space weather event with resulting EMP effects could potentially devastate all sectors of society because of the interdependencies of modern social infrastructure.  If the power grid was lost from EMP resulting from a space weather event, one could reasonably anticipate the almost immediate loss of transportation; fresh water; food and medicine with no means of transport for resupply; communications and an inability to produce or supply fuel.  In such a situation, it is not difficult to foresee a complete collapse of the financial and monetary systems either.  For example, an EMP from a space weather event could not only destroy the ability to electronically transfer funds, but also prevent access to electronic financial records.  On a more personal level, people would not have access to funds through banks or ATMs, potentially leading to a collapse of the monetary system.  Any local trade would likely be through barter or perhaps the new currency would be … ammunition!  As these few examples demonstrate, the financial and social effect of a space weather event could be incalculable.

But what if you wanted to make an insurance claim from such an event?  The first thought that occurred to me was how … there is no electricity or operating financial system.  Obviously, any response from the insurance industry would depend on the severity of such a space weather event and its resultant effects.  The above examples may seem far-fetched but are simply used to illustrate the potential difficulties the insurance industry could face from a space weather event.

Consequently, the insurance industry faces a host of problems in even considering President Obama’s call to arms in preparing the nation for space weather events.  In a utopian world, the insurance industry could potentially assist in shouldering a portion of the burden of recovering from such a space weather event … but would the insurance industry exist afterwards?  Who knows?  However, in the real world, and in light of the potential broad spectrum impact on society from a space weather event, the insurance industry should use foresight instead of hindsight and begin excluding such space weather events for all facets of insurance coverage. 

Posted by William Zieden-Weber

Credit: Science@NASA

NYC FEMA Flood Mapping Creates Insurance Uncertainties

In 2015, as many of its businesses and residents were still rebuilding from Superstorm Sandy, FEMA re-drew the flood map for New York City. The new proposed flood map designated approximately 35,000 additional residential homes and commercial buildings as being in a high risk flood zone. This would have drastically increased flood insurance premiums for thousands of New Yorkers. New York City’s Mayor, Bill de Blasio, promptly filed an appeal contesting the accuracy of the new flood map, claiming that errors in FEMA’s modeling overestimated the size of the 100-year floodplain and the height of the Base Flood Elevations.

On October 18, 2016, FEMA and New York City announced an agreement to revise the flood map, yet again, for New York City. The City also announced that until the new flood map is finalized, flood insurance premiums will be based on the 2007 flood map that were in effect prior to Sandy. The City claimed victory and announced that FEMA’s decision to revise the flood map will save coastal insureds tens of millions of dollars per year. 

Given that the changes proposed by the 2015 flood map would have had the most significant impact on coastal residential properties in Brooklyn, Staten Island, and Queens, it is uncertain how the decision to disregard and revise the flood map will affect commercial property underwriting in lower Manhattan and the rest of New York City. At this point, the only certainty is that the use of the 2007 flood map is temporary. And, while the temporary reliance on the 2007 flood map may lower premiums, insurers should continue to rely on other ways to protect themselves against a CAT when underwriting a risk, such as being more specific in excluding or limiting flood coverage or requiring a larger deductible.   

Inevitable changes to the flood map also raise questions regarding future claims. For example, what if a property that is designated by the 2007 map as being outside the flood zone is later designated to be in a flood zone during the effective dates of the policy? What flood map will insurers use to determine coverage or adjust the loss? Will a new flood map trigger questions about law and ordinance coverage and impact how an insured rebuilds? These questions may be of particular importance to policies that limit coverage to property located in high hazard areas. Given these uncertainties, insurers should take into consideration the exposures from a readjusted flood map when underwriting these risks. 

Posted by Jennifer Hoffman

Newly Discovered Fault Connections Raise San Francisco Major Earthquake Risk

While San Francisco is no stranger to the ever-looming threat of a catastrophic earthquake, a recent discovery of intersecting faults under San Francisco's San Pablo Bay has dramatically increased the risk of a major earthquake in the next thirty years.

