Bermuda: The outcome of Irma

While Hurricane Irma will be remembered as one of the strongest storms recorded in the Atlantic Ocean, it will also test the infrastructure and financial wherewithal of some insurers doing business in Florida, particularly newcomers and those with geographic concentration (Table 1).

Florida had benefited from a long period of relatively calm tropical storm activity until 2016, when it faced hurricanes Hermine and Matthew. These hurricanes were a stark reminder of the potential loss exposures in Florida’s property and casualty market. For several newer companies that have written significant amounts of Florida premium, Irma will be the first severe event to test the strength of their business models, or more precisely their risk selection and loss mitigation.

AM Best has determined the premium growth and market share of Florida insurers that have incorporated since 2007. While national carriers still hold material market positions, newer companies have grown to represent nearly a fifth of the market—growth that is not without risk. Many of these carriers have not been subject to a storm as intense as Irma, and their reinsurance programmes have not yet been truly tested. Irma will check the ability of Florida’s newer local/regional writers to mitigate catastrophe risks through appropriate reinsurance channels. While loss estimates are still being developed, companies with narrower profiles are more likely to experience larger swings in operating performance owing to severe weather events than national carriers. Irma may have a greater impact on operating results for the concentrated insurers; however, AM Best expects total losses to be within established catastrophe reinsurance limits for the majority of rated entities.

AOBs

Although the weather had been relatively favourable until the recent hurricanes, the market has been subject to other performance constraints, most recently Assignment of Benefits (AOB) issues. Simply put, the industry has experienced an increase in the frequency and severity of litigated water claims. The increase can be traced back to insureds assigning benefits to third-party contractors who have allegedly been inflating costs and taking advantage of the court-supported one-way attorneys’ fee rule in Florida. Performance has deteriorated in recent years due in large part to this issue. Given the state of the market, Irma has the potential to amplify AOB issues.

The majority of the AM Best-rated reinsurers will incur notable losses from this event, although the ultimate impact will depend on, among other factors, cedants’ retention levels, as well as the amount of losses absorbed by the capital and collateralised markets. AM Best has conducted a number of scenario tests and determined that initial loss estimates from Irma would have only a limited impact on the reinsurance sector’s capital. However, those reinsurers that have historically specialised in property catastrophe reinsurance or are more US-centric and have maintained their risk appetites for Florida and Caribbean property catastrophe risks are likely to be more disproportionately impacted by these losses than are peers with greater geographic diversification.

Market capacity

Renaissance Re, Everest Re, Validus Re, and Lloyd’s have historically committed significant amounts of capacity to this market. However, over the past few years, the vast majority of the reinsurers rated by AM Best have pulled back their capacity or increased their use of retrocessional capacity—much of it in the form of capital market vehicles—to minimise their exposures, given the deterioration in pricing conditions for the property catastrophe market.

AM Best expects Irma to be more of an earnings event for AM Best-rated reinsurers, given that balance sheets are extremely strong and have been stress-tested sufficiently to absorb extreme losses. There has been some speculation that pricing may harden, but it may be premature to come to this conclusion until losses for Irma, Harvey, and any other events fully materialise.

Yet with hardship comes opportunity. Although the aftermath of Hurricane Irma may be bleak for some, particularly overexposed companies with earnings and potential capital concerns, it will present opportunities for others. An insurer with a sound business model and strategy that can effectively navigate the storm may attract displaced insureds.

Additionally, smaller or struggling companies may opt to pursue mergers and acquisitions, already occurring in the current market.

Hurricane Irma may also force insurers to rethink their risk selection/appetites and reinsurance purchases. The storm could prompt some concentrated companies to increase their focus and efforts on diversifying outside Florida, while others may revamp products to more desirable coverages. A market filled with new participants may yield a variable number of responses, as insurers hone their strategies and learn from the event.

As the industry and insurance companies become hurricane weary, it should be noted that the hurricane season remains active through November and post-event exposures remain ever-present.

This article is an excerpt from a Best’s Briefing Hurricane Irma Tests Newer Participants in Florida’s Market.

Chris Draghi is a financial analyst at AM Best. He can be reached at: chris.draghi@ambest.com
Michelle Baurkot is a director at AM Best. She can be reached at: michelle.baurkot@ambest.com