Canadian Underwriter
Feature

Caught in the Vortex


July 1, 2014   by Greg Meckbach, Associate Editor


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Property damage was being reported following the June tornadoes that hit the southern Ontario communities of Angus and Tottenham. But industry experts say the damage from those tornadoes, in particular, and tornadoes in Canada, in general, are not expected to prompt significant losses for reinsurers here.

On June 24, a tornado with winds measuring more than 135 kilometres per hour – reported to measure 1 on the Enhanced Fujita (EF) scale – touched down in Tottenham, northwest of Toronto. Just one week earlier, the community of Angus about 35 kilometres away was the site of a stronger tornado, reported to be an EF2, meaning with wind speeds measuring between 180 and 220 km/h.

The EF scale, now used by Environment Canada to measure the strength of tornadoes, has six ratings. For example, an EF0 tornado has wind speeds of 90 km/h to 130 km/h; an EF1 has wind speeds of 135 km/h to 175 km/h; an EF2 has winds speeds of 180 km/h to 220 km/h; an EF3 has wind speeds of 225 km/h to 265 km/h; an F4 has wind speeds of 270 km/h to 310 km/h; and an EF5 has wind speeds of 315 km/h or more.

“I think at the end of the day, Angus won’t be a huge dollar loss” to insurers, predicts Glenn McGillivray, managing director of the Institute for Catastrophic Loss Reduction (ICLR). “It’s a significant event, but it’s not going to be huge from an industry perspective.”

The June 17 system prompted about 100 claims for Aviva Canada policyholders in central Ontario, reports Wayne Ross, vice president of national auto, property and specialty claims for the insurer. Two policyholders in Angus had “significant damage” to their homes, Ross says.

Most claims reported to Aviva from the Angus event involved shingles blowing off roofs, damaged fences or items in backyards being tossed around, Ross says. Other losses included living expenses for homes requiring repair or reconstruction, he adds.

The Angus tornado “will not have any reinsurance impact,” for Aviva, Ross expects, noting that “that will all be net” for the insurer. Aviva does not publicize its reinsurance treaty limits, but they are “very large,” says Ross.

“I suspect, unless it’s a small mutual company, that most of the companies will be paying this out on a net basis and not involving reinsurance,” Ross predicts. “Tornadoes are not a substantial risk (to reinsurers) in Canada.”

TORNADO RISK IN CANADA

Environment Canada records about 90 tornadoes a year in Canada, with an average of 43 annually occurring in the Prairies and an average of 17 annually touching down in Ontario and Quebec. McGillivray reports that the “vast majority” of tornadoes are EF3 (225 km/h to 265 km/h) or weaker.

The deadliest tornado to date in Canada was an F4 twister that hit Regina in June 1912, notes information from Environment Canada. A map on the federal department’s website plots all known tornadoes in the country from 1980 through 2009 (during which time the original Fujita, or F, scale was used).

Over the almost three decades plotted, there were three F4s (330 km/h to 410 km/h), 24 F3s (250 km/h to 320 km/h), 119 F2s (180 km/h to 240 km/h), 478 F1s (120 km/h to 170 km/h) and 1,217 F0s (60 km/h to 110 km/h). Only one F5 – which touched down near Elie, Manitoba in 2007 – has ever been recorded in Canada.

“There is no connection that anybody can draw right now between climate change and tornado frequency, but we can, anecdotally, draw a connection between greater development and tornado activity,” says McGillivray. As for whether or not tornadoes are becoming more intense, the “jury is out,” he says.

Although “there is no scientific evidence that there is increasing frequency of tornadoes,” inflation-adjusted economic losses in Canada from convective storms (which include thunderstorms, tornados and hail) have “roughly doubled” from 1980 to 2013, reports Till Heydl, vice president of client management and marketing for Munich Reinsurance Company of Canada.

Attributing this, in part, to the increase in population, Heydl says that homes and properties are “much more valuable” than they were 30 to 40 years ago, and Canadians possess more cars and other valuables now than they did then. “That boosts the economic losses from these storms,” he explains.

“Most of them go undetected because they don’t hit anything,” Steve Smith, chief executive officer of Farm Mutual Reinsurance Plan Inc., says of tornadoes. “They hit maybe one barn or one house, or they don’t fully touch down and they don’t cause much in the way of damage,” Smith points out.

