Cat capacity crunch in focus as hurricane Ian nears Florida coast

The ability of the global insurance and reinsurance industry to shoulder catastrophe risk is being called into serious question as hurricane Ian heads towards the west coast of Florida and appears to be strengthening from Category 3 to Category 4. The hurricane raged through Cuba on Tuesday with winds of up to 125mph. Late Tuesday night, the US National Hurricane Centre (NHC) issued its latest warning as the hurricane was located about 100 miles southwest of Naples, Florida, with maximum sustained winds of 120mph. “Ian [is] expected to cause life-threatening storm surge, catastrophic winds and flooding in the Florida peninsula… storm surge warning issued for the lower Florida Keys,” stated the NHC at 12:30am (Eastern Time) on Wednesday 28 September. At that point, the hurricane was moving at 10mph (17 km). The hurricane coincides with catastrophe reinsurance capacity drying up in the face of mounting losses and fears over spiralling potential exposures. Florida has a particular capacity crunch problem and at the end of July, the state, through the Florida Office of Insurance Regulation (OIR), was forced to intervene to ensure that homeowners could secure some kind of coverage. Credit ratings agency AM Best said hurricane Ian will be the first test of Florida’s newly-created reinsurance programme. Chris Draghi, associate director of AM Best, said: “In a hardened reinsurance market where capacity and the cost of coverage have been significantly altered, hurricane Ian could add to the capital pressure faced by those insurers that are thinly capitalised and have not been able to secure appropriate reinsurance.” The agency explained that the Reinsurance to Assist Policyholders programme followed a special session in May to provide $2bn of coverage for hurricane losses to insurers that otherwise might not be able to buy it in the private market. AM Best said this reinsurance programme will come under pressure if hurricane Ian hits densely populated areas such as the Tampa/St Petersburg area, where homes are larger and the insured value per home is higher. “Property insurance in Florida is already a tough market and this impending hurricane looks set to make conditions only more demanding,” said Christopher Graham, senior industry analyst at AM Best. “Reinsurance rates are already increasing and a catastrophic hurricane will likely put more pressure on reinsurers to raise rates.” The agency said insured losses from hurricane Andrew, which made landfall in 1992 as a Category 5 storm in south Florida, totalled $15.5bn, which in today’s money would be approximately $30bn. Insured losses from a landfall in the populous area around the city could match losses from hurricane Andrew, it added. AM Best pointed out that the reinsurance programme’s $2bn coverage limit is for all participants in aggregate. There are some important exclusions and limitations, including a limit on loss adjustment expenses to 10% of the reimbursed value – an important limit given that in Florida, defence and cost-containment expenses alone have been approximately 12% of losses. “Insurers concentrated in Florida, or those writing at least 20% of gross written premium in the state, have been greatly affected by major hurricanes. The overall property loss ratio for this population spiked to 72% with hurricane Irma in 2017, and was higher than 60% when hurricane Michael hit a much less populated area in 2018. In total, these hurricanes also led to a drop of nearly 20% in policyholders’ surplus, limiting those insurers’ ability to cover future events,” the ratings agency explained. “Of the companies writing solely within Florida and writing at least $20m in premium, more than 80% of that premium is in the homeowners or farmowners line of business. Many of these insurers have a high premium-to-surplus ratio and depend heavily on reinsurance, including the new state-run programme.” Draghi added: “Although the reinsurance programme provides some capital insulation, it is not expected to make insurers’ programmes completely whole, as compared to protection purchased in prior years.” The impending arrival of hurricane Ian in Florida will bolster the resolve of international reinsurers to further limit their catastrophe exposure during key discussions at the Baden Baden gathering of insurers and reinsurers next month. The primary insurance market is already feeling the impact while corporate risk and insurance managers are increasingly concerned about the future availability of adequate catastrophe insurance protection. The Federation of European Risk Management Associations (Ferma) recently stressed this point in its response to the European Insurance & Occupational Pensions Authority’s (Eiopa) consultation on rising exclusions for systemic risks. Ferma stated: “Regarding evidence on coverage disappearing, Amrae (Ferma member in France) found in a survey conducted with AXA Climate in 2021 that some 61% of risk managers believe that some of their business locations or activities may become uninsurable in the future (due to climate factors).” Inevitably, the ongoing capacity crunch for critical systemic risks including catastrophe/climate risk, pandemics and cyber will lead to further calls for public-private partnership and state backing to help plug the gaps, which will be discussed at the Ferma Forum in Copenhagen on 9-11 October. Limited appetite among insurers and reinsurers for such risks was underlined in Insurance Europe’s comments on Eiopa’s supervisory statement of exclusions, as it stated: “Risk monitoring is an essential part of insurance business, and insurers are constantly investing in research into new risks, but there are limits to what can be insured, especially in global, interconnected markets. “Beyond risk monitoring by insurers, state interventions in terms of risk mitigation and prevention in specific areas related to systemic events (eg climate change, pandemic crises) is key. Public-private partnerships can also be important to build up resilience to certain risks.” German insurance association GDV went a step further as it stated: “Insurance is not a universal right to unlimited compensation. Against the background of the requirements of the Solvency II Directive – namely to ensure the financial stability of insurance companies in order to protect the customers – risk-based calculations and risk exclusions are necessary. Without that, many risks would be uninsurable or insurers would become insolvent after major events. The insurance industry experienced something like this after the 1906 San Francisco earthquake, when more than a dozen insurers became insolvent.”

Cat capacity crunch in focus as hurricane Ian nears Florida coast

AM Best says more thinly capitalised insurers under pressure

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