AAIS Catastrophe Planning In Focus: Hurricanes

Every year for the Atlantic Basin, the hurricane season officially starts on June 1 and ends on November 30. That does not mean storms cannot be formed before June 1 or after November 30. Increasingly the first named storm have formed before the official start of the hurricane season.

The names of Atlantic tropical storms are maintained and updated by the  World Meteorological Organization  (WMO). There are  six separate lists , each with twenty-one different names in alphabetic order, that are used in rotation for Atlantic hurricane seasons. When a storm has brought severe loss of life or property, that name will retire and get replaced. For example, WMO’s Hurricane Committee has  retired  Dorian (2019) and Laura, Eta and Iota (2020) from the rotating lists because of the death and destruction they caused. Up until 2020, Greek alphabet was used when the designated names on the list have been exhausted in a single season. As of March 2021, WMO  decided  that the Greek alphabet will not be used in future. Instead, a  supplemental list of names  is provided in case more than twenty-one named tropical cyclones occur in the Atlantic basin in a season.

Hurricane Season 2024 forecast has been increased mid-season to be an above-average season largely due to record breaking sea surface water temperatures that offset the typically limiting impact of the ongoing El Nino event.

As displayed below, according to the  Insurance Information Institute  (I.I.I.), as of 2019, eight out of the top ten costliest catastrophes in the United States are hurricanes. The insured property loss estimates from these hurricanes account for more than 80% of the total estimated losses from these events, even when flood damage covered by NFIP is excluded.

Today's weather technology allows us to monitor and forecast storm progress with real-time data and analytics. Around-the-clock updates are made available by organizations such as NOAA and commercial firms to help people and businesses prepare and make decisions. Many times, the challenge is to crunch through the large data influx with agility, understand the impact, and make decisions.

In this article, we will discuss fundamentals about hurricanes, recollect a few coverage issues surfaced from major hurricane events in the past, and touch on a few hurricane-related coverage provisions. Hopefully, this will help increase the agility needed for making decisions in real-time.

Tropical cyclones are a global phenomenon that threaten lives and livelihoods across the world. More commonly in the United States tropical cyclones are referred to as Hurricanes.

A tropical cyclone is a rotating low-pressure weather system that has organized thunderstorms but no fronts (a boundary separating two air masses of different densities). Tropical cyclones with maximum sustained surface winds of less than 39 miles per hour (mph) are called tropical depressions. Those with maximum sustained winds of 39 mph or higher are called tropical storms.

While historically the focus on hurricanes tends to be on those originating in the Atlantic and threatening the typical hurricane states of Florida, Louisiana and others along the Caribbean and Atlantic coasts, hurricanes can and do occasionally affect other parts of the US--namely those on the Pacific Ocean.

In the US when the one-minute  maximum sustained wind  of a tropical cyclone exceeds 74 mph it is classified as a hurricane. In the Atlantic Basin, a hurricane’s intensity is commonly described by the  Saffir-Simpson Hurricane Wind Scale  (SSHWS) in which a rating from 1 through 5 is assigned based on the one-minute maximum sustained wind speed. Hurricanes reaching Category 3 or above are considered major hurricanes.

The main components of a hurricane are the eye, the eyewall, and the outer rain bands, as explained by ICAT ( Anatomy of a Hurricane , 2018). The eye is the calm part of a hurricane, but in the eyewall around the eye, you will see fierce winds and rains. The intensity of the wind and rain diminishes further away from the center.

Although the definition of a hurricane is based on the wind speed, the damage a hurricane brings depends on a number of factors, including the size of the storm system, the path the system moves through, and the speed at which the storm system moves over land. The size of a hurricane is usually measured by the diameter of its hurricane- and gale-force winds. Hurricane-force winds can extend outward to about 25 miles in a small hurricane and to more than 150 miles for a large one. Tropical storm-force winds can stretch out as far as 300 miles from center of a large hurricane. ( Hurricane Facts , n.d.)

Below is a series of maps for historical hurricane tracks post-1950 that made at least one landfall as a major hurricane (Category 3 or higher) somewhere in the US. The first two slides show Category 4 and Category 5 landfalls, and the last two slides show Category 3 landfalls.

