Recent hurricane Hermine is not expected to pose any problems for the insurance, reinsurance and insurance-linked securities market, with insured losses expected to be relatively low and no chance of catastrophe bonds being exposed, according to Fitch Ratings.
Fitch expects only a “modest impact” for the property & casualty insurance sector and that losses passed on to reinsurance firms from Hermine will also likely be limited.
However, while limited in terms of impact, Fitch does believe that hurricane Hermine could depress third-quarter results for Floridian and other primary insurers with concentrated exposure in the affected region.
As we wrote previously, catastrophe risk management and modelling firm Karen Clark & Company (KCC) has estimated the insurance industry loss from Hermine as being up to $500m, while the economic loss could stretch to $1 billion.
As a reminder, that was from losses in Florida and the southeast U.S., where Hermine came ashore and affected the hardest. It doesn’t include any losses that come from onshore surge or beach erosion on the east coast, we believe, however as Hermine tracked further offshore than expected any additional losses are expected to be minimal.
Fitch explains that the insurance companies with the largest exposure to homeowners’ business in Florida by statutory direct written premium, are Universal Insurance Holding Group, Tower Hill, State Farm Mutual, Citizens Property Insurance and Federated National Insurance.
All of these have very robust reinsurance programs in place, including participation from the ILS fund market and other collateralised sources, including some catastrophe bonds.
However, if reinsurance firms do take a loss from Hermine it is expected to be slight, as most insurers will retain the majority of their losses, we’d expect.
The Florida property insurance market share dynamic has changed considerably since 2005’s Hurricane Wilma, Fitch explains, which was the last hurricane to make landfall in the state.
During the 11 year hurricane drought, homeowner insurance risk in Florida has shifted away from national writers and state-backed Citizens, with smaller Florida specialist homeowners’ insurers growing significantly in size, thanks to the Citizens depopulation program. Specialist homeowner insurers now hold approximately 60% of Florida homeowners’ insurance market share, Fitch says.
Because of this dynamic in Florida, Fitch notes that most of these primary companies are untested by a hurricane loss, and their ability to rapidly assess and manage claims is also uncertain. That’s also a reason that these insurers use ample reinsurance protection, to ensure they can call on financial backing when major events occur.
“Loss experience from Hermine will provide insight into the preparedness of the Florida specialist companies for the next significant storm that hits the state,” Fitch explains.
Finally, Fitch notes that there are numerous outstanding catastrophe bonds which are technically exposed to any hurricane landfall in Florida, like Hermine. However, the rating agency explains; “Fitch does not expect losses to materialize for any outstanding catastrophe bond given the relatively small insured loss expectations from the event.”