In February, Texas experienced a series of storms that tore through every corner of the Lone Star state. These storms ushered in a week-long freeze and power outages that will rivaled the most destructive hurricanes to hit the U.S. These storms shuttered oil and gas production, food-processing facilities and manufacturing plants while leaving millions of people in darkness for days on end. Many residents have had to deal with burst pipes and other property damage from the unprecedented snow and cold.
A Shock to the System
"This is a unique event that impacted the entire state," says Zach Burdine, RPS Area President. "Typically, we see coastal storms and hurricanes as well as hailstorms in the northern part of the state, which is situated at the edge of Tornado Alley. We don't get hit with everything at the same time. No county was spared from being hit with multiple events." In fact, Texas Governor Greg Abbott issued a disaster declaration for all 254 counties in the state.
"Initially, we were hit with a storm that covered the entire state with an inch to an inch and a half of ice. On the heels of the ice storm, three to four storms spread snowfall and damaging ice or a combination thereof across the state. It was one event after another," recounts Burdine.
The storms that battered Texas also exposed the limitations of the state's infrastructure.
"Texas's infrastructure is ill-prepared to deal with frigid conditions," explains Burdine. "We have droughts, hot summers and mild winters across the state, except for a few areas in the Texas Panhandle. Our power grid, water supply systems, and sewage systems are set up to handle extreme heat, but are not designed to withstand the cold we experienced for such a long period of time.
"The lack of winterization caused a great deal of damage on both the local grids and for individuals. Residents in major cities like Dallas and Austin went without the essentials - water, heat, electricity - for days. Some systems were unable to come back online for another week in certain areas, particularly in the rural parts of Texas that are run by electric co-ops. Crews in counties across the state had to physically repair power lines, which takes time. One county, for example, had 2,400 downed power lines."
The Aftermath: A Staggering Volume of Claims
The economic impact of the Texas storms could end up costing a total of $195 billion, on the low end, to as much as $295 billion, according to TX-based economic research firm The Perryman Group. It's too early, however, to project insured losses, although some modelers have estimated the cost to be up to $20 billion.
"Most of the damage for small commercial and residential insureds is water damage due to burst pipes," notes Ryan Pike, RPS Dallas Branch Manager. "While on the large commercial side, you're seeing utility service interruption as a major issue, particularly in manufacturing."
The volume of claims is staggering, according to Pike. One carrier, for example, is handling in the range of 50,000 claims while another is managing upward of 120,000 claims.
"Most insurers are well staffed to handle a normal volume of claims with in-house and third-party adjusters, and are able to respond quickly to get repairs done and indemnify clients," says Pike. "Unfortunately, in this case, no carrier has enough staff to handle what is amounting to hundreds of thousands of claims in the span of five days."
In addition, when a catastrophic storm occurs, it's typically in a particular region. Carriers have the ability to send adjusters from other parts of the state to help weather those events very well.
"In this case, though, the ability to move people throughout the state compounded by COVID-19 restrictions creates a real challenge to adjust so many claims in a timely manner," Pike explains.
Most property damage claims should be covered and, depending on the program, there may be sub-limits. Insured property typically includes buildings and other structures, equipment, supplies, and other personal property. Water damage caused by burst pipes or collapsed roofs due to the weight of snow or ice should in most cases also fall under this coverage.
Business interruption coverage would come into play if a business had to shut down due to property damage, power outages, or water shortages. Coverage for utility service interruption will depend on whether coverage for this risk is included in the policies that are in the client's insurance program.
Other claims involve D&O lawsuits from residents and commercial entities against ERCOT (Electric Reliability Council of Texas), which operates the electric grid and manages the deregulated market for 75 percent of the state, and electric co-ops.
"D&O claims typically will tap into the excess and umbrella lines as well," says Burdine.
Storm's Impact on Insurance Rates
The insurance market has been challenging on the property side in terms of rates and deductibles and time will tell how the storm will affect renewals.
"As reinsurance rates increase, carriers will be affected and ultimately the insured will feel the impact," says Burdine.
"In addition, we have seen an increase in hail and wind deductibles over the last five to six years, but the AOP (all other peril) deductible hasn't followed suit. Claims from these storms fall under the AOP deductible and you may see a change in carrier underwriting. It's important for agents to get ahead of renewals, communicate with clients to prepare them for what may be coming.
"It's also critical to have stewardship-type conversations with your broker and insurance underwriter to get a sense of how they are viewing risks, what trends they are seeing and to understand the whole picture. It takes a team effort to work in the insured's best interest."
"Additionally, agents should get as much detail as possible from insureds 30 to 90 days prior to renewal on how they weathered the storm," advises Pike. "Did the insured lose power and water and for how long? Did the insured's property suffer any damage? If so, what type of damage and what are the repair estimates?
"This allows agents to get more markets involved in the renewal process in order to obtain competitive rates. Having as much specific information as possible will better enable an underwriter to consider a risk. The carrier has to feel comfortable with the state of the risk after a claim.
"If information is provided upfront, it gives the carrier peace of mind in terms of what is going on with the risk and confidence they are getting accurate information for proper underwriting."