Reevaluating the impact of tornado in the US Cargo Market

This season has broken records, most notably in the southern states during the peak weekend of 27-28th April, and Memorial Day weekend at the end of May.

In April alone, preliminary reports show that nearly 550 tornadoes were recorded to have hit numerous towns with a category EF3 tornado causing the devastation of Sulphur, Oklahoma and a category EF4 storm notably ripping through Dollar Tree’s million-square-foot warehouse in Marietta, Oklahoma.

Severe thunderstorms cause tens of billions of dollars of damage each year across the United States; in the first five months of 2024 alone, there were eleven billion-dollar weather events costing in excess of $25 billion, sadly resulting in at least 84 fatalities. The property insurance damage costs from a single tornado strike can easily reach $1-3 billion when affecting more populated areas. The impact from tornado is less often felt in the marine market however, due to the mobile nature of cargo, the low occurrence of tornado in ports, and the limitations of temporary storage cover for cargo either side of transit.

With the atmosphere warming and changes in tornado activity being observed however, combined with the growth in large distribution centres and increasing levels of stock now being covered under throughput policies in the marine cargo market, as the position evolves, so too will the approach to underwriting this peril.

US tornado season has historically run from March to June, when warm air from the Gulf of Mexico collides with colder northern air moving south over the centre of North America, and significant thunderstorms accumulate down the eastern side of the Rocky Mountains across the Great Plains and Midwest.

A recent study by Coleman T.A et al suggests that the long-term trend for the number of days in which tornadoes touch down in the area previously known as ‘Tornado Alley’ is decreasing, and the number of severe tornadoes (Enhanced Fujita Scale EF3+) is also slightly decreasing. However, the paper also suggests that the total number of tornadoes per year is increasing, with a higher number being recorded on any given day.

As the geographical spread of tornado-generating convective storms also appears to be shifting away from the sparsely populated Great Plains towards the southern and eastern areas , more populous regions are at risk. In addition to frequency and shift in region, the length of season appears to be growing, impacted by climate change as warmer waters and moisture in the air create tornadoes earlier in the year, even during the cold season in the Eastern United States.

The unpredictable behaviour of tornadoes can pose challenges for modelling, as historically tornadoes have not been a key concern for cargo insurers due to the high miss-factor and relatively small path of damage. With the cargo market having increased around 75% in capacity since 2020, reaching approximately £1.5bn in the London Market alone, and the tangible changes in extreme weather becoming more prevalent, tornado risk needs to be reconsidered.

For manufacturers and retailers in the US, stock has traditionally been covered under umbrella policies in the domestic Property market, although stock throughput (STP) policies to protect stock throughout its life cycle, have also existed in the marine market for decades as an alternative to purchasing property and transit covers. Rather than incepting at point of transit, cover for stock throughput may attach to raw materials throughout the manufacturing process, through to delivery at the client’s premises, removing any potential gaps in cover.

Globalisation has created a surge in popularity for stock throughput policies from the cargo market as a cost-effective solution to protecting stock throughout the supply chain, whilst some domestic carriers in the US have restricted their capacity following a period of losses. The pivot towards the more keenly rated London cargo market has resulted in some significant cargo losses from tornado in the past five years.

The question of whether the current solution will continue to be suitable for the cargo market, will require consideration as the climate changes. As tornado incidence is increasing, so too is demand for major warehousing and distribution facilities.

Consumer demand and the rise of e-commerce has meant that distribution warehouses are never emptied. With stock monitored and replenished on a continuous basis, these now huge locations can be home to hundreds of millions of dollars’ worth of product at any given time. For rural areas such as the Midwest and central South-East, large-scale distribution has become particularly important due to the vast areas needing servicing.

The Dollar Tree distribution centre in Marietta, Oklahoma which received a direct tornado hit on April 27th, was originally built in 2003 at 600,000 square feet. Ten years later it received a multimillion-dollar upgrade to increase its size to 1 million square feet. Although multi-million square feet warehouses for major organisations such as Walmart, Amazon and Family Dollar exist all across the United States, the prevalence of them in areas where little protection is afforded for unlikely but severe perils such as tornado, is becoming an increasing problem.

These sorts of policies and clients require combined solutions from the market to protect their assets, so a joint approach to risk management and underwriting is required.

The monitoring of accumulation of cargo in storage is nothing new – realistic disaster scenarios have long been produced by insurers and modelled for primary perils such as hurricane, flood and earthquake.

The consideration now arising is that where colossal distribution centres are situated in the Great Plains and the Midwest, they may become more frequently exposed to tornado which is problematic in the event of a direct hit due to extreme windspeeds, and lack of advance warning.

Chaucer’s Head of Cargo Geoff Wilkinson has certainly noticed an uptick in tornado losses alongside an uptick in the quantum of the impact on market losses in recent years. Whether this is because there are more tornadoes, or a greater likelihood of significant losses in the cargo market due to the boom in major warehouses is as yet undetermined, but the net result to the market is noticeable.

“My experience of over 30 years of writing cargo business, during which I have witnessed the growth of stock throughput cover in our market, is that a warehouse being hit by a tornado was a very rare occurrence. In the last few years alone however, there has been an increasing number of catastrophic tornado hits, for example the 2020 Nashville, TN tornado which impacted global clients such as Dell and others, to the tune of approximately $400m. In 2023 the Pfizer plant loss in Rocky Mount NC hit the insurance market at $250m and earlier this year, the Dollar Tree stores warehouse in Marietta, Oklahoma caused another multi-million market loss.”

With a combined loss to the market of these three events alone approaching a billion dollars, the attitude of the market to continue writing ever-increasing line sizes values at single locations, needs review, Wilkinson believes.

In addition to the increase in frequency and spread of the tornado peril, another reason for this growing concern for cargo underwriters, is the fragility of warehouses themselves. Traditionally, cargo covered in temporary storage on port would require warehouses to be sufficiently robust to defend against hail, flood, earthquake or hurricane. The necessity – and the commercial will - to construct multi-million square foot warehouses durable enough to resist tornado-speed winds has perhaps not been sufficient in the past, given the relatively high miss-factor with tornadoes and the cost associated.

With an increasing risk of severe damage and the potential for more injuries and fatalities as have been seen this year, state authorities may need to review construction priorities and building codes in the longer term. In the interim, the onus is on the market to consider how educating clients can play a part in protecting their assets. Given these potential challenges with modelling cargo and changing construction practices, additional risk management considerations may need to be introduced and as a market, there is more work to be done in understanding the changing behaviour of tornadoes.

As insurers we apply risk selection to control the portfolio, generally writing new or retro fitted buildings with good storm or earthquake protections - and ensuring clients have a windstorm contingency plan in place.

Current standard best practice for large warehouse buildings inland does not offer sufficient protection to withstand the force of tornadoes however, whose strongest winds can be between 120-200 miles per hour. Whilst there will always be certain kinds of losses which are low frequency but high severity, as a result of the changes in human behaviour and tornado activity, current practices in construction and insurance provisions are becoming less sustainable. This is particularly the case given the possibility of multiple sizeable warehouses being hit by a single tornado path, with the aggregations now emerging.

With the changing climate, reviewing the broadening scope of where tornadoes hit and the line pushing eastwards towards more populous areas, combined with evaluating the increasing size and aggregations of vast warehouse distribution centres, will help ensure cover remains available and affordable for clients.

References

NPJ Nature Climate Science Spatial trends in United States tornado frequency: Vittorio A. Gensini 1 and Harold E. Brooks

Coleman T.A et al. : Spatial and seasonal shifts in tornadoes in the US