Hurricanes Harvey, Irma and Maria have caused untold human strife, suffering and devastation, particularly across the Caribbean and parts of the US where the impact has been worst. The financial impact, whilst eye-wateringly significant, still falls short of worst-case scenarios. What effects might we start to see across the market and practically in the context of insurance companies’ own professional indemnity (PI) risks and cover, are there things to watch out for?
Estimates vary as to the scale of losses incurred. Hurricane Harvey has so far caused more than USD 10 billion in insured losses, not including those losses borne by the National Flood Insurance Program according to AIR Worldwide. They also state that Hurricane Maria has caused between USD 40 billion and USD 85 billion of insured losses, 85% of which are in Puerto Rico. According to Risk Management Solutions, Hurricane Irma losses are estimated at between USD 35 billion and USD 55 billion.
So what effect will the combined impact of these three hurricanes have on the market? Worst fears were allayed when Irma failed to hit Miami (which had the potential to create a hard market overnight). In addition, Hurricane Maria delivered a ‘glancing blow’ to North Carolina and Virginia, and certainly nowhere near the apocalyptic levels of destruction suffered by Puerto Rico.
Nevertheless, losses have hit a number of insurers hard. Chubb Ltd. has stated losses could total as much as USD 1.3 billion. Travelers expect between USD 245 million and USD 490 million in after-tax costs from Harvey. Munich Re has said that the combined cost would wipe out third-quarter profit and threaten its ability to meeting full-year targets. Lloyd’s has already begun paying out what is currently estimated to be a total financial impact of USD 4.5 billion.
Meanwhile, Hiscox is expecting a USD 225 million claims bill through two areas of exposure: reinsurance protection and insurance lines such as personal and commercial flood cover. And RSA has warned that natural catastrophe losses from the US, Caribbean and Mexico will hit its third quarter results, against which underwriting actions are being taken.
Therefore, whilst currently unlikely to be a capital event, the likelihood is that we will begin to see a steady drip-feed of rate increases on reinsurance and natural perils covers, which may also permeate into wider coverage lines.
Another question is how alternative capital markets will react when faced with catastrophe losses in what has hitherto been a lucrative business. It is certainly worth watching for the impact on the insurance-linked securities market; will this be seen as a further opportunity, or will investment capital dry up due to the magnitude of these events?
It is also worth highlighting at this point that ‘hurricane season’ is not yet behind us, and therefore any further windstorms could still have a sizeable impact on the insurance landscape. In addition, where ILS Funds split their exposure across different territories/perils, any further natural disasters around the world could equally have far-reaching consequences.
Whereas the market can only wait and see exactly how far reaching the impact of recent events will be in terms of rates across reinsurance and direct lines, for those insurers with exposure to the territories impacted, claims handling practices will no doubt be a key consideration moving forward, particularly with regard to bad faith.
So far more than 87,000 flood insurance policyholders in Texas have received more than USD 727 million in advance payments according to the Federal Emergency Management Agency. However, estimates say that the total clear-up operation may take until Christmas to complete. In such circumstances, bad faith potential is heightened due to high traffic of claims. Insurers must rely on temporary personnel and third party contractors to process the sheer volume of claims in line with statutory requirements, meaning detail can often get overlooked and the possibility of bad faith litigation increases accordingly.
In addition, the potential for class action claims increases when core issues in insurance-related storm damage cases are similar across a wide demographic of policyholders. This can emanate from litigants claiming that various insurer claims guidelines were uniformly applied, knowing that the value of claim aggregation can be so significant. Class actions may also be filed as ‘placeholders’, in order to toll certain claims-filing deadlines or allow broader bad faith discovery against insurance companies who refuse to pay mass claims.
Another area of potential dispute between insurers and policyholders will be over causation – whether the property damage was caused by wind, water or pre-existing condition (or a combination of these factors). Such disputes were heavily litigated post-Katrina and Ike, with many insurers looking to resolve such issues with policy amendments such as anti-concurrent causation clauses. The Texas Supreme Court has approved the use of such clauses, although their application will remain highly contentious.
In summary, whilst the combined impact of hurricane season is unlikely to be a capital-depleting event (as yet), the final cost will take quite some time to crystallise. And as with any event impacting such a high number of policyholders, insurers’ internal practices will be placed under great pressure as they navigate the claims fallout.
For further information, please contact Hilary Harmsworth, Partner on +44 (0)207 558 3298 or email firstname.lastname@example.org