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The Perfect Storm

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Extreme weather is wreaking havoc on the catastrophic market, especially in America’s Heartland.

In the classic movie The Wizard of Oz, Dorothy famously looks around after awakening with her dog in the Land of Oz and says, “Toto, I’ve a feeling we’re not in Kansas anymore.” That line takes on an entirely new but still appropriate meaning for the insurance industry, which lately has come to realize that Kansas isn’t exactly Kansas anymore.

Indeed, Kansas is emblematic of the changes taking place in much of the Midwest as an increasing number of carriers realize the region not only isn’t the golden sea of tranquility they had once assumed it to be, it’s also no longer the place to write scads of underpriced business simply to offset East Coast or West Coast losses.

The East and Gulf coasts have their expensive hurricanes and the West Coast has its earthquakes, mudslides and costly fires, but states like Oklahoma, Missouri and, of course, Kansas, are now seeing an increased number of tornadoes, thunderstorms and storms producing large hail that inflicts extensive damage to buildings, roofs and fleets of vehicles. In 2011, insured losses from tornadoes and thunderstorms exceeded $25 billion, more than double the previous record, with tornadoes the costliest type of natural disaster based on insured losses, according to Munich Re.

Insurers apparently are waking up to this new reality. “Every time you watch the news and the lead story is about a storm here in the Midwest, the market has changed again,” says Branch Manager Michael Ehrhardt of the Burns & Wilcox St. Louis and Overland Park, Kansas, offices. “If you haven’t had a wind and hail claim, you know someone who has. If you haven’t been affected by the wind and hail claims, it’s only because your policy hasn’t been renewed yet. Company rates are going up. [The cost of] wind and hail [coverage] is going up. Standard earthquake capacity is going away and is being placed in the excess and surplus (E&S) market by a broker like Burns & Wilcox.”

Standard markets either have begun to reduce or are completely restricting the availability of catastrophe property coverage, especially for flood and earthquake. Carriers that once would have provided full earthquake coverage, or a $5 million sub-limit for a massive structure, now are offering a $2.5 million or a $1 million sub-limit; some are outright refusing to provide any earthquake coverage, according to Ehrhardt.

Wind and hail coverage also is becoming difficult to place with standard carriers, though carriers usually don’t say that they won’t provide it. Instead, they tend to point to any wind or hail claim the client had filed in the past and thereby decline it. Or they may apply a separate, higher wind-hail deductible, usually around $2,500, but sometimes as high as $25,000 or even $50,000. Habitational risks like large apartment buildings and complexes, which represent a tough class for most coverage anyway, have been particularly hard hit by the standard market’s limitations on wind and hail coverage. Nowadays they often go to the surplus lines market for coverage, says Brokerage Manager Daniel Brimer of the Burns & Wilcox St. Louis office.

No matter how expensive or hard to find coverage may be, or how willing they are to absorb catastrophe risk, businesses are finding they simply cannot do without these coverages. “As lending requirements have strengthened because of economic concerns and loans in default, lenders are now requiring purchase of catastrophe policies and monitoring this with more enthusiasm,” says Ehrhardt.

And they are probably right to do so. Storms dropping baseball-sized hail falling at a velocity of 120 mph are a major concern; they can obliterate roofs or quickly destroy a fleet of vehicles in an open lot. The tornado that pummeled the city of Joplin, Mo., on May 22, 2011, made national headlines, but a month before, on April 22, the Good Friday Tornado hit Lambert International Airport in St. Louis, peeling off a large section of its roof, shattering hundreds of glass panes, closing the airport for a day, blowing a shuttle bus on top of a wall and flipping a tractor-trailer. Two streets in a residential subdivision adjacent to the airport simply ceased to exist. Damage was in the tens of millions of dollars.

The insurance industry is reacting. “Historically, carriers have had money in the kitty to pay for big hurricane or earthquake losses because they haven’t had big claims like Joplin,” observes Brimer.

“The interior of the country has had smaller events. But the frequency is much greater now, so carriers are pulling back on other catastrophe offerings” because the dollars can be very real.

As the standard market readjusts its appetite, the E&S market has become a better bet, especially when a quick turnaround is needed for a challenging risk. Good brokers have the market relationships and the knowledge to place even tougher risks quickly, says Brimer. He recently found a market for a $20 million Chicago office building that had been vacant for four years, and he got the quote within 24 hours so the sale could go through.

In a market in transition, that alone is a modest feat of wizardry.

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