Florence will likely trigger NFIP reinsurers – again

Hurricane Florence will likely be an earnings event for the private insurance industry but the National Flood Insurance Program (NFIP) could be hit with heavy losses, potentially resulting in claims for its reinsurers for the second year in a row and its first cat bond being triggered, according to Fitch Ratings.

The rating agency said substantial insured losses from water related claims are likely to be incurred by the National Flood Insurance Program (NFIP), private flood insurance carriers and auto insurance writers with a modest level of losses ceded to the traditional reinsurance and insurance-linked securities (ILS) markets.

Risk modelling firm AIR Worldwide has suggested insurance industry losses from Florence will range between $1.7 billion and $4.6 billion, excluding the impact of ongoing flooding from precipitation. Willis Towers Watson estimated that losses would fall between $2.5 billion and $5 billion, while Karen Clark and Co. estimated that insured losses would be $2.5 billion.

But flood losses are expected to significantly contribute to overall losses from Florence as storm surge and historic levels of rainfall have inundated coastal area as well as a significant number of inland counties. Flood risk in the US is almost entirely assumed by the NFIP as standard homeowners' insurance policies typically do not cover the peril.

This means that flood losses from storm surge and torrential rain may lead to a material event for the NFIP, which counts the most affected states, North Carolina, South Carolina and Virginia each among the organization's top 10 largest exposures by policies in force.

This could mean claims for reinsurers. The NFIP has added considerable risk transfer mechanisms to its structure in the last 18 months, which has helped the organization shift a portion of its risk to traditional reinsurers as well as the capital markets. The NFIP 2018 reinsurance programme covers the organization for 18.6 percent of losses between $4 billion-$6 billion and 54.3 percent of losses between $6 billion-$10 billion.

While the cat bond market is broadly expected to be unaffected, the expectation could be the NFIP's FloodSmart Re 2018-1, issued in August 2018, which provides the organization with $500 million of third-party collateralized limit. If flood losses incurred by the NFIP from Florence increase past the bonds attachment point of $5 billion, third-party investors could be at risk of partial loss of principal.

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