Scientists at the U.S. Geological Survey published their discovery this week in Scientific Advances. The Hayward Fault has long been considered a threat because it runs under densely populated neighborhoods east of San Francisco. The study found that beneath San Pablo Bay, it joins with a Rogers Creek fault, a less active underground fracture to the north. This newly discovered direct link between the faults raises the possibility of a simultaneous rupture of the Hayward and Rodgers Creek faults, a scenario that could result in an earthquake up to a magnitude of 7.4 that would cause widespread property damage, extensive loss of life, and far-reaching ripple-effects on the global economy.

The relationship between these two faults had long been unknown.  Detailed subsurface imaging, geophysical interpretation and kinematic modeling by the U.S.G.S. team demonstrate that the Hayward and Rodgers Creek faults are directly connected at the surface.  The Hayward and Rodgers Creek faults combine to represent a continuous 118 mile-long fault.  If they were to break simultaneously, they could produce a magnitude 7.4 quake. 

An earthquake of this magnitude would be more than five times stronger than the 1989 Loma Prieta quake on the San Andreas Fault that killed over 60 people and caused an estimated $6 billion in property damage.  In addition, the epicenter of the 1989 Loma Prieta earthquake was located 60 miles southeast of San Francisco while the Hayward-Rogers Creek faults run directly beneath the city.  David Ponce, a scientist with the USGS research group, was quoted by Popular Mechanics on this risk:

“You have to understand that there are over 2.4 million people living right along this fault, and the population of this whole area is around 7.5 million. It also turns out that major transportation, gas, water and electrical lines cross this fault. So when it goes, it's going to be absolutely disastrous."

Mr. Ponce was also quoted as saying that there is a 32% chance that such a quake could occur in the next 30 years.

Speculation regarding California earthquakes and “the next big one” is hardly anything new, but with the Hayward-Rodgers Creek discovery this week, it appears we have a new front-runner for how that “big one” could originate.

Posted by Matt Gollinger

A Look Back, and Ahead, to the “California Shakeout”

Two weeks ago, the CAT-Law Navigator reviewed an Earthquake Advisory issued by the California Governor’s Office, which directed the public to prepare for an increased probability of earthquakes through October 7. The Advisory was issued following the observation of an “earthquake swarm” near Bombay Beach, California, that started on Sept. 26, 2016, beneath the Salton Sea, near the southern end of the San Andreas Fault. The U.S. Geological Survey had calculated that there was up to a 1 in 100 chance of a magnitude 7 or greater earthquake occurring on the southern San Andreas Fault through October 4 (later revised to up to a 1 in 500 chance of such an earthquake through October 7). Given those odds, it’s no surprise that a major earthquake did not in fact materialize, but the U.S.G.S. calculation and the Governor’s Advisory reminded us of The Great Southern California Shakeout Scenario, first published by the U.S.G.S. in 2008, which modeled a similar event. 

The goal of the 308-page 2008 Shakeout Scenario was “to identify the physical, social and economic consequences of a major earthquake in southern California and in so doing, enable the users of our results to identify what they can change now—before the earthquake—to avoid catastrophic impact after the inevitable earthquake occurs.” (Shakeout Scenario at p. 2) In service of that goal, the authors outlined the magnitude and locus of an imagined Southern California earthquake along the San Andreas Fault, and then estimated the resulting physical damage, the impact on social systems, and the actions that can still be taken to prepare for and minimize the impact of a Southern California earthquake.  

The authors of the Shakeout Scenario noted that although the particular earthquake scenario they modeled “may never happen . . . [b]ig earthquakes on the San Andreas Fault are inevitable, and by geologic standards extremely common, but probably will not be exactly like this one. The next very damaging earthquake could easily be on another fault.  However, lessons learned from this particular event apply to many other events and could provide benefits in many possible future disasters.” In other words, the earthquake scenario the Shakeout authors imagined is not their prediction, but it provides a thorough analysis of one possible scenario, and the author’s findings have broad application for those interested in the subject.

