Carriers must act now to tackle alarming rise in hailstorm losses

By Matthew Patience

Most U.S. insurance carriers know the damage hailstorms can cause. Insurers see the number of claims filed in the wake of thunderstorms that strike throughout the country. Yet insured losses from hailstorm-related claims have been growing at an alarming rate over the last 20 years, with 2023 proving a record year for such claims.

At the same time, many industry experts argue that carriers are not taking hail or severe convective storm risk seriously enough. U.S. carriers urgently need new solutions to tackle this growing problem before rising losses drive them out of insuring at-risk properties altogether.

The scale of hailstorm losses is staggering

Severe convective storms is the collective name for severe thunderstorms, including heavy rainfall, strong winds, hail and tornadoes. Although these storms are closely associated with the Great Plains and Midwest, in reality, they occur all over the U.S. The damage they cause has also been rising at an alarming rate.

Since 2000, SCS insured losses have grown at a compound annual growth rate of 9.6%. To put this in context, that’s more than double the CAGR of global insured loss from all perils, which was 4.3% over the same period.

In 2023, SCS insured losses in the U.S. reached $60 billion for the first time, setting global and national records. Eighteen individual events from last year were estimated to have cost the industry more than $1 billion each, with states such as Texas and Colorado among the worst affected.

As Zurich puts it: “Severe convective storms are among the most common and most damaging natural catastrophes in the United States … But hail may be the costliest of the convective storm perils.”

Indeed, in 2022, State Farm suffered losses amounting to a staggering $3.5 billion due to hail events alone – 83% of these losses resulted from home damage. This is $1 billion higher than the insurer suffered the prior year. Although inflation explains some of this increase, it was also due to State Farm receiving 45,000 more claims in 2022 than in 2021.

These losses are so great that they have even caused the insurance industry to debate how it classifies risks, with many experienced voices arguing that the traditional categories of “primary” and “secondary” perils may be obsolete in a time in which secondary perils accounted for 67% of global insured losses. SCS peril – defined as a secondary peril – alone accounted for 57% of total global insured losses.

Challenges insurers face with hailstorms

While the debate over the classification of perils rages, U.S. insurance carriers face a host of practical challenges that have contributed to the rise in insured losses due to hail damage. As we’ve already seen, inflation is one cause, but there are several others that carriers must contend with.

One of these may be climate change, although as Gallagher Re’s Chief Science Officer Steve Bowen has written: “Climate science remains uncertain as to how it may affect future SCS behavior, though regional shifts and more conducive environmental days for outbreaks seem most likely versus an overall increase in event frequency.”

More pertinent may be the increase in housing built in hazard areas within Sunbelt states such as Texas, along with rising costs of housing and construction materials. These and other factors have contributed to a combined exposure growth rate of 8.9% per year since 1990, according to Aon.

Different building materials are also a factor, particularly when it comes to roofs. Where asphalt shingles can suffer from cracking or punctures from large hailstones, metal roofs can be dented and damaged that way. Insurers must be aware of which building materials have been used and their age and quality if they are to get an accurate picture of an insured property’s ability to stand up to a severe hailstorm.

Time for new and innovative solutions

With this staggering rise in losses and underlying increase in risk exposure, it’s clear that carriers must do more. The losses experienced by State Farm and others in 2023 cannot be allowed to become a regular occurrence. At the same time, insurance carriers play a crucial role in protecting homeowners from the financial burden imposed by hail damage. They cannot risk underinsuring those at risk, leaving entire swathes of the U.S. liable for long-term economic drag due to lack of appropriate cover.

Thankfully, new and innovative solutions already exist that can help significantly mitigate hail peril, assess risk more accurately, and reduce insured losses.

With geospatial intelligence, for example, carriers can view hail events across the U.S. in real time. As a result, they know within hours where storms have struck, the severity of the impact, and where to send claims adjusters. By combining multiple intelligence sources – including radar, surface and aerial observation, satellite views, and forecast models – insurers can get an accurate estimate of the size of the hailstones and estimate the damage level in a given area from light to moderate, substantial, or severe.

Perhaps even more important than the granularity and accuracy of this data is the speed with which insurers can leverage it. Many are now able to receive detailed intelligence within 24 hours of an event, enabling them to mobilize resources and help those customers most in need of support, as well as to assess claims more rapidly. All of this helps bring comfort to those affected by the storms.

In addition to the benefits of faster response time for customers, carriers can also get an accurate advance picture of claims before they come in, giving them a high level of reserving accuracy and oversight of how hail events are likely to affect their portfolio.

All of this is possible now. Some carriers are already beginning to leverage these solutions and seeing the benefits. Now is the time for others to make the leap – not just to reduce hail losses but to ensure that those most at risk can feel secure, protected, and confident that they’ll be able to withstand whatever Mother Nature throws at them next.

Matthew Patience is the client solutions manager for McKenzie Intelligence Services. Contact him at [email protected].