As severe convective storms (SCS) become more common, insurance companies are feeling the pressure to change how they handle risk. A recent partnership with Munich Re has highlighted the urgent need for the industry to rethink its strategies in light of rising losses from these extreme weather events.
In 2024, tornadoes, hail, and wind storms caused an astonishing $56.4 billion in damages, according to Munich Reinsurance Company. This alarming figure reflects not just the growing population in urban areas and inflation, but also the increasing severity of these storms. Tehya Duckworth, a senior vice president at Munich Re US, emphasized that the record losses should prompt insurers to take proactive measures.
Duckworth pointed out that when SCS events occur, they are not only happening more often but are also more intense. This "frequency of severity" means that insurers must adapt to the reality of extreme weather being a constant threat. A significant factor contributing to these losses is the "bullseye effect," where urban development pushes into areas previously untouched by severe weather. As storms expand their reach, more valuable properties are caught in their path.
Additionally, meteorologists have observed a shift in storm activity. Regions that once experienced fewer tornadoes, such as the Southeast and Mid-Atlantic, are now facing more frequent severe weather. Climate change is likely influencing these changes, leading to unpredictable weather patterns. For instance, in the summer of 2023, a persistent weather pattern caused multiple SCS outbreaks in Texas, marking it as one of the worst years for SCS-related losses.
Insurers must adapt their practices across several areas, including underwriting, claims management, and pricing. Duckworth noted that understanding the vulnerabilities of properties, such as roofs, is crucial. Older roofs, particularly asphalt shingle types, are more prone to damage. Some insurers are now adjusting their policies to account for the actual cash value of older roofs, incorporating depreciation schedules for transparency.
Data collection is also vital. Insurers are gathering property data through inspections, but many fail to utilize this information effectively. Organizations like the Insurance Institute for Business and Home Safety are working to assess vulnerabilities and improve risk management.
Duckworth highlighted the importance of ongoing inspections, not just at the start of a policy, but throughout its duration. With many experienced adjusters retiring, training new staff on policy language is essential to ensure claims are handled correctly.
Pricing models must also evolve. Duckworth warned that many current models underestimate the losses from SCS events. Insurers need to recalibrate their models to reflect the reality of increasing storm severity.
Managing risk accumulation is another challenge. Insurers need to be aware of how widespread storm losses can be, especially when writing policies across multiple regions.
To succeed in the long term, Duckworth advised that insurers focus on education. Many have extensive networks to help inform policyholders about risk management and their actual exposure. Additionally, improving building codes in storm-prone areas can enhance resilience against severe weather.
FEMA estimates that for every dollar spent on mitigation, six dollars can be saved in future losses. As climate-driven storms continue to rise, it’s clear that insurance companies need to reevaluate their strategies to remain effective and resilient.