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Insurance industry should withstand Florence losses: Ratings analysts

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Hurricane Florence could generate tens of billions of dollars in insured losses for the property/casualty sector as it heads toward the United States, but the industry should be able to withstand any losses, according to analyses by ratings agencies.

It is unclear where the intensifying Category 4 storm will make landfall, but its high winds and heavy rainfall could cause loss of life, flash flooding and property damage, generating significant losses for insurers and reinsurers, according to a report by New York-based ratings agency Moody’s Investors Service Inc.  

Florence could generate tens of billions of dollars in insured losses, according to Chicago-based ratings agency Fitch Ratings Inc.

“Primary property/casualty insurance writers across the multi-state forecast landfall area are expected to incur losses primarily from the high winds that are accompanying the storm toward the coast,” Fitch said. “The threat of extreme flooding has implications for the National Flood Insurance Program, private market flood insurers, personal and commercial automobile writers, traditional reinsurers, and Insurance Linked Securities markets.”

Primary insurers like State Farm Mutual Automobile Insurance Co., United Services Automobile Association, The Allstate Corp., Liberty Mutual Group Inc. and Travelers Cos. Inc. will likely be less affected since their premium concentration in those states is moderate relative to their total U.S. premiums, according to Moody’s. Nationwide Mutual Insurance Co.’s North Carolina and South Carolina's homeowners market share is slightly over 10% of its homeowners business, but only 2% of its total U.S. direct premium written.

“We expect these large national carriers have the capacity to withstand this hurricane event because they carefully monitor their coastal exposure, geographic diversification and have high-quality reinsurance protection and strong capital bases,” Moody’s stated. “Regional carriers are more vulnerable given their geographic concentrations.”

The top five commercial writers for inland marine, allied lines, fire, commercial multiperil nonliability risks as measured by statutory direct written premiums in North Carolina, South Carolina, Georgia and Virginia include Liberty Mutual, CNA Financial Corp., Travelers, Nationwide and American International Group. Inc., according to Fitch. The top five private flood writers as measured by statutory direct written premiums in those states include FM Global Group, AIG, Assurant Inc., Zurich American Insurance Group and Swiss Re America Group.

Reinsurers and insurance-linked securities investors may also face losses, according to Moody’s. Aside from reinsuring primary companies, 28 reinsurers provided $1.46 billion of reinsurance cover to the NFIP for losses from individual flood events: 18% of losses between $4 billion and $6 billion and 54.3% of losses between $6 billion and $8 billion. On Aug. 1, through a Hannover Re transformer vehicle, $500 million of the NFIP’s financial risk was transferred to the capital markets through a catastrophe bond.

Reinsurers also reinsure the North Carolina wind pools, Moody’s noted.

“Given Florence’s trajectory and forecasts of storm surges of up to 12 feet in some areas, significant economic losses are likely, but flood damage is typically not covered by homeowners’ policies,” Moody’s stated. “This often becomes a point of dispute when the immediate cause of loss — wind versus flood — is unclear. On Wednesday, Florence’s rainfall was forecast at up to 30 inches in some areas, which is below the 60 inches of rainfall that Hurricane Harvey dumped in parts of Texas in 2017. Primary property and casualty insurers could incur significant claim losses on commercial — hotels and resorts, tourism and industrial — and residential properties, including watercraft, and private passenger and commercial vehicles. Additionally, commercial lines claims would likely include business interruption losses, which could be substantial if the hurricane destroys critical infrastructure, causes long-term power outages or interrupts business in the aviation, tourism and industrial sectors.”

A significant portion of high-risk coast insurance is provided by wind pools in North Carolina, according to Moody’s. The North Carolina Insurance Underwriting Association Coastal Property Insurance Pool offers wind and hail coverage in the state’s 18 coastal counties while the North Carolina Joint Underwriting Association Fair Plan provides last-resort homeowners and commercial property coverage to all of the state except for the barrier islands. NCIUA had a statutory surplus of $1.7 billion while the NCJUA had $23 million as of June 30.

“If losses and expenses exceed available surplus, the NCIUA is likely to charge assessments of up to $1 billion to primary insurers that write property business in North Carolina in a calendar year,” Moody’s said.

Florence could be the most devastating storm to impact the Carolinas since Hurricane Hugo in 1989, according to experts. Factoring in present-day exposures such as increased building along the coast, Hugo would have resulted in total insured losses of about $20.5 billion, according to Newark, California-based catastrophe modeling firm Risk Management Solutions Inc.

“The potential for extensive flood and storm-surge-related damage related to Florence has drawn early comparisons with Hurricane Harvey, which produced a historic level of rainfall along the Texas coast in August 2017, leading to massive flooding and significant losses that were borne by the NFIP or were ultimately uninsured,” Fitch said. “Florence could have a meaningful impact on the commercial property and business interruption markets in the region, but the extent of losses would increase significantly if the storm tracks through a major metropolitan area as Harvey did in Houston.”