Claims

Preparing for Hail

Hailstorms present a growing threat, but insurers can minimize losses by studying storm data.
By: | November 2, 2016 • 7 min read

Hailstorms are expanding their geographic footprint in every direction.
In Texas, storms are striking as far south as San Antonio. While the city normally experiences one to five hailstorms per year — a moderate risk zone for hail — this year it had more than 30, according to data tracked by Liberty Mutual’s risk engineering arm.

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“Hail activity has also been expanding more into the North and Northeast,” said Arindam Samanta, director, product management and innovation at Verisk Insurance Solutions.

“We’ve noticed it becoming more of a problem in parts of Ohio, Illinois and Minnesota, outside of traditional hail-prone areas.”

As these areas become more developed, more properties are built in hail’s path, increasing claim frequency and severity.

Areas on the west and south sides of Oklahoma City, for example, have largely transformed from wheat fields to sprawling suburban communities in the last 10 years.

Arindam Samanta, director, product management and innovation, Verisk Insurance Solutions

Arindam Samanta, director, product management and innovation, Verisk Insurance Solutions

“We know that the weather patterns responsible for the formation of hail are fairly consistent over certain geographic areas — the Great Plains states, the Rocky Mountain West, parts of the Midwest — but over time the expansion and aerial coverage of cities and suburbs throughout these regions have increased, so the number of properties in the path of these damaging hailstorms will increase,” said Curtis McDonald, product manager, weather verification services, CoreLogic.

The type of storm has changed too. Smaller stones with diameters of less than 2 inches combined with higher velocity winds wreak different types of damage than larger, denser stones.

Hail typically smashes up roofs, siding, skylights and roof-mounted equipment like refrigeration units. In 2016, though, wrecked air conditioner coils have constituted roughly 30 percent of hail damages.

The smaller hailstones have an easier time getting into the coils — which are fragile and susceptible to damage — but are not heavy enough to significantly damage roofing materials and sturdier equipment.

The costs associated with hail damage have also risen due to the expensive repair and replacement of air conditioning units that are either too old or too new. For out-of-date equipment, there may no longer be parts available, while newer units must adhere to eco-friendly guidelines that elevate their price.

Many newer A/C units are also custom-built, especially for large commercial properties, so the replacement process is not only costly, but time-consuming.

Commercial property insurers can build a defense strategy by arming themselves with data, and there are plenty of ways to gather it.

“For 200-ton to 500-ton air conditioning units, it could take three to four months to get a new unit built and installed. And sometimes roof modifications are necessary during that process,” said Ralph Tiede, vice president, commercial insurance, and manager, property risk engineering, at Liberty Mutual.

“The business interruption impact can be significant, and that’s one piece of the puzzle that risk managers may not think about,” Tiede said.

If a storm strikes in the middle of a hot Texas summer, then the property may need to shut down completely while it waits for the new unit.

Data-Driven Defense

Commercial property insurers can build a defense strategy by arming themselves with data, and there are plenty of ways to gather it.

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The Insurance Institute for Business and Home Safety (IIBHS), a research organization funded by insurance companies, conducts storm simulations inside its massive laboratory in Chester County, S.C., firing lab-created hailstones from cannons into full-size buildings to study effects on roofing, siding and outdoor equipment.

The organization also conducts field testing using impact probes to analyze hailstone size and density, and radar to track weather patterns.

“The IIBHS supplies member companies [including Liberty Mutual] with the most up-to-date information. That’s critical, because otherwise we’d be left making risk mitigation recommendations to clients based on building codes that are years old and don’t reflect what’s happening today,” Tiede said.

Other analytics organizations provide similar real-time insights.

Verisk Analytics uses weather modeling and ground observations to complement its real-time weather monitoring data feed.

Ralph Tiede, vice president, commercial insurance, and manager, property risk engineering, at Liberty Mutual

Ralph Tiede, vice president, commercial insurance, and manager, property risk engineering, Liberty Mutual

“We use an extensive ground-based network, including dual-pol radars, which collect huge amounts of data on fast-moving storms every two to five minutes,” Samanta said. This helps to complete the picture of a property’s exposure and keep an accurate record of hail events.

Storm history, collated with industry-wide hail claims data, informs Verisk’s Hail Damage Score, which ranks a location on a scale from one to 10. Higher numbers indicate higher likelihood of exposure to past damaging hail events and the presence of pre-existing hail damage.

