While Florida’s insurer of last resort, Citizens Property Insurance Corporation, has provided a range of projected estimated losses from hurricane Ian of between $2.3 billion and $2.6 billion, if the average claims cost comes in around the levels of 2017’s hurricane Irma, the data could suggest a loss far higher.
At first, straight after hurricane Ian’s landfall in Florida, Citizens projected a net loss of around $3.8 billion, with a potential claims burden of 225,000 anticipated.
We understand that the claims figure is a projection made by Florida Citizens’ staff, while the modelled range of claims to be expected is for between 100,000 and 150,000. Staff have opted to prepare the insurer for the chances of a higher number, it seems.
So, the net loss projection was reduced to between $2.3 billion and $2.6 billion earlier this week, which is a modelled loss and loss adjustment expense (LAE) estimate (but without litigation), from an AIR model output, we understand.
But, with 225,000 claims anticipated, even at that high-end estimate of $2.6 billion, it would give an average claims cost of just $11,556, which seems very low.
If we took the 150,000 claims, the top-end of the model output, it would give an average hurricane Ian claims cost of $17,333, still low.
Even at the lower-end of the modelled output, 100,000 claims from hurricane Ian, the average claims cost is $26,000 at the high-end of the loss estimate, which is getting closer to where it might be expected to settle, but still may not be high enough, if inflation and litigation are added.
For an approximation of where the average claims cost from hurricane Ian could come out for Florida Citizens, it might be instructive to look back at hurricane Irma from 2017, the most recent major hurricane loss in Florida.
It’s important to note, before we begin, that this is a relatively unscientific approach and in no means a projection for where Citizens losses may end up. But it is instructive and perhaps supportive data for the decision-making of those exposed to the Citizens reinsurance tower and catastrophe bonds, we believe. At the very least, important to consider.
Hurricane Irma claim costs averaged roughly $31,000 for Florida Citizens (across 77,150 claims as of the mid-year 2022), with its total bill from that storm almost $2.4 billion, with still roughly 4,000 claims pending as of the end of June 2022.
So, looking at the Florida Citizens claims count estimates for hurricane Ian, at the lowest end of 100,000 an average claims cost around Irma levels would equate to a roughly $3.1 billion loss. At the 150,000 claims level, that could be as much as $4.65 billion.
But, take the Citizens staff estimate for around 225,000 claims and apply the Irma average of $31,000 and you get a much higher loss total, of around $6.975 billion.
All of which is significantly higher than where Florida Citizens has pegged its initial projected estimate of losses from hurricane Ian.
The average hurricane Irma claims cost would include LAE, litigation, social inflation, etc. As we all know, litigation was a serious issue, as where issues such as AOB.
Citizens current estimate for hurricane Ian does not include claims under the deductible, also the estimate for 225,000 claims would include claims that ultimately do not result in payment, we believe.
But, even if you take the lowest end of the model output, of 100,000 claims, you still get a much higher loss, with potentially greater implications for the reinsurance panel backing Citizens tower.
At the higher end of the model output, the 150,000 claims (so the $4.65bn possible loss at an avg. claims cost close to Irma), you could even get into the lower-end of the Everglades Re catastrophe bonds, depending on how claims fall across the Coastal and Personal Lines Accounts.
It seems safe to assume that the average claims cost from Ian, implied by Citizens estimate, is likely lower than it will turn out and that the average could come out close to Irma.
But what about the last five years of inflation since that storm?
As we explained earlier today in our article about the early hurricane Ian claims data from the FLOIR, the average inflation rate of a dollar from 2017 to 2022 was roughly 3.86% per year, giving a cumulative price increase of 20.83%.
So, if we took the Irma average of $31,000 and applied 21% inflation, just for dollar inflation since 2017, nothing for supply-chain effects and other labour/material cost increase effects, we could perhaps approximate the average claims cost as up to $37,000.
Which again lifts the possible loss to Citizens, quite considerably, as the low-end with 100,000 claims goes to $3.7 billion, the mid at 150,000 claims lifts to over $5.5 billion and the top-end with 225,000 claims reaches a huge over $8 billion.
Let’s assume 30% of claims are settled without payment, or fall under the deductible and even then it’s clear the numbers are a lot higher than Citizens latest estimated loss.
Of course, this is an unscientific approach, but it is data worth considering, especially for reinsurance partners of Citizens with capital at-risk in its reinsurance tower, as well as for those marking prices for the Citizens sponsored Everglades Re catastrophe bonds after Ian.
It’s going to take a long time before we know the real bill Florida Citizens will pay to support its policyholders recovery from hurricane Ian. The fact there are 4,000 pending Irma claims five years after that storm made landfall shows just how long it could take.