Today’s report titled, “No Respite For Re/Insurers As Hurricane Irma Prepares To Give A Big Jolt,” from S&P Global Ratings has bad news for insurers and reinsurers alike. Depending on the extent to which Hurricane Irma makes a landfall in Florida, there could be much higher insured losses compared to Hurricane Harvey. As projected by AIR Worldwide, if a Category 5, Andrew-like hurricane were to strike just south of Miami and a little north of the city of Homestead, the total insured losses for Florida could reach upward of $130 billion.

“Strong capitalization will help mitigate the impact, but Irma will likely stress-test not only the re/insurers but also the staying power of third-party capital,” said S&P Global credit analyst Hardeep Manku. “Regional pricing is also likely to harden, but the impact on global re/insurance pricing is debatable,” he added.

While tallying losses to date from Hurricane Harvey, the re/insurance sector is likely to have little respite as Hurricane Irma is shaping up to cause a far greater hit to lives and homes than Hurricane Harvey.

As S&P explains, Florida is one of the peak wind exposure zones for many re/insurers, and third-party capital is significantly involved. Post-Hurricane Andrew, the primary insurers turned to reinsurance to manage risk. Therefore, S&P believes, reinsurers rather than primary insurers will bear the brunt of covered losses. This is different from S&P’s view on Hurricane Harvey, where it’s estimated that primary insurers will retain most of the losses.

With the re/insurers earnings already coping with Hurricane Harvey-related losses, capital will potentially take a hit. And although the ratings are supported by record-high surplus levels, S&P would consider a company that experiences large losses that translate into capital erosion as an outlier that could be subject to a negative rating action.

Nevertheless, S&P cautions, the extent of rating actions will depend on reinsurers’ capital buffers for the current ratings, reinsurers’ earnings power over the next two years, and management’s intent and plan to replenish the capital.

blowing palm trees in the wind

Wind speeds for Hurricane Irma continue to be well over 150 mph as the storm tracks across the Caribbean. By the time it hits Florida, the speeds could be under 100 mph. (Photo: Shutterstock)

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It’s wind and storm surge for Irma

For Hurricane Irma, wind and storm surge are likely to be the primary cause for losses rather than flood-related damage as is the case for Hurricane Harvey, which will affect residential property the most. As a result, S&P expects the difference between insured losses and economic losses to be narrower. S&P also expects losses for personal auto to be less than losses from Harvey because so many Florida residents have evacuated, unlike Hurricane Harvey where many sheltered in place or were unable to leave the affected areas because of the flooding.

Reinsurers will have a significant exposure to potential damages arising from Hurricane Irma, reports S&P, unlike in the case of Hurricane Harvey. Florida wind is considered a peak zone for many reinsurers. These reinsurers provide significant coverage to Citizens Property Insurance Corp. (a not-for-profit government entity, which is the primary insurer of last resort), and to the Florida Hurricane Catastrophe Fund (FHCF).

S&P has observed insurers raise their reinsurance utilization in the past five years, with some buying higher layers for greater severity protection. Therefore, S&P says, the resultant impact for primary insurers will be limited to their net retention layers, with the bulk of the insured losses being transferred to reinsurers, the state catastrophe fund, catastrophe bonds, and similar structures.

And with Hurricane Jose and Hurricane Katia waiting in the wings, insurers and reinsurers as well as property owners are facing a stressful hurricane season.

The report is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to [email protected].

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Rosalie Donlon

Rosalie Donlon is the editor in chief of ALM's insurance and tax publications, including NU Property & Casualty magazine and NU PropertyCasualty360.com. You can contact her at [email protected].