Such data can help insurers discern what to look for when conducting property inspections for potential new clients, and may lead them to decide that a location is too risky to underwrite.

112016_05_claims_hail_chartAnalytics firm CoreLogic also produces retrospective data using a proprietary forensic database that houses three years’ worth of storm data.

“At CoreLogic, we score properties based on the actual number of hail events that previously impacted it,” McDonald said. “It’s a tool underwriters can use when evaluating a new property or geographic area.”

But with hailstorms fanning into new regions and the resulting damage changing in nature, data based on past events may not suffice. Forward-looking probability metrics complete the risk picture.

“We’ll also run a 10,000-year simulation and look at the probability of hail 1 inch in diameter or greater impacting a specific property in the future,” McDonald said.

Other data points to consider are more property-specific: the types of building materials for roofing and siding, the number of roof-mounted equipment units and skylights, the age of the equipment, the current value of the building, and any mortgage or potential liens.

“High quality data is key in forming a basis for a view of risk in areas where it is still emerging,” Samanta of Verisk said.

Risk Mitigation

Hailstorm and property-specific data can aid insurers in multiple capacities, from initial assessments of a potential new client to risk mitigation recommendations to expeditious claims processing.

“We have specific guidelines for our engineers when they go out to do an assessment of a new building in an area prone to hailstorms and wind,” Tiede of Liberty Mutual said. “We will want them to look at specific things like the roof condition, roof-mounted equipment, and any maintenance programs in place.”

The engineers then report back to account managers, who use the information to customize pricing and deductible structures, and to develop specific risk mitigation recommendations.

“We built a proprietary hail tool where we’ll enter in all the property-specific data collected for us by our engineers, and it will show us the loss potential for that specific location.

“We pass that along to the account managers, who help clients develop and prioritize specific steps they can take to reduce their exposure,” Tiede said.

Recommendations can include installing factory-approved hail guards over air conditioning and heating units, replacing an old roof with stronger material, conducting regular roof maintenance and installing protection for skylights.

112016_05_claims_fact_chart

At about $250 each, “manufacturer-installed hail guards are a surprisingly inexpensive fix” that won’t compromise the unit’s efficiency, Tiede said.
Liberty Mutual’s tool also has the benefit of identifying customers who are doing their homework and have already taken steps to protect themselves.

“If we have a customer who is proactively taking these steps that could reduce loss expectancy, this might make them more attractive, which would likely be reflected in that risk’s pricing,” said Brent Chambers, underwriting consultant, national insurance property, Liberty Mutual.

“It’s a tool we can use to sharpen our quote.”

“Customers who are loss-conscious deserve some type of credit. If we can, we like to give them something back to demonstrate that we’re partners in this together,” Tiede said.

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Insurers can also use weather monitoring systems to send out alerts to clients sitting in a storm’s path, advising them of immediate steps they can take to limit damage and providing them with a claims contact if a loss occurs.

“If they suffer serious damage, they may not be able to get inside the building or get access to their files where they keep their insurance information,” said Chambers.

“We send them the claims intake phone number to call so they have it right in front of them if they need it.”

When insureds are warned and prepared, claims can be filed and resolved more quickly.

“Hailstorms aren’t going to stop, and in fact we’re going to see more and more of them,” Tiede said. “2016 saw a lot of hail damage — about 5,400 storms this year, and it’s a risk the whole industry is waking up to.” &

Katie Siegel is an associate editor at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Report: Hospitality

Bridging the Protection Gap

When travelers stay home, hospitality companies recoup lost income through customized, data-defined policies.
By: | October 12, 2017 • 9 min read

In the wake of a hurricane, earthquake, pandemic, terror attack, or any event that causes carnage on a grand scale, affected areas usually are subject to a large “protection gap” – the difference between insured loss and total economic loss. Depending on the type of damage, the gap can be enormous, leaving companies and communities scrambling to obtain the funds needed for a quick recovery.

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RMS estimates that Hurricane Harvey’s rampage through Texas could cause as much as $90 billion in total economic damage. The modeling firm also stated that “[National Flood Insurance Program] penetration rates are as low as 20 percent in the Houston area, and thus most of the losses will be uninsured.”

In addition to uninsured losses from physical damage, many businesses in unaffected surrounding areas will suffer non-physical contingent business interruption losses. The hospitality industry is particularly susceptible to this exposure, and its losses often fall into the protection gap.

