Texas Big Freeze: Why are the numbers so far apart?
(Re)insurers are now expecting that the Texas winter storm will be a $10bn-$20bn loss, but that huge range reflects widespread uncertainty and difficulty in getting a handle on the loss.
Some sources are still saying that they see the loss at the lower end of this range and are increasingly confident it can be contained to $10bn to $15bn.
“We are struggling to get to $10bn on Texas, so I don’t know how KCC got to $18bn,” one underwriter said.
Another said: “If it gets to $20bn that will be far more than it feels at the moment.”
However, others were more conservative due to the nature of the loss, expecting that the freak damage to a southern state would drive remediation costs much higher, causing a split in opinions on the loss.
There are several factors driving the major uncertainty. First is the unfamiliarity with the event and huge breadth of its impact – many models have not even envisaged a winter storm loss of above $10bn, and some lower end severe winter storms would have modelled as low as $5bn.
A prior similar event, the 1983 Big Freeze, would have cost $7bn in 2015 dollars, RMS calculated at that time.
This also makes judging how the severity of losses will compare to prior benchmarks difficult.
A similar major freeze-event winter storm occurred in 1983 – dubbed the Freeze Outbreak, which also impacted Texas – for which RMS put insured losses at roughly $7bn in 2015 dollars.
Secondly, projecting how much demand surge could amplify losses is expected to be particularly complex given the pandemic. Pandemic distancing will also make calculating lost business income difficult, and on top of BI losses, there are other complex coverage questions that will come into play, such as mold limitations or utility coverage eligibility.
One source indicated that demand surge could add 30% to the Texas storm’s loss total, above the 20% cost inflation seen in the aftermath of hurricanes Harvey and Maria.
A major swing factor in loss estimates is how much of the loss is expected to come from commercial lines business, with sources divided on the personal/commercial split.
A final issue that may impact how claims flow to the reinsurance market is whether the storm will be recorded as a single event by insurers or split into multiple events following multiple PCS designations.
AIR Worldwide issued an open-ended loss forecast that the storm would be “above $10bn” and highlighted many of these challenges in modelling for the loss.
“The power outage component and its exacerbating effect on losses are not explicitly captured by the AIR model, limiting the ability to capture the overall impact using the model alone,” the firm said, adding that demand surge questions added to the difficulty.
Brian Haden, president of the Texas Association of Public Insurance Adjusters (TAPIA), told this publication that he believed the snowstorm could be a “$12bn plus” total insured loss, and that getting up as high as $20bn could be possible factoring in interruption and non-property claims.
“The number of people impacted is far, far greater than any hurricane we’ve had,” Haden said.
While some homeowners will file claims that will ultimately fall under their deductibles, which are typically around 1%-5% of total insured values in the state, this would still put pressure on insurer resources.
Moreover, Haden said that he expected average severity to be higher than historical levels. Typically, water losses might come from one point of pipe break on a property, but the adjuster said that in many cases, he was seeing three to five breakages, meaning multiple rooms in a property rather than just one or two will need repair.
“These are going to be – on average – much more extreme water loss claims [than historically],” he said.
The adjuster said he had visited one apartment complex where 48 units had suffered water damage and none were left habitable.
However, his typical cases skew towards high-value claims – exceeding $100,000 and in one case, more than $500,000, he said.
He expected greater volumes of residential claims than commercial. On the commercial side, more businesses had been re-opened in Texas than nationwide amidst the pandemic, which could make it difficult to establish the baseline for judging BI losses.
On the commercial side, water outages were a delay to many businesses opening again, even if they had repaired burst pipes already, Haden added.
CBS was reporting on 24 February that water outages may continue for some Dallas residents for another week. As of 25 February, the Texas Commission of Environmental Quality said one million were still subject to boil water notices.
Many Texan insurers implemented relatively low sub-limits at $5,000 or $10,000 some years ago due to concerns about mold losses, but the TAPIA director said that these should not apply if homeowners took steps to air out their property where possible.
Some market sources agreed with TAPIA’s take that severity would be significantly higher than average.
“When an event happens in a part of the world where it is unusual, you can expect the frequency and severity to be higher than you would budget for,” one pointed out. “It will be hard to adjust this loss. Texas is not used to this.”
Early guidance from insurers also ranges widely, one carrier suggested, from $9,000 to $15,000 per claim – suggesting overall insured losses on a rough extrapolated basis of sub-$10bn up to $15bn.
As a prior benchmark, State Farm told the San Antonio Express-News that the average Texas water damage claim was $10,300 last year, versus a nationwide $15,500 average.
There were also varied views on how much damage will come from commercial lines – Karen Clark & Company (KCC) cited commercial damage as a major factor in its $18bn estimate.
The fact that commercial buildings were empty and have longer roofs were highlighted by some as creating more vulnerability.
But with few examples being discussed of major commercial damage, other sources said that they were struggling to see where these claims would arise based on reports to date. However, these claims do typically take a number of weeks to become apparent.
Rick Miller, who is the US property leader at Aon Risk Solutions, said the bulk of losses from the event would likely fall on the personal lines sector, but commercial lines claims would still be “significant”.
Miller said that commercial structures typically have better risk management practices in place and are more substantially built, but that multi-family properties and the real estate sector might see “substantial” losses.
Insureds and brokers in the area are still assessing the extent of damage to the energy sector.
