snowfall insurance 101 - sima

18th Annual Snow & Ice SymposiumSchaumburg, IL

Snow & Ice Management AssociationCopyright © 2015

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Snowfall Insurance 101

Robert Holmes

President

PRICE

VOLUME

REVENUE

Weather Insurance

addresses

“Volumetric” Risk

Volumetric Risk

• Unlike traditional insurance, which is more catastrophic in

nature (tornadoes, hurricanes, etc.), weather insurance is

designed to address events of a relatively high probability.

• Popular form of coverage for outdoor events (rain

insurance).

• Relatively new to the snow removal industry.

• Addresses the risk of too much / not enough weather

(volumetric).



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Weather Insurance Policy VariablesThe Building Blocks

Location Coverage Period Weather Peril

Type of Coverage

Claim Trigger

Limits:

Sub-Limit & Aggregate Limit

1. Location

Available Locations for Claim Settlement

• National Weather Service First-Order Locations.

– Primarily major airports.

– Available for use by all carriers.

• National Weather Service Cooperative Network.

– National Weather Service Equipment.

– Staffed by volunteers, one observation per day

– Available for use by most carriers.

• Location Specific Claim Settlement.

– Requires a third party to provide a report determining the snowfall at

a specific location.

– Cost to produce the report in the insured’s to pay.

– Available for use by some carriers.

2. Coverage Period

• Coverage Period options.

– Seasonal.

– Single month.

– First or last half of winter.

– A single date.

• Coverage Period is defined by the insured’s needs.

• Coverage Period does not need to begin/end on the

first/last day of the month.

• Regardless of the choice of the Coverage Period, the

claim is paid at the end of the Coverage Period.



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3. Peril

Weather insurance is available for many weather

perils. With regards to SNOW:

• Total Inches of Snowfall

– By far the most commonly used.

– Simply a sum of the daily snowfall for each day in the

Coverage Period.

• Event-based Options

– Typically defined as some amount of snow, or more,

occurring on a single day.

• Example: Event = Daily snowfall greater than or equal to 1.0” .

4. Type of Coverage

• Excess Snow.

– Designed to protect against financial issues due

to a season of excessively high snowfall totals.

• Lack of Snow.

– Designed to protect against financial issues due

to a season of excessively low snowfall totals.

5. Trigger

• This is the variable that triggers a claim.

• For an excess snow policy, the trigger is the

amount of snow that must occur in order for a

claim to be paid.

• For a lack of snow policy, the trigger is the

amount of snow that must fail to occur in order for

a claim to be paid.

• The closer the deductible or threshold is to

“average” conditions, the more expensive the

policy becomes.



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6. Incremental Sub Limit

• The Incremental Sub limit is used to

calculate the final claim amount.

• Is expressed in terms of:

– Dollars per inch (per-inch limit),

– Dollars per event (per event limit).

• It is crucial to define this variable, as it will

directly determine the amount of any claim.

7. Aggregate Limit

• The Aggregate Limit is maximum amount

the policy will pay under any

circumstances.

• Is typically set at a level equal to or greater

than the most extreme event over the past

~30-50 years.

• Any level can be utilized depending on the

amount of risk mitigation required.

Policy Example – Excess Snow

Location: Chicago O’Hare.

Coverage Period: December 1, 2015 to April 30, 2016.

Peril: Sum of daily snowfall.

Type of Coverage: Excess Snow.

Trigger: Snowfall greater than 60 inches.

Sub Limit: $15,000 per inch of snowfall.

Aggregate Limit: $450,000 (equates to a 90” snowfall season).

Premium: $33,000



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Policy Example – Lack of Snow

Location: Fargo, ND.

Coverage Period: November 1, 2015 to April 30, 2016.


Type of Coverage: Lack of Snow.

Trigger: Snowfall less than 25 inches.



Premium: $18,000

Snowfall Insurance Policy Design

The Basic Building Blocks

Location

Coverage Period

Coverage Type

Trigger

Sub Limit

Aggregate Limit


Insured determines the Sub Limit based on:

• Historic expenses/revenue.

• Expected expenses/revenue for upcoming winter.

• Risk mitigation goals.

Insured determines the Trigger based on:

• Typically determined by the balance between desired level of risk transfer versus premium.

• Triggers closer to “average” snowfall have higher premiums.



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Snowfall Insurance Policy DesignSub Limit Determination

• An estimate of your exposure can be created by

incorporating historical snowfall data with your

historical expenses.

• Two basic calculation examples.

– Will use hypothetical snowfall data.

– Hypothetical figures for fluctuating costs (not fixed

costs) will be used.

– Either approach may be used but the average of the two

approaches may provide the best approximation of your

potential risk.

