Traditional reinsurers and insurance-linked securities (ILS) markets are expected to experience only modest levels of losses from Hurricane Florence, with the majority likely to be absorbed by the National Flood Insurance Program (NFIP), according to Fitch Ratings.
Florence weakened to a Category 1 hurricane as it approached the U.S coast last week, resulting in low levels of wind damage but significant flooding as the slow-moving storm inundated areas of North and South Carolina with up to 40 inches of rain and 10-foot storm surges over a period of several days.
Fitch said it expects flood damage to contribute significantly to overall losses, but noted that insured losses from water related claims are likely to be almost entirely assumed by the NFIP, as standard U.S homeowners’ insurance policies typically do not cover the peril.
Whilst private flood insurance carriers and auto insurance writers may also be exposed to some losses, the private market for flood insurance in the U.S is limited to a handful of surplus lines writers, admitted companies, and Lloyd’s of London syndicates.
Additionally, Fitch noted that a significant portion of total flood related losses will likely be uninsured as the take up rate for flood insurance in the affected counties is relatively low, particularly for inland areas that are not typically considered at high risk.
While it remains difficult to surmise the extent of the damages, current estimates put insured losses from Florence at between $1.7 billion and $4.6 billion according to AIR Worldwide, between $3.0 billion and $5.0 billion according to CoreLogic, and at $2.5 billion according to Karen Clark and Co.
Fitch said that it expects flood losses to lead to a material event for the NFIP, as the states most affected by Florence – North Carolina, South Carolina and Virginia – are each among the organisation’s top 10 largest exposures by policies in force.
If NFIP losses exceed $4 billion then its $1.46 billion reinsurance program will trigger, covering 18.6% of losses between $4 billion and $6 billion and 54.3% of losses between $6 billion and $10 billion.
If the flood damage from Florence does breach the attachment level, it would be the second consecutive year that the NFIP utilised its reinsurance program, as it recovered its entire $1.042 billion layer of coverage in 2017, largely as a result of losses from Hurricane Harvey.
Fitch also said that it will continue to closely watch the FloodSmart Re 2018-1 catastrophe bond that was issued by the NFIP in August 2018, which will provide the organisation with $500 million of third-party collateralised limit if flood losses exceed $5 billion.