Inside The Disaster Blaster

By | November 17, 2010

For those who question the intelligence of insurance companies, here’s a new industry development that should answer those questions once and for all: The insurance industry is ecstatic because it just dropped $40 million on a three-bedroom house that fell down in approximately 12 minutes.

And guess what? They couldn’t be happier. Just for good measure, insurers promptly spent another $200,000 to blow down two more identical houses — just to make sure things were built incorrectly the first time around. They even invited the media to witness the final, spectacular collapse.

Cheap thrills are great, and cheap disasters even better. Welcome to the future of insuring Americans’ homes. Agents: Be excited.

The houses in question — the last of which met its quick demise on a sunny, October afternoon inside a massive, cement building in northwestern South Carolina — hold the promise of drastically reshaping the economics of the property insurance industry, which last year spent $26 billion repairing and rebuilding wind-damaged homes in the United States. The unpredictable Mother Nature is a constant concern for insurers’ balance sheets, as she brings with her the prospect of unexpectedly large claims from disasters wreaked across a geographic scale.

Comparatively, $40 million and a slew of destroyed homes are peanuts.

Only the gods control the wind. Insurers and homeowners carry but a single defensive weapon in their battle to thwart wind-driven catastrophe claims: better construction. Bolstering the collective power of that one defense is the only true method of battling cat claims, according to the industry. That, in a nutshell, is the significance of the Institute for Business and Home Safety’s (IBHS) Research Center in S.C., where the industry-funded, pricey destruction of homes is ongoing. It’s innovative in that, until now, no one has really been able to demonstrate the effectiveness of construction techniques. With the research center’s completion last month, that’s all changed.

One hundred and five fans — each spanning five-and-half feet and generating 300 horsepower — line the walls of the six-story, 21,000-square foot test chamber at the research center. Their combined force generates wind speeds higher than 90 miles an hour, or roughly the force of winds in a category three hurricane. The chamber is capable of holding nine, 2,300- square foot homes, and pummeling them with punishing winds to test how well each stands up. But on the sunny afternoon of Oct. 19, when the most recent test was conducted, it held just two.

The houses were built from plans to an actual house in Illinois, a region plagued by frequent, damaging windstorms. One was built to conventional standards, using techniques and materials commonly applied throughout most of the country.

The other, however, is where the real magic lay. It was built using IBHS’s so-called “fortified” standards, which include metal strapping on joints, a second water barrier on the roof, enhanced decking material and specialized fasteners for attaching siding.

“Strikingly, the difference behind these two is really a short list — it’s only about a $3,000 difference,” said Anne Cope, research director for IBHS. But as the fans started blowing, the real difference became obvious.

The two houses stood side-by-side in the chamber, each facing the wind. As 90-mile-an-hour blasts struck them, the conventional house began to show its weaknesses. Siding flew off; a front window collapsed. During the final part of the test — when doors were opened to show the effects of pressurization inside a house during a windstorm — structural failure knocked the conventional house to the grounds in mere seconds. The fortified house was left relatively unscathed, despite the intense winds and open door.

The difference? “Choice of products,” Cope said. “The products that are on the house that’s still standing were wind‒rated products, and the products that are on the house that’s gone were just regular entry‒level products. The biggest difference, though, is in the strapping. The fortified home has straps that tie the load path from the roof all the way down through the building to the foundation, and that’s what really made the difference. The house that’s gone was not strapped to its foundation, and when it failed, that’s exactly what happened.”

In the future, IBHS will add capabilities for even faster wind speeds, hail and wildfire — further pushing the envelope in terms of testing defenses that homeowners and insurers, can use to protecting their key assets.

“The insurance industry picks up the pieces of people’s lives every year,” said Julie Rochman, IBHS president and CEO. “We spend billions of dollars in claims, paying people for small events as well as the really large, named events. Hundreds of people’s lives are lost, in some cases, thousands. We can do better. In this country, we tend to put the pieces back in the same places in the same way time after time after time. So if we can educate ourselves about how to do better, we can change the dynamic of the way we rebuild, design, repair and maintain houses and businesses.”

Learning From Cars

Rochman, a former exec at the Insurance Institute of Highway Safety (IIHS), knows firsthand the impact of such research. The IIHS — a similar, industry-funded organization that tests cars for safety and damage resistance ­­­— is a major player in getting carmakers to optimize life-saving and claims-reducing features.

That experience — a key mission for the research center — was a main driver to bring Rochman in as IBHS head three years ago.

Her hope is that the research center can generate the same type of impact on the construction industry as the IIHS does on carmakers

“Property insurance is one of those areas where loss costs continue to be through the roof,” she said. “With investments being what they are today, the way to get to profitability, the way to keep a robust, healthy private insurance market is to lower losses. And that’s what we’re going to try to do here is save the industry — and therefore our policyholders —millions of dollars in natural hazard losses every year.”

Kevin Kelso, chief marketing officer for Farmer’s Insurance and IBHS chair, said it’s important that the insurance industry conduct this research and help set improvements for how houses are built.

Research and testing “is a longstanding practice of the insurance industry,” he said. “We’ve had spectacular success on the automobile safety side. The standards that have come out of the IIHS testing have been really influential in improving the quality of car construction. We believe that the same thing is possible with home construction. And with the growing level of housing that’s being built in vulnerable areas, it’s more important than ever that we have housing that can withstand the things that we know perfectly well are going to happen.”

The Property Casualty Insurers Association of America (PCI) hailed the center’s opening as “a landmark occasion for property casualty insurers and the millions of American homes and businesses we protect.

“This pioneering research will help protect families and enable consumers to build stronger homes and businesses,” said PCI President and CEO David Sampson.

Added Leigh Ann Pusey, president and CEO of the American Insurance Association: “The research conducted in this center will help improve construction and structural design methods and ultimately reduce losses to businesses and homeowners around the country.”

So what does that mean for agents? As the frontline between consumers and the industry, Rochman said it’s important that agents and brokers “use this information to talk to their policyholders and customers about what they can do to raise the quality level of construction where they live or where they work.”

“Everybody deserves a safe home,” she said. “Everybody deserves a business that can withstand damage so that jobs aren’t lost and the tax base isn’t ruined. A lot can be learned here, and we hope to push this information out as widely as we can so everybody can use it.”

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