“I would not expect this to have a big impact on the energy business. And it's not that those locations didn't suffer losses. But certainly [insureds] in the energy sector carry very significant retentions. I would more than likely expect that it would not go into the insurance layer.”
Miller called the BI component of claims “the most complicated” part of estimating the industry loss tally, and that BI claims would be higher for businesses that experienced significant damage, versus those that just lost power.
Speaking more broadly about claims, he added: “I think this is going to be an event of multiples upon multiples of small business claims.”
Some schools are reported to have taken significant damage, which would likely come through a limited segment of the market participating in municipal programs.
According to one broker, “a lot” of school districts had losses in the $3mn-$4mn range, and several had claims so far costing above $10mn. The same broker said it even had one loss expected to be north of $50mn.
Repair delays will also exacerbate claims, said Johnny Fontenot, head of the Dallas office for retail broker McGriff.
“Restoration companies [typically] send people way in advance of a hurricane,” he commented. “A week in advance”, before a hurricane, he said “they're all staged and they're already all over the place. In this event, no one staged anything. No one was ready for it.”
He shared an anecdote of a plumbing company in the area that had a backlog of 11,500 appointments as of the middle of last week, and of a local personal lines agency where half of its customers had claims.
Split of loss
Clearly, the higher the loss rises, the further the loss would be expected to skew towards the reinsurance market.
Early on, sources saw the event leaning more towards an insured retained loss. One underwriter noted that with disruption highest inland, where nationwide carriers dominate, this should remain the case.
In one affirmation of this view, Liberty Mutual CEO David Long said on the company’s earnings call that the loss would be “ugly, but not ugly enough to have reinsurance kick in”.
“I think we've had something like 20,000 claims reported already. And it's a little early to frame what the total loss could be, but it will be easily in the sort of mid-range, hundreds of millions of dollars; but this will unfold over time,” he said, according to an SNL transcript.
The firm’s president of global retail markets, Tim Sweeney, said that it would primarily be a homeowners’ event for the carrier, with 20,000-25,000 claims expected, although the situation was “very fluid and very early”.
But amongst the more regional players with larger quota share coverage, some sources name checked Homeowners’ of America and Germania as carriers that may pass through losses early on.
Aggregates were also a concern for the reinsurance market – particularly for the likes of USAA, which buys both traditional and cat bond cover in relatively low-attaching aggregate form over a period running from last year into this year, and Nationwide.
Given how early on in the year it is, the erosion of deductibles will also be a concern for January incepting aggregates.
“It will probably impact regionals more. But if State Farm and USAA have 20,000 claims each, you can see how that will build up for nationals as well,” one said.
“You could see them eroding huge amounts of their deductibles on agg programmes.”
On the issue of how many events the snowstorm might constitute, splitting it into multiple events could benefit either insurers or reinsurers depending on the structures, although multiple retention losses would likely be more painful to the primary market or aggregate reinsurers.
But McGriff’s Fontenot said the claims were generally being bundled rather than treated as a multiple PCS-designated loss.
“We haven't had a problem with that yet,” Fontenot commented. “All the carriers have understood it was eight successive days. Any carrier that tries to say that, they're going to have a difficult time defending that position.”
The breadth of the loss is also not helping establish a clear picture, as there will be a large number of potentially very minor claims for things such as food spoilage.
More esoteric points of coverage are also uncertain.
The Insurance Council of Texas told the San Antonio Express-News that additional living expenses coverage would not generally respond to expenses of staying in a hotel short term “because of loss of power/heat when it’s a widespread event like we experienced these last few days,” although clearly for longer-term disruption it would respond.
AIR Worldwide also raised queries over how business interruption cover would apply. Some policies include utility service interruption coverage, but it said there was a grey area as coverage only applies if the property damage in question is a “result of damage to a covered utility property by the same peril”, and the cause still remains unclear.
AIR said that subrogation remained a possibility with respect to utility losses. Local media has reported that governmental grid operator Ercot has sovereign immunity from lawsuits, although a court case on a separate issue is set to test this principle at the state’s Supreme Court later this year.
The issue of how much damage has been caused by the state’s ageing infrastructure also raises the fundamental question over how the industry prices for these kind of factors – which are by no means unique issues to Texas.
Looking ahead to how the loss will impact mid-year reinsurance renewals, one underwriter said this will no doubt play a factor.
“Texas will blow holes in reinsurers’ Q1 cat budgets and they will need dollars coming in at 1.6.”
On the primary side of the market, McGriff’s Fontenot said that property rates had been starting to stabilise in the past quarter, following prior cat losses in the region, including a heavy hailstorm hitting Dallas in 2016, Hurricane Harvey in 2017, and a major group of tornados in October 2019 that caused an estimated $2bn in damage.
“We were seeing 15%-20% rate increases [and] were just starting to get where we’re getting 9%-10% rate increases. And now this has happened, and that's going to adversely impact rates.”
Unlike during Hurricane Harvey, where insurance recoveries were limited by the lower availability of flood limits, most of the claims from the winter weather will be covered. However, the losses are also impacting business whose revenues had already been devastated by the pandemic, and had begun trimming their insurance coverages in an effort to cut costs.
“A lot of domestic carriers have pulled out of more and more of our placements, with maybe four or five domestics now on a layer program through Lloyd's.”