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US insurers well-positioned to withstand hurricane losses

Posted On: May. 31, 2017 1:53 PM CST

U.S. property/casualty insurers’ capital strength should enable them to withstand near-term volatility related to hurricane events, but a major catastrophic hurricane could change that, according to a new report. 

The capital strength for domestic property/casualty insurers is currently “very strong,” as demonstrated by the aggregate policyholders’ surplus growing in 2016 by 3.1% to $713 million, according to the report by New York-based Fitch Ratings Inc. released on Wednesday. 

But the occurrence of a major catastrophic hurricane could potentially have a significant effect on insurance industry capital and Fitch currently has a negative sector outlook on the P/C industry, largely related to near-term market conditions and profitability challenges, according to the report, “U.S. Hurricane Season 2017: A Desk Reference for Insurance Investors.” 

"2017 is more likely to be an active hurricane season according to meteorologists, but minus any extremely severe storms, most insurers should be able to manage losses that may unfold," Christopher Grimes, director, Fitch Ratings, said in a statement. "The real storm for P/C insurers continues to be the competitive pricing environment."

Pricing on U.S. hurricane-exposed primary property business has not improved in the wake of modest insured losses related to Hurricane Matthew in 2016, according to the report. Aon Benfield Group Ltd. reported that private insurers and the National Flood Insurance Program paid out nearly $4 billion in claims from Hurricane Matthew as of April 2017. 

In the reinsurance market, conditions also remain soft due to large volumes of underdeployed capital and sluggish demand from buyers, despite increased global catastrophe losses in 2016, according to the report. 

“Fitch expects pricing conditions to remain challenging in the primary property market, particularly commercial property, as well as at the midyear 2017 reinsurance renewals,” the ratings agency said in a statement. 

Insured losses from the 2016 hurricane season were relatively limited despite the devastation caused by Hurricane Matthew and Hurricane Hermine, particularly compared to the 2004 and 2005 hurricane seasons, but many Florida insurers remain untested, according to the report. 

"Many growing Florida property insurers have brief histories, untried by a large loss event, which creates uncertainty as to how these firms will respond to a future hurricane that generates significant industry losses," Mr. Grimes said. 

The NFIP is in debt to the tune of $23.4 billion, largely as a result of flood claims from Hurricane Katrina in 2005 and Superstorm Sandy in 2012, and the program is scheduled to expire on Sept. 30, 2017, although there have been proposals floated by Congressional legislators to reauthorize and reform the program. 

"In the event that hurricane force wind damage is minimal, flood damage remains a key risk,” Mr. Grimes said. “While most years the premium levels for risk assumed by the NFIP exceeded claims, major flood events blow the balance. The ability of the NFIP to transfer risk to traditional and alternative reinsurance markets, will be a key factor in securing the viability of the program in the face of significant catastrophic flood events.”