How insurers prepare and respond to hurricanes

09 October 2017

The devastating hurricanes that wreaked havoc in Texas, Florida, and the Caribbean have tested the strength of the (re)insurance market in the US.

Ed Hochberg, CEO, North America, JLT Re

After making sure people were safe, our priority was ensuring that claims would be paid quickly. So far, the response from the (re)insurance market has been good and I expect that to continue.

It has been the market’s time to shine. Reinsurers have been willing to advance money on a provisional loss basis so there are no cash flow delays.

The market has demonstrated that when there is a crisis it will pay claims on a timely basis – which is, of course, the reason why people buy insurance.

Estimated insured losses

Insured losses from Hurricanes Irma and Harvey are estimated to be between $25 billion and $50 billion, but this is not an all-encompassing number.

There are some elements of loss that aren’t included in the figure, such as marine losses from pleasure craft, as well as the significant potential for demand surge.

Add on Maria’s impact on Puerto Rico, which is estimated at $20 billion to $30 billion (or more), and the accumulated hurricane losses can certainly now be characterized as ‘substantial’.

However, the (re)insurance market was over-capitalized to the tune of $60 billion before the storms hit, with another $20 billion in cat premiums on top.

If there was a significant pricing correction I would be very surprised. That said, with the cumulative effect of catastrophes, as well as challenges in other lines of business, we could be in for a transitional market.

In Florida, the companies there were prepared for a hurricane of at least the size of Irma, although there could be a more traumatic effect if further storms hit.

The homeowners market in Florida has a very large share of approximately 50 insurance specialists that are relatively small.

They are heavily dependent on (re)insurance and within that there is a big share taken by what I call the alternative market, or ILS funds.

Overall, I think the market will absorb the losses and respond well, but there will be elements of the market where there will be a correction.

The D&F and binders markets could take a disproportionate hit and there could be some capacity retrenchment; moreover, the retrocessional market, dominated by ILS players, may be taken by surprise by the magnitude of the losses (with Maria tacked on).

The effect of such retrenchment could last a couple of years in terms of pricing and conditions. There could be a ripple effect in the rest of the market, but the extent remains to be seen.

Impact of Hurricanes Harvey, Irma, and Maria

A potential challenge for the industry in assessing losses is that the wide-reaching impact of Hurricanes Harvey, Irma, and Maria is bound to cause some supply and demand issues around building materials, contractors and claims adjusters. This demand surge is hard to pick up on in loss modeling.

The losses from Irma weren’t as bad as projected but it caused damage to the vast majority of the state of Florida and some parts of Georgia.

This means the sheer number of claims will be large and that is going to cause problems.

Furthermore, there are clearly difficulties in even assessing the impact of Maria, with loss estimates ranging from $20 billion to an eye-watering $85 billion.

Some people have said these hurricanes are proof of climate change and could result in changes to modeling. But this is a macro issue and trying to apply it at a micro level can be tricky.

It will be interesting to see what persuasive evidence of short and long-term climate change arises, how that could affect the intensity and frequency of hurricanes, and how modeling firms respond.

Please contact Ed Hochberg on +1 215 309 4520 or ed.hochberg@jltre.com

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