Insurers will bear brunt of Harvey losses; downgrades possible

Based on the initial loss estimates relating to Hurricane Harvey, primary insurers - as opposed to reinsurers - will bear the brunt of the covered losses from Hurricane Harvey, according to S&P Global Ratings. But the rating agencies also stressed that some companies will be better able to absorb the losses than others.

S&P Global Ratings has gone for a mid-range estimate of around $6 billion, based on information coming from risk modelling agencies at this stage.

“While the large, national primary players have sufficient geographic and product diversification to absorb the losses, some of the regional and local players could face significant hits to their earnings and possibly their capital,” S&P said.

“With the earnings of certain personal lines players already stretched, the hurricane-related losses could wipe out their earnings for the year. Consequently, we could consider taking negative rating actions on certain outliers, specifically those where we believe capital levels might decline beyond our base-case assumptions. Such could be the case for Hochheim Prairie Insurance Group, a small insurer entirely exposed to Texas, for which the likely impact from this event will be greater.”

The rating agency suggested that the largest exposures for the sector are through property and auto lines. The brunt of the wind and storm surge damage is in the coastal regions, but as the hurricane progressed inland, the nature of losses transformed to flood driven by incessant rain.

The rating agency suggested that insurers will bear the brunt more than reinsurers, but the latter will not be unaffected. In 2017, among other reinsurance coverages, the reinsurance market provided $1 billion of protection to the NFIP and $2.1 billion to TWIA, which attaches at $2.8 billion (reinsurers cover losses between $2.8 billion and $4.9 billion).

“We don't expect the potential losses from Harvey to consume reinsurers' catastrophe budget for the year, especially considering the below-average catastrophe losses in the first half. Pre Harvey, we expected reinsurance pricing to decrease 0 percent to 5 percent into 2018. We expect any impact on pricing because of Harvey to be limited to affected regions and policies.”

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