According to S&P Global Ratings, global reinsurers will be significantly exposed to the damage caused by Hurricane Ian in Florida, which could reach $40 billion. Despite this, analysts expect losses to remain within annual catastrophe budgets.
Hurricane Ian made landfall in the Fort Myers metro area of southwest Florida on September 28th as a Category 4 storm with wind speeds of up to 155 mph–nearly a Category 5 storm.
The track of the storm through the state appears similar to that of Hurricane Charley, analysts noted, which made landfall at Punta Gorda in August 2004 and caused around $7 billion of insured losses at the time.
As Ian’s footprint is much larger and the progress of the storm is much slower, wind damage will be more widespread and water damage from rainfall and storm surge more severe. Estimates of storm surge were up to 12-18 feet, compared with estimates of 6-8 feet for Hurricane Charley.
Early pre-landfall estimates of insured losses from Hurricane Ian ranged from $15 billion to $40 billion. S&P Global Ratings’ current expectation is that the insured losses will be closer to the high end of this range.
Wind damage, storm surge, and water damage from heavy rainfall will cause major losses for residential and commercial property insurers and, to a lesser extent, for auto insurers. According to the agency, insurers are well positioned to absorb these losses.
Catastrophe risk modelling company, Karen Clark & Company, expects Ian’s impact in the US will drive a privately insured loss of around $63 billion, with the majority of that coming from Florida.
S&P Global Ratings data and loss estimates used in their report ‘Insured Losses From Hurricane Ian Will Likely Be Substantial But Manageable‘ are also only for Florida.
The report highlighted that the state’s insurance market has a unique characteristic, where much of the residential property exposure is written by smaller local insurers who are heavily reliant on reinsurance.
Historically, the top 21 global reinsurers have had an average market share of global insured catastrophe losses of about 20%, S&P Global Ratings analysts explained. Florida’s market uniqueness makes it likely that the share of insured losses from Ian assumed by reinsurers and alternative capital will be above this average.
Additionally, Florida is considered a peak zone for property catastrophe risk, and reinsurers have used alternative capital to manage their exposure. Therefore, the agency believes that alternative capital will assume some of these losses.
S&P Global Ratings said: “At this stage, we believe the impact from Hurricane Ian, coupled with reported catastrophe losses in the first six months of 2022, could still be within reinsurers’ catastrophe budgets.
“Even if the hurricane creates insured losses close to $40 billion, the sector would be broadly within its annual catastrophe budget. The combined earnings ($22.5 billion) and catastrophe budget ($15.5 billion) create a buffer of $38 billion before catastrophe losses would hit the sector’s capital.”
However, the catastrophe budget buffers are likely to be fully utilised or exceeded by the end of the year, analysts pointed out.
They added: “The global reinsurance industry has a poor track record when it comes to earning its cost of capital (defined as the weighted average cost of capital). Reinsurers have failed to surpass this hurdle in the past five years (2017-2021) except 2019, and 2022 looks set to continue this trend. As a result, our view of the global reinsurance sector remains negative.”
Additionally, S&P Global Ratings expects Ian’s losses for the US. P/C and global reinsurance sectors will accelerate the firming of property rates in 2023.
The agency concluded: “We will closely monitor the loss impact, and we could take rating actions if our base-case capital and earnings assumptions are not met. But at this stage, we expect Hurricane Ian to be largely contained within annual natural catastrophe budgets.”