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Insurers brace for big loss as Irma heads toward Florida

Posted On: Sep. 8, 2017 12:51 PM CST

Insurers brace for big loss as Irma heads toward Florida

Hurricane Irma, which remained a powerful Category 4 storm Friday, could pass close to Miami and cause massive insured losses, catastrophe modeling firms and analysts said.

If it hits Florida as expected, it could dent insurers’ capital, unlike Hurricane Harvey, which pounded Houston last month, where losses are expected only to reduce insurer and reinsurer earnings.

Hurricane Irma, which has already caused devastation in several Caribbean islands, is now showing a 60% chance of passing within 50 nautical miles of Miami, according to a blog post Thursday by Michael Kozar, senior modeler, model development, for catastrophe modeler Risk Management Solutions Inc.

But the loss range in this preliminary analysis could easily move higher or lower depending on shifts in the storm track and its intensity. Irma’s anticipated direction of travel has been changing continually through the week, oscillating between both coasts of Florida. It is likely that this changeability will continue, and so the modeling uncertainties remain significant.

Another RMS blogger offered some preliminary damage estimates.

“For the last 48 hours, all the forecasts have been consistent in indicating that Hurricane Irma will have a significant impact in Florida, most likely making landfall in the state. The latest RMS HWind forecast shows it tracking more westerly than before, and this reduces the potential for loss because of the relative concentrations of exposure in the southern end of the Florida peninsula,” said Tom Sabatelli, hurricane risk expert with RMS.

“Based on today’s long-range forecast, RMS calculates there is still a 10 percent chance of wind losses from Irma exceeding US$85 billion. This assumes a U.S. landfall, with the scenarios in RMS modeling showing almost all of that insurance loss to be in Florida,” Mr. Sabatelli wrote.

RMS will continue to update its analysis of potential insurance losses as Hurricane Irma moves closer to the U.S. coast.

Irma is now expected to shift more south and west than previous modelling had indicated, according to RMS.

“Based on forecast models initialized at 12:00 UTC today Thursday, shows that Irma’s projected path has shifted further south and west than the previous forecasts. The highest probabilities now run through southeastern Florida, with Miami having a nearly 60% chance of the storm passing within 50 nautical miles of the city,” wrote Mr. Kozar.

On Thursday, RMS reviewed some of Irma’s initial damage in the Caribbean.

The insurers most exposed to Florida commercial multi-peril losses, according to data from Oldwick, New Jersey-based rating agency A.M. Best Co. Inc., are American International Group Inc., with $250.2 million of direct premiums written; Zurich Financial Services NA Group, with $127.9 million; Heritage Insurance group with $119.2 million; Nationwide Group with $83.2 million; and units of Chubb Ltd. with $78.6 million.

“The potential for catastrophic property losses is a very real possibility in Florida,” Best said in a Friday Best’s Briefing on Irma.

“If the track and intensity of the storm progress as anticipated, Irma will fall under the category of an extraordinary event, making it one of the worst hurricanes to make landfall in the United States,” according to the briefing. “The commercial insurance segment is likely to experience significant claims for both direct property losses and business interruption if Irma’s impact is in line with current forecasts.”

Irma could well exceed Harvey’s impact on reinsurers and become a capital event, according to Standard & Poor’s Global Ratings in a new report Friday.

“Depending on the extent Hurricane Irma makes a landfall in Florida, there could be much higher insured losses compared with Hurricane Harvey,” S&P said.

The report, titled, "No Respite For Re/Insurers As Hurricane Irma Prepares To Give A Big Jolt," said that Hurricane Irma can cause much higher insured losses compared with Harvey. S&P previously said that Harvey would likely hurt insurers earnings rather than hit their capital.

The rating agency pointed to data from the Insurance Information Institute that noted the last big hurricane to hit Florida was Hurricane Andrew in August 1992, which led to $27.3 billion of insured losses, in 2017 dollars.

“According to AIR Worldwide, if a Category 5, Andrew-like hurricane were to strike just south of Miami and a little north of the city of Homestead, the total insured losses for Florida could reach upward of $130 billion,” S&P said.

S&P went on to say that Irma could hit regional pricing but global pricing may withstand, while third-party capital could be tested by Irma’s impact.

“Strong capitalization will help mitigate the impact, but Irma will likely stress-test not only the (insurers and reinsurers) but also the staying power of third-party capital,” S&P Global Credit Analyst Hardeep Manku said in a statement. “Regional pricing is also likely to harden, but the impact on global (insurance and reinsurance) pricing is debatable.”

On Thursday, S&P reported that a group of catastrophe bonds could potentially be exposed to Irma.

Exposures Up

In its Weekly Cat Report issued Sept. 8, Aon Benfield’s Impact Forecasting said, “With the event still very much underway and the potential impacts from a United States landfall still a few days away as of Sept. 7, it is too early to begin quantifying the overall impact of Hurricane Irma,” while pointing out that “Any slight wobble may mean the difference in many billions of dollars’ worth of damage; especially given the high volume of population and exposure across several counties in central and southern Florida.”

The Aon report goes on to note population and housing growth in Florida puts more people and property at risk.

“The state of Florida has seen extensive population growth in the past two decades, with much of that growth occurring across central and southern sections of the state. Since the year 2000, the population has grown in this area by more than 4 million people alone,” the report said.

“Across the entire state of Florida, more than 2 million new homes have developed since 2000,” the Aon report said. “The majority of the growth has occurred in areas across the peninsula — raising the potential exposure at risk to natural disasters.”

CoreLogic said in an update Friday that about 8.5 million residential and commercial properties in Florida are at either extreme, very high or high risk of wind damage from Hurricane Irma, while the firm’s storm surge analysis shows that about 3.5 million residential and commercial properties in Florida are at risk of hurricane-driven storm surge damage. Neither analysis includes potential damage from inland flooding, the statement said.

Fitch Ratings said Friday that Florida's state-run property insurers, including Florida Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund “are well positioned to meet claims while continuing to provide strong bondholder protections. Both entities have accumulated exceptional levels of liquidity over the course of 12 years with minimal hurricane activity.

Morgan Stanley, in a research note Friday, said that some sectors could see a post-Irma bounce in demand.

“There are positive implications as well with storage and hotels being two real estate asset classes that have historically seen an increase in demand following a natural disaster. We could see a near-term rise in retail spending as the community looks to rebuild and some apartments could benefit over the medium term given demand for shelter,” the bank said in its note.

Harvey’s Impact

In its “Global Catastrophe Recap August 2017,” Aon’s Impact said insured losses will likely exceed $10 billion as a result of Harvey and “Total economic losses were estimated to minimally reach the tens of billions (USD), which ensures that Harvey is likely to become one of the costliest natural disasters on record in the United States.”