2010: The Year in Review

by Gary Kerney, Assistant Vice President, ISO Property Claim Services

The year 2010 is memorable for two reasons: the large number of catastrophes declared by Property Claim Services® (PCS®) and the absence of a major landfalling tropical system, even though the season was the third most active on record.

PCS declared 33 catastrophes in 2010. That frequency of events ties with 2006 as the second greatest number in the past decade. The largest number of catastrophes occurred in 2008 with 37. The 2010 catastrophes in the United States also represent about one-third of all insured catastrophes worldwide. The insured loss from U.S. catastrophes last year is approximately $13 billion (some estimates are still under review). That figure ranks 2010 as the sixth worst since 2001, and the loss figure represents about 10 percent of insured loss worldwide. The nearly 2.3 million claims associated with the 33 events are less than the ten-year average as measured by PCS.

Although catastrophes are low-frequency, high-severity events, the insurance industry is prepared for and focused on them. Together over the course of a year, catastrophes pose a significant threat. But as we saw in 2010, their effect is not always overwhelming. An analysis of catastrophes over the years shows no meaningful correlation between frequency and severity. We have learned too well that it may take only one event to turn the world on its head.

2010 Hurricane Tracks

In 2010, PCS named 42 of the 50 states and the District of Columbia in its definitions of catastrophe events. Considering the lack of correlation between frequency and severity, PCS named Oklahoma in four catastrophes, with the insured loss estimate from those events at about $2.2 billion. On the other hand, PCS named Pennsylvania in nine separate catastrophes, yet the estimated insured loss from those events at less than one-third the loss in Oklahoma. 

The randomness of catastrophe activity is also evident in the analysis of tornado activity during the year. The preliminary count of tornadoes in 2010 is 1,436, which is more than 100 above the three-year average measured between 2007 and 2009. Again, there were 73 tornadoes reported in Oklahoma and a record-setting 145 in Minnesota. But the related insured loss in Oklahoma was four times larger than the estimated catastrophe loss in Minnesota. 

2010 Recorded Tornado Paths

With respect to hurricanes, the team of Klotzbach and Gray at Colorado State University and Weather Service International (WSI) has each issued its 2011 hurricane season forecast: 17 named storms, 9 hurricanes, and 5 major hurricanes. Tropical Storm Risk in London issued a forecast just slightly different: 16 named storms, 8 to 9 hurricanes, and 4 major hurricanes. Organizations issue the forecasts months ahead, and they’re subject to change as the season gets closer.

While the forecasts portend a somewhat less active season than that of 2010, the current forecasts again exceed the seasonal average of 11 named storms, 6 hurricanes, and 3 major hurricanes. Whatever the outcome, the more storms that form in the Atlantic Basin, the greater the odds of one or more making landfall. Looking beyond 2004 and 2005 — years marred by hurricane destruction — the effect of one hurricane such as Andrew in 1992 can equal the destruction of a group of smaller landfalling storms. 

The PCS list of the top ten costliest catastrophes contains eight hurricanes, but it also includes the September 11, 2001, terror attack and the 1994 Northridge earthquake in California. So, while the focus on hurricanes is not misplaced, other types of events also pose devastating consequences. We cannot lose sight of those or the potential loss from other perils.

A number of issues have arisen in recent years that have added to overall insured loss or at least the expectation that losses will increase in the future:

  • climate change
  • unanticipated insurance coverages
    • life
    • health
    • mortgage
  • rebuilding issues
  • terrorism
  • class action lawsuits
  • political actions

An unexpected wrinkle in 2010 was the oil spill caused by the explosion on the Deepwater Horizon in the Gulf of Mexico. The presence of oil in the Gulf raised a number of questions about the potential effect of oil-laden water pushed inland by a hurricane from surge and wind. We may never know the answer. Another important development related to the spill concerns the number of adjusters recruited to handle the hundreds of thousands of claims filed against the oil driller. Would the decrease in available adjusters have an effect on the claims-handling process?

There’s no doubt insurers could have faced more challenging circumstances in 2010. All the ingredients were present. Fortunately, those challenges never arose. It may be just a matter of time, however, before they do. Remember — it takes only one catastrophe to create challenges that require new thinking, unchartered response, and innovation.