The word "hurricane" was derived from the Mayan god, Hurakan, of wind, storm, and fire. This relates well to the well-known hazards associated with hurricanes: high winds, tornadoes, storm surge, and inland flooding. A less commonly mentioned but not uncommon hazard to be aware of is fire. Excessive wind, rainfall and flooding can easily result in wiring issues and equipment failures that lead to hard-to-contain fires.

High wind is a primary cause of property damage and loss of life in hurricanes. Hurricane watches and warnings are issued to specified areas 36-48 hours in advance of the anticipated onset of tropical-storm-force winds (sustained winds of 39 to 73 mph). These warnings often server as a trigger for hurricane-specific coverage terms such as hurricane deductibles. We will further discuss hurricane deductibles in a later section.

Wind-borne debris is the debris carried by high winds. Glazed doors and windows are among the most vulnerable components to wind-borne debris. It presents a particularly high risk in hurricanes since it can cause openings in structures allowing further damage to occur faster.

Storm surge is another deadly hazard to contend with in a hurricane, especially in developed coastal areas. An  NHC study  (Rappaport, 2014) showed that 49% of tropical-cyclone fatalities in the US (1963 - 2012) were attributable to storm surge. It is the phenomenon that takes the largest number of lives in single-day weather-related events in the US. Below is a short video covering the basics about hurricane storm surge.

The following video from The Weather Channel during Hurricane Florence (2018) provides a virtual experience of storm surge at different levels.

The National Hurricane Center (NHC) began issuing storm surge watch/warning graphics beginning in 2017 for tropical cyclones affecting the Gulf and Atlantic coasts of the United States.

Flooding caused by torrential rain that comes with a hurricane - even when the wind category is low - can bring devastating losses, especially when the storm system lumbers slowly over land. Hurricane Floyd in 1999, Hurricane Harvey in 2017, and Hurricane Florence in 2018 all serve as recent reminders of this. A 2018  NOAA study  (Kossin, 2018) found that the speed of movement of tropical cyclones, including hurricanes, has been slowing in recent decades, with more storms lumbering slowly over land and potentially causing more flooding.

Tornadoes are one of several dangers that hurricanes, tropical storms and their remnants can unleash as they move inland (" The Five Atlantic Hurricanes That Produced the Most Tornadoes ," 2019). They are the smaller cyclones within the larger tropical cyclone. According to  NOAA , almost all tropical cyclones that make landfall in the US spawn at least one tornado, as long as enough of the circulation of the storm moves over land.

 Hurricane Ivan  (2004) holds the record as of June 2020 for spawning the most tornadoes: a three-day outbreak of 120 tornadoes lashed out across the Atlantic coast all the way from Florida to Virginia, Maryland, and Pennsylvania.

The video below from The Weather Channel explains how hurricanes can spawn tornadoes, highlighting the fact that this type of tornado forms quickly, which results in little to no warning:

Fire is a less obvious but not uncommon hazard associated with hurricanes. There are several established causes:

• Compromised building energy systems
• Compromised industrial processes
• Human actions

There are also a number of circumstances that can exacerbate the growth and spread of fires in the immediate aftermath of a hurricane:

• Compromised fire protection systems and separations
• Diminished or compromised water supply
• Debris impediments to fire department response
• Priorities for fire service personnel on saving lives over saving property
• Building density in coastal communities
• Access limitations due to coastal geography

The most common cause of fires are from compromised building energy systems. Flooding, especially salt water in coastal areas, may compromise the electrical system of buildings leading to fires. Homeowner actions, however well-intentioned they may be, may also cause fires, especially given the distractions of an emergency situation. With power interruptions, people may utilize candles, gas lamps, or other heat-producing items for temporary lighting that are easily left unattended. In fact, the  National Association of State Fire Marshals  (NASFM) cautions the public about the the  importance of fire safety as hurricane activity increases .

Hurricanes may increase the severity of fires. Strong winds and flooding can cause extensive damage to fire protection systems and building envelopes, leaving properties vulnerable to fire spread. In addition, as highlighted by a 2007 EPA report (Craig L. Patterson et al., 2007), the domestic water supply may be significantly reduced, which may limit firefighting water supply.

