Despite the fact that U.S. flood events are largely paid for by the National Flood Insurance Program (NFIP) and primary insurance, where flood is a covered peril, the recent severe floods in Louisiana could see some of the burden covered by reinsurance capital.
The U.S. state of Louisiana was hit by storms, torrential rain and severe flooding between the 11th and 15th August 2016, causing widespread damage as meteorologists called it the latest 1-in-1000 year rainfall event.
Risk modeller RMS said that riverine flooding was a major issue after large parts of south eastern Louisiana saw over 10 inches of rain in a 48-hour period to August 13, with some areas receiving as much as 31 inches (780 mm).
Jeff Waters, meteorologist and flood risk expert at RMS, explained; “The flooding has impacted both major and minor river networks. Louisiana was experiencing one of the top 20 wettest years on average leading up to this flood event. The already heavily saturated soil conditions have only helped to exacerbate the flooding, signifying the importance of having a view of flood risk that inherently reflects antecedent conditions pre-event. Doing so ensures that rainfall discharge, runoff, and inundation are captured as accurately as possible.
“Also, the fact that floodwaters overtopped a levee at Laurel Ridge stresses the importance of understanding the sensitivities of flood risk mitigation strategies, including defense and levee failures.
“It’s difficult to tie any single event to climate change. However, this flooding is an example of what could happen as a result of climate change and increased greenhouse gases: an increase in frequency and intensity of extreme precipitation events.”
As a result of the flooding in Louisiana a multi-billion dollar economic loss is expected. But the insurance and reinsurance industry impact will be significantly softened by the impact of low flood insurance penetration in Louisiana and the payouts handled by government backed NFIP policies.
However, despite the buffer that the NFIP provides, it’s becoming clear that the reinsurance market could see some exposure to the Louisiana flood event, as 1347 Property Insurance Holdings, a property and casualty insurance holding company operating in Louisiana, explained.
The company has a property catastrophe reinsurance program in place with a $5m retention per event, so 1347 Property Insurance Holdings exposure would not exceed that but anything above that level will call on its panel of reinsurers. Given 1347’s business in Louisiana through its Maison Insurance subsidiary, $5m seems low and its losses could well exceed this retention level.
The company said that based on its experience; “pre-tax losses incurred by the Company, net of reinsurance, are not expected to exceed $5,000,000,” which reflects its ultimate exposure after any reinsurance has kicked in as being capped to the retention, suggesting the bulk of the claims would be covered under its catastrophe program.
1347 also said that it “believes that it may have recoveries available to it under its per-risk reinsurance program,” which suggests some leakage into the reinsurance market as well.
We understand that 1347 Property Insurance Holdings has some collateralized reinsurance participation in its program, with sources suggesting that some ILS fund managers have participated and the company in the past expressing a desire to leverage insurance-linked securities (ILS) trends to enhance its reinsurance protection.
Hence, if losses on the property catastrophe program are above the retention level, or the per-risk aspect pays out, it could see minor claims falling to the ILS market.
1347 Property Insurance Holdings will not be the only private market insurer exposed to the Louisiana floods with a reinsurance program in place that could pay out. The larger primary insurers will likely retain a lot of risk from these floods, but smaller specialist property insurers operating in the state will likely have reinsurance that kicks in at lower retention levels.
For these smaller, largely property exposed, primary insurers that specialise in wind and catastrophe coverage that often includes flood, reinsurance layers typically kick-in at lower retention levels. As these insurers expand into Gulf and East coast states, as we’ve seen with the Florida primary players, reinsurance market exposure to U.S. flood events will likely naturally grow.
Also, as smaller, fast growing insurers, companies such as 1347 Property Insurance and Maison need robust reinsurance in place to help them deal with the severe catastrophic events that can occur, flood risk included.
Demonstrating the scale of the Louisiana flood event, Steve Bowen, a meteorologist at Impact Forecasting, Aon Benfield’s risk modelling unit, said that FEMA had already received over 25,000 NFIP claims, which as at the 21st August puts this flood event as the 9th based on filed NFIP claims counts.
With claims still being filed it is likely that the Louisiana flooding will end up ranking a few places higher than that, as the below chart from Aon Benfield, as tweeted by Steve Bowen, shows.
— Steve Bowen (@SteveBowenWx) 22 August 2016
Risk modelling firm RMS provided some background on the Louisiana flood event:
- This is one of the most significant U.S. natural disasters, let alone flood events, since Superstorm Sandy (2012). A slow-moving, near stationary tropical disturbance combined with high humidity levels and warm sea-surface temperatures to bring torrential rainfall to much of Louisiana and parts of Mississippi over the course of three days. The system pulled record amounts of moisture from the Gulf into the atmosphere, creating a continuous cycle of heavy rain and subsequent flooding throughout the region.
- Reports of properties affected by the flood range for 40-60k. Flooding has been particularly severe in the parishes of Livingston (~39,000 homes flooded), Ascension (~15,000 homes flooded), East Baton Rouge, and Tangipahoa.
- Louisiana has the third highest number of National Flood Insurance Program policies in-force (452k as of June 2016), flood insurance penetration is low, especially in affected parishes. Thus, it’s expected that many properties sustaining damage from these floods are either uninsured or underinsured for flood, resulting in reliance on federal disaster grants in parishes declared as major disaster areas. The event stresses the importance of understanding what, if any, flood coverage is included in a standard homeowner policy, and serves as yet another warning to those considering dropping or forgoing flood insurance. Relying on historical record or experience alone can create a false sense of security for anyone trying to understand their flood risk.
- Only approximately 12% of businesses and homes in East Baton Rouge Parish and Tangipahoa Parish are covered by flood insurance, while this figure is approximately 23% for Ascension and Livingston parishes. Only 1% of property owners in St. Helena Parish hold flood insurance.
- Additional rainfall forecast will exacerbate current ground water conditions and river levels, increasing the risk of flooding, though accumulations are not expected to be nearly as heavy as experienced over the previous weekend.