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The Irma counter-reaction: Hopes grow that $35bn Ida estimate will prove over-done

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Nearly three months on from Hurricane Ida, sources have said that they increasingly struggle to see how claims could reach the $35bn+ top end of ranges discussed earlier on after the storm hit.

While the market remains somewhat divided on Ida’s potential impact, hopes are growing that the insured loss will settle towards the lower end of prior expectations.

Even so, it is unlikely that (re)insurers will be quick to release significant reserves as there remains a heightened awareness of the potential for the pandemic to prolong the process.

Even the carriers who said they were struggling to see how Ida claims could reach $30bn tended to reiterate that this remains the upper end of their bound for reserving, due to caution over the potential for loss inflation or slower claims emergence.

Few were willing to put a $20bn-$25bn range on the loss, and some still have a $30bn-$35bn range, but $30bn seems a common middle ground, with many believing that this has significant headroom built in for potential negative surprises.

Previously, as this publication reported after the extent of northeast damage from the storm was laid clear, the market had assumed the loss would deteriorate to a $25bn to $35bn range, with most in the $30bn+ camp.

But as we wrote in October, some were already beginning to query how the claims could possibly stack up as high as some estimates.

This sense has solidified as time has gone on, largely due to the low component of reported commercial claims.

In addition, there is a sense that the industry’s initial conservatism in assessing Hurricane Ida losses was an over-correction driven by a fear of seeing a repeat of the prolonged loss creep that followed 2017’s Hurricane Irma loss, which was so detrimental to investor confidence.

In general, some also believe that there is an element of tactical over-reserving underway as the reinsurance sector hardens, taking the chance to set aside excess reserves that may help to drive pricing up while the sentiment over cat risk is already negative.

Some believed that the uneven distribution of losses is also driving different perspectives on the overall loss quantum based on business mix. There appears to be a growing London consensus that the loss is over-cooked due to EC3’s increasing focus on primary/commercial lines, moving somewhat out of step with the reinsurance market, which looks set to pick up personal lines claims more in line with early estimates, even if not in line with top-end figures.

Confidence boosters

Factors that may keep Ida on the downside of $30bn include:

  • Low residential insured values in Louisiana area hardest hit by the storm

  • Over-caution in the initial estimates – the Irma counter-reaction

  • Lack of major commercial claims emerging

  • Low NFIP loss, suggesting manageable northeast impact

One of the primary reasons that (re)insurers are optimistic on Ida claims is that the extrapolated residential market share of losses, based on individual insurer reports, continues to put this portion of the claims at a low enough level for the total to remain in the $20bns.

Overall reported claims for Ida have now reached $9.5bn, on top of which would be a large chunk of a further $9bn in general Q3 cat losses in reported results figures tabulated by this publication.

One source, however, suggested that outdated exposure information may be depressing the projected figures, and that using alternative market share assumptions would drive the total implied figures higher.

Even so, there is little showing up in the way of major commercial claims – leading to the view that it will remain predominantly a homeowner insured loss.

One London market insurer source said that they had received only around a third of the reported Ida claims they expected, based on an initial reserve set at the $30bn-$40bn mark – whereas typically this far after a storm they would expect to have been notified of around 60%-70% of total claims.

Others echoed the low levels of reporting against what would be expected this far on, albeit people remained cautious that there could be delays in claims notifications.

Meanwhile, the flood loss component of Ida was a particular source of uncertainty, given the patchwork of private and public covers that exist for this peril. But with early loss estimates from the National Flood Insurance Program (NFIP)coming in at $2bn or lower, according to sources, this put it well below its $4bn reinsurance attachment threshold with favourable implications for the overall flood loss.

Initially, modelling firm RMS had projected total NFIP flood claims at $3.8bn-$6bn, with up to $2bn from the northeast alone. The firm estimated private flood insured losses would range from $5.5bn to $8.5bn – which could reduce to several billion if in line with the lower NFIP experience.

As many pointed out in the initial weeks after the storm, some of the loss estimates swirling around Ida were not like-for-like figures. The higher NFIP tally was part of the reason for the RMS estimate rising as high as $31bn-$44bn in total, while other projections that rested only on private onshore losses were notably lower: AIR’s estimate was $20bn-$30bn and KCC’s was $21.3bn (including northeast claims).

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There has also been variation amongst the reinsurers that have put industry loss figures out as well as their own individual claims – with Swiss Re putting the cost at $28bn-$30bn and Axis putting it at $35bn.

Downside fears

On the other side of the equation, those who are wary that the loss will ultimately reach $30bn or above are largely guided by fears of rampant loss inflation after the pandemic.

AIR Worldwide told this publication it was assuming Ida losses would come in 9%-15% above modelled results due to the potential for increased material and repair costs.

But some sources expect loss inflation to run closer to 25% based on results from other regions, such as Australia, that are also combatting disaster rebuilds in a disrupted market.

Factors that are leading carriers to remain conservative are:

  • Supply chain disruption slowing repairs and pushing up costs, driving LAE higher than model estimates

  • Potential for mould remediation claims to emerge over time

  • The possibility of slow reporting patterns due to lack of availability of adjusters or the longer tail of flood claims

Other than these specific fears, some sources generally retain the sense that there is ongoing potential for some of the issues that hit Hurricane Irma loss handling to recur.

“Hurricanes are now long-tail events that can take three years to settle,” one noted.

Overall, there seems to be somewhat of a split on Ida between the London market – where sources are broadly more optimistic on the loss settling towards the lower end – and somewhat more pessimistic Bermudian carriers, which are holding closer to the $30bn level. This may reflect the more primary commercial lens that London-based carriers have on the loss.

The $30bn threshold will undoubtedly be a notable one for certain segments, such as industry loss warranty buyers or sellers, or occurrence retro.

But regardless of whether Ida settles under or over the $30bn mark, its impact on the industry will be long-lasting, and it remains a significant loss event. One of the immediate impacts is on trapped capital, as cedants are unlikely to readily budge on negotiating favourable rollovers of capital, given the heightened uncertainty, even if they believe their reserve picks are over-baked.

On a localised basis, the storm is already driving ongoing pain amongst Louisiana regionals – with FedNat shutting down its Maison brand that operated in the state, and two other carriers put into insolvency by the regulator (State National Fire Insurance Company of Baton Rouge and Access Home Insurance Company of New Orleans). The local insurance commissioner Jim Donelon believes Ida could hit the $30bn mark on a nationwide basis, he told sister title Inside P&C recently.

As one of a trio of major events that has contributed to 2021 disaster losses coming in above the 10-year average, Ida is still contributing to the wariness over catastrophe risk and how aggregation of risks has been mispriced in the prior soft market.

So even though the outcome from the two quaintly “I” named storms – Irma and Ida – may be remarkably dissimilar, both can lay claim to having driven a changing dynamic within the (re)insurance sector.

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