In a little over a week, the [EPA] team had visited and assessed over 400 water systems in the areas affected by Hurricane Katrina. Major problems included; loss of power/loss of pressure, no backup generators (as many as 60 generators were requested), and damage/destruction to treatment plants and water distribution systems. - Craig L. Patterson et al., 2007

More likely are physical impediments from debris and downed electrical lines that may significantly delay or block emergency response from local fire department resources. During or immediately after a hurricane, local fire departments may also triage their responses and resources given the competing demands for service. Fire departments may be already fully engaged in finding and evacuating trapped persons whose lives are endangered and initially have less resources available for emergency responses to fires that may primarily endanger property. These limitations are more pronounced in dense coastal areas where houses are in close proximity so any delay may cause a fire to propagate from one building to another as we saw in the Breezy Point fire after Hurricane Sandy in 2012.

More than 100 homes burned to the ground at Breezy Point as a result of a six-alarm fire during Hurricane Sandy (2012), after seawater streamed into homes and came into contact with electrical wiring. Fallen trees and flooding also prevented timely rescue from the local fire services. (Fires during the 2012 Hurricane Sandy in queens, New York: A first report, 2013)

“There was three feet of water on the far end of the bridge. I had to park my fire department sedan, and ended up boarding an Engine Company to ride into the scene. Water was up to the headlights as we drove toward the glow.”

In industrial and commercial settings there are also increased but less obvious risks from disruptions to the processes and chemicals used on site. This was highlighted in recent years during an incident that occurred in Crosby, Texas on August 29, 2017. 

Flooding from Hurricane Harvey disabled the refrigeration system at the Arkema plant which manufactures organic peroxides. The organic peroxides had earlier been transferred to the refrigerated trailers that were used as a final emergency backup for power failures. The following day, over two hundred people within a 1.5 mile radius were evacuated due to likelihood of a fire from the decomposing organic peroxides. Starting on August 31 into September 1, three refrigerated trailers caught on fire consecutively due to increased in temperature.

Hurricane Andrew in 1992 was a wake-up call for effective enforcement of existing building codes. According to The Insurance Institute for Business and Home Safety (IBHS), had the building codes been enforced, losses would have been  at least halved . Florida enacted major changes to its building code in 1993 and again in 2002. As of March 1, 2002, the Florida Building Code is uniformly enforced statewide as a baseline. Other Gulf states adopted similar statewide building code, some with statewide enforcement. For more details on building codes by state, refer to the following IBHS page:

When a hurricane brings a coastal property down to its concrete foundation ("slab"), it is hard to determine which portion of the total loss caused by wind and which portion caused by water. It is also hard to determine the timing of the damage from each cause. However, it is a key determination because private insurance usually covers wind losses, while excluding losses caused by storm surge and flood. These water losses are instead covered by the National Flood (NFIP) managed by the federal government.

A series of hurricanes in the 2000's such as Ivan (2004), Katrina (2005), Rita (2005), and Ike (2008) led to numerous individual and class action lawsuits in Gulf states such as  Florida ,  Louisiana ,  Mississippi , and  Texas . Hundreds of millions were awarded to claimants as a result, making "coverage leakage" a notable issue for both wind policies and NFIP policies.

On July 6, 2012, the  Consumer Option for an Alternative System to Allocate Losses (COASTAL) Act  was signed into law as part of the Federal highway conference bill by the President in order to better discern wind damage from storm surge damage in the case of "indeterminate losses." It requires NOAA to produce detailed “post-storm assessments” in the aftermath of a damaging tropical cyclone that strikes the U.S. or its territories.

Read more about slab claims in RMS' blog:

Hurricane deductibles were introduced to keep insurance available and affordable. The concept was first developed after Category 5 Hurricane Andrew in 1992, which cost insurers about $15.5 billion (about $29 billion in 2020 dollars) and led to  at least 16 insurer failures . Hurricane Katrina in 2005 and Hurricane Sandy in 2012 brought even more awareness to these types of deductibles.

Nineteen states and the District of Columbia have hurricane deductibles in place, as shown on the map: Alabama, Connecticut, Delaware, Florida, Georgia, Hawaii, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Texas, Virginia and Washington D.C..

