Floridian carriers and their reinsurers will avoid the worst-case Hurricane Ian scenario as the storm sidesteps the densely populated and high-value Tampa Bay area.
But even as a medium-sized loss event it will heavily impact vulnerable parts of the industry, with Florida homeowners’ insurers prone to insolvency, cat reinsurers plagued by poor underwriting performance and the retro market strained.
While the track has become more favourable to the industry over the last 24 hours, projected windspeeds have risen, which will have an offsetting effect.
Ian is due to make landfall on the west coast of Florida at around 14:00 ET near Port Charlotte.
As of the National Hurricane Center’s 12:00 ET update, Ian was producing maximum sustained winds of 155 mph, placing it just shy of Cat-5 strength, with rapid weakening expected once the storm comes ashore.
Had Ian struck Tampa fully, the impact of the storm could have been huge, with some early predictions of a $50bn+ insured loss due to the area’s dense population, high residential property values and plentiful commercial assets.
The more southerly course of the hurricane, however, will still produce a loss event easily large enough to hit the reinsurance market meaningfully and to disrupt retro markets.
Ian will strike after one of the toughest summer renewals in living memory for Florida and will be the first test of legal reforms and state intervention introduced only months ago to keep the market afloat.
The storm, though not as impactful for the sector as previously feared, also comes amid a sea-change in the perception of property cat risk, with global reinsurers adjusting their appetite for the business in the wake of five years of elevated cat losses.
Q3 will be a messy quarter for reinsurers, as losses from Ian clash with billions of dollars of creep on the summer’s French hail losses and some ceded losses from the $2bn-$3bn Typhoon Nanmadol.
With the hurricane yet to make landfall, it is important to note that there are still major uncertainties regarding its impact. Below, we have gathered what we know so far about the likely effects on the domestic, direct and facultative (D&F), reinsurance and retrocession markets.
The nature of the storm
Projections as late as early Tuesday had the storm with a near direct hit on the Tampa Bay area, which was of greater concern across the industry given the area’s population and property density.
Since the latest track shows Ian skirting Tampa and making landfall closer to Port Charlotte, the worst-case scenario has been avoided.
That said, Ian is still expected to cause “catastrophic storm surge, winds and flooding in the Florida peninsula”, according to the NHC.
Winds of 155 mph, which class Ian as Cat 4, could wreck homes and power lines. Storm surge could go as high as 18 feet in some areas, swallowing coastal homes. Rain is expected to cause flooding across the state.
Quantum
There is not enough solid information in the public domain to give a loss estimate with any real degree of confidence at this stage.
However, triangulating between model outputs, historical analogues and the judgment of seasoned market sources suggests a starting point around the $20bn-$30bn mark.
As is typical at this stage of an event there is significant divergence in views and a great deal of reticence around being pinned to a number.
Some sources pointed to the scope for a $40bn+ loss, emphasizing the wetness and slow pace of the storm, the intensification of the windspeeds and the impact of inflationary pressures. One or two sources think the loss will ultimately grind its way to $50bn. Some sources have suggested a sub-$20bn loss is still a possibility – further emphasizing the degree of uncertainty at this early stage.
Karen Clark & Company yesterday issued a pre-landfall number of $32.5bn based on the (less favourable) storm track at that point. Another modelling firm has issued an indicative event set which spans $20bn-$64bn.
Early loss estimates have rarely aged well in recent years, with sources frequently under-estimating ultimate losses even as they note underestimates of prior events.
Complicating factors: Inflation, demand surge and reform
While Ian’s path may be similar to Hurricane Charley’s in 2004, the inflationary environment is not the same.
Everything from building materials to labour costs have increased exponentially in the last year alone across the US with Aon’s construction materials price index up 35% compared to pre-pandemic levels. These dynamics will turbocharge typical post-event demand surge.
This will also be the first test of the reforms passed by the Florida legislature in May’s special session.
Not only will insurers have to factor in increased loss adjustment expenses (LAE), but the true test to the market will be the level of litigation activity in Florida.
On the litigation front, the Florida legislature passed laws in the special session that prohibit assignment of the right to obtain attorney fees to anyone other than a named or omnibus insured, or a named beneficiary of the policy.
The purpose of the legislation is to curb the number of third-party lawsuits seen by the courts, but this is when the market will see if it holds true.
Citizens CEO Barry Gilway believes that the legislation will “make an enormous difference”, while other sources are more sceptical and think the legislation hasn’t had enough time to work.
