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Primary insurers will bear the brunt of losses from Harvey, the storm that made landfall as a Category 4 hurricane in Texas, but despite the widespread damage most insurers should be able to absorb the losses without reducing their capital, according to analysts.
The claims process, though, which will likely include extensive business interruption claims, will lead to coverage questions that may affect future wordings of flood coverage, experts say.
“We believe the bulk of the losses will be taken up by primary writers,” said Hardeep Manku, director at S&P Global Ratings Inc.
Late last week, catastrophe modeling firms were estimating insured losses from the storm of more than $15 billion, excluding claims coverage by the National Flood Insurance Program.
Flooding will likely lead to the bulk of the losses, analysts and catastrophe modelers say.
In regard to inland flooding, “most of what you see in Houston and around that area is from rain and rivers topping their banks,” said Karen Clark, president of catastrophe modeler Karen Clark & Co. in Boston. “That, in our view, will dominate the loss in Harvey.”
Insurers should be able to absorb losses with earnings, Mr. Manku said.
“From preliminary estimates, we don’t think this is a capital event,” Mr. Manku said. “It’s more of an earnings event, which means that the expected losses will be absorbed by earnings the sector will have over a period of a few quarters.”
Pricing may see some upward pressure in effected regions and business lines, he added.
Reinsurers will be less affected, however.
“Pre-Harvey, we expected reinsurance pricing to decrease 0% to 5% into 2018. We expect any impact on reinsurance pricing because of Harvey to be limited to affected regions and policies,” S&P Global Ratings credit analyst Taoufik Gharib said.
With flood accounting for much of the damage, the NFIP will account for much of the losses, Mr. Gharib said.
The insurance-linked securities sector should emerge largely unscathed.
“We don’t expect any losses though there could be some erosion in the retention layers of the annual aggregate bonds,” said Gary Martucci, New York-based director of global insurance ratings at S&P Global Ratings.
Many of the commercial insurance claims from the storm will likely be related to business interruption losses, several experts said.
“I would anticipate, given the extensive and massive flooding arising out of Hurricane Harvey, you’re going to have all sorts of business interruption claims, said Robert Fisher, a partner with Clyde & Co in Atlanta.
“The business interruption piece will be quite meaningful here,” said Duncan C. Ellis, U.S. property practice leader for Marsh L.L.C. in New York, adding that such claims can be complex.
“The time-element aspect of a property policy is always the most prickly part of it, by far,” Mr. Ellis said. “The property damage side is typically the easier one to adjust. Business interruption can take longer at times to adjust than the property damage piece. In this case, in Houston, that’s going to take some time.”
Policy language in play
Some policy language evolved after previous storms, and could do so after Harvey as well.
“There certainly have been changes to policy language that have attempted to address a number of coverage issues that arose out of hurricanes Katrina and Sandy such as issues relating to the application of flood sublimits and issues relating to whether flood and storm surge were separate and distinct perils, or one and the same,” Mr. Fisher said.
Much of the case law that followed Hurricane Katrina held that storm surge was nothing more than a synonymous term to flood and that storm surge was a type of flood, he added.
New issues could emerge following Harvey. One issue that may require more clarity, according to Mr. Ellis, is that of the definition of what is “flood,” which is defined and subject to a sublimit, vs. surface water, which is not defined. Further, surface water is not sublimited and is very different than flood. “There could be a bit of a challenge” around sorting through which is which in the case of Harvey, he said.
Harvey’s rainfall produced most of its water and the storm surge was more limited than with Sandy.
Harvey is much more a flood event than a storm surge event, according to Ms. Clark. “It’s very straightforward meteorologically,” she said.
This is the reverse of what occurred with Superstorm Sandy, in which much of the flooding and ultimately the losses occurred due to the storm surge, which was much wider than with Harvey, which was much more geographically limited to the areas near landfall around Rockport, Texas, Ms. Clark said.
Harvey also had an “interesting wind footprint,” Ms. Clark said, with an area of hurricane-force winds that was relatively small and an area of tropical storm-force winds that was quite large. The storm also dissipated “quite rapidly” after intensifying to a Category 4 storm just prior to landfall, she said.
New Texas law
Commercial policyholders with Harvey claims could be affected by a new Texas law relating to weather-related property insurance claims that went into effect Friday.
Under Texas House Bill 1774, for claims made on or after Sept. 1, the interest penalty that insurers will have to pay if they wrongfully deny or underpay a covered claim changes from 18% under the current law to around 10% currently, according to a brief by Dallas-based law firm Jackson Walker L.L.P.
“There are differing viewpoints about how meaningful the law will be for property owners, including those affected by Harvey,” Marsh said in a report issued Friday. “Our advice to property owners affected by Harvey is that if you believe you may have a claim, the most prudent course of action is always to report it in as timely a fashion as possible.”
The Property Casualty Insurers Association of America is calling for at least a six-month extension of the National Flood Insurance Program to allow the Federal Emergency Management Agency to deal with Tropical Storm Harvey claims.