Hurricane Sally expected to drive significant NFIP flood losses: A.M. Best

Hurricane Sally’s extreme rainfall and storm surge are expected to drive significant insured losses for the National Flood Insurance Program (NFIP), putting its reinsurance panel and catastrophe bond investors on alert, according to A.M. Best.

The rating agency said that the the U.S. Federal Emergency Management Agency’s (FEMA) flood insurance program and also private market flood insurers are both expected to face significant losses following hurricane Sally’s passage across the Gulf Coast and into southeastern U.S. states.

Overall, A.M. Best expects that insurance and reinsurance market losses from hurricane Sally won’t be as significant as recent hurricane Laura, or other ongoing catastrophe events such as the western U.S. wildfires, but flood coverage provided federally by the NFIP or by private market carriers is now in focus given the level of rainfall experienced with the storm.

Given the slow pace of hurricane Sally’s passage ashore and inland, there have been rainfall totals of as high as two feet recorded in some areas of Alabama and Florida and storm totals of up to 35 inches are possible.

A.M. Best notes that the NFIP’s reinsurance program for 2020 attaches for losses of more than $4 billion, adding that over two-thirds of flood insurance written in Alabama is federal.

In addition, A.M. Best notes that hurricane Sally “also potentially could place flood-related catastrophe bonds in its crosshairs.”

As we explained yesterday, an early modelled estimate from AIR Worldwide pegs hurricane Sally’s immediate wind and surge losses in a range from $1.5 billion to $3.9 billion.

It would take a really significant number of flood insurance claims for the NFIP’s reinsurance cover, or FloodSmart Re catastrophe bonds, to be tapped, but it’s not outside the realms of possibility.

A.M. Best notes that it does not expect homeowner or auto insurance damage to be particularly significant with hurricane Sally, with water driven impacts possible the major component of the storms economic losses.

As a result and with the NFIP’s burden expected to be significant, A.M. Best says that, the “NFIP’s reinsurers and investors on the flood-related cat bonds will be watching the events closely.”

The flood impacts are expected to be widespread, far outside of the region impacted by hurricane force winds and surge, with central Alabama and Georgia expected to see up to 12 inches of rain, and parts of the Carolinas to receive up to nine inches by later in the week.

As a result, auto insurance losses could rise further with water damage and A.M. Best also warns that some homeowners property insurance policies can respond as “a standard homeowner’s policy will cover water damage from rain as long as the storm has “opened up” a hole in the roof.”

The rating agency does say that it expects losses to be lower than hurricane Harvey, the most recent major flood bringing hurricane that triggered a full payout of the NFIP’s traditional reinsurance program.

According to the III, record NFIP payouts are 2005’s Hurricane Katrina at $16.3 billion, 2017’s Hurricane Harvey second with $8.9 billion and 2012’s Superstorm Sandy with $8.8 billion.

Hurricane Ivan of 2004 is a good comparison though, given the region it affected and while that storm didn’t bring as much rainfall with it, the NFIP’s losses only reached $1.6 billion, so far below the $4 billion attachment point for the NFIP’s reinsurance program.

It will take some time to understand the NFIP’s claims burden from hurricane Sally.

As we explained earlier today, FEMA is back in the reinsurance market working towards a January 2021 renewal of its flood reinsurance cover for the NFIP. Sally could make that process a little more challenging, until it becomes clear whether the existing program attachment point is at risk from the storms flooding, or not.