Snowfall Insurance Policy DesignSub Limit Determination,

Linear Regression Method

•Scatter plot of non-fixed costs vs. inches of snow.

•Slope of the line indicates the relationship between snowfall and costs ($2,693 per inch). Cost per inch of snowfall equals approximately $2,700 (y=2692.7x).

y = 2692.7x R² = 0.939

$0

$50

$100

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$250

$300

0 20 40 60 80 100 120

Co

sts

(th

ou

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nd

s)

Snow (inches)

Total Costs vs. Total Snow

Snowfall Insurance Policy DesignSub Limit Determination, Best/Worst Method

•Identify highest snowfall year & costs Year 6 had 107.6 inches, cost = $250k

•Identify lowest snowfall year & costs Year 5 had 14.9 inches, cost = $18k

•Divide cost diff. by diff. in snow $232k / 92.7” = $2,503 / inch

•Result: Cost per inch of snow equals approximately $2,500

0

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40

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120

$0

$50

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Sn

ow

9in

ch

es

)

Co

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(T

ho

us

an

ds

)

Total Costs vs. Total Winter Snowfall

Snowfall Costs

Average of both approaches yields exposure = $2,600/in.



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• Chicago O’Hare winter snowfall*.

• What is “Normal?”

– 30-year NWS climatological mean = 36.5”.

– 10-year average = 46.9”.

– 20-year maximum = 82.0” (2013-14).

– 20-year minimum = 19.8” (2011-12).

– Period of Record maximum = 89.7” (1977-78).

– Period of Record minimum = 9.8” (1920-21)^.

• *missing data filled from other sources.

• ^derived from multiple sources

Snowfall Insurance Policy Design• Planning for such a “moving target” is challenging.

– 55” or greater has occurred on 15 occasions since 1883-84.

– 25” or less has occurred on 26 occasions since 1883-84.




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Location: Chicago O’Hare.

Coverage Period: December 1, 2015 to March 31, 2016.






Premium: $6,000


• Boston – Logan winter snowfall.




– 20-year maximum = 110.6” (2014-15).

– 20-year minimum = 8.3” (2011-12).

– 50-year maximum = 110.6” (2014-15).

– 50-year minimum = 8.3” (2011-12).


– 80” or greater has occurred on 7 occasions (14%).

– 15” or less has occurred on 4 occasions (8%).

0

20

40

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100

120

Boston - Logan Snow 1966-2015



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Policy Example – Excess Snow

Location: Boston - Logan.



Type of Coverage: Excess Snow.

Trigger: Snowfall greater than 70 inches.



Premium: $9,000


• New York - LGA winter snowfall.




– 20-year maximum = 77.9” (1995-96).

– 20-year minimum = 3.4” (2001-02).

– 50-year maximum = 77.9” (1995-96).

– 50-year minimum = 1.9” (1972-73).


– 45” or greater has occurred on 6 occasions (12%).

– 10” or less has occurred on 4 occasions (8%).

0

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New York - LGA Snow 1966 - 2015



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Location: New York - LGA.







Premium: $5,400

Applications – Risk Management

A snow insurance policy can be used to protect your company with regards to a single, relative

large, seasonal contract.

• Determine the per-inch expense to your company required to fulfill the promised services.

• Purchase an insurance policy to protect your company from expenses exceeding the contract price.


RE

VE

NU

E

SNOWFALL

0

Seasonal Contract

PURCHASED

EXCESS SNOW

POLICY



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RE

VE

NU

E

SNOWFALL

0

Protected Seasonal Contract


• Determine the per-inch revenue to your company expected under the contract in a “normal” year.

• Purchase a lack of snow insurance policy to protect your company from a significant erosion of income.

A snow insurance

policy can be used to protect your company with regards to a single, per-

service contract.


RE

VE

NU

E

SNOWFALL

0

PURCHASED

LACK OF SNOW

POLICY



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RE

VE

NU

E

SNOWFALL

0

Protected Per-Service Contract


• Heavy on by-service contracts?

• Determine the potential risk and quantify that risk in terms of dollars per inch.

• Purchase a lack-of snow insurance policy.

• Heavy on seasonal contracts?

• Determine the potential risk and quantify that risk in terms of dollars per inch.

• Purchase a excess snow insurance policy.

A snow insurance policy can be used to protect on

an enterprise-wide basis.


• Purchase a per-event policy.

• Purchase a big-storm policy.

Have a significant exposure to the

number of events, or a large snowfall event?

• Purchase a snow insurance policy that had multiple locations/deductibles/limits embedded in a single policy.

Have exposure in more than one location?

• Purchase both excess and lack of snow coverage.

Concerned about extremes in both lack of snow and excess

snow?



