Winter storm to drive record losses, reevaluation of cat budgets: AM Best

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According to rating agency A.M. Best, catastrophe losses suffered in Texas from the US winter storm, which has been named winter storm Uri, may reach record levels, suggesting the estimates of significant insurance and reinsurance market losses are likely to come true.

winter-stormAs we explained on Friday, catastrophe risk modelling specialist Karen Clark & Company updated its estimate for insurance and reinsurance market losses from the winter storm event in the United States to $18 billion, up from above $10 billion, reflecting the widespread and severe impacts felt.

Some market sources have even suggested the total bill, across the entire U.S., could go even higher, although there is some disagreement and others suggest that low double-digit billions would be a more reasonable estimate.

As ever, it will be some time before the final bill is understood and with elements related to business interruption expected to be a significant factor, the winter storm is proving to be a particularly challenging catastrophe to estimate at this time.

A.M. Best said that the majority of the insured losses are expected to fall to the homeowners, commercial property, and auto lines of insurance business.

The business interruption element will fall within the commercial property insurance bucket and KCC had said last week that it expected the majority of claims to fall to those lines.

A.M. Best warns that demand surge is likely to be a significant factor in the ultimate industry loss from the winter storm event, raising the prospects of potential loss amplification and loss creep for insurance and reinsurance companies affected.

Loss adjustment expenses could spike for insurers with this event, A.M. Best says, as a surge in demand for plumbers and contractors to repair homes and businesses is likely to be seen.

As well as higher loss costs due to demand surge and higher material pricing, the rating agency also warns that insurers could also be on the hook for additional living expenses as many homeowners are expected to require rehousing while repairs are undertaken.

Given the storm has occurred in the first-quarter and is expected to drive potentially record losses, A.M. Best also warns that re/insurers may need to reevaluate their catastrophe budgets for the year ahead, as the winter storms could end up using far more of their budgets than would normally be anticipated for a Q1 event.

On the business interruption side, it’s not just the physical damage related BI claims from the winter storm that insurers will have to deal with.

There are also expected to be utility service related BI claims, as the power outages across the state of Texas were a significant factor.

Early claims data from some insurance carriers continue to point to the winter storm causing a particularly significant insurance and reinsurance industry loss event, with tens of thousands of claims being filed.

As a result, A.M. Best warns that, “Winter Storm Uri and the damage it causes from snowfall, freezing rain, and arctic temperatures in Texas and other southern states may lead to record first-quarter property catastrophe losses for the insurance industry.”

That is certainly an unwelcome start to the year for U.S. primary insurance carriers, as well as for some of their reinsurance providers, including insurance-linked securities (ILS) funds.

On the ILS fund side of the loss, it seems while there could be some occurrence layers that trigger, the majority of the concern will be related to private ILS quota shares, sidecars and aggregate reinsurance agreements.

While many aggregate layers start their annual risk periods at January 1st, there are others that run to the second quarter or mid-year and it is those where the losses from this event may be most immediately of concern, including any exposed catastrophe bonds.

It will take time for the extent of any losses from this winter storm event that fall to the reinsurance and ILS market to be understood, but it seems the smaller to more regional carriers are likely to be the first to trigger their reinsurance, given the nationwide carriers tend to have much higher retentions.

While losses could hit a record level for Texas alone, in winter storm terms other states are also going to see a significant number of claims hitting the insurance market.

In total, KCC said that its industry loss estimate covers 20 US states, reflecting the particularly widespread footprint and impacts of this catastrophe loss event.

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