How the Insurance Industry Responds to Weather

By Sue C. Quimby, CPCU, AU, CIC, CPIW, DAE – Senior Vice President

Weather impacts every homeowner and business owner and therefore their insurers. Insurance companies are in business to pay claims, but also to make money for their stakeholders.  Insurers use a variety of methods to address weather risks, including policy conditions, underwriting guidelines, claims management and tracking and measurement tools. Helping clients understand their options is another value-added service of the professional insurance agent.

A single event can cost billions of dollars. In fact, 2023 broke records, with 28 separate climate and weather-related events resulting in at least $1 billion in damage.  Total weather-related damages from these disasters climbed to over $92.9 billion. Nearly 1,200 tornadoes were confirmed by the National Oceanic and Atmospheric Administration (NOAA). Wildfire destroyed the town of Lahaina in Hawaii, and floods and winter storms wreaked havoc across the United States. Drought and heat-related losses also occurred.

One common method insurers use to control losses is deductibles. A deductible is the part of the loss – usually a specific dollar amount – for which the insured is responsible.  However, when dealing with weather-related perils, there may be a twist.  Wind or hurricane deductibles are often percentage deductibles.  This means the deductible is a percentage of the insured value, and not a flat dollar amount.  Weather-related deductibles can apply to exposures such as wind, hail, hurricanes or named storms.

State regulations vary and proper notification to insureds of the existence of such deductibles and how they work is essential to avoid misunderstanding at the time of a claim. In 2012, Hurricane Sandy was downgraded to a tropical storm prior to landfall in New Jersey and New York, which saved policyholders thousands of dollars. Instead of a percentage hurricane deductible, based on the total insured building or personal property value, the flat dollar deductible, based on the actual loss, applied.

Hurricane deductibles are common in the East Coast and Gulf States of the United States. They apply to storms officially designated as hurricanes by the U.S. National Weather Service.  Named storm deductibles apply to storms officially named by the U.S. National Weather Service and can include hurricanes and tropical storms.  In recent years The Weather Channel has started naming winter storms as well – these would NOT be subject to a named storms deductible unless they are officially named by the U.S. National Weather Service.

Policy exclusions are another method used by insurers to address weather-related issues. Flood is a common weather-related exclusion. Flood has long been excluded in most standard policies. Damage caused by flooding can be far ranging and very costly.  Flood damage is not usually considered sudden and accidental, but gradual. Historically, only certain areas were subject to flooding. More recently, people have realized that anyone can be a flood victim, since ever increasing construction leaves water with no place to go. Water damage exclusions often extend to such causes as water/sewer backup, flood, tsunamis, ground water and standing water. Some water damage coverage (such as water/sewer backup for example) can be added to a standard homeowners or businessowner’s policy. Flood insurance is more often a separate policy.

Policies also include weather-related limitations.  For hail losses, this may be a time limit for reporting claims.  Hail damage is sometimes confused with other damage.  Prompt reporting allows proper claim adjustment. Policies also may require use of an actual cash value basis for repair of hail damage rather than replacement cost due to depreciation of the roof.

Specialty programs such as flood insurance address exposures that are generally not covered by traditional carriers.  Historically, coverage was mainly available only through the government-controlled National Flood Insurance Program.  In recent years, additional carriers have entered the market, with some offering more extensive coverage than the NFIP.  Crop Insurance is another specialty program. It helps farmers mitigate their exposure and losses from weather-related damage to crops.  In 2020, over 380 million acres of farmland were protected by the Federal Crop Insurance Program. There are currently over a dozen USDA-approved crop insurance carriers.

Other specialty programs provide coverage against weather-related losses to short term events such as fairs, weddings and parades, and long-term events such as construction projects, or coverage for energy providers and municipalities.

Weather-related issues are a major concern to insurers. Improved risk assessment, underwriting and claims management tools are changing how the insurance industry responds.  Helping clients understand how their coverage may be impacted by weather claims is another sign of the true insurance professional.

This article is for educational and discussion purposes only and it is not insurance or legal advice and should not be relied upon when making insurance or legal decisions. Nothing herein shall be construed to constitute a legal or underwriting opinion. Nothing herein shall be construed as offering any political, social, or public policy opinion by the author or MSO. Neither the author nor MSO are responsible for errors in, or the accuracy or currentness of, the article.