Global reinsurance rates are likely to remain low despite Hurricane Harvey’s ruthless battering of parts of Texas and Louisiana over the past week, according to global ratings firm Fitch.
The main differentiator between Harvey and other devastating US storms is the amount of flood damage Harvey has inflicted. This has had considerable impact on economic and insured loss estimates.
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“Hurricane Harvey is mainly a flood event with more limited impact from wind,” said Graham Coutts (pictured), director, insurance, Fitch Ratings Ltd. “In terms of wind losses, you’re probably talking low single-digit billions – maybe something similar to what we saw with Hurricane Matthew last year, so that’s not a big impact. The flood event is huge – 27 trillion gallons of water, compared to Katrina which had about 6.5 trillion gallons.
“We have been looking at the early indications on the size of the loss. Hurricane Sandy’s economic loss was around $70 billion and insured loss was around $30 billion. Hurricane Katrina’s economic loss was around $175 billion, with an insured loss of $70 billion. So where does Harvey fit in with that? We’re not sure at the moment. It’s still early days but you would certainly expect that even if economic losses were similar to Sandy, you would probably expect a slightly lower insured loss.”
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There are a number of factors affecting the potential size of these losses. Underinsurance plays a big part on the personal lines side, according to Coutts. Not many people take out personal lines flood insurance, so this area is likely to see higher economic losses than insured losses.
As the fourth largest city in the US, Houston could potentially experience “a very significant impact” in the commercial lines sector as a result of Harvey flooding. Business interruption could continue for some time and result in “very large losses,” said Coutts.
The National Flood Insurance Program (NFIP) covers most flood risk in the US. Harvey’s impact is likely to be a “significant event” for the already “hugely in debt” program.
“Flood is mainly covered by the National Flood Insurance Program. The NFIP does have some layers of reinsurance on it – between $4 and $8 billion. It has 26% reinsurance, which is shared between 25 reinsurers,” Coutts commented. “There could be a total loss of potentially $4 billion for the reinsurance industry, but that is spread quite evenly among a number of different players. There may be some significant Lloyd’s exposure there because I think eight of that reinsurance program are Lloyd’s syndicates.”
It’s too early to tell the exact extent of Harvey-related losses but the insurance industry is seeing a very wide range of potential loss estimates. Even the lower end of the loss estimates (around $5 billion) would place Hurricane Harvey as one of the top 10 US wind storms in history.
Despite Harvey’s significant size, Fitch Ratings is not predicting a huge impact on pricing. Coutts said Harvey is not large enough to cause a widespread turn in pricing, so “global rates are likely to remain low”. But of course, everything could change if Hurricane Irma strikes hard.
“There’s also the impact of Hurricane Irma, which is just developing at the moment,” Coutts added. “If that becomes another large storm, which affects Florida for example, then perhaps we might start to see a change of perceptions in the industry, which might lead to some rate increases – but it remains to be seen how that develops.”
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