Hurricane Laura losses could stress insurers' earnings after COVID-19, warns AM Best

Losses from Hurricane Laura could further stress insurance companies' earnings, which have already been weakened by the COVID-19 pandemic, warns ratings agency AM Best.

According to the report, reinsurance may help mitigate losses, but will challenge future risk management strategies, as loss-affected areas will see increases in reinsurance rates that are already hardening. "Although the capital position of smaller companies may be at greater risk, prudent enterprise risk management strategies could result in losses that affect earnings more than capital," said AM Best.

The ratings agency noted that many rated insurers have purchased first-event cover well-above the estimated loss associated with a 1-in-100-year hurricane, and programmes often include drop-down and reinstatement features that insulate a company from a second event.

Hurricane Laura, a Category 3 storm, is expected to make a landfall in Louisiana. The storm surge could reach 13 feet and push 30 miles inland or more along Louisiana’s southwestern coast.

AM Best said State Farm has the largest market share in Louisiana for the four lines of business that likely would be affected (i.e., commercial multi peril non-liability, fire and allied lines, homeowners/farmowners, and auto physical damage) at more than 22 percent combined, while 10 companies account for almost 60 percent of the state’s market. However, it noted that very few companies have significant exposures to these four lines relative to their total direct premiums written.

The agency warns that COVID-19 likely will exacerbate inherent price inflation for construction supplies and contractors following hurricane events, as adjusting claims, transporting goods and sourcing labor may be even more costly than usual. However, technology may be a mitigating factor as the use of drones may help insurers assess losses and estimate replacement costs.