Fitch Reports Hurricane Dennis Could Impact Florida Insurance Market

Fitch Ratings is reporting that Hurricane Dennis is expected to represent a material loss to the insurance industry.

Dennis came ashore on Sunday, July 10, at 3:25 p.m., on Santa Rosa Island, Florida, as a Category 3 hurricane with winds of 115 to 120 mph. The storm then crossed the Florida panhandle into Alabama.

Catastrophe modeler EQECAT Inc. has preliminarily estimated the insured loss at $3 billion to $8 billion. Though this represents a relatively wide range, such estimates are typically refined as the National Weather Service publishes statistics on the storm track, wind speed, and central pressure.

Nonetheless, even if Dennis comes out at the low end of the estimated range, it will still be a significant storm. Additionally, total economic losses, which include losses to public property and uninsured losses, are typically twice the insured loss.

Fitch believes insurers selling homeowners’ and commercial multiperil property insurance lines in the Southeast U.S., particularly Florida and Alabama, will be most affected by the storm. In Florida, public sponsored entities (Citizens Property Insurance Corporation, Fitch long-term rating ‘A’, and the Florida Hurricane Catastrophe Fund, authorized bonding program rated ‘AA’ by Fitch) will bear a significant portion of this cost.

Fitch believes that these public sponsored entities as well as the private insurance industry (particularly many smaller Florida-only insurers) and the Florida population as a whole have not yet fully recovered from the 2004 hurricane season.

This situation is compounded by a prediction from the National Oceanic & Atmospheric Administration (NOAA) that 2005 will be an above-average year for hurricanes in the Atlantic Ocean. To have such a powerful storm make landfall so early in the season (which runs from June 1 to November 30) does not bode well for either the insurance industry or the state of Florida.

Fitch further believes another severe storm season could set in motion a complex series of economic and regulatory events that could include a greater number of private insurer insolvencies and additional assessments to Florida policyholders. However, severe back-to-back storm seasons could also be the catalyst needed to raise premium rates to adequate levels and attract better capitalized insurers to the state.

Citizens Property Insurance Corporation, a public sponsored entity and Florida’s insurer of last resort, is a case in point. Citizens began the 2004 hurricane season with a $1.1 billion surplus in its high-risk account and ended the year with a $515 million deficit in that account. Citizen’s deficit is expected to be eliminated through a 6.8% assessment to Florida’s insurers and, ultimately, to their policyholders. If losses and expenses exceed Citizen’s 2005 premiums, Citizens could again report a deficit, necessitating an assessment for 2005.

Private insurers have no such assessment mechanism. A private insurer becomes insolvent when its surplus drops below zero. In such circumstances, the state assumes control of the insolvent insurer.

However, in a manner similar to the assessment process, losses in excess of the insurer’s assets are charged to a guarantee fund. Thus, policyholders normally receive some percentage of what is owed to them. The guarantee fund, in turn, assesses insurers. To the extent regulators and competitive market conditions permit, insurers then pass the cost on to policyholders.

The unprecedented 2004 hurricane season saw one insurance company insolvency in Florida. With essentially no time to recover, however, another severe season in 2005 has the potential to cause additional insurer failures of some small, un-rated, Florida-only insurers. Fitch does not expect insolvencies among the larger, more diversified, and better capitalized insurance companies.

Dennis is not expected to trigger a loss to any of the catastrophe bonds in the Fitch rating universe.