A.M. Best Warns on Hurricane Maria Impact on Caribbean/Puerto Rican Insurers

September 20, 2017

Many insurers and reinsurers in the Caribbean and in Puerto Rico will be tested as they brace for Hurricane Maria, the second hurricane to hit the region in two weeks, according to ratings agency A.M. Best.

Hurricane Maria could be a financial challenge for some carriers with concentrations of property risk in the Caribbean, particularly those carriers that have already been dealing with losses from Hurricane Irma and late-2016’s Hurricane Matthew.

Category 5 Hurricane Maria could could hit areas with higher insured values. Also areas that already have sustained damages due to Hurricane Irma may suffer further damage, which would lead to concerns about which event was responsible for which damage, A.M. Best warned in a briefing.

In addition, A.M. Best warned that reinsurance limits after Hurricane Irma need to be reinstated, and although most companies have automatic reinstatement coverage to protect against a second event, not all companies are prepared to cover a third.

According to the briefing, many catastrophe reinsurance contracts also feature profit-sharing provisions, whereby a percentage of underwriting profit is returned back to the ceding company. Several companies with exposures to Hurricane Irma have already lost millions of dollars in profit commissions due to last year’s Hurricane Matthew, and likely will lose millions more as a result of hurricanes this year.

Finally, the growing frequency of severe hurricanes in the Caribbean could result in higher reinsurance costs when contracts are negotiated next year, according to the ratings agency

Although Hurricane Irma spared Puerto Rico from a direct blow, the U.S. territory currently sits directly in the path of Hurricane Maria. The island’s property/casualty insurers, like their Caribbean counterparts, have generally modest retentions relative to surplus. In addition, most have significant vertical protection for a severe event. However, Hurricane Maria does not appear to be a typical modeled event and could generate outsized losses.

The briefing notes that Hurricane Irma did not breach a majority of the insurance companies’ net catastrophe reinsurance limits, and so most insurance companies covering Puerto Rico have not faced reinstatement protection premium charges, and, unlike their Caribbean counterparts, have not faced significant infrastructure challenges as a result of Hurricane Irma.

A.M. Best said it is monitoring the effects of these storms on its rated insurers and cautions that a continuation of such extraordinary hurricane activity could exact pressure on Credit Ratings.

Source: A.M. Best Briefing: Hurricane Maria Could Test Financial Strength of Caribbean/Puerto Rican Insurers

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