Stay Vigilant: 2013’s Enduring Catastrophe Lessons

Hurricane season starts in a few weeks. As the claims community prepares for the uncertain months ahead, many carriers may think back to an uneventful 2013. However, while no catastrophe events resulted from hurricanes, it would be a mistake to assume that the wave of apparent good fortune will continue. Rather, the claims community should look to the recent past as a reminder to stay vigilant. Now is the time to review catastrophe plans, explore contingencies and prepare to serve your customers.

Mixed Messages

Catastrophe activity in 2013 was either above or below average depending on whether you’re looking at frequency or severity. Property Claim Services (PCS), a division of Verisk Analytics, designated 29 catastrophe events in 2013, primarily thunderstorms, affecting 25 states and the District of Columbia. However, catastrophe losses in the United States were only $12.9 billion. Put in perspective, the entire year’s result was lower than that of each of the top three catastrophe events of the past 15 years: Hurricane Katrina at $41.1 billion (2005), the World Trade Center attack at $18.8 billion (2001), and Superstorm Sandy at $18.8 billion (2012).

The gap between catastrophe activity and insured losses underscores the lack of correlation between frequency and severity. For the 29 catastrophe events in the United States in 2013, the overwhelming majority (83 percent) were thunderstorms. That stands in stark contrast to 2012, in which 26 U.S. catastrophe events led to nearly $35 billion in insured losses. Sandy, of course, drove the increase, accounting for more than half of 2012 insured catastrophe loss activity. Excluding that one event, 2012’s losses would have exceeded those of 2013 by 26 percent (as opposed to more than 170 percent).

The reason for 2013’s low level of losses stems from the Atlantic basin. Despite the formation of 13 named tropical storms (slightly above the 10-year average), none made landfall. As a result, catastrophe-prone states such as Louisiana and Florida sustained comparatively little damage. Louisiana had only $593 million in insured losses from catastrophe events despite having suffered $33 billion in the past 10 years. Florida is close behind at $32 billion in the past 10 years, yet had no PCS-designated events last year, resulting in no catastrophe losses. Texas was among the five most affected states in the country last year, which is not unusual. However, that dubious distinction required only $1.5 billion in insured losses. In the past decade, Texas suffered total catastrophe insured losses of $27 billion.

Again, the impact of noncorrelation becomes evident. Despite an active year in the Atlantic basin, none of the forming storms made landfall. Named storm activity does not necessarily result in catastrophe events. Had the wind blown differently, insurer catastrophe plans might have been tested. The importance of vigilance is clear – even during or after a slow year.

Enduring Lessons

Big years tend to produce the most frequently cited lessons. Claims executives made sure that their organizations learned from superstorm Sandy; Hurricanes Katrina, Rita, and Wilma; and the one-two punch that Hurricanes Gustav and Ike brought to Texas in 2008. Quiet years, however, can be equally instructive.

For the coming hurricane season, catastrophe claims department leaders can ensure that they have established relationships with independent adjuster firms and continually provide training before the need becomes acute. For tropical-storm-prone states, such as Florida and Louisiana, claims organizations should revisit contracts with vendors to confirm availability at prices already negotiated to mitigate future claim payments without compromising customer service.