U.S. Winter Storms February 2021

Update 1 | Summary
Posting Date: February 25, 2021, 3:30:00 AM

A series of winter storm events across the U.S. has led to widespread catastrophic freeze impacts, particularly in the State of Texas. Starting on February 12 and continuing through the following week, these storms impacted more than 70% of the continental United States with freezing temperatures, snow, and ice. Most of the states affected exhibited resilience in terms of being well prepared for adverse winter conditions through insulation; the ability to avail themselves of mutual energy sharing agreements; and past experience. Texas fared less well, leading to a winter storm catastrophe in that state, driven in large part by the impact from significant-duration power outages.

AIR clients may download an Excel Workbook containing industry-level risk counts by line of business and county from AIR’s Industry Exposure Database for the United States as a resource for those who wish to perform their own industry level analyses of this event from the Downloads tab. The information provided herein is strictly confidential and is solely for the use of AIR clients.

Record Low Temperatures and Their Impacts

The freezing temperatures—many of them records—and winter precipitation hit Texas and the southern U.S. on February 13 and lasted there through February 18. This event marks the longest continuous freeze on record for most locations, with Waco as an example of one Texas city staying below freezing for 203 consecutive hours—53 more than the previous record. At the peak of the low temperatures, on February 15, the average temperature across Texas was just 12° Fahrenheit, or 6° lower than the average temperature in Alaska on the same day.  

These freezing temperatures, coupled with the unusually high demand for heat, was enough to cripple the state’s power grid and plunge wide swaths of the State of Texas into cold and darkness. A recent blog from our colleagues at Verisk’s Wood Mackenzie summarized the Texas energy crisis, its causes and consequences. While many factors contributed to the overall failure of the Texas electricity grid, indications are that equipment failures due to low temperatures was the most common. The average period of continuous power outage in Texas was reported to be around 30 hours, following which neighborhoods continued to rotate power outages several hours at a time. At the peak of the power outage in Texas, 4.5 million customers in that state were without power.

The freeze peril most commonly leads to damage from water resulting from burst pipes.  Once ice builds up and creates a blockage in the pipe, pressure builds downstream from where the blockage is in the pipe; this increase in water pressure is what ultimately leads the pipe to burst. A burst pipe can lead to significant flooding damage that requires extensive repairs.

Texas Power: A Tale of Two Grids

Texas does not embrace practices as robust as some Midwestern and Northeastern states; the state has not undertaken mitigation efforts against the impacts of freezing temperatures, e.g., the insulation of pipes for water supply and sprinklers. In addition, the Electricity Reliability Council of Texas, the grid operator that controls roughly 90% of the electric load in Texas, is not connected to other states’ power grids, effectively rendering much of the state an island unto itself in the face of such extreme events and leaving it with no capability to borrow/share surplus power. One notable exception is the City of El Paso, which fared much better than most of the rest of the state. El Paso is not a part of the Electric Reliability Council of Texas but gets its electricity from El Paso Electric, which oversees the electricity from Hatch to Van Horn, Texas, and is a part of the Western International grid.

Types of Potential Claims Resulting from Power Outage

Loss of power brings with it a set of scenarios that can eventually translate to insured losses. With temperatures plunging well below freezing for several days in a row, frozen pipes and the other problems that ensue, such as burst pipes and water damage, tend to predominate. When water freezes within pipes, it not only prevents the flow of water but can also damage pipes, fittings, and fixtures. Basements are rare in the South, so residential plumbing is often run through attic spaces, exacerbating the nature and complexity of water damage to buildings that sustain burst pipes in that region. Estimates from past events dominated by the freezing temperatures sub-peril pegs the average residential insurance claim from water damage due to frozen pipes anywhere between $10,000 and $15,000. Depending on the extent of the damage, this dollar range can be significantly higher for specific cases when considering loss of use, repairs to the home, and replacement of contents that were damaged. Even in the absence of water damage, losses due to food spoilage and additional living expenses can lead to a considerable number of lower severity claims, which can add to insured residential losses. For commercial risks, freeze-dominant historical events have resulted in average claims upward of $30,000. Reports suggest that many industries within the manufacturing and energy sectors in Texas were disrupted due to rolling power cuts, which could ultimately result in large claims; among commercial risks, multiple reports have indicated that smaller commercial risks are bearing most of the loss, with schools especially hard hit.

