Predications of hardening reinsurance market after Irma ‘premature,’ insured losses lower than initially feared: A.M. Best

Hurricane Irma will “try the ability” of Florida regional property insurers to mitigate catastrophe risk through reinsurance, but there will be a “material” reduction in forecasts of insured losses from the storm, which will be “more of an earnings event” for large reinsurers rated by A.M. Best Company Inc., the ratings firm suggested in a report released Thursday.

Marine One, with President Trump aboard, flies over areas impacted by Hurricane Irma, Thursday, Sept. 14, 2017, in Naples, Fla. (AP Photo/Evan Vucci)

Hurricane Irma made landfall in Cuba Sept. 8 and two days later it made two landfalls in southwest Florida before being downgraded to tropical storm status Sept. 11, reported Chicago-based Impact Forecasting in a report released Thursday.

Fourteen of the top 40 – including three of the top five – most expensive insurance losses of the past 45 years were North Atlantic hurricanes, with Katrina topping the list at nearly US$80 billion, Swiss Re reported in early 2016. In that report – Natural Catastrophes and Man-Made Disasters in 2015 – Swiss Re noted that 2015 was the 10^th year in row that no major hurricane made U.S. landfall, the longest stretch since the 1860s.

Tropical Storm Irma dissipated Sept. 12 and 13, 2017, after moving north northwest over land out of Florida, Impact Forecasting, a unit of Aon plc, reported Thursday.

With maximum winds of 185 miles per hour (298 km/h) for 37 hours, this was “the longest any tropical cyclone around the globe has maintained that intensity on record,” noted Impact Forecasting, adding that an estimated 60% of Barbuda residents were left homeless and there was “widespread flooding” in Havana. In Florida, Impact Forecasting – quoting the Federal Emergency Management Agency – reported 25% of Key West homes were destroyed and downtown Miami was flooded. There was widespread wind damage in the centre of the state and Jacksonville had the “biggest storm surge ever recorded” when the St. Johns River flowed into downtown Jacksonville.

AIR Worldwide reported Sept. 11 it estimated at the time insured losses from Irma could range from US$20 billion to US$40 billion.

“Although accumulating the loss estimates from Irma will take time, the storm’s westerly path and less-than-expected intensity will result in a material reduction of many initial forecasts,” A.M. Best said Sept. 14 in a briefing titled Hurricane Irma Tests Newer Participants in Florida Market.

Related: Catastrophe bonds sponsored by Florida property insurers ‘could trigger’ due to Irma claims: A.M. Best

“At first, the storm was expected to hit the eastern part of Florida, particularly Miami, as a Category 4 or 5, and possibly result in $100 billion or more of insured losses,” noted Oldwick, N.J.-based A.M. Best, adding that it “expects Irma to be more of an earnings event for A.M. Best-rated reinsurers, given that balance sheets are extremely strong and have been stress-tested sufficiently to absorb extreme losses.

A.M. Best reported “there has been some speculation that pricing may harden, but it may be premature to come to this conclusion until loss estimates for Irma, Harvey, and any other events that may occur during the remainder of the year are taken into account.”

Hurricane Harvey made landfall in Texas Aug. 25, bringing “extreme wind gusts, storm surge, isolated tornadoes and prolific rainfall,” Aon Benfield reported in its Global Catastrophe Recap report for August.

“Insured losses—including those paid by private industry and the National Flood Insurance Program—were likely to well exceed” US$10 billion, Aon Benfield said at the time of Harvey.

Of the 40 most expensive natural catastrophes from 1970 through 2015, the North Atlantic Hurricanes Katrina, Sandy, Andrew and Ike placed first, third, fourth and seventh respectively, Swiss Re reported last year in Natural Catastrophes and Man-Made Disasters in 2015. Placing second, fifth and sixth respectively were the 2011 earthquake and tsunami affecting Japan, the Sept. 11, 2001 airplane hijackings and the 1994 Northridge, Calif. earthquake.  Swiss Re added that Katrina, Sandy, Andrew and Ike – which formed in 2005, 2012, 1992 and 2008 respectively – had insured losses of $79.6 billion, $36.1 billion, $27 billion and $22.3 billion respectively. All figures are in U.S. currency adjusted for inflation to 2015.

Global reinsurers rated by A.M. Best “will incur notable losses” from Hurricane Irma, “although the ultimate impact will depend on, among other factors, cedents’ retention levels as well as the amount of losses absorbed by the capital and collateralized markets,” A.M. Best said Sept. 14, 2017.

Two days earlier, A.M. Best warned that catastrophe bonds sponsored by U.S. insruers “with significant Florida property exposures” and by Florida-domiciled property insurers “could trigger after retentions and other traditional reinsurance covers have eroded” because those primary insurers “could suffer significant losses depending on the severity of the losses caused by Hurricane Irma.”

Related: Hurricane Harvey highlights magnitude of insurance protection gap: Aon Benfield

In its Sept. 14 briefing, A.M. Best noted that after a “period of severe weather events in the early 2000s” American insurers “started cutting their appetites for Florida’s hurricane-prone business” and afterwards, insurers – such as the state-formed Citizens Property Casualty Insurance Corporation – were formed to fill the demand.

More recently, Citizens had a “depopulation program,” there was a period of more benign weather and the reinsurance market softened, A.M. Best suggested in the report.

More than 15 insurers incorporated after 2006 to write property in Florida, A.M. Best added, adding these newer companies now represent nearly a fifth of the market.

“Many of these carriers have not been subject to an intense storm such as Irma, and their reinsurance programs have not yet been truly tested,” A.M. Best added.  “Irma will try the ability of Florida’s newer local/regional writers to mitigate catastrophe risks through appropriate reinsurance channels.”

In Natural Catastrophes and Man-made Disasters in 2015, Swiss Re reported – in addition to Katrina, Sandy, Andrew and Ike –  10 other North Atlantic hurricanes made the list of top 40 most expensive insurance losses from 1970 through 2015. They were: Wilma (2005), Rita (2005), Charley (2004), Hugo (1989), Frances (2004), Irene (2011), Georges (1998), Jeanne (2004), Floyd (1999) and Opal (1995). Wilma, Rita and Charley had insured losses of $15.2 billion, $12.35 billion and $10.1 billion respectively, all adjusted for inflation to 2015 U.S. dollars.

Hurricane Mitch – which hit Central America in 1998 – made Swiss Re’s list of top 40 worst catastrophes in terms of victims, with more than 11,000 dead or missing, the reinsurer said in the same report in 2016 on a separate table.