Year in review: Growing cannabis, cyber and weather claims
How the emerging marijuana industry, the sophistication of ransomware and an increase in wildfires are affecting insurance claims.
Claims activity in 2019 has seen a number of familiar trends such as natural and man-made disasters like flooding, earthquakes and fires as well as mounting cyber claims. In recent years, cyber topped emerging risks as insurers not only scrambled to figure out how to cover incidents but also watched as businesses of all sizes lagged on adopting coverage.
In 2019, we watched as a newer threat started gaining momentum and stumping insurers in the process: the wild west of cannabis. As more and more states legalize the medicinal and recreational use of marijuana, insurers are trying to figure out how to insure a substance that is still classified as a Schedule 1 drug, making its use or sale illegal at the federal level.
Insurers got closer to a win when the House passed the SAFE Banking Act in September, which provides financial institutions with a safe harbor for providing services to marijuana-related businesses in states where it’s legal. The National Association of Professional Insurance Agents (PIA National) and other allies worked to secure parts of the Clarifying Law Around Insurance of Marijuana (CLAIM) Act into the SAFE Banking Act. This would prevent federal criminal prosecution of and civil liability for agents, brokers and insurers, and their officers, directors and employees when engaging in the business of insurance in states that have legalized cannabis in some form.
New business — and new risk
There are approximately two dozen insurers offering marijuana-related coverages to businesses involved in the growing and selling of the drug. Many of these businesses operate as cash-only, and the passing of the SAFE Banking Act is expected to help them work with financial institutions to further legitimize and ensure their businesses.
Cannabis use isn’t expected to grow, per se — it’s always been around in one way or another. However, marijuana as an industry is expected to grow, and that growth is something insurers need to prepare for, Andrew Holmes, chief underwriting officer for UK-based CFC Underwriting, told Claims earlier this year. Marijuana can impact many facets of the insurance industry, including auto (personal and commercial), property & casualty, commercial general liability, workers’ compensation, directors & officers liability, cyber, product liability, health and life.
An industry with little to no regulation and lack of legal representation are new enough for the insurance industry to figure out how to insure. Then this year, another twist was thrown into the mix when the Centers for Disease Control and Prevention announced that 33 deaths due to pulmonary disease seemingly occurred in relation to vaping a black market THC product. The incident is a wake-up call for companies that have little to no legal representation and will start looking to the insurance industry for help to bolster its business and supply chain.
Cybercrime time
Insurers also continued to watch cyber risks in 2019, as they have been for the last few years. According to the 2019 Hiscox Cyber Readiness Report, 53% of businesses reported a cyberattack in the previous 12 months. Firms are still slow to adopt cyber coverage, however, which is cause for alarm when the global cost of cybercrimes is estimated to be between $445 and $600 billion, according to McAfee’s 2018 Economic Impact of Cybercrime Report.
These costs are mounting as the sophistication of cybercrime increases. It isn’t just data breaches businesses need to worry about — claims are increasing due to ransomware, malware and business email compromise activity in industries from schools to manufacturing and more. Patrick Cannon, head of enterprise risk claims at Tokio Marine, says insurers are now regularly paying out $1 million ransom claims every 24 hours. In 2019, two specific types of ransomware have been targeting organizations: LockerGoga and Ryuk, according to Aon.
Going into 2020, insurers need to stay on top of ever-evolving cyber threats and keep up with demands from insureds for coverages that will help protect them in the event of increasingly sophisticated attacks.
It’s only natural
Meanwhile, global economic losses from natural catastrophes and man-made disasters in the first half of 2019 amounted to $44 billion, according to Swiss Re Institute’s preliminary estimates. Of that, $19 billion were covered by insurance, with the main drivers being thunderstorms and flooding events. These estimates were 22% lower than the 2000-2018 average, according to a report by Impact Forecasting, the catastrophe model development team of Aon’s Reinsurance Solutions business.
But as they say, the night is still young. In 2018, the top three insured losses globally were caused by events that occurred after September 1: The Camp Fire, Hurricane Michael and Typhoon Jebi.
