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Advisen Front Page News - Friday, February 26, 2021

   
Insured losses from prolonged southern freeze, power outages a challenge to predict

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Insured losses from prolonged southern freeze, power outages a challenge to predict

By Chad Hemenway, Advisen

Catastrophe modeler AIR Worldwide said the freezing conditions and storms that affected multiple states this month are likely to cost more than $10 billion in insured losses, but the model does not fully account for variables such as power outages – a major factor in Texas.

AIR said much of the insured loss is expected to come from Texas, which suffered a widespread power outage due mostly to equipment failure within the state’s power grid from prolonged freezing temperatures and an unusual demand for heat. At its peak, the power outage affected 4.5 million customers.

Nearly 12 million residences and more than 800,000 commercial properties were impacted by the weather event. The number of claims caused by the deep freeze is expected to eclipse the more than 500,000 claims from 2017’s Hurricane Harvey – among the costliest hurricanes ever at $30 billion.

AIR’s extreme weather-event models do not “explicitly” capture potential insured losses from power outages. Other variables such as demand surge, government intervention, whether utility-service interruption coverages pay out, and the possibility of emerging claims for mold add to the difficulty of modeling this event. Many residential and commercial policies have exclusions for mold damage but factors such as these can “potentially drive the loss well in excess” of $10 billion, said AIR.

“Unlike a hurricane or severe convective storm, which impacts a concentrated region within a state, this event affected almost the entire state of Texas,” said the modeler, adding that it estimated average claims severity to be $15,000 for personal lines and $30,000 for commercial. These figures are derived from similar historical events, AIR said.

About 80% of claims, mostly related to water damage from frozen pipes that burst, are expected to come from personal lines. The claims-severity prediction for residential properties could be higher depending on loss of use, repair costs, and replacement of contents. Insurance pay-outs for food spoilage and additional living expenses can add low-severity claims.

Looking at commercial claims, AIR said many industries in the manufacturing and energy sectors were affected by the loss of power, but reports indicate smaller commercial risks “are bearing most of the loss, with schools especially hard hit.” Other policy-language factors related to utility-service interruption can affect coverage for commercial losses. Some coverage may only be available with an endorsement.

Managing Editor Chad Hemenway can be reached at chad.hemenway@zywave.com

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