How could the 2018 hurricane season impact P&C insurers?

In good news for the U.S., updated forecasts for the 2018 hurricane season suggest hurricane activity will be average, based on current weather patterns in the Atlantic Ocean — despite Subtropical Storm Alberto, which made landfall on the Florida Panhandle on May 28. But what does that mean for property & casualty insurers in terms of profitability?

According to Fitch Ratings’ annual hurricane season preview report, the outlook isn’t too bad.

“Significant property losses in 2017 will lead to higher premium rates in loss-affected primary market segments,” said Christopher Grimes, director at Fitch Ratings in a statement. “Market pricing data indicates that the soft market appears to have finally reached a bottom with rate increases seen in most lines, particularly commercial property and property catastrophe reinsurance business.”

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Pricing improvements may ultimately prove short-lived, however, as the level of rate increases achieved are falling below underwriter expectations and competitive market dynamics are unchanged.

Despite the number of hurricanes and resulting losses in 2017, demand for insurance linked securities (ILS) and catastrophe bonds remained strong in the first five months of 2018, the report says. Nearly $3.6 billion of bonds exposed to named storms have already been issued this year, with U.S. wind risk still the leading peril.

Related: Top 10 states at risk of hurricane storm surge damage in 2018

Florida specialists impact on market

Florida specialist homeowners writers — defined as insurers with greater than 50% of their statutory direct written premium in Florida homeowners insurance that are not a subsidiary of a large national company — reported net insured losses that were largely passed to the reinsurance sector and alternative capital investors.

The Florida specialists, which rely heavily on the use of reinsurance programs, reported that gross losses were well within limits of their respective 2017–2018 reinsurance programs. The report found that these Florida specialists ceded more than 50% of homeowners direct written premiums to external reinsurers in 2017, compared with approximately 10% of all homeowners writings for the P&C industry in aggregate.

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Five of the 10 largest direct writers of Florida homeowners business are in the Florida specialist group and are subsidiaries of public holding companies:

• Universal Insurance Holdings, Inc.
• Heritage Insurance Holdings, Inc.
• Federated National Holding Corp.
• United Insurance Holdings Corp.
• HCI Group Inc.

Even with the losses from Hurricane Irma in 2017, the Florida market has considerable resources to meet losses from hurricanes that may strike in 2018, Fitch says.

Related: 4 ways for businesses to prepare for another active hurricane season

Challenges to pricing

The report notes that pricing on homeowners property risks in Florida continues to increase, but not as a direct result of catastrophe loss activity. Accusations of fraud and abuse of assignment of benefits clauses and the proliferation of non-wind, water-related claims (specifically litigated claims) led many property insurers to push for rate increases. Price increases may still not be enough to reflect the catastrophe risk faced by property writers in the state, the report says.

April 2018 renewals suggest that the improved pricing environment will be short-lived. “The reality of the reinsurance market is that alternative capital competes directly with traditional capital, which limits the extent of cyclical price changes following severe catastrophe-loss years,” said Senior Director Brian Schneider in a statement.

Fitch expects property reinsurance pricing at the June/July 2018 renewals to be flat to slightly higher, but only in the mid-single digits, as surplus capacity continues to damp premium rate increases.

The report also lists the top 10 insurers by direct written premium for 18 coastal states in both personal and commercial property insurance. These statistics provide a way to assess an individual insurer’s potential exposure to a major storm well in advance of any loss estimates.

The report, “U.S. Hurricane Season 2018: A Desk Reference for Insurance Investors,” which is available on the Fitch Ratings website, provides analysis on potential effects of a major storm season on large insurance companies based on direct premium property insurance market share by state, and the industry as a whole.