Industry expected to re-examine risk in northeast U.S.: Fitch

Hurricane Sandy is likely to inspire some companies to revisit flooding-related risk management and exposure in the northeast United States, suggests a special report from Fitch Ratings.

“In nearly all cases, Hurricane Sandy demonstrated the favourable spread of loss and limited concentration risk among individual insurance companies resulting in manageable losses to insurers,” notes Hurricane Sandy Update, released last week. “However, there were several areas related to flooding risk exposure that the models did not fully capture and companies did not fully anticipate, despite robust modelling available for the Northeast U.S.,” the report adds.

Although a post-tropical cyclone when it made landfall on the southern coast of New Jersey Oct. 29, Sandy “produced record levels of storm surge typically associated with hurricanes of greater intensity. As a result, it was the flooding and not the wind that cause the most damage.”

In the wake of hurricanes Sandy and Irene – which affected much of the same region in August 2011 and caused more than $4 billion in insured losses – Fitch expects companies will reexamine their risk management and exposure to northeast U.S. catastrophes. “In particular, the fact that a below-hurricane status landfall event such as Sandy was able to cause such an extensive level of damage and a significant dollar amount of insured and uninsured losses, will lead the industry to examine whether pricing in the region is adequate and if contract wording is appropriate for the risk being assumed,” the report notes.

Fitch states that individual companies have already issued Sandy-related loss estimates of approximately $16 billion to $17 billion. “An insured industry loss of $20 billion or more appears likely.”

The size and intensity of Sandy over a widespread region created uncertainty in coming to estimates for insured losses. This resulted in many (re)insurance companies not releasing “credible loss estimates until almost two months after the storm hit,” Fitch points out.

Several large insurance companies – among these, State Farm Mutual Group, Berkshire Hathaway Inc., Liberty Mutual Group, Inc., Factory Mutual Insurance Company (FM Global) and Allianz SE – had not issued loss estimates at the time the report was released. “This group and others could add another $5 billion or more in losses to those already reported,” the report states.

Affecting a widespread and densely populated area with excessive rainfall and high storm surge, Hurricane Sandy caused extensive flooding and lengthy power outages for homeowners and businesses alike.

It appears that Sandy will produce a loss split of 60% to 65% commercial lines and 35% to 40% personal lines, reverse that for most hurricane events. “Much of this shift is due to flooding from the record storm surge being such a significant component of catastrophe damages, particularly in large commercial areas, including lower Manhattan,” the report states.

“It is important to note that the vast majority of [business interruption] and [contingent business interruption] coverage purchased in the U.S. is included as part of the insured’s commercial property policy, and are thus included within the overall property policy’s coverage limits, and should help to contain total losses.”

Heightened commercial lines losses were also driven by recent increases in take-up rates for flood policies on commercial and industrial properties following Hurricane Irene.

In Sandy’s wake, Fitch reports that “while many of the typical property lines of insurance are being affected, it was a particularly outsized event for auto losses and marine insurance.”

The storm is expected to result in a record $2 billion to $3 billion loss to the marine (re)insurance market. “This outsized loss is due to the massive flooding and storm surge damage as the enormous size of Hurricane Sandy affected such a significant amount of coastline and inland regions,” notes the report.

With regard to vehicle-related losses, automobile insurance typically does cover auto damage caused by flood if the driver has comprehensive coverage. “As a result, many personal lines companies suffered high levels of auto losses from Hurricane Sandy, as evidenced by Allstate’s indication that approximately 40% of its estimated total gross losses of $1.275 billion were from auto,” Fitch adds.

The models did not capture the extent of exposure to auto losses, with thousands of claims associated with new cars (as cargo claims) and vintage cars that were flooded with salt water during the storm surge. “Hurricane models typically produce low automobile loss under the assumption that the majority of vehicles are driven away prior to the storm as part of the evacuation. AIR estimates that more than 230,000 automobiles were affected by the storm, which is expected to generate insured auto losses between $1.0 billion and $1.2 billion,” Fitch adds.

“Hurricane Sandy is not likely to change market underwriting capacity and tip the balance to a hard property market,” the rating agency concludes. “However, it is more likely to promote continuation of favourable pricing trends in 2013, particularly in U.S. primary property markets,” the report adds.

“Fitch views Sandy as an earnings event and not a capital event for most companies and for the overall industry. It is expected that while companies will suffer a sizable hit to fourth-quarter earnings, most will still report net earnings and capital growth for full-year 2012.”

Fitch does not anticipate material rating changes for individual property/casualty insurers, even if losses creep over the high end of catastrophe modellers estimates.