Damageability, exposure drive escalating SCS losses
Gallagher Re’s Megan McConnell and Josie Fix examine the drivers behind the trend of increasing US severe convective storm losses.
The first nine months of 2023 were highly active for US severe convective storms (SCS), with insured losses crossing the $50bn threshold for the first time on record, according to Gallagher Re analysis.
It has been an above-average year from a frequency perspective, with the US seeing more instances of tornadoes, large hail (two-plus inches) and severe straight-line winds than historical averages (2005-22), according to the National Oceanic and Atmospheric Administration’s Storm Prediction Center.
Considering this year’s SCS activity, it may be surprising that observable data from 2000-2022 suggests the frequency and severity of tornado and hail events have not significantly increased over the past two decades in the US, and there has been no clear trend in frequency (see charts below).
Even so, the (re)insurance industry has been grappling with escalating US SCS losses for nearly two decades. Annual losses have averaged more than $25bn in the past decade alone.
Gallagher Re’s analytics team posit there are two main factors – damageability and exposure – which are driving industry SCS losses.
The evidence collated by Gallagher Re finds that aging housing stock and severity trends outpacing CPI are the largest contributing factors to the increase in SCS losses in the US. This is followed by the overall increase in housing stock, compounded by increased movement into SCS-prone areas and the general phenomenon of urban sprawl over the past two decades.
The volume of newer properties as a percentage of overall housing stock in the US has been slowly declining, with homes less than five years old now making up just 4 percent of overall housing stock as of 2020, compared with 9 percent 20 years earlier. Gallagher Re research shows that older properties are 3.5x more likely to generate a new hail claim than new homes.
Our research has found that hail claim severity outpaced inflation over the past decade. This trend could be attributed to rising material costs, the utilization of independent adjusters and an increasingly litigious environment. Between 2010 and 2020, when assessing more than 400,000 hail claims in the US, severity increased by an annual average of 5.3 percent, compared with CPI, which rose by just 1.6 percent over the same period, according to Gallagher Re analysis.
Additionally, Gallagher Re’s analysis of US housing units shows significant growth in SCS-prone metropolitan and suburban areas over the past two decades. In addition to the population moving to more SCS-prone areas, metropolitan and suburban areas show the highest rates of growth, which compounds the impact. Between 2010 and 2020, some 69 percent of new housing units were built in urban or suburban areas near major metropolitan centers.
What may have been a remote SCS event located just outside a suburb 10 or 20 years ago would now have a greater likelihood of impacting a larger swath of exposures, leading to significant insured loss.
Considering the evolving dynamics involved in quantifying insured losses for SCS, it becomes evident that the conventional methods for estimating expected losses are no longer suitable for the task at hand. Though previously SCS was seen as a ‘secondary peril’, insurance carriers now acknowledge the significance of adopting a customized risk perspective in order to address the impact on balance sheets.
By combining the latest weather, exposure and claims data, Gallagher Re has developed underwriting tools and pricing support which truly reflect the risk characteristics of a portfolio in a changing environment.
Megan McConnell is executive vice president and Midwest sales leader, Gallagher Re, Josie Fix is executive vice president and head of short tail analytics, Gallagher Re