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Applications – Risk ManagementEvent-based Policy


Peril: Daily snowfall of 1.0” or greater.

Type of Coverage: Excess snowfall events

Trigger: Greater than 18 events.


Aggregate Limit: $160,000 (8 events over Trigger of 18).

Total snowfall events of one inch or greater, Albany, NY

(avg. ~ 14 events/year)


“Big Storm”-based Policy


Peril: Event of daily snowfall of 8.0” or greater.

Type of Coverage: Excess snowfall events

Trigger: Greater than 2 events.


Aggregate Limit: $150,000 (3 events over Trigger of 2).

Total snowfall events of eight inches or greater

Albany, NY (avg. ~ 1.5 events/year)

Applications – Risk ManagementPer-Event based, Multiple Location Policy

Location: 14 locations in the Midwest/Great Lakes area.

Coverage Period: December 1, 2015 to March 31, 2016.

Peril: Event of daily snowfall greater than or equal to 0.5”.

Type of Coverage: Lack of Snowfall Events.

Trigger: Less than 120 Events.

Sub Limit: $30,000 per event

Aggregate Limit: $750,000 (25 events under Trigger).



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Applications – Risk ManagementPer-inch based, Multiple Location Policy

• Coverage Type: Excess snowfall

• Coverage Period: December 1 to March 31.

• Locations: 6 locations in the Great Lakes area.

Location 1 2 3 4 5 6

Trigger 75” 35” 55” 90” 70” 45”

Pre-inch

Limit$8.700 $9,500 $4,000 $5,000 $3,300 $3,000

Agg.

Limit$174,000 $190,000 $100,000 $125,000 $99,000 $45,000

• Policy Aggregate Limit = $600,000

Applications - Marketing

• Offer a seasonal snowfall contract with a partial refund

should the seasonal snowfall be less than XX inches.

• Example: Snowfall refund

– Seasonal snowfall contract cost to customer = $25,000.

– Contractor offers to refund $5,000 to customer if the seasonal

snowfall (Nov-Apr) is less than 25.0 inches.

– Could also add a second tier – another $5,000 returned should

there be less than 20”.

– Purchase a lack of snow insurance policy to cover the refund.

• Could be embedded into a service agreement to entice a

customer.

• Could offer to the customer as an option.

Cost of Snow Insurance

• Premium is determined by several factors.

– Location.

– Type of coverage.

– Per-inch or Per-event Incremental Limit.

– Aggregate Limit.

– Threshold level of snowfall.

• Policies with thresholds closer to “average” historical snowfall are

more expensive than those that cover a more extreme scenario.

• Pricing is determined primarily on the probability of

occurrence base on historical weather data.



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Cost of Snowfall Insurance

Coverage Type: Excess Snowfall

Location: Detroit Metro Airport.

Coverage Period: November 1 to April 30.

Weather Type: Sum of daily snowfall.


Aggregate Limit = $50,000

Trigger 60” 65” 70” 75”

Premium $4,650 $2,750 $1,570 $1,070

Cost of Snowfall Insurance

Coverage Type: Lack of Snowfall

Location: Detroit Metro Airport.

Coverage Period: November 1 to April 30.

Weather Type: Sum of daily snowfall.


Aggregate Limit = Zero Inches of Snowfall

Trigger 35” 30” 25”

Premium $9,280 $4,670 $1,590

Seasonal Forecasts

Do seasonal forecasts provide enough reliable information to use for winter season planning purposes?

What’s the cost of a wrong forecast?

How accurate is “accurate”?

How wrong is “wrong”?

A seasonal forecast is a volumetric forecast.



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2011-12 Seasonal Forecasts

2011-12 Seasonal Snowfall Totals

• Minneapolis = 22.3”

• Chicago O’Hare = 19.8”

• Detroit Metro = 26.0”

• Columbus = 12.2”

• Philadelphia = 4.0”

• New York LGA = 5.1”

• Boston = 8.3”

Snow Insurance Benefits

• Revenue protection

• Expense control

• Contract type flexibility

Volumetric Risk

Mitigation

• Concentration on what you can control

• Capital investments made with confidence

Reduction of

Uncertainty



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Capital Purchases

• All premiums displayed are for discussion purposes only. Actual insurance quotes may only be obtained by completing the appropriate application for insurance.

• All clients are advised to seek independent legal and tax advice regarding the appropriateness of a particular weather risk management solution. Spectrum Weather and Specialty Insurance, Inc. does not provide such advice, nor does it assume any liability by virtue of the information contained herein; these materials are for informational purposes only.

Disclaimer

Thank You

Robert Holmes

Spectrum Weather and Specialty Insurance, Inc.

[email protected]

816.810.2346

snowfall insurance 101 - sima

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