Rating agency Standard & Poor’s said that it expects that industry losses from hurricane Florence will be manageable, with no significant impacts to insurance and reinsurance interests.
While “material insured losses” are expected from hurricane Florence, which is right now pounding the North Carolina coast, the hit to the industry is not anticipated to cause insurance or reinsurance companies a major problem.
S&P said that a majority of the eventual insured losses from Florence will likely end up with primary insurers rather than reinsurance, given the amount of losses expected and the prominence of national insurers in North and South Carolina and in Georgia that generally tend to retain a higher level of catastrophe losses.
That suggests a lower impact for ILS funds than would have been anticipated 48 hours ago, as Florence’s weakening is increasingly meaning the industry loss will likely be dominated by water effects, rather than wind.
Even at over $8 billion of industry losses, S&P does not expect hurricane Florence to be a capital event, just a drain on earnings for insurance and reinsurance firms.
In a similar way, we’d expect any ILS market impact to be relatively immaterial for most players, although some higher risk strategies could see slightly more in the way of impacts still.
“The combined earnings for U.S. insurance and the global reinsurance sectors will be sufficient to absorb the total year-to-date natural catastrophe losses. Therefore, we expect minimal rating actions, if any,” S&P said.
“If the rest of 2018 has as many natural catastrophes as 2017 had, re/insurers will definitely feel the pain, albeit to varying degrees,” S&P Global Ratings credit analyst Hardeep Manku commented.
S&P noted though that “a portion of losses may end up in the reinsurance sector subject to flood losses breaching a certain threshold” by which it is referring to the NFIP’s reinsurance program and catastrophe bond, which remains at-risk from the inland flooding that is developing across the region.
But “Florence won’t test the global reinsurance sector,” S&P explained, due to its well-capitalised nature and the strength of global players, as well as the contribution made by the ILS market.
Hurricane Florence will contribute to the annual aggregate deductible erosion though, on which S&P explains, “The losses from the year-to-date nat cat events would contribute to the triggering of the aggregate limits under the reinsurance covers to the extent that those, in combination with other nat cat losses throughout the year, could reach the trigger point for these contracts. However, reinsurers have been increasingly leveraging the retrocession market through alternative capital while ceding some of the tail risks, which will help mitigate losses from other large nat cat events.”
S&P said that “we would not expect a triggering” of any of the rated catastrophe bond tranches it covers.
However, for bonds like the Residential Re series from USAA, S&P only rates the lower risk layers, while the much higher risk layers are placed into the market without ratings.
We believe those higher risk layers still won’t be hit, but it’s key to remember that rating agencies only comment on cat bonds they actually have rated, and that is a tiny portion of the overall marketplace now.
On those bonds it rates, S&P says, “We will not be taking any rating actions on the bonds until we observe the damage after Florence makes landfall, and most likely not until we receive loss estimates from the issuers.”
S&P also said it does not expect any widespread influence on re/insurance pricing from Florence, and explained, “Pricing in affected regions and lines of business may rise as re/insurers look to recoup losses. However, we don’t view the estimated amount of losses as disruptive enough to create a ripple effect when it comes to national pricing for primary insurance business, though it may provide some support for ongoing rate actions by primary insurers for certain business lines. The same sentiment prevails for global reinsurance pricing: the reinsurance sector got some rate increases following 2017 catastrophe losses but the pricing momentum is fading and Florence-related losses would not stall that trend.”
Overall, the insurance, reinsurance and ILS industry impact from hurricane Florence is not expected to create any significant disruption to the marketplace, but could provide further stimulus for rates to be held up, rather than sliding further in primary property markets.
Fellow rating agency A.M. Best said that it, “expects that most reinsurers will experience losses from Florence due to the highly syndicated nature of property catastrophe business.”
However it also said, “The vast majority of reinsurance companies maintain extremely strong balance sheets and have been stress-tested sufficiently to absorb significant catastrophic events. In terms of any wider impact on reinsurance market conditions, it is A.M. Best’s belief that unless losses are materially outside of expectations or followed up by subsequent large catastrophic losses, it is unlikely to see any meaningful market hardening outside of loss-affected areas.”
Overall, the industry impact is expected to be manageable, while for the ILS market losses are expected to be within expected bounds.
Corelogic has recently put the estimated wind and surge industry loss from Florence at $3 billion to $5 billion.
Register today for ILS Asia 2023, our next insurance-linked securities (ILS) market conference. Held in Singapore, July 13th, 2023.
Get a ticket soon to ensure you can attend. Secure your place at the event here!