Fitch Estimates Ivan May Become Second Costliest Hurricane For U.S. P/C Insurers

September 17, 2004

Chicago-based Fitch Ratings has issued some preliminary comments on the extent of the losses from Hurricane Ivan’s destructive rampage through Alabama, Florida and other Gulf Coast States.

Fitch noted that “Ivan was a strong Category 3 hurricane with 130 mph winds when it made landfall,” and was the “third major hurricane to strike the United States this season, following Charley and Frances.” It’s also likely to “be the costliest of the three storms,” based on catastrophe modeling firm EQECAT’s preliminary estimates in the range of $4 to $12 billion. [See also estimates from AIR and RMS]

Fitch cautioned that “it is still too early to make accurate insured loss estimates, noting that final insured losses from Frances have still not yet been tallied. However, unless actual losses vary significantly from early estimates, Ivan may supplant Charley as the second costliest insured hurricane loss in US history behind 1992’s Hurricane Andrew.”

The report concluded that although the first half of the year had seen “relatively light” catastrophe losses, “the year will now certainly be an above-average catastrophe loss year. If losses from Ivan do approach the $10 billion range with three months left in the year and, more importantly, six weeks left in hurricane season, then 2004 could well see $25 billion of catastrophe losses. This represents more than twice the average annual US catastrophe losses of $11 billion.”

Fitch set out its “preliminary analysis” of the effects the catastrophic events could have on insurance industry as follows:
— Cumulative hurricane losses are now at a point where they could have a positive effect on insurance and reinsurance pricing. This could potentially impact the recent softening in property insurance pricing.
— On balance, Fitch believes primary insurers still bear the brunt of the costs of this hurricane season though Ivan does shift some of the burden to reinsurers. The split between primary insurer and reinsurer is an interaction between reinsurance attachment points and limits. With each successive storm, primary insurers must first absorb the full cost up to the attachment point of their reinsurance (analogous to a deductible) before they can cede losses to their reinsurers.
— Each separate event gives the primary insurers another contract limit. In a really large event, such as Ivan has the potential to be, the ability to cede another limit starts to tilt the cost burden back towards reinsurers.
— Reinsurance contracts require reinstatement after each event before another limit is available. Some provide for free reinstatement while others require a reinstatement premium. Likewise, some reinsurance contracts permit an unlimited number of reinstatements while others may limit the primary insurer to one or two. If a primary insurer does not have the ability to reinstate the reinsurance policy, then the primary insurer must purchase more reinsurance or go bare (without reinsurance). Note: even if the primary insurer wants to purchase more reinsurance, there may be no reinsurers willing to sell it in the middle of hurricane season.
— Meaningful insured losses from Ivan are expected to occur outside of Florida. As a result, private reinsurers will also absorb the reinsurance losses as opposed to the Florida Hurricane Catastrophe Fund, a public-sponsored reinsurer that provides a significant amount of reinsurance in Florida.
— To the extent that there are insured losses in Florida, it increases the likelihood of an assessment from Citizens Property Insurance Company, a Florida public-sponsored primary insurer. Assessments from Citizens remain a very real possibility. Assessments would be made to the primary insurers writing premium within Florida. Since the assessments can be recovered through future premiums, they represent a cash flow, but not an expense to private insurers. That said, assessments would further strain the private insurers’ liquidity at a time when it has already been strained by three major storms.
— Fitch does not expect an assessment from Florida Hurricane Catastrophe Fund, which also has the authority to assess private insurers writing in Florida.
— Louisiana also has a public-sponsored primary insurer, the Louisiana Citizens Property Insurance Company. The Louisiana company is newer and has built up less surplus than the Florida company. Thus, significant losses in Louisiana might also trigger assessments against the other primary insurers writing premium in that state.
— Regulatory risk remains high, particularly in Florida. Homeowners have come to the realization that multiple events mean multiple deductibles. Additionally, if Citizens makes an assessment, the cost of that assessment will be built into future premiums. Conversely, many of the large, national, primary insurers have formed ‘Florida only’ subsidiaries. As we have indicated previously, Fitch believes the purpose of those subsidiaries is not to avoid claims but, rather, to make credible an insurer’s threat to leave the state if regulation becomes too onerous.
–A list of the ten primary insurers with the greatest homeowners exposure to the three-state regional consisting of Alabama, Louisiana and Mississippi is available on the Fitch Website at:

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