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Hail.  Tornados.  Floods.  Ice.  Snow.  Droughts.  Wildfires.  And now earthquakes?  Is there any natural disaster that Mother Nature won’t throw at Oklahoma?

The fact is that this state’s destructive weather has resulted in devastating property losses in Oklahoma over the past five years.  One insurance industry professional from Oklahoma Farm Bureau Insurance put it this way:

Here’s the stark reality for Oklahoma:  This marketplace over the last five years had the most historic amount of loss in the history of all organizations – not just one individual insurance company…catastrophic…in both numbers of claims and the severity of those claims…

Confirming industry data shows that claimed losses on state homeowners policies more than quintupled from 2005 to 2010, with insurers paying out far more than they took in each of the past three years.  Statistics from the National Association of Insurance Commissioners detail that insurers paid out $319.2 million for Oklahoma homeowners claims while collecting $804.1 million in premiums.  Just three years later, in 2008, claims surpassed $1 billion.  By 2011, claims totaled more than $1.6 billion, and in that year, insurers paid out $622 million more in homeowners claims than they earned in premiums.

What makes these numbers even more compelling is that the extreme weather events of the past few years have occurred in so many different segments, from flooding events to tornados to drought.  Indisputably, however, claims for hail and wind damage, often in connection with tornados, take highest honors in terms of property damage to both homes and autos.  On a nationwide map showing hail activity in the United States, Oklahoma is the bulls-eye, with the second highest hail claim frequency of the fifty states, trailing only South Dakota.  Approximately three fourths of the premium dollars paid by Oklahoma insureds go to hail and wind losses.  Add to this losses resulting from the 2007, 2009 and 2010 ice storms, the 2010 floods, the ongoing tornados and the record breaking droughts of 2011 and 2012, and it is easy to see why Oklahoma weather makes this state a tough insurance market for both insurance providers and customers.

Another stark result of severe weather is the damage caused to Oklahoma’s agricultural crops, such as cotton and wheat.  The 2011 cotton crop, for example, was hard hit by drought, down 79 percent from the 2010 harvest, according to the U.S. Department of Agriculture (“USDA”).  Some Oklahoma farmers believe the state’s 2012 cotton crop will be a “near zero gain, just like last year.”  Any rains that fall now would come too late to save this year’s planting.  Many farmers have already decided to forego harvesting a 2012 crop, which typically begins in late September, and will file claims on federal crop insurance policies.

The impact of this wicked weather trickles down into other areas of Oklahoma’s economy.  Farm operators generally hire a number of seasonal workers to help with cotton harvest, but that is unlikely to happen in large numbers this year, and one Oklahoma co-op has reported permanent employee lay-offs.  It is also felt in the area of new farm equipment sales, which has cost at least one Oklahoma company an estimated loss of $5-6 million in 2011, and in higher prices for food and consumer goods.

Response to Staggering Losses

In addition to rising costs from the number and severity of weather-related claims, harsh weather events mean insurance companies also pay more in premiums to reinsurers on coverage for catastrophic events involving property damage.  Meanwhile, insurers’ returns on their investments – roughly 70% of such assets are in bonds – have been quite low.

The ways companies insuring Oklahoma properties can handle such losses are limited.  The most obvious one is through general or targeted rate increases.  After rising steadily for the past few years, homeowners insurance premiums across the nation were expected to jump another 5% in 2012 to $1,004, according to the Insurance Information Institute.  That’s the biggest annual increase in some time, and would mark the first time the national average premium is above $1,000.

Oklahomans already pay above average premiums, ranking in the top five in the nation for homeowners insurance, which in 2009 was an average of $1,123 for a year’s coverage.  While there is no way to quantify how much property insurance costs will increase in Oklahoma in the future, rates continue to rise due to experienced losses from the recent severe storms, and to the anticipated need to pay future catastrophic claims.  State Farm raised its rates in Oklahoma about 10% last year, and Oklahoma Farm Bureau raised rates from 5% to more than 30% based on different criteria for individual customers.

Some insurance carriers take different steps to cope with staggering losses.  Some have curtailed business in high density areas of the state, including Tulsa and Oklahoma counties.  Others have changed policy terms.  Allstate recently introduced a new homeowners policy in Oklahoma and Kansas that changes the way it pays claims on roofs that incur hail or wind damage.

A more permanent way insurers deal with huge losses is to close down shop entirely.  About 130 companies offer homeowners insurance in Oklahoma, and two of those, State Farm and Farmers, account for more than 40% of the market share.  Last year, State Farm, the largest, paid out $405.5 million in claims in Oklahoma but collected only $275.4 million in premiums.  While there has not been a mass exodus of insurers from the Oklahoma property insurance market, at least one company, GHS Property & Casualty Co., has said it will withdraw from the Oklahoma auto insurance market primarily due to “the staggering effect of multiple natural disasters that have left GHS with irreconcilable underwriting losses.”

