Insurance in Illinois

Hurricanes and Insurance Burdens & Considerations

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The insurance industry in the United States is a major economic force in the country, but is the largest commercial entity regulated at a state, rather than a federal level. This has been the case since the McCarran-Ferguson Act of 1945. An insurance policy company mush go through regulation on a state-to-state level, where policies and practices often differ. While outsourcing has been a major business force in most other financial markets, insurance companies are largely American-owned and traded due to the obstacle that state by state regulation poses on foreign influences (Lehrer 2010).

Due to the fact that Illinois in an inland state, it is geographically protected from most major hurricanes, although tropical system remnants that move in from the Gulf of Mexico and the Atlantic Ocean do move up onto the area occasionally. The majority of data regarding the effects of weather extremes in the state of Illinois pertains to the effect of hail on crop health. Hurricane Ike, however, created severe damage and problems for inland North America, including Illinois (Associated Press 2009).

The major effect of Hurricane Ike in Illinois was flooding, which was rampant along the DuPage, Des Plaines, and Chicago Rivers; the overflow of the Des Plaines River resulted in up to four feet of flooding in some forest areas. In terms of human life threats, most of the people who had to be evacuated and treated medically following Hurricane Ike were volunteers piling sandbags on the rivers’ edges to mitigate the flooding damage. Former governor Rod Blagojevich declared a state of emergency for the entire state and over 45,000 residents lost power due to rain and wind damage to the electrical systems throughout the state. The crop damage following the remnants of Hurricane Ike in Illinois was extensive, hitting the corn and soybean crops that were planted in these rivers’ valleys. There were no deaths reported in Illinois, but there were seven deaths reported in neighboring Indiana, where over 350,000 people lost power due to the storm (CBS News).

What happens when a storm is not technically classified as a hurricane but has all of the devastating effects that one causes? This was an issue of concern following an unusual “inland hurricane” that hit Illinois in the spring of 2009. Hurricanes are defined by several characteristics; they are storm systems, which have a concentrated low-pressure center which produce heavy rains and winds and thunderstorms and tornadoes. Hurricanes are also known as tropical cyclones because they form over warm ocean waters (Merrill 1993). When a strong storm system with a low pressure center develops but does not have a tropical origin, there is some confusion about how to classify such a system meteorologically or colloquially. In the case of the major storm system that hit Illinois and the American Midwest in 2009, the term “inland hurricane” was adopted to convey the severity of the storm (Coyne 2009).

The storm was officially known as a derecho (Spanish for “Straight”) and hovered over the area for a long period of time and caused extensive wind damage. The storm caused the death of 6 people and power was lost for 200,000 residents in Illinois. This storm presented an interesting case study for insurance claims related to severe weather in Illinois. Hurricane insurance, which is rare in Illinois, was not necessary due to the fact this storm was not technically a hurricane. Flood insurance and wind damage coverage were much more pertinent to Illinois residents following the derecho of 2009. The Carbondale Hurricane, as it came to be known, was not in fact a hurricane but was strong enough to have been classified as one if its internal pressure and origin has followed the necessary criteria for tropical cyclones or hurricanes (Pielka et al. 2009).

Crop insurance companies vary greatly in size but tend to be highly regional, focusing their business within a handful of states. Most make their data available to the Corp-Hail Insurance Actuarial Association in order to determine industry and nation-wide loss and development rates. Crop insurance is a major business in Illinois, which has millions of acres of farmland. In a retrospective analysis of 93 years of data from 60 volunteer-run weather stations in the state, one study found that hail was a significant contributor to crop damage-related insurance burden. Crop insurance also has a reinsurance industry where, as in property insurance, insurance companies are protected from major losses due to catastrophic weather events (Chagnon 1996).

In some cases, the results of tropical storm systems in Illinois can be positive. In 2005, four tropical storm systems, Tropical Storm Arlene and Hurricanes Dennis, Katrina, and Rita, were found to have alleviated drought conditions in Central and Southern Illinois. A study that looked at the historical records indicated that it was the first season in recorded history (dating back to 1856) that four tropical systems moved through this region. The storms were spaced advantageously, with Arlene and Dennis hitting early in a dry growing seasons. The net rainfall in this area from these four storms was determined to have had a significant effect on lessening one of the worst droughts in this region of Illinois, adding to the area rainfall about 6 inches of rain during the hurricane season (Angel 2006).

Life Insurance and Hurricanes

The insurance industry has been bracing for anticipated worsening weather for over a decade.

