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Harvey insured loss within insurers’ retentions but could erode NFIP’s reinsurance program: Fitch

31st August 2017 - Author: Luke Gallin

Fitch Ratings has said that hurricane Harvey is unlikely to result in any ratings downgrades of property/casualty re/insurers as the storm is expected to be an earnings event, and while the insured loss is likely to fall within insurers’ retentions, the storm could wipe out the National Flood Insurance Program’s (NFIP) reinsurance program.

Hurricane Harvey flooding in Houston

Hurricane Harvey flooding in Houston – Photo from ABC News

Fitch expects the majority of the economic loss from Harvey to be uninsured or covered by the NFIP, owing to much of the loss coming from flood-related damage other than wind-related damage. Typically, insurers that Fitch rates have strong capital positions and their ratings incorporate an expectation of some cat losses, says Fitch.

For reinsurance companies, Fitch expects that the insured loss from the storm will fall within primary players retention levels under catastrophe programs, with perhaps a small portion transferred to reinsurers.

However, the event is expected to result in a meaningful loss for the NFIP, despite many homes in the counties impacted by Harvey not having flood insurance. The NFIP placed a significant reinsurance program at the start of this year, ceding $1.042 billion of risk to global reinsurers and Lloyd’s of London syndicates, so losses are expected here.

“Given the magnitude of Harvey flooding, reinsurers providing the NFIP with flood reinsurance protection (26% of NFIP losses between $4 billion and $8 billion) could suffer a total loss. However, as there are 25 carriers on the program, the loss should be manageable for each reinsurer,” explains Fitch.

Furthermore, Fitch underlines that catastrophe losses in the first-half of the year for the reinsurance sector were below average, meaning firms will be able to better absorb any impact from Harvey.

Fitch expects the majority of the insurance industry loss from the event to be more weighted to commercial lines than seen with past hurricanes, owing to a huge number of expected commercial flood and business interruption losses, which are covered.

“Flooding from Harvey has led to closures of broad transportation networks and numerous office and manufacturing facilities in the Houston area that will last for an indeterminate period, and property damage and lost business income will take some time to estimate. Coverage terms and the means for calculating losses from BI and contingent BI claims can vary across policies, and entail a lengthy settlement process,” explains Fitch.

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