Best Comments on Wilma’s Potential Impact on the P/C Industry

October 25, 2005

A.M. Best Co announced that it has begun to assess the potential financial impact of Hurricane Wilma on the property/casualty and reinsurance industry, following the storm’s landfall in South Florida.

Best said its “initial focus will be on those rated organizations with the largest market share exposure relative to surplus. In addition, those companies that sustained losses associated from Hurricanes Katrina and Rita, particularly within the reinsurance segment and national primary insurers, will also be considered for a priority review.”

The rating agency also indicated that while it awaits “information from the affected entities,” it is “evaluating potential market share exposure based on a number of different industry loss scenarios.” Best said its analysts “will review each organization’s overall reinsurance protection relative to the market share and modeled results. Further, the analysis will include details regarding each company’s model assumptions, particularly as they relate to demand surge. Lastly, A.M. Best will evaluate each organization’s financial flexibility post-event, as those with strong flexibility will be able to more quickly replace depleted capital.”

The bulletin also notes that, “in comparison to Hurricanes Katrina and Rita, the Florida Hurricane Catastrophe Fund (FHCF) will provide the private insurance sector with reinsurance coverage, depending on the magnitude of Hurricane Wilma. The FHCF provides coverage for the 2005 hurricane season up to a limit of $15 billion through a combination of cash and bonding authority, in excess of an industry retention of $4.5 billion. The retention is applied to each of the two largest events in 2005 and reduced to $1.5 billion for other events.”

Best also warned that “given the considerable volume of claims associated with Hurricanes Katrina and Rita,” it “believes a number of companies’ claims operations may be stressed, leading to greater risk of errors, bad faith claims and undetected fraud.”

In a specific comment on the Florida insurance market, Best observed that there are “a number of companies operating in the Florida property market that are not engaged in A.M. Best’s interactive rating process and, therefore, are not rated by A.M. Best. While A.M. Best does not assign a formal rating opinion to these entities, A.M. Bests believes their ability to meet policyholder obligations may be stressed given their geographic concentration in South Florida. This risk is increased given the significant losses sustained by the Florida market in 2004.”

Best said it would “continue to evaluate the potential and actual impact of Hurricane Wilma as more detailed information becomes available. While A.M. Best realizes that actual loss estimates will take time to accumulate, it is expected that all rated companies will provide preliminary modeled loss estimates and/or ranges within a reasonable time frame. Given the significant industry losses already sustained from 2005 hurricane activity and the path of Hurricane Wilma across the state of Florida, there is increased likelihood of rating downgrades or negative revisions to insurers rating outlooks.”

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