Ian unlikely to submerge reinsurance towers: KBRA
Hurricane Ian is unlikely to shoot past the upper limits of most reinsurance programmes for primary insurers with Florida exposure, ratings agency KBRA said in a research note titled, “Hurricane Ian impacts material but manageable for insurers”.
At a minimum, all insurers with exposure in the affected areas will experience at least an earnings impact and, depending on the ultimate magnitude of losses, may also incur a capital impact as well. It appears that gross losses so far will remain well within the upper limits of most individual company reinsurance programmes, KBRA said.
Hurricane Ian-related losses will inject further disruption, it added, to an already challenging 1/1 renewal season and add further uncertainty to Florida’s June 2023 renewals. The near-term impacts to KBRA-rated entities are expected to be “manageable”, but medium to longer-term concerns for the industry overall continue to increase; particularly in the wake of increased balance sheet pressures caused by market volatility.
While not directly comparable due to differences in measurement scope, some estimates of economic damage are as high as $100 billion, including uninsured properties, damage to infrastructure, and other cleanup and recovery costs, KBRA said.
Industry experts at the American Property Casualty Insurance Association annual meeting held in early October noted that, at a minimum, Hurricane Ian will be an earnings event. Additionally, the storm could be a capital event for reinsurers as well, depending on the magnitude of the loss. Aon recently reported that global reinsurer capital declined 11%, or $75 billion, to $600 billion in the first half of 2022, primarily driven by substantial unrealized losses on investment portfolios.
KBRA previously noted that several prominent reinsurers announced plans to exit or significantly reduce their exposure to the property catastrophe market, including Axis Capital, Everest Re, Markel, and SCOR. The few reinsurers to increase writings in property/casualty have focused more on casualty lines.
The KBRA report continued: “Hurricane Ian will further complicate the upcoming 1/1 reinsurance renewal season which was already challenged by supply and demand issues, persistent inflation, increased cat losses, asset write-downs, and pullback from the insurance-linked securities (ILS) market. The negative impacts from Ian may further constrain capacity and contribute to further increases in prices to the detriment of reinsurance purchasers looking to reduce retentions and buy more coverage at the top of their cat towers.”
KBRA believes its rated insurers have appropriate cat reinsurance coverage in place and it is not aware of any instances where losses are expected to exceed the top layers of coverage. Every company with material exposure to Hurricane Ian is expected to take a full retention loss, it added, and, in many cases, up to the same amount in reinstatement premium. In KBRA’s rated universe, net retentions as a percentage of policyholder surplus range from 5.6 percent to 31.7 percent with a median of 13.3 percent, while current loss estimates as a percentage of the first event tower range from 30 percent to 69 percent.
“Insurers’ responses to this event remain consistent with their cat plans and are being executed accordingly,” KBRA said. “In contrast to some prior major hurricane events, insurers are not reporting any significant issues with availability of adjusters. The wind (covered by homeowners’ insurance) versus flood (not typically covered by homeowners’ insurance) component impacts
will be challenging to sort out and the debate is expected to contribute to elevated levels of litigation. KBRA-rated insurers who offer private flood insurance in Florida cede most of their exposures to other third parties, leading to low levels of exposure on their balance sheets.”
The analysis concludes that industry loss estimates are wide-ranging, partly due to potential impacts from litigation and inflation, which are “unpredictable and difficult to accurately quantify”.
“Hurricane Ian will certainly cause an earnings impact to insurers with property exposures to the storm. Reinsurance pricing and availability will also be impacted, to the detriment of an already struggling Florida market. While KBRA expects near-term impacts to its rated entities with Stable Outlooks to be minimal, companies currently on Ratings Watch or a Negative Outlook have a higher potential for a rating downgrade. As such, KBRA will continue to monitor how losses develop overtime.”