I guess you could say growing up in Minnesota and spending most of my life in a climate that is exposed to winter weather almost half of the year has made me an expert in how winter weather can affect the insurance industry.
There is no denying that the recent Arctic outbreak was severe and historic meteorologically. The list of records and stats is very impressive and too long to list here, so I’ll just reference a good tweet thread by Alex Lamers, who is a meteorologist at NOAA weather prediction center.
The main point the insurance industry needs to understand with this extreme cold is that it occurred in the middle of February, which makes it climatologically that much more impressive, because the cold was topping records and stats that usually occur in late December or early January. The other impressive nature of this Arctic outbreak is the duration, which when combined with the time of year makes it that much more important an event.
We know the Deep South can get severe cold, but the prolonged nature of the cold this late into the winter season is a tail event meteorologically.
You might have seen several different sources of winter storm loss trends shared across different insurance publications, but one needs to use caution in truly understanding winter storm losses. The best example I like to use is the superstorm of 1993, which lasted from March 11 to 14 and which is often used as a benchmark winter storm loss event for the insurance industry.
It is classified as a winter storm due to its large impacts on the Northeast states with winter weather as the storm developed into a powerful nor’easter. However, over 40% of the loss came from severe weather that occurred in Southern states from a very strong cold front. The largest event loss (35%) impacts occurred across the state of Florida from numerous tornadoes. Although many in the insurance industry reference the inflation-adjusted loss of over $3 billion for the 1993 superstorm, social economics mean the loss was much larger.
BMS has taken steps to truly understand trends in winter weather events that only look at flooding, freezing temperatures, ice, snow and wind as possible causes of loss, as shown above.
Only two recent periods meteorologically would be comparable cold weather-related loss events, Dec. 17-31, 1983 and Dec. 21- 26, 1989. Today, these events would have resulted in $2 billion and $1 billion in insured losses, respectively, after adjusting for inflation, with no way really to understand how social-economic factors might have played a role if that type of cold occurred today. The current loss development with the 2021 Arctic blast seems to be several times the magnitude of any cold-weather loss the insurance industry has ever experienced.
See also: Increasing Regulation on Climate Change
This is largely a result of the insurance industry taking the brunt of a compounding event, which will be one of the topics at this year's Virtual Reinsurance Association Cat Risk Management Conference. This winter storm is the latest example of a compounding event to affect the insurance industry, resulting in much higher losses than what should likely be expected from an event.
The cold was historic. It was also the trigger for power outages that resulted in the inability to heat and move water, which resulted in water outage. This compounded into many other impacts, like internet outages and even trash collection delays, making the already miserable situation even worse, and likely a worse insurance industry loss.
If the power had stayed on and the demand could have been met, the losses would not be nearly this bad. Time and time again, we see the long-term lack of electricity compounds the overall insured loss. Hurricane Maria’s impact on Puerto Rico or the compounding impacts of the Tohoku Earthquake in 2011 come to mind as recent examples where the lack of power for a prolonged period had very large compounding impacts on insurance industry loss.
Therefore, is it time for the insurance industry to take a much larger role in the vested interest in helping ensure power grids around the world are reliable during times of disasters? Some might say the opposite is happening due to environmental, social governance impacts. The American Society of Civil Engineers rated U.S. infrastructure a D+.
Maybe in the future, the insurance industry can be at the table during discussions around critical infrastructure, which seems to have a clear impact on insured losses.
