Standard & Poor’s Ratings Services has issued a comment on the state of the U.S. property/casualty insurance industry and its short- and intermediate-term prospects in the wake of Hurricane Jeanne, the fourth hurricane to strike Florida this season.
“The insured loss estimates for Hurricane Jeanne appear to be averaging about $7 billion,” said S&P. “These, combined with the estimated insured losses from the three earlier storms, would give a total insured loss from all hurricanes this season in the low $20 billions. In real terms, this approaches the loss from Hurricane Andrew in 1992.”
The rating agency said, however, that at this point it doesn’t have concerns about the solvency of any of the P/C insurers that it rates interactively. “Certainly, most companies’ earnings will be adversely affected by the storms, with anywhere from one quarter’s to one year’s earnings being absorbed by the losses,” stated S&P credit analyst Thomas Upton. “Companies’ longer-term financial strength could eventually be diminished by the consequences of the storms, necessitating changes in their assigned ratings, but Standard & Poor’s expects that these changes will be modest and will be exceptions rather than the rule.”
S&P observed that overall, “companies have withstood the effects of this series of storms without major adverse consequences for their financial strength for two reasons. First, the state-sponsored Florida Hurricane Catastrophe Fund has proven to be quite resilient in its ability to absorb a large part of the insured losses. Second, individual companies–both primary writers and reinsurers–have become much more adept at catastrophe risk management than they were in the early 1990s.”
That’s the upside. The downside is S&P’s expectation that “the consolidated magnitude of this series of storms is such that there will be issues that the industry and its regulators will have to deal with soon.” It listed its concerns as follows:
— Apart from insured losses themselves, companies might find that the sheer number of claims arising out of these storms, sometimes with multiple claims on individual properties, will test the capacity of the industry to manage this aspect of its business.
— Property catastrophe reinsurers could revisit the frequency assumptions built into the models that they use to forecast property losses. Although the insured losses borne by such insurers in this series of storms has been relatively small, thereby partially validating the analysis that they’ve done in the past, the occurrence of such an event is bound to provoke reconsideration. Similarly, primary carriers will be more sensitive when structuring their reinsurance programs to protecting themselves from multiple events in a single year.
— Large national property casualty writers that have not already done so might choose to follow the examples of State Farm and Allstate, creating separate Florida subsidiaries to segregate the risk of hurricanes from the rest of their business.
— Part of companies’ risk-management protection against high frequency of events was the maintenance of relatively high deductibles on property losses under homeowners policies. In effect, the risk was managed by putting it back on the policyholder. As the realization of this sets in, regulators will be pressed to find ways to provide relief to consumers in the future.
— Policyholders could be subject to pass-through assessments from Citizens Property Insurance Corp. (which insures high-risk homes not accepted by commercial insurers) and possibly from the Florida Hurricane Catastrophe Fund. Such assessments are subject to annual limits, but homeowners could face assessments of up to 10 percent for one or more years.”