Potential losses from hurricane Hermine, which became a Category 1 hurricane and is heading for landfall tonight in northwest Florida, are expected to be manageable for insurance and reinsurance capital, according to analysis from analysts Keefe, Bruyette & Woods (KBW) and risk modelling firms.
Hermine is tracking towards the Gulf Coast of Florida and is expected to make landfall tonight, becoming the first landfalling hurricane to impact Florida in more than a decade.
Analysis from KBW states that while it remains too early to provide any conclusive loss estimates, the fact that the storm is tracking towards northwest Florida, as opposed to more heavily populated areas of the state, suggests lower gross losses that will be manageable for the insurance and reinsurance industry.
“While a hurricane warning is in place for Florida, the storm is mostly expected to impact northwest Florida, which has lower total insured value (TIV) than high population areas such as the tri-county (i.e., Broward, Miami-Dade and Palm Beach counties) and the greater Tampa Bay region. As a result, industry gross losses should be manageable,” said KBW.
With hurricane Hermine now a category 1 storm this is the first time in a number of years that a hurricane has posed a threat to the reinsurance, insurance-linked securities (ILS) and catastrophe bond sectors have had to take notice of.
That being said, KBW expects “Florida homeowners insurers’ maximum exposures to a tropical storm or hurricane is limited to their retention, as they purchase significant reinsurance coverage to protect their balance sheets and earnings from such events.”
KBW explains that most insurers that operate in the region will experience some impact from the event, with Citizens, Universal, and Tower Hill likely to feel the biggest hit as they are the three largest writers of property insurance in the state. Of course at least some of these insurers have ILS participating in their reinsurance programs, as many in the U.S. now do.
Furthermore, State Farm, Allstate, and Nationwide are the three largest property insurers in the Southeast of the U.S., so it’s expected that they will feel a fair share of the impact as losses materialise. Again, these large national primary carriers will all have some ILS fund participation in their reinsurance programs.
KBW expects that some reinsurers will take a share of the losses, even in the event of a low-level hurricane event, as Florida property insurers typically make good use of reinsurance protection for the Atlantic hurricane season.
Despite the fact losses are expected to be manageable, it is the proliferation of aggregate covers in reinsurance and retrocession markets that a minor hurricane could now impact. Aggregate covers that have been accumulating losses from events so far in 2016, could find their retentions eroded further by any overflow of losses into the reinsurance market.
Only time will tell exactly where the storm makes landfall and just how strong it is, but Florida’s eleven year wait for a landfalling hurricane will come to an end in the coming hours. It’s important to remember that any hurricane of this size can still cause significant property losses and pose threat to life and as ever it will take some days for the scale of the impact to be appreciated.
The track of Hermine beyond Florida also suggests widespread impacts throughout the U.S. eastern states.
As we wrote earlier:
Hurricane Hermine is expected to strike the Florida Gulf Coast on Thursday night as a Category 1 storm, the intensity of which is still uncertain. Hermine is then forecast to pass close to Tallahasee and head into Georgia, then through the Carolinas where tropical storm characteristics will be seen. One thing is certain, Hermine will leave torrential rainfall with resulting flooding in its wake as it heads northeast.
If Hermine turns offshore and gets back over the Atlantic waters off the Georgia or Carolinas coastline sea surface temperatures in that region could mean the storm can regain or maintain some strength, following its passage across Florida, further impacting the southeast coastline. Some forecasts now show a strong extra-tropical Hermine off the eastern seaboard causing a risk of storm surge into coastal areas in New Jersey and as far north as New York state, something to watch out for later in the weekend.
Whatever the path, a Category 1 hurricane and subsequent strong tropical storm carrying torrential levels of rainfall that impacts the whole of that area of the U.S. southeast and eastern coastline will result in a greater level of insurance and reinsurance impact, than just a Florida hurricane hit alone.
Even a category 1 hurricane could still cause an insured loss in the high hundreds of millions to north of $1 billion, resulting in reinsurance claims with ILS funds or structures potentially paying some portion of the final bill.
Risk modelling firm RMS agreed that losses from hurricane Hermine will be manageable for the industry.
Ben Brookes, RMS of VP Capital Markets, explained; “Initial indications are that Hermine will not cause a major insurance industry loss and that this is unlikely to be an event that has a meaningful impact on soft reinsurance market conditions. And, based on the last NHC forecast, RMS analyses show there’s likely to be no significant impact to the catastrophe bond market.
“However it is still very early and uncertainty remains – the storm may intensify or create a larger storm surge than anticipated and so this situation could change.
“Furthermore these initial estimates of the impact on the insurance industry are not a reason for complacency among those communities in the path of the storm, which is a dangerous natural phenomenon. People should follow the advice of the authorities.”
Risk modellers AIR Worldwide provided some insight into the region at risk”
“According to AIR, among single-family homes, wood frame is the most common construction type, although masonry is also common in Florida. The foundations of single-family homes are often a concrete crawl space, slab-on-grade, or (particularly in older wood frame houses) spread concrete footings. Florida has a relatively small percentage of basements, but as Hermine tracks north, basement flooding could be more of an issue. The exterior walls of wood frame homes can be finished with stucco, wood siding or shingles, vinyl, or aluminum cladding. Interior walls in older homes are usually finished with plaster; in newer ones they are usually finished with gypsum board.
“In general, masonry houses are better able to withstand high winds than those made of wood. When masonry is used as the exterior wall material, the walls are normally constructed to full height. Then wood floors and the roof are framed into the masonry, resulting in continuous exterior walls and an overall strong structural frame. Such a structure is more resistant to hurricane winds and the impact of wind-borne debris as compared to wood frame buildings. A masonry building with a slab foundation is also more resistant to water pressure and buoyancy forces compared to wood frame buildings.
“Large, high-value homes generally exhibit a high quality of construction, often with sophisticated engineering input and often with secondary risk mitigation features. They also tend to be well maintained. They may feature complex architecture with elaborate roof geometries containing multiple gable ends and corners, which tend to mitigate wind loads.
“According to AIR, inundation caused by storm surge is expected to begin this afternoon in Big Bend and to become deep and widespread as Hermine moves through the area. Structural damage to some homes and businesses is expected, as well as a weakening of some foundations caused by heavy rain and surge, with some homes removed from their foundations entirely. Roads and bridges, including escape routes, could also get washed out, leading to closures.
“Hermine’s winds are expected to cause damage to roofing and siding materials, porches, awnings, carports, and sheds. Mobile homes, especially those that are unanchored, could experience significant wind damage, and unsecured, lightweight objects could become airborne and cause damage as projectiles, particularly to windows, which could allow water into structures. Large trees could snap or be uprooted, falling on power lines and causing outages. Small craft could break away from their moorings and become beached or damage other craft. Damage to marinas, docks, boardwalks, and piers in the area affected is expected.”