Hurricane deductibles are typically specified as a percentage of the insured value or the amount of insurance of the property. They are usually higher in dollar amount than the standard all-peril deductibles. The percentage typically varies between 1% to 5%, depending on the location of the property. In a qualifying event, these deductibles usually apply in place of the standard all-peril deductibles.

In some states, such as Florida and Louisiana, in response to having multiple hurricanes during a single season, hurricane deductibles are applied on an annual basis instead of an occurrence basis. Generally this means that if there is more than one hurricane loss during a calendar year, the deductible that applies for the second and all subsequent hurricane losses will be the remaining amount of the hurricane deductible or the deductible amount that applies to loss caused by all other perils, whichever is greater. Actual working examples can be found in the following video from Florida's Division of Consumer Services.

The trigger for the applicability of a hurricane deductible will vary by state and insurer. Some states - such as Florida and Louisiana - mandate when they apply, while other states - such as Pennsylvania and Massachusetts - allow carriers more flexibility.  Florida laws , for instance, are very specific regarding when the hurricane deductible applies, for what duration of time and how many can be applied in a calendar year. Still, there are some common characteristics that define the trigger.

Storm Status - Usually the triggering of hurricane deductibles requires that the National Hurricane Center has declared the storm as a named storm or hurricane. In some states, the category of a hurricane is used as part of the triggering condition.

Hurricane Time Period - The time frame for when a hurricane deductible applies is usually connected with the time period that hurricane watches or warnings are in effect. In some states, hurricane-force wind (74 mph or higher) measured by the National Hurricane Center is required in that area. Depending on the state, the area of interest could be anywhere in the state, a county or municipality where the insured property is located, or other specified areas in the state.

Hurricane Territory - Some states will specify the geographic area, such as counties, in which hurricane deductibles are required. In other locations in such a state or in other states, it is the insurer that has more influence over where hurricane deductibles apply.

To illustrate these triggering condition features, a manual rule in the AAIS Homeowners Program in New York notes that, for New York City and neighboring counties, a "catastrophic windstorm deductible" is applicable to all windstorm loss that occurs during a time period beginning 12 hours before the hurricane makes landfall and ending 12 hours after the hurricane makes landfall. Windstorms are considered catastrophic when the National Weather Service has declared that:

• a Category 2, 3, 4, or 5 hurricane has made landfall anywhere in the State of New York; or
• a hurricane causing Category 2, 3, 4, or 5 force winds in the area within the State of New York in which the loss occurs makes landfall outside the State of New York.

The following article from the Insurance Information Institute provides more details about hurricane deductibles on a state by state basis:

In coastal states, to incentivize property owners to strengthen their structures, state regulators either require or allow mitigation credits in homeowner property insurance. The discounts vary based on compliance with certain building codes or specific building features such as:

• Roof Geometry
• Roof Covering/Material
• Roof Deck Attachment
• Roof to Wall Connection
• Wall to Foundation Connection
• Gable Roof Bracing
• Opening Protection
• Basic Design Wind Speed

The discounts can also vary depending on location. For example,  Alabama  applies different discount factors for the Coastal/Central/Northern zones.

Other states adopt the  hurricane-prone region  defined by the American Society of Civil Engineers (ASCE) to apply various discount factors.

The following Smart Home America link provides a broad view of the available mitigation incentive programs by state.

As insurance of last resort, there are two main types of residual property insurance market plans: Fair Access to Insurance Requirements (FAIR) Plans and Beach and Windstorm Plans (also known as "Windpools"). In addition, there are two state-run insurance companies that serve the same purpose: Florida Citizens Property Insurance Company (Florida Citizens) and Louisiana Citizens Property Insurance Corporation (Louisiana Citizens). These residual market plans mainly differ in the way they are structured, the insurance coverage provided, and the eligibility requirements.

Beach plans usually provide wind/hail coverage for residential and commercial properties in coastal territories, while FAIR plans provide last-resort insurance access in non-coastal territories. In the absence of a separate Beach plan, the FAIR plan usually also provides the insurance of last resort to coastal areas. FAIR plans account for the vast majority of policies and exposure in the overall residual property market. At the peak year (2011) for the residual market insurance plans, FAIR plans accounted for over 80% exposure.

