Hurricane Ida loss puts some aggregate covers at-risk: Fitch

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Hurricane Ida is expected to result in a significant loss event for the reinsurance market according to Fitch Ratings, who also believe that some aggregate covers may be at-risk of attaching on the back of Ida’s industry impact.

hurricane-ida-satellite-landfallHurricane Ida made landfall on Sunday and its impacts continued well into Monday, as the once 150 mph monster hurricane slowly degraded over land.

The insurance, reinsurance and insurance-linked securities (ILS) industry appears to be anticipating a loss of between US $15 billion and $25 billion from hurricane Ida, with some uncertainty over precisely where that figure lands, given the broad region affected by the storm and a range of potential complications in the claims process, from power outages, to business interruption, energy and utility sector losses, and the potential for flood waters to recede and leave properties with mold.

Fitch Ratings is just the latest to suggest that reinsurance contracts will take a reasonable share of the loss, suggesting a share for the insurance-linked securities (ILS) market, largely through collateralised arrangements such as quota shares and excess-of-loss contracts.

While the hurricane is expected to drive perhaps the largest single loss of 2021 for the insurance market so far, it is expected to be a manageable event, creating more of an earnings hit than a capital event for reinsurers and ILS funds.

“Hurricane Ida is expected to generate significant economic and insured losses in Louisiana, but is unlikely to trigger ratings downgrades of individual property/casualty insurers or reinsurers,” Fitch Ratings explained.

Adding, “While losses will take some time to reconcile, there are indications that this will be an earnings and not capital event for the industry. ”

The majority of the property and casualty sector has experienced capital expansion in the last year, which means the market is well positioned to absorb a significant catastrophe loss of this kind, the rating agency said.

Fitch also remarked that, “Ida is likely to surpass winter storm Uri ($15 billion) as the largest industry event in 2021 and Hurricane Laura ($10 billion), which was the costliest insured catastrophe event of 2020.”

Fitch also highlighted some of the factors that drive uncertainty and could result in possible loss amplification or creep down the line.

Chief among these is how impacted the city of New Orleans was, with damage likely to take time to analyse, complicated by the loss of power as utility infrastructure was damaged causing widespread power outages to the metropolitan area that could take some time to repair.

Fitch sees this as a factor in “increasing the potential for elevated economic and insured losses,” with the impacts to New Orleans seen as a critical factor for the eventual industry loss.

Added pressures from the COVID-19 coronavirus pandemic could play into claims management, repairs and response, while the pandemic may also inflate claims, Fitch believes.

“The ongoing pandemic may compound the normal logistical challenges of assessing damage to property following a catastrophe event and lead to modestly elevated levels of loss adjustment expenses,” Fitch explained. Adding that, “The severity of insured property claims may face adverse impact from supply chain shortages of building materials and higher contract labor costs.”

Two primary insurers in particular are highlighted by Fitch as worth watching out for as the losses from hurricane Ida develop.

Subsidiaries of United Insurance Holdings, Ltd and FedNat Holding Company are both in the top-ten homeowners writers in Louisiana and both have reported elevated combined ratios and capital declines in 1H21.

These companies and other thinly capitalised primary carriers will be more reliant on ceding losses to their reinsurance partners, Fitch cautions, after which losses from hurricane Ida would erode their capital further.

As a result, the more thinly capitalised and loss affected insurers are likely to prove the most vulnerable to an event like hurricane Ida, Fitch believes.

For the reinsurance market, Fitch explained that, “Ida will be a significant loss event for reinsurers given the estimated size of the loss at greater than $10 billion and the concentration of more regional primary insurers in the state that have generally have lower retentions.”

The rating agency also believes that some companies aggregate protections may be exposed, saying, “The storm could also trigger aggregate covers given the above average accumulation of insured losses thus far in 2021.”

With insurer catastrophe budgets already assumed under pressure prior to the hurricane season, and some analysts expecting that certain re/insurance carriers could exceed their catastrophe budgets in 2021, it seems entirely plausible that there could be aggregate covers in the market which Ida losses could top beyond their attachment points.

Also read:

Hurricane Ida to hit quota shares & excess-of-loss reinsurance: Moody’s.

Hurricane Ida losses to fall more to reinsurance, but renewals influence low.

Hurricane Ida data suggests $15bn to $25bn industry loss: Twelve Capital.

Hurricane Ida insured losses expected in the double-digit billions.

Hurricane Ida cat bond fund impact minor on latest track: Plenum.

Hurricane Ida hits Cat 4, landfall location key to ILS market impact.

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