Fitch Ratings have performed some analysis on the potential impact on the re/insurance industry were the industry loss from hurricane Sandy to creep up towards the $40 billion mark. This is interesting as it’s gone very quiet on the loss estimate front in recent days and many insurers, reinsurers and the cat bond market continue to work on the up to $20 billion industry loss or up to $50 billion economic loss that current estimates put Sandy at.
We haven’t heard from the main risk modelling agencies in over a week now, which is not surprising as the job of improving their estimates becomes more difficult as more of the damage became accessible and available to analyse. We hope to hear some updates on the potential industry loss figures from them next week. The only other estimate which may help to quantify Sandy’s impact was that made by the Governor of New York, Andrew Cuomo, who said yesterday that he believed Sandy may have cost New York alone $33 billion in damage and lost business. Were that to prove correct then the current upper estimate for economic losses of $50 billion seems perhaps even a bit too low.
So it’s useful to see the analysis that Fitch have undertaken. They have published an updated analysis of the potential impact Sandy could have on the U.S. insurance industry. To do this they analysed a number of hypothetical loss scenarios for both the industry and individual insurers based on premiums, mix of business and market share in affected states to develop loss projections. They included an analysis for a more remote loss scenario of a $40 billion industry loss, noting that this is for purposes of sensitivity analysis only and not to be construed as any type of estimate.
The exercise shows that the insurance industry’s capital position could withstand even the most remote industry loss estimates and that it would still likely generate a statutory profit over the year 2012 even if the loss was that high. Based on this sensitivity analysis, Fitch says that hurricane Sandy is unlikely to be a market changing event and is unlikely to tip the industry into a hard property market, but is more likely to promote continuation of favorable pricing trends in 2013, particularly in U.S. property markets. They do not anticipate any material rating changes for insurers or reinsurers they rate due to losses from Hurricane Sandy.
Fitch estimates insurers with the largest potential insured losses from this event include State Farm Mutual Group as the most exposed to a $20B or $40B loss, followed by Allstate, Liberty Mutual, Travelers Group, Chubb, National Indemnity, Nationwide Mutual, Erie Insurance, USAA and Hartford Fire. At a $40 billion industry loss Fitch see all of these insurers suffering a $1 billion plus loss, with the most exposed, State Farm, potentially facing as much as £3.8 billion of gross losses. They also note that some large commercial property writers such as American International Group and FM Global are likely significantly exposed.
Fitch notes that the contribution of the reinsurance sector grows as the industry loss increases, with a $40 billion industry loss pushing as much as $14 billion over the reinsurance sector after primary insurer retentions.
Fitch notes that the current industry loss estimates contain a lot of uncertainty, particularly around the question of commercial flood insurance coverages and business interruption and contingent business interruption exposure.
As loss estimates rise and the actual incurred losses rise with them, insurers’ catastrophe reinsurance protection will begin to offset significant losses. Fitch says that the complexity of reinsurance structures makes it difficult to estimate insurers net losses. Several of the most exposed primary insurers buy additional northeast-only catastrophe protection to protect against events similar to Sandy. Some individual companies may also benefit from per risk covers, facultative reinsurance, catastrophe securitizations (cat bonds), and industry loss warranties (ILWs) that will further affect the final net loss figures for insurers.
You can access the full analysis from Fitch Ratings via the press release here.