Natural catastrophes and other major events that compromise travelers’ safety have prolonged impacts on tourism and hospitality. Even if they suffer no physical damage, any hotel or resort will lose business as travelers avoid the area.

“The hospitality industry is reliant on people moving freely. If people don’t feel safe, they won’t travel. And that cuts off the lifeblood of the industry,” said Christian Ryan, U.S. Hospitality and Gaming Practice Leader, Marsh.

Christian Ryan
U.S. Hospitality and Gaming Practice Leader, Marsh

“People are going away from the devastation, not toward it,” said Evan Glassman, president and CEO, New Paradigm Underwriters.

Drops in revenue resulting from decreased occupancy and average daily room rate can sometimes be difficult to trace back to a major event when a hotel suffered no physical harm. Traditional business interruption policies require physical damage as a coverage condition. Even contingent business interruption coverages might only kick in if a hotel’s direct suppliers were taken offline by physical damage.

If everyone remains untouched and intact, though, it’s near impossible to demonstrate how much of a business downturn was caused by the hurricane three states away.

“Hospitality companies are concerned that their traditional insurance policies only cover business interruption resulting from physical damage,” said Bob Nusslein, head of Innovative Risk Solutions for the Americas, Swiss Re Corporate Solutions.

“These companies have large uninsured exposure from events which do not cause physical damage to their assets, yet result in reduced income.”

Power of Parametrics

Parametric insurance is designed specifically to bridge the protection gap and address historically uninsured or underinsured risks.

Parametric coverage is defined and triggered by the characteristics of an event, rather than characteristics of the loss. Triggers are custom-built based on an insured’s unique location and exposures, as well as their budget and risk tolerance.

“Triggers typically include a combination of the occurrence of a given event and a reduction in occupancy rates or RevPar for the specific hotel assets,” Nusslein said. Though sometimes the parameters of an event — like measures of storm intensity — are enough to trigger a payout on their own.

For hurricane coverage, for example, one policy trigger might be the designation of a Category 3-5 storm within a 100-mile radius of the location. Another trigger might be a 20 percent drop in RevPAR, or revenue per available room. If both parameters are met, a pre-determined payout amount would be administered. No investigations or claims adjustment necessary.

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The same type of coverage could apply in less severe situations where traditional insurance just doesn’t respond. Event or entertainment companies, for example, often operate at the whim of Mother Nature. While they may not be forced to cancel a production due to inclement weather, they will nevertheless take a hit to the bottom line if fewer patrons show up.

Christian Phillips, focus group leader for Beazley’s Weatherguard parametric products, said that as little as a quarter- to a half-inch of rain over a four- to five-hour period is enough to prevent people from coming to an event, or to leave early.

“That’s a persistent rainfall that will wear down people’s patience,” he said.

“A rule of thumb for parametric weather coverage, if you’re looking to protect loss of revenue when your event has not actually been cancelled, you will probably lose up to 20 to 30 percent of your revenue in bad weather. That depends on the client and the type of event, but that’s the standard we’ve realized from historical claims data.”

The industry is now drawing on data to establish these rules of thumb for more serious losses sustained by hospitality companies after major events.

“Until recently the insurance industry has not created products to address these non-physical damage business interruption exposures. The industry is now collaborating with big data companies to access data, which in turn, allows us to structure new products,” Nusslein said.

Data-Driven Triggers

Insurers source data from weather organizations that track temperature, rainfall, wind speeds and snowfall, among other perils, by the hour and sometimes by the minute. Parametric triggers are determined based on historical storm data, which indicates how likely a given location is to be hit.

“We try to get a minimum of 30 years of hourly data for those perils for a given location,” Phillips said.

“Global weather is changing, though, so we focus particularly on the last five to 10 years. From that we can build a policy that fits the exposure that we see in the data, and we use the data to price it correctly.”

New Paradigm Underwriters collects their own wind speed data via a network of anemometers that stretch from Corpus Christi, Texas, all the way to Massachusetts, and works with modeling firms like RMS to gather additional underwriting information.

The hospitality industry is reliant on people moving freely. If people don’t feel safe, they won’t travel. And that cuts off the lifeblood of the industry.– Christian Ryan, U.S. Hospitality and Gaming Practice Leader, Marsh

While severe weather is the most common event of concern, parametric cover can also apply to terrorism and pandemic risks.