Insurance Research and Publishers stated, “The property insurance industry was staggered by a series of increasingly severe catastrophic losses during the last five years. Even larger catastrophes are possible as population and building development continue to increase in exposed areas” (Changnon 1996)

While the recent highly active hurricane seasons represent an anticipated loss of life and property, from an insurance perspective, active hurricane seasons present business opportunity. The hurricane insurance sector has grown rapidly over the past decade in response to worsening weather patterns nationwide. “After consecutive years of devastating storms across Florida, several insurers have entered the market, seeking to capitalize on shrinking capacity.” said Melissa Gannon, vice president of Weiss Ratings (Weiss 2010).

Hurricane-related insurance is almost categorically related to property insurance. When deaths related to hurricanes occur, this is determined to be a death due to an act of God.

Creating Hurricane Insurance Policies

Unsurprisingly, most major stakeholders in the insurance industry advocate for less regulation from both profit and service perspectives. “In jurisdictions where underwriting freedom prevails … Competitive, risk-based underwriting facilitates fairness in pricing, prudent conduct, widespread availability of coverage, and risk sharing among insurers,” says Robert Detlefsen, Director of Public Policy for the National Association of Mutual Insurance Companies (Lehrer 2010). In the case of hurricane-related insurance in the state of Illinois, a general lack of competition might lead one to believe that higher price points are permissible, but due to a general lack of risk, the demand for this type of insurance is uniformly low (Lehrer 2009).

Hurricane Katrina, which hit Louisiana in 2005, taught the hurricane insurance industry and the general public many lesions about best practices and navigating data loss that accompanies large-scale weather-related disasters. After Katrina, thousands of life insurance policies were destroyed and death certificates took weeks or months to process as humanitarian and evacuations processes were underway. Company spokespersons from Metlife and State Farm Life, two of the companies that had the highest investment in the area affected by Hurricane Katrina stated that few insurance claims came into the companies in the weeks following the disaster (Pasha 2005).

The American Council of Life Insurers stated that most consumers did not submit their claims because they lacked proper documentation following the disaster. Insurance companies, however, will process claims without death certificates under extreme circumstances, following up with more standard investigations in the wake of the crisis (Pasha 2005). Life insurance companies will accept several alternate forms of verification under hurricane-related conditions. Other acceptable documents include an affidavit from a funeral home director, family members affidavits, hospital records or a physician affidavit.

Insurance companies also set up toll-free hotlines in the wake of specific hurricanes. This allows for claims to be started via telephone without policy numbers by providing the companies with security information to verify the account. A general sense of liberal resource allocation has become an industry standard following Hurricane Katrina, when an utter lack of resources in impoverished communities was seen to augment the suffering of individuals affected by the disaster. Insurance companies, along with federal aid agencies, especially FEMA, experienced a great deal of negative public relations following Katrina and are now more readily paying claims in the immediate timespan following a hurricane to facilitate the recovery process (Pasha 2005).

Another more recent development in hurricane-related concerns in life insurance claims is the emergency loan offering several companies are offering hurricane-affected policy holders. Customers are able to take out an emergency cash loan by borrowing against the cash value of their policy without collateral. The loans do accrue interest and those who die before the loan is paid back will have the payout to their beneficiary lessened by the amount of the loan. The loans, which are not a standard term-life offering but can be opted-into when setting up a policy, are intended to assist in rebuilding efforts not covered by property insurance (Pasha 2005).

The case of the Carbondale ‘Hurricane” raises interesting points of consideration for handling insurance-related needs around the threat of hurricanes in Illinois (Associated Press 2009). Most of the major storm damage in the state is not attributable to actual hurricane, but to remnants of tropical systems, non-tropical severe storms, such as derechos, and heavy seasonal hail. Standard hurricane policies such as what are seen in the more hurricane-prone American South do not meet the needs of people experiencing severe weather in the American Midwest.

Based on the data concerning the rain and hail impacts of several severe storm systems discussed earlier in this paper, it seems that comprehensive flood and/or wind damage insurance is far more pertinent to the needs of Illinois residents. If the damage does not come from a storm classified by meteorology experts as a hurricane or tropical storm system, there is a great deal of uncertainty regarding whether or not insurance companies will cover the damage. Therefore, Illinois residents would be best served by coverage which covers damage types rather than cause of damage. Comprehensive property and life insurance along with wind and flooding insurance should be sufficient for an average Illinois resident, with crop-related insurance for farmers as an additional necessary measure.


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