Statutory Aid

The Oklahoma Insurance Commissioner cited Oklahoma’s extreme weather events in a recent explanation of amendments to Oklahoma’s fraud statutes, which may provide some small measure of relief to both insurers and insureds.  On July 1, 2012, Senate Bill 1439 and its amendments to various statues including the Fraud on Insurance Companies Act, 21 O.S. § 1662 et seq., became law, strengthening provisions relating to insurance fraud, which is generally defined an act committed with the intent to fraudulently obtain payment from an insurer.  Fraudulent claims costing billions of dollars annually account for a significant portion of all claims received by insurers, including the common occurrence of fraud in connection with severe weather events.  As noted by Commissioner John Doke, “unscrupulous contractors” follow the destructive paths of severe Oklahoma storms, with schemes to take advantage of consumers dealing with property losses, eventually leading to insurance fraud.  The laws contain tougher penalties for such fraud by provisions that, among other things:  (1) classify as a felony the presentation of any false or fraudulent insurance claim, (2) allow prosecutors to group together several smaller violations alleged against the same perpetrators, such as “unscrupulous contractors,” to enable more serious crimes to be charged, (3) increase penalties, and (4) provide civil immunity for insurance fraud whistleblowers.

These laws have been applied in several recent cases.  Charges filed on August 12, 2012, by the Oklahoma Attorney General involved an insured who allegedly filed a false claim for hail damage to her vehicle.  She represented that while she was out of town, her vehicle was parked at a relatives’ residence and was severely damaged during a hail storm.  She further contended that there was no prior damage to the car.  The insurer, however, provided proof that the insured had filed at least 10 previous claims on the same car.  During an investigation by the AG’s Insurance Fraud Unit, the insured admitted that she had lied about the car’s location during the hail storm, that she had already filed multiple claims, and that she had only had the car repaired twice.  http://www.oag.ok.gov.

With respect to crop damage caused by severe weather in Oklahoma, federal statutory protection means both insureds and insurers can fare better due to federal government aid.  As explained by Dennis A. Shields, Agriculture Policy Specialist, in a December 2010 report on the program, although farming is generally regarded as a financially risky business, and most agricultural production is subject to factors including the vagaries of weather, Congress put in place a limited federal crop insurance program in 1938 to address the effects of the Great Depression and crop losses from the Dust Bowl.  The Federal Crop Insurance Corporation was created to carry out the program, which focused on major crops in major producing regions.  The program remained limited until passage of the Federal Crop Insurance Act of 1980, as amended, 7 U.S.C. § 1501 et seq., which expanded the program to include many more crops and regions of the country.  Congress enhanced the program in 1994 and again in 2000, in part to encourage greater participation.  Today, many banks require that farmers purchase crop insurance as a condition to obtaining operating loans.

The program is overseen and regulated by the USDA’s Risk Management Agency (“RMA”).  It essentially protects farmers from declines in yields and crop prices by the federal government subsidizing the premium amounts farmers pay, and reimbursing private insurers to offset their operating and administrative costs that would normally be paid by the farmers.  Crop insurance policies are sold and completely serviced through 16 approved private insurance companies.  The RMA sets the rates that can be charged for the policies.  Independent insurance agents sell the policies and are paid sales commissions by the insurance companies, whose losses are reimbursed by the USDA, along with their administrative and operating costs.  In actuality, the USDA pays an average of 60 cents of each dollar of premiums for such policies, and can currently subsidize up to a limit of $13 billion a year on insurance company overhead costs.  It also shares the financial burden in catastrophic loss cases.

This federal program was most recently modified in the 2008 Farm Bill, when Congress revised it to achieve budget savings and to supplement crop insurance with a permanent disaster payment program.  The 2008 Farm Bill is set to expire this year, including its disaster relief provisions.  The outlook for the Bill is cloudy.  Chairman of the House Agriculture Committee Frank Lucas, who represents districts with many Southwest Oklahoma cotton farmers as constituents, explained in a recent interview that other issues are overshadowing the Farm Bill, including a resolution to fund government activities for the next six months and the paring down of the defense budget.  He reports that some members of Congress are calling for the passage of a stripped down, short-term extension of the 2008 Farm Bill even if is only for a few months.  This would allow for some disaster relief and would push consideration of a comprehensive farm bill into the next Congressional session.  Others want reforms now.  Even so, Lucas says that obtaining support from legislators in some farm states is difficult because even with the drought, the individual producers in those states have not yet been sufficiently impacted to raise concern about the 2012 Farm Bill:

Right now, the circumstances may be such that producers can survive.  And maybe their bankers can stay with them.  And maybe their suppliers can stay with them.  But a farm bill is not about the next six months.  A farm bill is about year three and four and five years from now.  That’s why I’m so frantic about passing a new farm bill establishing for five more years the safety net so that when the bottom falls out of demand, or supply goes berserk, or Mother Nature goes on a multi-year tear as we’ve seen in Oklahoma, that we have some way to keep rural America from collapsing.

While it is not known whether Mother Nature’s recent severe storm tear through Oklahoma is the result of permanently changing weather patterns or just a short-term phenomenon, Oklahoma’s wicked weather will almost certainly continue to have a significant impact on the insurance industry.