Iowa derecho: ‘Every reinsurer is going to get a report card’

More than four weeks on from the devasting Iowa derecho, the event has garnered limited attention beyond the state, something which is likely to explain the mixed response from reinsurers to an event that some believe is equivalent to a Hurricane Katrina for the Hawkeye State.

Primary insurers with operations concentrated in the region are said to have been the quickest in responding to the event, despite some initial setbacks caused by a combination of the scale of the destruction and the pandemic, while the speed with which reinsurers have paid claims has varied.

This publication called attention to the size of the event in a piece late last month, describing it as a multi-billion claim that went under the radar, and noting that local sources were pointing to a loss that could be $7bn-$10bn including crop losses.

Frank Harrison, CEO of the reinsurance broker Holborn, whose company has an outsized presence in the state, described an event where ceding companies were experiencing a loss that was “multiples” of their previous largest ever cat event.

“We talk about losses all the time, but this one, on a scale, is the Hurricane Katrina, or Hurricane Andrew of its time,” Harrison commented, pointing to its relative impact on Iowa.

The executive said that the response of some in the reinsurance community to date reflected the dearth of coverage from the national media and also industry publications.

“It's amazing,” Harrison said. “When a Northeastern event or a hurricane in the Gulf comes through, or even the California wildfires, there’s widespread coverage. You'll see it in the evening news, but this one was not covered anywhere.

“That's caused some reinsurers to pause on some of our claims collection efforts just because they've been caught unaware that the thing even happened, with no real feel that this is an historic event. We’re getting some reinsurers who are asking an awful lot of questions before submitting their claims payments.”

Despite the tepid response from some reinsurance trading partners, the loss activity on the ground paints a very clear picture.

“We now know categorically this was truly an historic event,” he said. “We now know, factually, for several of the local companies, not only is it the largest loss in their history, it doesn't just eke out the next largest, it's multiples of the next largest.”

More than just crop

Early loss estimates in the event’s aftermath focused on the potential scale of crop losses, which would largely be federally insured, with some optimism that crops held in storage from early harvesting could mitigate the event’s loss potential.

However, it is becoming increasingly clear that the commercial and personal lines portion of the loss will make up a larger part of the total, and that crop losses will extend beyond planted fields.

“They're finding increasingly, there's a lot of metal shards where the winds were so powerful that they splintered away from the metal structures, and now that a lot of the crops are not salvageable,” Harrison explained. “So the crop insurance loss is probably going to continue to grow.”

He continued: “The crop piece is a big component of this – it’s probably $3bn-4bn – but the insured loss has got to be upwards of $10bn, maybe a little north of that at this point. And think of that in relation to a state with less, slightly less than five million in population,” he added.

Insurers moving quickly

Though the industry’s immediate claims response was hampered somewhat by remote-working staff losing power during the event, and complications due to the pandemic, local carriers in the region moved quickly to get on their feet.

“There was a little bit of slowdown, more in the Cedar Rapids area because they were just hit harder. They were really flat on their backs for a couple of days, so that they were probably two days behind the Des Moines players and the like, but only a couple days behind,” said Harrison.

Sean Kennedy, the CEO of personal lines-focused insurer IMT, based in West Des Moines, said shortly after the event that his company typically has about 4,700 storm claims each year, and was approaching nearly 5,000 claims for August 10 alone.

“We're already at about 4,000 to 5,000 this year, so we're going to be pushing 10,000 claims for the year, well above our normal average,” Kennedy said.

As of late August, IMT’s expected loss from the event stood at around $80mn.

“Just as a comparison, the closest loss to that in our company history was in June in 2014, and that was a $20mn loss, so this is already going to be four times as large as anything we've ever had,” said Kennedy.

Jeff Menary, CEO of Grinnell Mutual, reported that his company was already seeing indications of demand surge as the region seeks to recover, with indications of potential increases in the cost of building materials of 10%-20%.

“Lumber mills are behind in production due to Covid-19, building materials supply chains are stretched because of some of the early national hurricane losses,” said Menary.

“Some building materials dealers are having difficulty securing sheeting, plywood and shingles. There's been some contractors or lumber yards that have been ordering building materials and have been told that they many not receive these items until later this fall.”

United Fire and Casualty’s CEO Randy Ramlo spoke of the challenge the pandemic presented to the insurer’s response.

“When you have a derecho event like this, and the power’s out for some people for multiple weeks, that's the wrong time to be working from home,” the executive said.

“It was a big challenge for us that we'd never experienced, where the claim was in our backyard, where our insureds probably expect us to respond better, thinking ‘hey, it’s the local insurance company, that's right downtown’.”

Ramlo continued: “But yet, all of our people were in the same boat as they were, and had damage to their homes and no power and everything else.”

Despite the early setback, Harrison said local companies were paying claims with “blinding speed”.

“It's amazing how quickly the payout pattern is on this particular claim,” he said. “In some senses, it's fairly easy to adjust, because it's just a massive wind event.”

They really do pride themselves in helping these people in times of duress, he added.

In addition to the accumulation of smaller sized losses, numerous large individual risk losses point to an event that hit with particular severity, where modeling on these losses further reveals the historic nature of the event. Harrison said a modeling review on individual risks showed a loss event at the 1-in-1,000 return period, in some instances.

“It's either that big an event or the models are wholly inadequate, or a combination of both,” Harrison observed.

Reinsurance response

With the event mostly flying under the radar, the response from reinsurers has so far been uneven, Harrison said. The executive was emphatic in highlighting the London market in particular as a standout performer.

“We've already collected substantial sums for the clients we serve in the market,” Harrison explained, while also noting that Lloyd’s response to the event has been “awesome. They have been absolutely fantastic.

“And that’s because there’s been an incredible amount of trust and relationships built with the CEOs who are typically the reinsurance buyers at every one of these companies, and they trade together for decades... Lloyd's gets an A++.”

Despite the superlative response from Lloyd’s, Harrison said the response from the rest of the market had been uneven, and with so few major loss events for trading partners to prove their value, particularly in the Midwestern region, his company is paying close attention to how reinsurers perform – with each set to receive “a report card”.

“All of my brokers are independent operators. Their whole goal in life is to structure and align reinsurance partners that match the risk appetites of the clients they serve, and they think are uniquely suited to take on the risks of those clients.”

“Shockingly, there are a small handful of the highest rated reinsurers that performing the worst,” he added.

Harrison cited the example of Cuthbert Heath, who insisted on paying all claims tied to the 1906 San Francisco earthquake immediately without onerous scrutiny of policy terms, a step that engendered goodwill towards Lloyd's in the US for decades to come.