Rating agency KBRA said hurricane Harvey could surpass Katrina losses, as extensive flood damage devastates Houston and commercial and business interruption losses tally up over time, although the event is not expected to materially impact P&C insurers in the region.
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While Hurricane Katrina caused the National Flood Insurance Program (NFIP) to payout $U.S. 16.3 billion in flood insurance losses in Louisiana and Mississippi, in Harris County alone, the NFIP has 240,000 policies with $60 billion in exposure.
The NFIP, which has a total reinsurance programme capacity of $1.024 billion, could be pushed to its maximum payout limit as a result of Harvey flood damage, some experts have claimed this could lead to a reform of the programme, KBRA commented that it’s “unclear what happens if Hurricane Harvey pushes the NFIP over their $30 billion borrowing limit.”
KBRA echoes other re/insurance experts in stating that Harvey impact on the overall industry will be modest, with no significant changes to the overall U.S. property casualty (P/C) insurance market.
The agency doesn’t anticipate negative rating actions, as the P&C insurance market is adequately positioned to absorb losses, given current capitalization levels and loss estimates.
Harvey comes after U.S. P&C insurers have enjoyed years of low levels of catastrophe losses, driving favourable earnings and surplus growth, and resulting in a record high $709 surplus in 2017 Q1.
A material impact in the P&C insurance industry would need an aggregate loss of at least $100 billion, or a 10% surplus decline, according to the rating agency.
“A loss of this magnitude would return surplus to levels in late 2013, as the industry has averaged more than $50 billion annually in after tax net income from 2013 through 2016. Taking into account this overall level of capitalization and initial loss estimates, KBRA does not believe Hurricane Harvey will affect the overall financial strength of the P/C industry,” the report said.
However, costs to re/insurers are expected to escalate over time as business interruption costs increase: the Texas coastal region plays an important economic role, with the Houston metropolitan statistical area alone responsible for $503.3 billion in gross domestic product (GDP) in 2015.
Therefore the scope of Harvey’s business interruption and commercial property losses costs could snowball considerably.
Carriers with strong balance sheets, conservative premium to surplus levels and strong reinsurance programmes are well-positioned to manage Harvey’s impact, however, regional insurers with exposure concentrations and less reinsurance programmes could be vulnerable to losses.
And with the hurricane season still active and three months remaining in the 2017 season, KBRA noted; “a second material event could further highlight strong and weak reinsurance programs.
“If a second meaningful event were to make landfall in the remaining three months, the structure of catastrophe reinsurance programs could play a critical role in avoiding surplus declines.”