Wild side
Last year when our Year in Review went to press, the Camp Fire was raging in Northern California. The blaze, sparked by an electrical fire transmission by energy provider PG&E, went on to burn 153,336 acres and become the highest insured loss of 2018, according to AIR. Insured losses climbed to $614 million in the first three months of 2019, pushing total claims to over $12 billion as of April 2019, according to the California Department of Insurance.
As we go to press this year, dozens of fires are blazing through a number of areas in Northern and Southern California. Most notably so far are the Kincade Fire in Sonoma County and the Getty Fire near Los Angeles that have burned thousands of acres. Fire containment is slowly rising, but other fires like the Easy and Hill Fires are sparking by the hour.
In an effort to prevent further blazes, PG&E and Southern California Edison have shut off power to thousands of homes and businesses, and many have been forced to evacuate. For the first in its history, the National Weather Service has issued its first-ever “extreme red flag warning” for much of Los Angeles and Ventura counties.
It wouldn’t be unlikely for wildfires to top 2019 claims again. According to CoreLogic, the U.S. has been experiencing record-breaking wildfires over the past several years. In 2018 alone, nearly 9 million acres burned — the sixth-highest total since modern historical records began in the mid-1900s.
Shakedown
California made headlines for other natural disasters, with this year being the 30th anniversary of the Loma Prieta earthquake (otherwise known as the World Series earthquake) that struck the San Francisco area in 1989. At the time, the 6.9 magnitude quake was the worst to hit the nation since 1906. The now-infamous “World Series earthquake” cost $902 million in insured losses.
Global risk and analytics firm RMS calculated that if the quake were to strike again today in exactly the same place, it would cost $4 billion in insured losses. That possible reality is sobering in the wake of two earthquakes that struck Southern California in July of this year.
On July 4 and 5, two earthquakes at 6.4 and 7.1 magnitudes, respectively, struck near the city of Ridgecrest, about 125 miles north of Los Angeles. The quakes were the worst to hit California since 1994’s Northridge earthquake, a 6.7 magnitude tremor that hit Los Angeles and caused $44 billion in damages. While damages weren’t notable, the earthquakes were a reminder of how susceptible California is to a major loss due to the natural catastrophe.
For Californians, the arrival of the next major earthquake isn’t a matter of if, but when, and when it strikes, it will most likely be catastrophic — and 75% of losses would be uninsured, according to AIR.
Globally, earthquakes have struck other parts of the Americas, including the 8.0 magnitude Lagunas earthquake in Peru and 6.7 magnitude quake in Coquimbo, Chile.
Into the hurricane
Hurricanes did their damage in 2019, though not as catastrophically as in previous years. Hurricane Barry in mid-July struck Louisiana as barely a Category 1 storm but caused record rainfall in Arkansas. In total, insured flood and wind losses (excluding NFIP losses) from Hurricane Barry are estimated to cost between $300-$600 million, according to CoreLogic.
Hurricane Dorian hit the Bahamas with an estimated 1.5 billion to $3 billion in insured losses, according to AIR Worldwide. The storm was the worst to hit the Bahamas in its history, and its legacy will last for years due to high winds that stalled over the islands, causing an estimated $7 billion in property damage.
Windstorms take over
Hurricanes and tornadoes account for a decent amount of claims this year. According to AGCS, windstorms are the fourth cause of insurance losses by total value of claims.
In October, tornadoes in Texas were the costliest in the state’s history, resulting in a preliminary estimate of $2 billion in insured losses, according to the Insurance Council of Texas. The estimate makes the Oct. 20 tornado outbreak the costliest in Texas history.
In the month of May, the U.S. was struck by 500 tornadoes. The tornadoes were part of weather patterns that were to blame for widespread flooding across the Great Plains and the Midwest.
Keeping an eye on risks and their impact on the insurance industry can help carriers and policyholders better prepare for future incidents. While wildfires and severe storms can be unpredictable, they are not unexpected and taking steps to mitigate their effect will help everyone recover more quickly.
Aubrey Gene is a freelance writer for Claims magazine and PropertyCasualty360.com.
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