While freezing and bursting pipes are typically the driver of losses from freeze events, damage resulting from fallen trees, roof collapse, and power surges are all reasonably common during these types of events.  Losses due to damaged sprinkler systems and, down the line, damage from mold caused by flooding, can also lead to additional losses—although in many cases both residential and commercial policies have exclusions regarding mold damage. 

While physical damage resulting from frozen pipes is covered under typical residential and commercial property insurance contracts, business insurance claims may also include an optional utility service interruption coverage as an endorsement. This endorsement typically covers lost business income due to loss of utility services, including loss of use, content spoilage, and others. This coverage is generally triggered beyond a specific time frame (typically 24, 48, or 72 hours). With wide swaths of Texas and adjacent states lacking power and/or water for several days, service interruption losses for commercial/industrial risks are expected to accumulate. There is some gray area in the coverage, however, as the coverage only pays out if the property damage in question is a result of damage to a covered utility property by the same peril; it remains unclear at this time whether the service interruption losses to commercial/industrial risks were a result of damage to a covered utility by the same peril. Subrogation remains a possibility with respect to this aspect of the loss.  Significant uncertainty exists in the magnitude of insured losses to commercial/industrial lines depending on the trigger time frame for business interruption payouts as well as the take-up of the utility service interruption endorsement.

Labor, Services, and COVID-19 Impacts

Labor and services relating to repairs following this event are expected to be highly strained, leading to delays in rebuilding and potentially higher claims—especially with regard to additional living expense and business interruption coverages. According to one recent report, some plumbers in Texas are reporting 10 times their typical call volume, and despite an influx of skilled labor from outside the state, delays in repairs are likely to continue in the short term. Further exacerbating these delays are shortages of some key plumbing supplies. Taken together, the demand surge for plumbing services is likely to be a driver of higher than typical repair costs.  While Texas is generally further along in reopening than many states, there could still be impacts from buildings that were unoccupied due to COVID-19 that would typically have been occupied; this lack of occupancy could have led to delays in water shutoff or other loss mitigation that could end up exacerbating some of those claims. 

Estimating Industry Insured Losses for This Event

In general, AIR uses its extreme event models to estimate industry insured losses following an event such as this. This event, however, presents significant challenges to model. The power outage component and its exacerbating effect on losses are not explicitly captured by the AIR model, limiting the ability to capture the overall impact using the model alone. What further adds to the modeling difficulty is the level of demand surge resulting from labor, services and the COVID-19 pandemic discussed in the previous section.

As an alternative, AIR estimated claims frequency and severity and the sources of uncertainty around both to gauge an insured loss potential from this event. With respect to claim frequency, wide swaths of Texas were without power for several days. Unlike a hurricane or severe convective storm, which impacts a concentrated region within a state, this event affected almost the entire State of Texas. Close to 12 million residential properties and more than 800,000 commercial/industrial risks were in the areas of Texas impacted by this event. Based on information from the Insurance Council of Texas, data from other Verisk units, and commentary from the insurance industry, it appears likely that the number of claims from this event may significantly surpass those from 2017 Hurricane Harvey, ultimately landing in excess of 500,000. While there is also still uncertainty in the proportion of claims that will come from personal versus commercial lines, the current expectation is that a significant majority of the claim count—on the order of 80%—will come from personal lines.

Given the significant number of expected claims, average claims severity values of $15,000 for residential risks and $30,000 for commercial risks, and the level of demand surge, industry insured losses appear likely to exceed $10 billion. However, there are several factors that could still potentially drive the loss well in excess of that figure—among these could be a higher-than-expected rate of claims among those risks affected by prolonged power outage; whether utility service interruption coverages pay out; larger than expected impacts from demand surge; government intervention; and whether claims from mold damage start to emerge as a significant source of loss. 

AIR clients may download an Excel Workbook containing industry-level risk counts by line of business and county from AIR’s Industry Exposure Database for the United States as a resource for those who wish to perform their own industry level analyses of this event from the Downloads tab. The information provided herein is strictly confidential and is solely for the use of AIR clients.

Update 1 | Downloads
Posting Date: February 25, 2021, 3:30:00 AM

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