Insights

Major tornado damage in the US Midwest

Posted 15.12.2021 – Quick takes

An unusual and prolific outbreak of late season tornadoes has caused extensive damage across the Mississippi Valley and Midwestern United States. A huge weather front brought very cold mountain air from the north to areas of the US that had been experiencing unusually mild weather for this time of the year, spawning more than 30 tornadoes on 10th and 11th December. 30 tornadoes forming in this short period of time would not be particularly unusual in spring or summer, when tornado activity is highest, but there have only been four occasions since records began that more tornados have formed in a 24 hour period in December.

 

Tragically, the death toll is expected to be in excess of 100, with more than 70 of these in the state of Kentucky alone. Property damage and general disruption has also been extensive. Nearly 500,000 customers across the mid-South and Midwest are reported to have experienced power outages, for instance. One particularly significant supercell thunderstorm impacted four states (Arkansas, Missouri, Tennessee, and Kentucky) across more than 600 miles and produced eight individual tornado emergency declarations. The storm was so powerful that a photograph from a tornado-damaged home in Kentucky was found almost 130 miles away in Indiana. Additional tornadoes caused major damage in the state of Illinois.

The Karen Clark Company (KCC) is the first to provide an estimate of the cost of the storms, initially calculating that the insured losses will be in the region of US$3bn, covering insured damage to residential, commercial and industrial properties, as well as vehicles. Although it will take weeks to fully calculate the human and economic cost of the tornadoes, the figure will undoubtedly run into the billions of dollars. Aon calculates that the insured losses from the top 10 historic tornadoes range from circa US$2.8bn to US$8.5bn (inflated to 2020 dollar terms).

Alpha comment

 

Although the vast majority of the cost of these tornadoes, where insured, will fall back on regional or national carriers in the US, some may be ceded to reinsurance programmes (albeit Aon does not expect the cession to be significant). Media coverage has centred upon two commercial buildings which both saw a significant loss of life: a candle factory in Mayfield, Kentucky and an Amazon warehouse in Edwardsville, Illinois. The latter may, perhaps, see some losses finding their way into the cargo market. Beyond these major facultative claims, much of the damage appears to be residential. Media speculation is that there may be some exposure for the London Market from the Farm Bureau programmes, especially in Kentucky. In all,  we do not believe that the cost of the storms will be a major event for Lloyd’s, but they have (unusually) arisen at a time when major reinsurance programmes are being negotiated ahead of the 1/1 renewals. Alpha has long argued that the reinsurance and retrocession space needs to see significant rate increases to cover both current risk and the potential impact of climate change on the US market. Whilst we are saddened by the human cost of these storms, we do believe that they offer a timely reminder of the risks that arise from natural catastrophe events and would urge underwriters to insist upon additional risk adjusted rate changes (RARC) to offset those risks.

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