Some sources suggested that even tropical storm force winds impacting the tri-state area in Florida – previously the epicentre of policyholder fraud – could boost losses.
Florida homeowners’ market impact
Florida homeowners’ carriers have already been on the chopping block as the state grapples with downgrades, lack of reinsurance capacity, increased litigation and in some cases, insolvency.
Sources are expecting more insolvencies to come about as carriers realise the full impact of the hurricane season, with some scope for small Florida-specific insurers to go through the top of their programmes.
Even if they do not, they are facing retention losses and reinstatement premiums.
And if these carriers can survive this hurricane season, they will face a pricey if not impossible reinsurance renewal.
The industry specifically has its eyes on United Insurance Holdings (UPC) and Citizens.
UPC is attempting a solvent runoff of its personal lines division in Florida, Texas, Louisiana and New York and recently laid off around 70 employees in its sales and marketing division.
Sources pointed out that the carrier has a heavy concentration of policies in southwest Florida.
Meanwhile, Citizens as the insurer-of-last-resort has taken on a significant number of policies from failed and exited carriers, topping one million policies recently, and bought significantly less reinsurance than in prior years due to the cost.
Reinsurance/retro impact
At a $20bn-plus quantum, Hurricane Ian will be a reinsurance event, given that a $2bn-$4bn residential property loss is enough to bring low-lying Florida cat treaties into play, although at these lower levels much of the ceded loss will pass to the Cat Fund.
With the more southerly track, the event will skew more heavily towards residential losses, increasing the overall share of reinsured losses given that commercial lines cedants run more net.
Wind losses will be picked up by Bermuda, the continental reinsurers, Lloyd’s and ILS, although Bermuda has significantly retrenched its Florida bet as part of the recent Bonfire of Cat Limits.
Sources noted that the predicted storm surges and flooding Ian will bring are generally excluded from primary coverage and that losses of this nature land with the National Flood Insurance Program (NFIP). The reinsurance programme for the NFIP, therefore, is a key point of concern.
The losses for cat treaty underwriters extend the wait for a 2016-type clean year that would allow some credibility to be restored to the loss-hit class.
Reinsurers keep more risk net than in previous years when they had access to Catco, low-lying UNL retro, quota-share and aggregate retro.
Sources have said that there is little to no UNL retro available below $15bn-$20bn, although above this level they will have support.
Reinsurers are typically able to trap retro collateral at a level double their own loss reserve, which would point to capital being trapped up to at least $40bn. This will place further strain on a marketplace where capacity was already scarce and rates were expected to soar, amidst a dearth of capital for fundraising.
Lloyd’s impact: D&F, binders and treaty
The London market has exposure to Ian via the D&F market, property binders and treaty, although Lloyd’s significant Florida presence in the D&F and binders market is smaller now than a few years ago following a period of cat de-risking.
Hiscox, TMK, Canopius, Scor and Hamilton are known to have scaled back on cat recently, but the retreat from peak US cat perils – particularly in property binders where rate adequacy has been slow to achieve – has been widespread.
Ian's forecast storm surge and heavy rainfall make possible widespread D&F losses as it covers both wind and flood. The London market also has specific forced-placed flood binders in Florida.
There are high-net-worth properties, property habitational accounts and commercial property on the southwest coast of Florida, as well as hotels and some power assets.
Sources also noted likely losses stemming from the Floridian municipal accounts, which cover government infrastructure and are heavily written in London.
A slow-moving track over Orlando would also bring the possibility of flood and BI losses from Disney, which buys a significant programme of which London takes a share.
In delegated authority, wholesalers Amwins, CRC and Ryan Specialty have major Florida binders, as do AmRisc and Clearwater. Traditionally these have been supported by London market capacity, although participation has been scaled back recently.
Ian will test how well insured asset valuations have been adjusted for inflation – and sources said this work has been more widely executed in the open market than in delegated authority.
A key factor for Lloyd’s property writers will be how low they buy their reinsurance. Recent hurricanes including Harvey and Laura brought painful net losses after programmes did not attach.
For Lloyd’s as a whole, losses from Hurricane Ian come on top of a £1.1bn estimated loss from the Ukraine conflict for the year. However, given improvements in underlying underwriting profitability following Lloyd’s performance drive, it is unclear whether Ian would be enough to derail underwriting profit for 2022.
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