Sometimes, though, losses from tornadoes in Canada exceed primary insurer’s retentions, triggering excess of loss treaties, Ross says. For example, damage to a factory during the devastating tornado in Barrie, Ontario on May 31, 1985 triggered Aviva’s excess of loss treaty.

ICLR reports that 12 people died that day from storms in central Ontario, while property losses “probably exceeded” $100 million.

Peter McCutcheon, Munich Re Canada’s senior vice president and chief underwriting officer, says that the Barrie tornado “would have been a significant event for the industry at that time.” In general, though, McCutcheon characterizes the amount of reinsurance losses from tornadoes in Canada as “troublesome, but not significant.”

LOCALIZED IMPACT

Tornado is “not specifically identified” in reinsurance treaties, but is generally covered under wind, notes Smith. Tornadoes in Canada “tend to be considered more in terms of severity to a more localized area than a frequency,” he says.

In general, Smith points out that insurers’ retentions tend to be $1 million to $5 million per risk, although smaller mutual companies tend to retain about $300,000 per risk.

“Each company would assess their own risk appetite on their own merit,” he says, adding that primary insurers’ catastrophe retentions, in general, tend to be about three to four times their retentions for individual risks.

A catastrophe treaty would kick in when a primary insurer has multiple risks affected by the same event, Smith explains. Ross adds that “if you have a catastrophe reinsurance treaty, it will look at the same weather pattern as one event.”

Losses from tornadoes could arise from damage to roofs, facades, cladding or windows, Hannover Re notes in an e-mail response. “Recently, there have not been any significant tornado losses for Hannover Re despite significant losses on the primary insurance side,” the reinsurer reports.

Tornado risk is normally covered under windstorm and it is “not typical that they would be named specifically as an exclusion or a covered peril,” says Tanya Page, manager of compliance, audit and performance at Western Financial Group. “It is best to check with your broker because policies can vary quite a bit,” Page advises.

Tornadoes can cause losses under different coverages, she points out. Commercial policyholders could potentially have damage to structure and commercial vehicles, loss of contents and business interruption, Page notes, while personal lines losses could include damage to the building. It could also potentially include contents and additional living expenses if the policyholder is unable to occupy the affected residence.

“Contents would be covered as well, if it was directly linked to tornado or wind damage, so if the tornado causes an aperture in the building that lets rain in or something like that, those contents would be covered,” she adds.

“Residential buildings are mainly affected by tornadoes due to their construction type, which is mainly wood frame construction,” notes Hannover Re. “Commercial, industrial risks or big apartment buildings are usually designed to withstand tornadoes. However, in cases of very strong tornadoes, even such buildings can be affected.”

Mobile homes, school portables, construction equipment, solar panels and wind turbines “are heavily exposed to the tornado risk,” the reinsurer reports.

PREVENTIVE MEASURES

M
cCutcheon says there is no general rule of thumb that an insurer could use to predict losses from a tornado of a particular strength.

McGillivrary would likely agree. “We don’t have a lot of experience where we are able to say, ‘This type of storm is going to generate this type of loss,'” he says.

Still, ICLR takes the position that tornado losses can be reduced through the use of hurricane straps, or metal bands that wrap around trusses and connect to walls.

Those straps cost about $1 each “and can largely eliminate the risk of roof failures from an EF2 tornado,” Greg Kopp, an engineering professor at Western University, notes in a recent press release issued by ICLR.

Homes can better withstand tornadoes if builders use “longer nails in roof sheathing, like 2.5-inch, rather than the code minimum two-inch nails, placed every six inches apart rather than every 12 inches,” reports Kopp, who is also research director of Western’s Boundary Layer Wind Tunnel in London, Ontario, where his areas of expertise include the effect of wind on low-rise buildings.

McGillivray and Smith suggest it is rare for a tornado to touch down in a built-up area, but Smith notes there certainly have been exceptions. Some of these include the Ontario examples of Oxford County in 1979, Barrie in 1985, Leamington in 2010 and Goderich in 2011.

Property Claims Services pegged losses from the Leamington and Goderich events at $120 million and $75 million, respectively.

“At the time, (the Oxford County event) was one of the more severe ones that happened up until that point,” Smith says of the three tornadoes that touched down in and around Woodstock in 1979. It “basically obliterated” the community of Oxford Centre, about 10 kilometres southeast of downtown Woodstock, he reports.


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