U.S. insurers have taken another hit these past few weeks as tornado season continues to wreak havoc on the nation. The tornadoes, which swept across parts of the U.S. from May 2-11, have the potential to be the costliest in U.S. history, according to the Insurance Information Institute (I.I.I.).
Boston-based AIR Worldwide, which uses a computer modeling program to estimate insured losses from catastrophes, has put the damages at $2.2 billion. Actual claims filed now exceed $1 billion, with damage assessment continuing in the affected areas. The 412 tornadoes during the first 10 days of May were the most since the National Oceanic and Atmospheric Administration began record keeping in 1950. The previous record for the first 10 days of May was 177 tornadoes set in 1999. More than 300 counties affecting 19 states suffered losses and more than 40 deaths were blamed on the storms.
The largest tornado-related loss in U.S. history was in April 2001, when tornadoes and storms struck 16 states including Missouri, Nebraska, Texas, Kansas, Illinois and Pennsylvania, costing insurers $1.93 billion (adjusted to 2002 dollars). Prior to 2002, the largest tornado-related loss was in May 1999, when tornadoes and storms struck 18 states including Kansas and Oklahoma, costing insurers $1.6 billion (adjusted to 2002 dollars).
The recent increase in homeowners insurance rates has been attributed, in part, to the frequency and severity of catastrophes, which began to increase dramatically during the 1990s. Over the past 12 years, insurers paid out more than $100 billion in catastrophe-related losses — about $700 million per month — many times more than in previous decades. Catastrophes include well- known events such as Hurricane Andrew and the Northridge earthquake, but also hundreds of smaller disasters associated with tropical storms, tornadoes, wildfires, hail, ice and snow.
“While the industry has the capacity to pay these claims, these latest storms substantiate what the industry has been seeing for years,” said Robert Hartwig, senior vice president and chief economist, I.I.I. “Homeowners insurance rates in many parts of the country continue to rise because of the extraordinary costs associated with paying these claims. In fact, virtually every part of the country is now at risk for billion dollar disasters,” he said. “Because of increased catastrophes and other factors, insurance companies have changed the way they approach the underwriting, pricing and marketing of their insurance coverage. They have also changed the way they plan for their response to the claims that are generated in huge numbers by catastrophic events.”
According to the I.I.I., homeowners insurers over the past decade paid out $1.18 in losses and expenses for every $1 they earned in premiums. In 2001 alone, homeowners insurers paid out $8.9 billion more in losses and expenses than they received in premiums, the second worst year on record (1992, the year of Hurricane Andrew, produced losses of $11.5 billion). Losses in the homeowners insurance line over the past three years (2000 through 2002) are estimated at $19 billion, rivaling the $20.3 billion in insured property losses from the September 11 terrorist attack.
Official insurance industry property loss estimates from the tornadoes will be available from Insurance Services Office (ISO) in the weeks to come.
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