The rise of CAT claims

The insurance industry is well aware of catastrophic claims. Adjusters and underwriters know when hurricane or tornado seasons start.

Adjusters may have to go to a different part of the country to handle severe losses, and underwriters may put moratoriums in place for writing new business in certain areas as storms approach.

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While some years have more CAT claims than others, 2017 was an astounding year with hurricanes and wildfires. There were 17 named storms including 10 hurricanes, six of which were Category 3 or higher.

A busy hurricane season

Hurricanes Harvey, Irma and Maria caused damage into the billions of dollars and destroyed islands. For example, 95% of Barbuda’s buildings were damaged or destroyed, and 90% of the power was cut off in Puerto Rico. More than 60 inches of rain fell in two locations over a period of a few days. Many areas remain devastated and still struggle to meet basic needs.

Recovery has been slow. Trailers for displaced residents in Texas were not available until 43 days after the storm, and it was more than four months before there were more than 900 trailers available. Approximately 9,000 people remain in FEMA-funded housing while repair requests are processed.

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At the time of this writing, six months after Hurricane Maria hit Puerto Rico in September; only 83.8% of Puerto Rico’s power has been restored. Even getting to this point has been complicated; many were without power, water and food for months, and rescue operations were complicated since Puerto Rico is an island.

Wildfires leave scorched earth

Meanwhile, western states were experiencing one of the worst wildfire seasons on record. California alone lost more than 1.2 million acres to fires. Estimates are that the total cost of the wildfire season will reach $180 billion. Prior to the wildfires, the states had experienced a five-year drought. Such a drought followed by record rainfall made the situation worse by providing a perfect environment for new vegetation to grow, providing fuel for the fires.

After the wildfires, the scorched ground had no remaining plants, giving way to mudslides when rains finally arrived. Houses were swept off of their foundations as mud and boulders slid down hills, taking out everything in their path. Mud up to five feet deep was reported, and there were several deaths and injuries.

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Hundreds of thousands of people have lost property and loved ones to these disasters, and are trying to return to some sense of normalcy. Many were uninsured for flood or underinsured for fire. After the disasters, the California Insurance Department reminded carriers of its efficient proximate cause doctrine, which states that if a covered loss is an efficient proximate cause of an uncovered loss, that uncovered loss is still covered. Therefore while mudslides are excluded, if the mudslides are a direct result of the denuding of vegetation from the wildfires, the damage from the mudslides will be covered.

Factors affecting claims

While insureds were trying to recover, insurance companies faced a severe shortage of adjusters able to handle all these claims in different areas of the country. FEMA was practically begging adjusters to go to damaged areas in order to process the large volume of claims.

While this was an exceptional year in many ways, indications are that this will not be an isolated occurrence. Many factors are in play, including climate change. Even small rises in temperature have significant effects on the weather patterns that cause rainfall, temperature raise and drop, and length of seasons.

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Unseasonably warm or cold spans of time affect crops and other growing plants, which could affect the landscape. Changing weather patterns can lead to droughts or unusual rainfall, each bringing its own problems. Many blame human development and actions for part of the changing environment.

Over time, development along the coasts has exploded. While 10% of the country accesses the shoreline (except Alaska), at least 39% of the population lives along the coast. More than 52% of the population lives on land that drains into watersheds, where water and sediments drain into a large body of water such as an ocean or a bay.

Population density along the coast is six times larger than the population density in inland areas. Not only that, but there are many people who live along rivers and streams that flood after spring rains and snowmelt occur. In March, parts of downtown Cincinnati and northern Kentucky were flooded due to heavy rains.

Development dangers increase risks

Unfortunately, the structures built alongside areas at risk of flooding do not always adhere to proper building specifications, leaving people exposed to significant loss. Some choose to rebuild in the same area after a flood loss occurs, putting a significant strain on flood insurance resources.

Construction developments near water are not the only ones facing potential hazards. Building too close to forested areas has had the same effect. Homes and other buildings are constructed in the wildland-urban interface zone, which is the transitional space between human development and unoccupied land. These areas are prone to wildfires, and more construction puts more property at risk. Fire spreads rapidly and can easily spread from one development to another. Some carriers are now considering restrictions on writing coverage in such areas.

After the wildfires have passed, there is the risk of mudslides. Since many of the buildings in wildfire areas are frequently built on hills or slopes, the risk of mudslide damage is exacerbated. Again, these structures, assuming they survive the wildfire, are more susceptible to mudflows when rains drench scorched and denuded land. Moreover, as with flooding, living near a wildland-urban interface has become a desirable place to live aside from the inherent hazards, and these areas have increased development as well.

Aside from natural changes in climate, humans often heighten the risk of destruction caused by natural phenomena by moving into susceptible areas. It is pleasant to live near the ocean, a lake, a river or a woody area, but each has its own distinct risks.

Unfortunately, people have ignored the risk and overbuilt in these areas, putting billions of dollars of property at risk because of poor planning. There are rarely used construction techniques that can minimize damage from natural events. In order to address the increases in natural hazards, we must review the where, what and how of property construction.

Christine G. Barlow, CPCU, (cbarlow@alm.com) is an editor with FC&S Online, the authority on insurance coverage interpretation and analysis for the P&C industry. It is the resource agents, brokers, risk managers, underwriters, and adjusters rely on to research commercial and personal lines coverage issues.

For more information on the lessons insurers have learned from last year’s active hurricane season, plan to attend America’s Claims Event in Austin, Texas, from June 25-27.