S&P Concerned by Hurricane Ivan; “Challenges Insurers’ Predictive Models”

Standard & Poor’s Ratings Services has issued a bulletin indicating that it “views the approach of Hurricane Ivan, which is projected to be moving toward Florida, with concern.” Reinstatement provisions in reinsurance treaties could cause some insurers problems.

With the probabilities very high that hurricane Ivan will strike Florida within the next few days, S&P pointed out that “there are still no precise industry figures on the insured losses associated with the last hurricane to strike Florida (Hurricane Frances), which made landfall on Sept. 5th. In addition, very few companies have reported the estimates of their own exposure to such losses.”

“Our conversations with leading companies in the industry in the past few days have led us to conclude that the losses born by private industry from Frances are expected to be no worse than the losses from the previous storm, Hurricane Charley, which made landfall on Aug. 13th,” explained S&P credit analyst Thomas Upton. “Further, it appears that the combined losses of the two storms, roughly estimated at $11 billion, are far less in real terms than the losses associated with Hurricane Andrew which struck Florida in 1992.”

S&P therefore confirmed that it would probably take no rating actions as a result of Charley and Frances, but it said: “Hurricane Ivan, or any subsequent storm, has incrementally greater potential to adversely affect the financial strength of both primary writers of property/casualty insurance in Florida and, to a lesser extent, the privately owned reinsurers to whom they cede business.”

S&P indicated that its concerns weren’t due to the intensity of the storm, but rather went to the “structure of insurance coverage inherent in the risk management programs of those property/casualty insurers who do business in Florida.”

The rating agency noted that the “Florida Hurricane Catastrophe Fund, the State sponsored fund that provides the first level of reinsurance coverage for most primary writers of homeowners’ insurance in Florida, has already absorbed losses from Charley and Frances which are estimated to be about $5 billion. The FHFC currently has the resources to provide further support to the industry, but its coverage is largely limited to residential exposures.

“Standard & Poor’s estimates that commercial losses from Charley and Frances were 25 percent-33 percent of that total, and those are born by either the primary writer of the coverage or its private reinsurer.

“Most private catastrophe reinsurers have limits on the number of events covered in aggregate by their policies, with a requirement that additional premium be paid for reinstatement after a first or subsequent event. Many such policies provide for a maximum of one such reinstatement. Clearly, for the primary writer who had such a catastrophe policy, i.e., with a maximum of one reinstatement, the consequences of a third storm could be quite severe, regardless of that storm’s intensity,” S&P stressed.

It added that with “all of these thoughts in mind, Standard & Poor’s will be monitoring the events of the next few days very carefully, and, as the situation develops, will have further comment on the effects it might have on both the industry and individual credits.”