There is a wealth of information in the extensive Shakeout Scenario document, but here are some headline findings of particular interest to the insurance industry: the authors modeled a magnitude 7.8 earthquake along the southernmost 200 miles of the San Andreas Fault, from the Salton Sea to Lake Hughes (South and East of Los Angeles); the earthquake involves extensive and widespread ground shaking, surface level fault offsets of 30 feet, liquefaction of the earth and landslides in isolated areas, but no tsunami activity due to the distance of the event from the Pacific Ocean. All told, the authors anticipated 1,800 deaths and over $200 billion in economic losses (with property damage of $112.7 billion and business interruption losses of $96.2 billion).  For comparison, the total amount of insured losses (in 2015 dollars) stemming from Hurricane Katrina was $49 billion, still the most expensive insurance catastrophe in U.S. history. The 9/11 Terrorist Attack involved insured losses of $24.6 billion; the 1994 Northridge, California earthquake’s insured losses were $18.6 billion. 

We will return to the Shakeout Scenario in subsequent posts, exploring the authors’ breakdown of the nature and scope of the event itself, the predicted damage to residential and commercial buildings, the impact on California’s infrastructure, and the broader business interruption implications. We will also consider the overall social impact and the authors’ advice for steps that can be taken now to reduce the physical and societal damage of a major earthquake along the San Andreas Fault and other California faults.  

Posted by Dan Millea

Pandemics

The spread of Zika in 2016 has once again brought to worldwide attention the threat posed by pandemics and infectious diseases. 

The World Bank describes a pandemic as “a global disease outbreak that represents a top global catastrophic risk.” Outbreaks of infectious disease have occurred regularly throughout history – Ebola, Avian Flu, SARS are just some recent examples - and market consensus is that a pandemic is inevitable. According to the World Bank, there is a “high probability that the world will experience a severe outbreak in the next 10 to 15 years that could destabilize societies and economies”. Despite advances in medicine and communication, the interconnectedness of international trade and travel in today’s globalised world, plus a larger (and more urbanised) population, means that pandemics spread more quickly and will affect more people. 

From a risk point of view, with their large impacts and low probability of occurrence, pandemics are catastrophe scenarios and, given the degree of their disruptive potential, one of the most important issues for the insurance industry.

In addition to human costs in terms of health and life, pandemics result in significant financial costs as a result of their associated economic and societal impact, the secondary impacts including disruption from security threats and civil commotion. The spread of an infectious disease increases both the cost of containing it and the social and economic damage sustained, and the timeliness and effectiveness of the response of international groups and governments is therefore a crucial variable. According to the World Bank, the annual global cost of moderately severe to severe pandemics is around USD 570 billion (0.7 of global GDP), and the cost of a severe pandemic like the 1918 Spanish flu could be as much as 5% of global GDP – most of the losses predicted to be those caused by resulting economic factors. Resulting losses from SARS and Ebola went into billions of dollars in the Asia Pacific region and West Africa respectively, and Zika is forecast to cost billions to Latin America and the Caribbean alone.

Due to the various impacts of a pandemic, (re)insurers may face claims across various lines.

As well as travel, health and life policies, (re)insurers may face exposures under liability policies (including employers’ liability) for alleged negligent exposure to disease. Whether the cover will respond will depend on the specific situation and policy wording, and the operations of any exclusions, for example, for Expected or Intended injuries, Pollution and Bacteria.

An outbreak will also affect a company’s operations and revenues, for example, if it is required to temporarily cease operations partially or completely due to pandemic-related issues. During the Ebola outbreak, in addition to the voluntary evacuation of employees, curfews were imposed in some countries, resulting in the cessation of operations at some sites, closure of ports and borders and disruption of global supply chains; (re)insureds particularly affected were those with business or supply operations in West Africa, particularly in the mining, energy or travel sectors. Claims may be brought for business interruption and/or contingent business interruption. BI (and CBI) is one of the most significant risks faced by a company generally, heightened by the increasing interconnectivity of global supply chains and the nature of modern production processes; in the event of a pandemic, the ‘just in time’ model of many businesses may cause supply shortages thus exacerbating the damage.

However, a standard BI policy would only be triggered after the policyholder has experienced a direct physical loss or damage to insured property; it would not automatically be triggered if an organization suffered loss of income as a result of, for example, Ebola. The general market view is that disease is unlikely to constitute physical damage to property and therefore BI losses cannot automatically result. As with any policy, everything depends on the wording and circumstances of the specific case, for example: whether contamination is considered a direct physical loss of the premises; whether BI coverage may extend to temporary closures due to “dependent properties,” such as a major supplier, or prohibited access by civil authorities to the insured’s premises due to a direct physical loss of another property. 

