Florence losses likely to be largely retained by insurers: Moody’s

Losses from Hurricane Florence will be largely retained by property/casualty insurers only “dampening” their third quarter earnings. Only reinsurers and ILS funds with low attachment points may find themselves subject to claims, according to a report by Moody’s, which also predicted no cat bonds would be triggered.

On 14 September, Hurricane Florence, a Category 1 storm, made landfall near Wilmington, North Carolina, causing high winds, heavy rain and storm surge in North Carolina and South Carolina. The large, slow-moving storm has caused property damage, power outages, evacuations and tragic loss of life.

The rating agency said it expects insured losses will dampen third-quarter earnings for primary insurers but will be readily manageable. Based on historical Category 2 hurricanes in the Carolinas using current property exposures, catastrophe modelling firm CoreLogic estimates that insured industry losses could be $3-$5 billion, the report noted.

But it also stressed this estimate is for wind and storm surge, but does not include damage from flooding or rainfall, which could be extensive. As Florence moves inland, North and South Carolina could receive up to 40 inches of rain in certain areas. Given Florence’s trajectory and storm surges of up to 10 feet in some areas, flooding could cause significant economic losses. Insured losses are likely to be split among homeowners, commercial property and business interruption, the report said.

It noted that flood damage is typically not covered by homeowners' policies. This often becomes a point of dispute when the immediate cause of loss (wind versus flood) is unclear. However, commercial lines insurers could face losses from flooding, which is typically an optional coverage. Flooding could also cause losses for commercial and personal auto as well as agricultural insurance lines.

“We expect these large national carriers to readily absorb these losses because they carefully monitor their coastal exposure and geographic diversification and have high-quality reinsurance protection and strong capital bases. Regional carriers are more vulnerable given their geographic concentrations,” Moody’s said.

“For large national insurers, we expect that losses will largely be retained. However, some reinsurers and insurance-linked securities investors (e.g., collateralized retro) could face losses on contracts with low attachment points. Catastrophe bonds typically incorporate very specific definitions of covered perils, which often do not include flood, and have high attachment points.

“As a result, we do not expect Florence-related losses to affect outstanding catastrophe bonds.”

It also noted that, aside from reinsuring primary companies, 28 reinsurers provided $1.46 billion of reinsurance cover to the National Flood Insurance Program (NFIP) for losses from individual flood events (18 percent of losses between $4 billion and $6 billion and 54.3 percent of losses between $6 and $8 billion).

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