How Hurricane Ian will strain insurers’ capacity

Hurricane Ian’s Florida landfall last week and subsequent return to the Carolinas means it’s shaping up to be one of the costliest storms in U.S. history.

But, while the storm that arrived on the heels of Hurricane Fiona caused massive insured losses, it is “not likely to affect credit for rated property [&] casualty (re)insurers given ample capital levels and the ability to increase premium rates,” said a report from Fitch Ratings.

“However, Florida insurance specialists that are unrated by Fitch have suffered financial losses and diminished capital in recent years remain vulnerable to large catastrophic events that generate losses in excess of reinsurance limits,” it added.

By Fitch’s initial analysis, insured losses for Florida could range from $25 billion to $40 billion. Totals could increase depending on how severely Ian impacts the Carolinas. By contrast, 2005’s Hurricane Katrina saw insured losses of $65 billion.

Meanwhile, modelling firm Karen Clarke & Co. (KKC) issued a flash report last week putting privately insured losses close to $63 billion.

KKC noted that figure accounts for insured loss to residential, commercial, and industrial properties as well as autos; building, contents, and time element losses; privately insured loss from wind, storm surge and inland flooding; estimated demand surge; and estimated impacts of excess litigation in Florida.

“Hurricane Ian will be a challenging storm for insurers due to the tremendous amount of coastal flooding and the unique nature of the Florida market with respect to a likely high proportion of litigated claims,” the report said.

In recent years, many U.S. national underwriters have cut in-force policies in Florida through non-renewals as a way of managing balance-sheet exposure, as well as the cost of their reinsurance programs, Fitch noted.

“Citizens Property Insurance Corporation, which has leading market share in both personal and commercial lines, continues to increase exposure from expansion of policies in force and by assuming business from other Florida specialists,” it said. “Citizens has stated that Ian will be a reinsurance loss event to the Florida Hurricane Catastrophe Fund, but not a significant event for its private market reinsurers.”

Fewer than 10% of U.S. homeowners who buy insurance purchase primary flood insurance, Fitch noted, but mortgage providers for federally backed loans require it if a property is in a zone deemed high-risk for flooding by the Federal Emergency Management Administration (FEMA).

Most owners who do buy coverage obtain it through the National Flood Insurance Program (NFIP), a government-supported flood insurer run by FEMA. The program is politically contentious but was given temporary extension through Dec. 16, 2022 by the U.S. Congress last week. Fully, 35% of NFIP policies are underwritten in Florida.

As restoration gets underway, determining which losses can be attributed to wind and storm surge will be contentious, said Mohsen Rahnama, chief risk modeling officer at RMS, as will understanding what portion of loss will go to primary, reinsurance layers, and retro. On top of that, Rahnama added, there’s the issue of understanding what will be covered by NFIP and what is uninsured.

Then there are the underlying economic factors plaguing economies worldwide since 2020 – sharply rising goods prices sparked by tight supply chains, and subsequent interest-rate hikes meant to tame that inflation.

“Claims leakage will focus on factors from loss amplification due to constraints in rebuilding supplies and contractors, through to another big wildcard – inflation, which will percolate through the system in several ways,” Rahnama said. “The current inflation situation pre-Hurricane Ian and any shortage of materials and qualified contractors in Florida will amplify the repair cost.

“I believe the repair will be in multiple stages, starting with a quick functional repair followed by the major repair – which requires a permit and qualified contractors. Also, the considerable infrastructure damage from Ian will slow down the recovery and exacerbate the repair time and losses, especially for islands disconnected from the mainland due to bridges and piers damages.”

Mara Elieser, whose husband kept a boat docked nearby, takes photos at the destroyed bridge leading to Pine Island, in the aftermath of Hurricane Ian in Spring Hill, Fla., Sunday, Oct. 2, 2022. The only bridge to the island is heavily damaged so it can only be reached by boat or air. (AP Photo/Gerald Herbert)