Insurance companies who operate in the state are usually required to participate in these residual market mechanisms. In some states, participating insurers fully share in the profits and losses ("Fully Participation Model"); while in other states, insurers are only subject to assessments to cover the plan's deficit ("Assessment Model"). Both Florida Citizens and Louisiana Citizens, for example, use the assessment model. Under both models, the participation ratio of a specific insurance company depends on its share in the total voluntary market in that state. For a more detailed analysis, refer to " Hurricanes and Residual Market Mechanisms " by Robert W. Klein.

The population and housing units in the coastal counties have seen a steady growth in recent decades. This fuels the explosive growth in the residual market plans in the time frame.

Over time, many of these plans developed high concentrations of high-value coastal properties highly exposed to wind. That created financing challenges after major hurricane events. As a result, some plans, such as Florida Citizens, Louisiana Citizens and TWIA in Texas, started a depopulation process to reduce the concentration by transferring policies to the private market. They usually provide incentives, such as policy and loss data sharing, to the interested private insurers.

To learn additional details on the hurricane residual market and their risk financing mechanism, refer to a whitepaper on Residual Market by Insurance Information Institute (I.I.I.):

and a series of articles on Residual Market by Guy Carpenter:

In anticipation of the catastrophic impact of major hurricanes, the insurance industry relies on reinsurance as a crucial mechanism to share and transfer risk, stabilize loss experience, and create additional underwriting capacity.

In fact, new reinsurers tend to crop up after major disasters. Some of the oldest reinsurance companies in the world were formed two hundred years ago in response to devastating fires.

• Cologne Re (now known as  Gen Re ) was formed after about a quarter of Hamburg, Germany was destroyed by  fire in 1842 .
• Swiss Re was  formed in 1863  as an effort to curb the outflow of reinsurance premiums to foreign insurers after the  great fire of Glarus  in 1861 brought two thirds of the town to rubble and ashes.

Hurricane Andrew (1992) and the string of costly hurricanes in 2005 brought waves of new reinsurer formation in the Bermuda market. By the spring of 1993, eight reinsurance companies were formed and brought $4 billion in fresh capital. Five more were created after Hurricanes Katrina, Rita, and Wilma in 2005.

Based on a  Federal Reserve Bank study  (Florentine M. Eloundou Nekoul & Alejandro H. Drexler, 2016), insurers with operations in the catastrophe-prone South Atlantic and West South Central states (see map above) used the most reinsurance during the study period of 2005 to 2015, transferring 32% and 33% of their insurance premiums, respectively.

Given the rare occurrences of major hurricanes, reinsurers often use catastrophe models to assess hurricane risk and inform the structure of the reinsurance program. The model output can help assess the probability of losses exceeding any given threshold, either on an occurrence basis or an annual aggregate basis. It can also provide various severity measures to help assess the tail risk.

An hours clause puts a restriction on the time during which incurred losses are eligible for coverage. Under such restrictions, a long-lasting event may result in multiple occurrences for reinsurance coverage, and reinstatement premium provisions may be triggered.

The insurance industry has come a long way in dealing with hurricanes since the wake-up call from Hurricane Andrew in 1992. More in-depth understanding and awareness about the risks associated with hurricanes has been built up driven by advancement in science and technology. As a result, hurricane-specific coverage terms such as hurricane deductibles and mitigation credits have been in place to encourage risk mitigation and boost coverage availability. Hurricane-specific reinsurance contracts and alternative capital such as catastrophe bonds have been brought to practice to improve financing capacity in risk transfer.

Today, almost 30 years after Hurricane Andrew, there is still no shortage of surprises and challenges presented by hurricane seasons to the insurance industry, the science community, and the general society.

As part of the Risk Awareness Service, AAIS also provides a Live Hurricane Tracker during the active hurricane season:

As the only not-for-profit member-focused national advisory organization, AAIS designed Risk Awareness Service to help our Members better understand the complexities of various perils, bringing to our Members useful resources and tools to assess the impact of these perils. Let us know how we can help you effectively protect and grow your business. We welcome your feedback on these Risk Awareness Service tools as we work to best serve you. To learn more about how AAIS can help with hurricane planning, contact us at membership@aaisonline.com or 800.564.AAIS.