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Florence spares industry major insured loss

Hurricane Florence will inflict only relatively modest insured losses on the industry, with the sharp drop in wind speeds and relatively low flood insurance penetration in the Carolinas capping claims at highly manageable levels.

As previously reported, there had been an expectation ahead of landfall on Friday (14 September) that insured losses could stretch to $8bn-$10bn, well short of the $20bn worst-case scenario earlier last week when the storm was at Category 4 strength.

However, most industry sources currently expect losses to come in significantly below this range, with a number pointing tentatively towards a $5bn private insured loss.

Karen Clark & Company was the first of the modelling firms to publicly issue a post-landfall loss estimate, and pegged the likely claims toll at $2.5bn. The estimate covered wind, storm surge and inland flood, but excluded any losses that will be picked up by the National Flood Insurance Program (NFIP).

That quick-fire loss number for a predominantly flood-driven event will be tested over a number of months, but it is a useful early data point.

Regardless, it seems clear that the industry is dealing with a near-miss like Hurricane Matthew ($4bn), rather than the worst-case historical parallel Hurricane Hugo ($20bn) or the flood-heavy Hurricane Harvey ($30bn).

At the end of last week, with Typhoon Mangkhut looking menacing and expectations of a $5bn+ loss from Japan’s Typhoon Jebi, the third quarter was starting to look messy.

But with early intelligence from sources suggesting Mangkhut could be an easily absorbable Hato-sized loss in the region of $1bn, (re)insurers could still escape the third quarter with healthy profits.

Flood, not wind

Hurricane Florence made landfall near Wilmington, North Carolina, as a Category 1 storm on Friday, with sustained wind speeds of around 80 mph (129 km/h). The storm dropped more than 30 inches (76 cm) of rain.

With the Carolinas hit by only Category 1 winds, is likely that wind damage will be modest, with the lion’s share of the loss coming from flooding.

Private insurers will again benefit from the relatively low level of penetration of flood insurance in the US.

If homes are insured, they typically get cover from the government-backed NFIP. The scheme is again likely to generate significant losses after running up $8.5bn-$9.5bn of claims from Harvey.

In excess of $4bn, the Federal Emergency Management Agency would be able to recover under its well-spread reinsurance programme, up to a total policy limit of $1.46bn. The treaty is covered with significant co-participations, with an exhaustion point of $8bn, and an additional $500mn of cat bond coverage that sources do not currently expect to attach.

While most homeowners’ insurers will escape flood losses, high-net-worth writers like AIG, Pure and Chubb will pick up claims, with some of this passing to quota-share reinsurers. Force-placed writers are also likely to take losses.

Auto writers will also pick up flood losses, with auto a major component of last year’s Harvey loss.

However, the bulk of the loss will come from commercial flood cover. Although not all business owners buy flood cover, enough do to generate sizeable losses.

One area of uncertainty will be the volume of business interruption claims that emerge from the event.

Flood can throw up complexities in the claims settlement process. Some policyholders will argue that damage was caused by wind not water, and some claims of this sort will be paid out.

Mould will also create scope for the late emergence of claims. Creep could also come from aggressive claims farming, although sources have suggested that the Carolinas lack the kind of litigation culture that has driven Irma claims billions of dollars higher this year.

Insurance loss

With an event of this magnitude, the percentage of losses ceded to reinsurers will be small. Nationwide players that typically attach at $10bn+ will not trigger their programmes, and will have to accept the loss net.

Other accounts that will be under watch from reinsurers besides the NFIP include the North Carolina Insurance Underwriting Association, the associated FAIR Plan, and the North Carolina Farm Bureau, with sources also flagging Heritage’s low-attaching programme given its coastal exposure and fellow Floridian super-regional UPC.

However, these are likely to be isolated losses and easily absorbed by cat reinsurers.

Indeed, the combined loss toll from Jebi, Florence and Mangkhut is unlikely to be enough to take the sector towards a normal level of cat losses for the year following a very benign first half. Swiss Re Sigma estimated H1 cat losses at $18bn, not much more than half the 10-year average of $30bn.

During Monte Carlo, this publication reported that absent an “Armageddon”-type event, cat rates were again set to come under pressure at 1 January, and with losses at these levels Florence is unlikely to upset that dynamic.

Underwriting sources have said that Jebi looks set to be a larger reinsured loss. Japanese cedants are said to have warned that the loss will penetrate the first layers of occurrence cat programmes. However, the biggest component of the reinsured loss will come from aggregate covers where deductibles had already been largely eroded, with underwriting sources fearing these protections could be totalled.

With the danger of a major loss from Florence now passed, and half of September already in the books, carriers will be starting to contemplate the prospect of a relatively clean wind season. 

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