Frances likely to be “major loss” to primary insurers

While primary insurers are likely to face a “major loss” as a result of Hurricane Frances, the impact on their reinsurance counterparts is less clear, but likely to be less severe, according to early analysis by Fitch Ratings.
Fitch notes that insurers will likely have to pay up to the attachment points on their reinsurance policies twice as a result of the two hurricanes Frances and the earlier Charley which struck Florida within the past month. “Additionally, once losses are ceded to a reinsurance contract, the primary insurer is generally obliged to pay a reinstatement premium if the primary insurer wants reinsurance coverage to continue for subsequent events,” the report notes. There may be some policies which do not have such premiums, and some may have “second event” or “drop down” attachment points, Fitch notes. However, other insurers may not be offered reinstatement premiums and may be forced to seek out new reinsurance or go bare for the remainder of the season.
Nonetheless, much of the burden from Charley and Frances will be felt by primary insurers, rather than their reinsurance counterparts, the report says. Primary insurers may also face potential assessments from government-run insurance entities (i.e. the FHCF) or state-sponsored Citizens Property Insurance Co., the “market of last resort” for wind/hurricane coverage. Fitch says a Citizens assessment is the most likely, and insurers may be expected to recoup this assessment through increased premiums to their policyholders next year. Reinsurers, on the other hand, are not subject to assessments by Citizens.