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Inside In Full: Midwestern derecho: A multi-billion claim that went under the radar

When a massive derecho covering the entire state of Iowa and traveling the span of 770 miles over the course of 14 hours struck two weeks ago the storm barely registered on the radar of the national media...

James Thaler and Bernard Goyder

But a couple of weeks on it has become clear that the event – overshadowed by Hurricane Isaias and the wildfires raging in California – will be a major loss event, and likely the worst insured loss in Iowa’s history.

Sources have indicated that claims will reach into the billions, with common insured loss estimates ranging between $4bn at the lower end and $7bn-$10bn at the top, when factoring in crop losses along with the significant property claims tally. 

The scale and intensity of the storm have led many to compare it to a hurricane hitting the Midwest, which is likely to lead to a loss profile like events more commonly seen in Florida or the Gulf.

The low media profile of the event and the disruption to claims adjusting resulting from Covid-19 have led to a slow start in terms of elements of the industry’s response, particularly on commercial lines claims, with additional challenges in prospect from demand surge that is being exacerbated by the pandemic.

Although 11 states were impacted, the concentration of the loss in Iowa creates scope for substantial reinsurance losses to be ceded by insurers focused in the state, although it is likely to be largely a retained loss for nationwides.

The loss comes as (re)insurers remain on watch for major US cat losses from what is expected to be an above-average wind season and from what is already shaping up to be a threatening wildfire season in California. Potential loss activity comes against a backdrop of a significant increase in property cat pricing in the mid-year US renewals, as (re)insurers exhibit a reluctance to assume volatility.

140 mph winds

A derecho is a widespread, long-lived, straight-line windstorm that is associated with a fast-moving group of severe thunderstorms, which can create wind speeds rivaling hurricanes or tornadoes.

In Cedar Rapids, Iowa, the city that was hardest hit by this derecho, peak gusts reached 140 mph – roughly equivalent in strength to a Category 4 hurricane. 

Steve Bowen, Aon’s head of catastrophe insight, said: “This is one of the stronger derechos we've seen in the recent record.

“It's a pretty much a guarantee that we're facing a multi-billion-dollar financial output from this,” he explained.   

The damage has been described as light-to-moderate over a relatively large area, making the damage profile more similar to a hurricane than to the devastation in a small area that would be typical with a tornado.

“Derechos happen every year, this is not an unusual phenomenon,” said Bowen.  

“What made this one particularly significant is the fact that the peak gusts were so high and the fact that it went through a couple of major metro areas and caused so much damage.

“From a hazard perspective, it’s not too significant, but the fact that it intensified and went into Cedar Rapids and it caused a direct hit, of course that's certainly unusual.” 

  

 

In the immediate aftermath of the event, much of the early focus in determining industry insured loss estimates turned to Iowa’s crop lands, where nearly a third of the state’s acreage was damaged. 

Losses are likely, although sources suggested that given the way the cover is structured there is likely to be a meaningful gap between the economic and insured losses.

 

Chubb, Farmers Mutual Hail, QBE, Great American and Zurich are among the largest writers of crop business in the state, according to data from SNL. 

Reinsurance market bracing for XoL claims 

Reinsurance underwriters are still seeking information to clarify the scope of ceded loss that will spill into the market, but there is a belief that including crop losses, the derecho will likely to be a more material market event than Hurricane Isaias.  

There is likely to be a dichotomy of ceded loss experience, with many of the large national carriers operating in the region likely to take most of the storm losses net, while more locally focused carriers will have reinsurance recoveries to collect.   

  

 

Among carriers with concentrated portfolios in the area, there is concern the event could trigger reinsurance claims that go through the top of catastrophe programs.  

One insurance executive estimated it took a little more than twenty minutes for the storm to nearly exhaust his company’s cat reinsurance limit, which was understood to have been purchased up to around a 1-in-250-year return period. 

The Midwestern region has historically been viewed as a diversifying region for reinsurers, offering an opportunity to put capacity to work on programs with less volatile exposures. 

The area also stands out as a corner of the reinsurance market marked by deep, longstanding trading relationships that have so far been proven less susceptible to commoditization, potentially moderating a strong rate response to ceded losses. 

For United Fire and Casualty CEO Randy Ramlo, the event will go down as one of his company’s biggest ever. 

“Our largest claim in history was Hurricane Katrina, where we had an office in New Orleans, and had a lot of writings there,” Ramlo said, adding that the company’s second largest loss came from Hurricane Rita.

“Those were big back-to-back events and we think this derecho probably won't be as large as our largest loss, but it could be number two. So it will be pretty significant.” 

Frank Harrison, the CEO of the reinsurance broker Holborn, cut his teeth in the state of Iowa and knows the market well. 

Holborn has a large presence in the region and has been active in assisting clients in evaluating the full extent of the loss. 

The executive told this publication that the event would provide a “learning opportunity” for the industry, where loss experience is vital, given the lack of data points available.

He said that it would help shape risk management plans, including the way insurance is sold, the way risk is spread, deductible levels, and the amount of reinsurance cedants buy.

 

Inside P&C provides unparalleled market intelligence on the entire US P&C market – from small commercial and personal lines right through to reinsurance and Bermuda. Redeem your complimentary 14-day trial for more premium content from Inside P&C.

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