BI policy extensions such as Loss of Attraction, Denial of Access and Suppliers/Customers may respond but are subject to sublimits and the terms and conditions of the policy in question. Similarly, extensions of cover for Infectious Diseases, which are sometimes included within a standard BI policy to cover BI losses attributable to the outbreak of diseases, would again be subject to the wording and conditions that apply - for example, if the wording is based on “notifiable human diseases”, cover will not automatically apply as the list of notifiable diseases of public health bodies will be jurisdiction-specific, and such cover may also be subject to orders of local civil authorities. 

Re(insureds) could therefore face gaps in coverage for potentially huge costs in situations where there is no physical damage to property. There may be certain circumstances in which property may be found to be damaged as a result of disease, for example if necessary decontamination measures are destructive, or where more extensive property damage occurs as a result of the secondary impact of a pandemic, such as strains on the emergency services or shortage of personnel to carry out the necessary repairs (although exclusions applicable to secondary impacts, for example for civil commotion, will also need to be considered). Should a pandemic result in severe financial losses as predicted, it is likely that there will be increase in policyholders looking for ‘deep pockets’ and advancing wider interpretations of policy language.

However, pandemics are just one example of BI losses triggered by non-physical damage events that businesses are increasingly facing, and specific cover for pandemic-related BI exposures, or “non-damage” BI polices, is available.

Pandemics are inevitable. (Re)insurers should assess their potential exposure and, as always, review their own policy wordings. While it may be that specific exclusions are written into policies (as was the case for many UK and US insurers in the wake of Ebola), (re)insurers also have the opportunity to offer bespoke products to meet the increasing need of companies for non-physical damage BI scenarios and the other multitude of risks that pandemics present.

Posted by Deepa Sutherland

Phew – That Was Close(?)

As the saying goes, “close only counts in horseshoes and hand grenades.”  And maybe hurricanes?  Was Hurricane Matthew a bullet that was dodged, or a bullet that hit the mark?  That depends on who you are and where you were. 

There was a moment there when it looked like the State of Florida was staring down the proverbial barrel of a colossal disaster.  Hurricane Matthew, then a category 4 Hurricane, had devastated Haiti and was making way for South Florida.  The predicted track had  Matthew making landfall somewhere along Florida’s Atlantic Coast, tearing along the eastern border for hours and hours, and then pummeling Georgia and South Carolina before making a bizarre eastward/southward loop and slamming back into Florida a second time.  (What kind of hurricane does that?  It almost looked personal.)

But in the merciful end, two important things did not happen.  Matthew did not make landfall in Florida – which kept the most powerful winds off-shore and away from homes and businesses – and it never made the arcing loop that would have carried it back to the Florida coast for a second round of damage.  But Matthew was nonetheless a powerful storm that did its share of harm, including multiple fatalities in the U.S. and an astounding death toll in Haiti.  How you view Matthew, then, is largely dependent on who you are and what you were expecting.  Were you a Miami homeowner hoping for the best, and the storm spun east and did most of its damage north of you?  Are you a Jacksonville shop owner whose business was flooded and ruined?  Are you an insurer with concentrated exposures along the coastline?  Did you dodge a bullet, or do you feel like you took a direct hit?  It depends, but the early estimates suggest there is plenty of damage to go around thanks to Matthew – billions of dollars, in fact, on top of the human toll.

CoreLogic reports that the total insured losses for residential and commercial properties hit by Matthew will ultimately range from $4 billion to $6 billion, exclusive of business interruption losses or contents damages.  CoreLogic estimates that 90% of those losses will be “related to wind” and 10% to storm surge – numbers that seem surprising based on the storm’s track and other news reports of heavy flood damage and relatively less catastrophic wind impacts.  At $4 billion to $6 billion in insured property loss, Matthew would be dwarfed by Hurricane Katrina and Super Storm Sandy, but would still rank among the most devastating property damage storms in U.S. history.

Lucky or unlucky?  It’s in the eyes of the beholder.

Posted by Dan Millea