Insurers could pay more than $1 billion to cover tornado damages

Alfa Mutual Group adjuster Lee Lowery assesses damage Thursday at the Tuscaloosa home of policyholder Willie H. Beall. (Courtesy of Alfa Mutual Group)

     Damage from Alabama’s tornado outbreak Wednesday will clearly run into the hundreds of millions of dollars and could cross the $1 billion mark, insurance industry experts said Thursday.
"We could be talking about $1.5 billion to $2 billion across the region," said Matthew Nielsen of AIR Worldwide Corp., a Boston-based insurance modeling firm that’s working to produce an estimate. Nielsen, who met Thursday with Alabama Insurance Commissioner Jim Ridling on other business, drove from Montgomery to Tuscaloosa for a firsthand look.
It could be days before modelers deliver the first estimates.
"We just don’t know, is the bottom line at this point," said Ragan Ingram, Ridling’s chief of staff.
Also unclear is how far the effects of the storms will ripple. Extended power outages could mean that some companies without any physical damage will collect on policies that cover business interruptions. And if insurers make big claims to their reinsurers — which are paid to share risk — that could ultimately affect what coast residents pay for hurricane insurance.
By early evening Thursday, insurers said policyholders had already made more than 15,000 claims statewide. They expect those numbers to grow rapidly over the next few days.
"This is the kind of thing where you have weeks and weeks where you receive large numbers of claims every day," said Jeff Helms, spokesman for Montgomery-based Alfa Mutual Group, Alabama’s second-largest homeowners insurer.
Most insurers dispatched mobile claims units and mobilized adjusters. For example, Mobile’s Pilot Catastrophe Services, which provides contract adjusters, was sending help to its clients, an official said.
Tornadoes 29 percent of damages
Tornadoes have long been a big part of what insurers cover. From 1990 through 2009, 29 percent of the damages paid by U.S. property insurers stemmed from tornadoes. The only larger cause was hurricanes and tropical storms, which prompted 45 percent of payments. Last year alone, severe thunderstorms and tornadoes caused $9.5 billion of damage nationwide.
The most expensive tornado outbreak in U.S. history may have been in April 2003. In today’s terms, that weeklong outbreak would cost insurers $4.5 billion to $5 billion, AIR and EQECAT Inc. say.
Risk Management Systems, another modeler, says the other contender for the costliest occurrence is the 1974 super outbreak, which killed 86 Alabamians and 315 nationwide.
Ingram said the 1974 storms, which raked areas from Pickens County northeast through Huntsville, cost $50 million in Alabama. That’s more than $225 million in today’s dollars.
"I think this event will certainly be one of the largest in terms of tornado and hail damage," said Jose Miranda, head of client advocacy for EQECAT, a modeling firm based in Oakland, Calif. "Certainly, I think this would be on par with a lower-category hurricane."
More than 700,000 Alabama electric customers remained without power late Thursday afternoon. Affiliates of the Tennessee Valley Authority, including Huntsville Utilities, were warning of no power anywhere for four or more days, because of damage to transmission lines.
Under some policies, businesses can recoup lost revenue when power fails, even if their property isn’t damaged.
"It’s an option," said Loretta Worters of the Insurance Information Institute, a New York-based trade group. "It’s an extension. Not everyone gets it."
Worters said businesses typically have to go 48 to 72 hours without power before the coverage kicks in. That means some business could start filing claims today.
Some insurers have bought coverage where reinsurers will cover part of large tornado losses. For example, Helms said Alfa is reinsured.
The reinsurance market is muddled because of losses from the Japanese earthquake and tsunami. Combined with other losses, worldwide insurers paid out $60 billion in 2011’s first three months, Miranda said.
Large reinsurance claims could push up prices, reversing the recent soft market. That, in turn, could pressure rates along the Gulf Coast, where reinsurance costs can make up the majority of premiums to insure against a hurricane.
"Given the fact that Japan has happened and that this has been a pretty bad season so far, this could have a significant effect," Nielsen said.