“We offer a terror attack quote on every one of our event policies because everyone asks for it,” said Beazley’s Phillips.

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“We didn’t do it 10 years ago, but that’s the world we live in today.”

An attack could lead to civil unrest, fire or any number of things outside an insured’s control. It would likely disrupt travel over a wide geographic region.

“A terrorist event could cause wide area devastation and loss of attraction, which results in lost income for hospitality companies,” Nusslein said.

Disease outbreaks also dampen travel and tourism. Zika, which was most common in South America and the Caribbean, still prevented people from traveling to south Florida.

“Occupancy went down significantly in that region,” Marsh’s Ryan said.

“If there is a pandemic across the U.S., a parametric coverage would make sense. All travel within and inbound to the U.S. would go down, and parametric policies could protect hotel revenues in non-impacted areas. Official statements from the CDC such as evacuation orders or warnings could qualify as a trigger.”

Less data exists around terror attacks and pandemics than for weather, though hotels are taking steps to collect information around their exposure.

“It’s hard to quantify how an infectious disease outbreak will impact business, but we and clients are using big data to track travel patterns,” Ryan said.

Hospitality Metrics

Any data collected has to be verified, or “cleaned.”

“We only deal with entities that will clean the data so we know the historical data we’re getting is accurate,” Phillips said.

“There are mountains of data out there, but it’s unusable if it’s not clean.”

Parametric underwriters also tap into the insured’s historical data around occupancy and room rates to estimate the losses it may suffer from decreased revenue.

Bob Nusslein, head of Innovative Risk Solutions for the Americas, Swiss Re Corporate Solutions.

“The hospitality industry uses two key metrics to measure loss of business income. These include occupancy rate and revenue per available room, or RevPAR. These are the traditional measurements of business health,” Swiss Re’s Nusslein said.  RevPAR is calculated by multiplying a hotel’s average daily room rate (ADR) by its occupancy rate.

“The hotel industry has been contributing its data on occupancy, RevPAR, room supply and demand, and historical data on geographical and seasonal trends to independent data aggregators for many years. It has done an exceptional job of aggregating business data to measure performance downturns from routine economic fluctuations and from major ‘Black Swan’ events, like the 9/11 terrorist attacks, the 2008 financial crisis or the 2009 SARS epidemic.”

Claims history can also provide an understanding of how much revenue a hotel or an event company has lost in the past due to any type of business interruption. Business performance metrics combined with claims data determine an appropriate payout amount.

Like coverage triggers, payouts from parametric policies are specifically defined and pre-determined based on data and statistical evidence.

This is the key benefit of parametric coverage: triggers are hit, payment is made. With minimal or no adjustment process, claims are paid quickly, enabling insureds to begin recovery immediately.

Applying Parametric Payments

For hotels with no physical damage, but significant drops in occupancy and revenue, funds from a parametric policy can help bridge the income gap until business picks up again, covering expenses related to regular maintenance, utilities and marketing.

Because payment is not tied to a specific type or level of loss, it can be applied wherever insureds need it, so long as it doesn’t advance them to a better financial position than they enjoyed prior to the loss.

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Parametric policies can be designed to fill in where an insured has not yet met their deductible on a separate traditional policy. Or it could function as excess coverage. Or it could cover exposures excluded by other policies, or for which there is no insurance option at all. Completely bespoke, parametric coverages are a function of each client’s individual exposures, risk tolerance and budget.

“Parametric insurance enables underwriting of risks that are outside tolerance levels from a traditional standpoint,” NPU’s Glassman said.

The non-physical business interruption risks faced by the hospitality industry match that description pretty closely.

“Hotels are a good fit for parametric insurance because they have a guaranteed loss from a business income standpoint when there is a major storm coming,” Glassman said.

While only a handful of carriers currently offer a form of parametric coverage, the abundance of available data and advancement in data collection and analytical tools will likely fuel its popularity.

Companies can maximize the benefits of parametric coverages by building them as supplements to traditional business interruption or event cancellation policies. Both New Paradigm Underwriters and Beazley either work with other property insurers or create hybrid products in-house to combine the best of both worlds and assemble a comprehensive risk transfer solution. &

Katie Siegel is an associate editor at Risk & Insurance®. She can be reached at [email protected]