Hurricane Irma has left a trail of destruction across Florida, but it could have been much worse on the ground.
For insurers, investors and consumers, the news is also good. The industry has avoided extreme losses, and insurance rates are unlikely to rise significantly.
Estimates of total potential losses from the storm came down after Irma lessened in strength and passed up the west coast, avoiding a direct hit on Miami. AIR Worldwide, a catastrophe-modeling firm, has cut its estimate of losses to a range of $20 billion to $40 billion, down from its earlier forecast of up to $65 billion.
This will still be painful for the smaller Florida-focused primary insurers such as Heritage Insurance Holdings HRTG 21.56% and Citizens Property, as well as for their reinsurers, which take on much of the risk of major catastrophes from these players. Shares of insurers rebounded on Monday, having tumbled last week as the storm approached. Heritage Insurance, for instance, was up 21% on Monday afternoon, reversing its entire decline last week.
Aside from the Florida Hurricane Catastrophe Fund, a state-backed reinsurer that takes the biggest share of hurricane exposure, the private reinsurers likely to be most exposed are the Lloyd’s of London market, Allianz of Germany, Tokio Marine Holdings and Everest Re Group , RE 4.26% according to Moody’s Investors Service .
But the losses look manageable: Allianz, for instance, estimates a net exposure of €200 million ($240.7 million) from Irma, less than 2% of its expected full-year operating earnings. Analysts at Wells Fargo , meanwhile, forecast that on average, the big U.S.-listed reinsurers are likely to suffer losses equivalent to less than 70% of expected 2017 earnings.
There is still plenty of reason for caution around these numbers. Steve Moss of RMS, another catastrophe modeling firm, said the sheer size of the storm meant that there had been flooding from seawater on both sides of the Florida peninsula, spreading the damage. But fortunately, he added, the position of the storm meant the strongest winds around Tampa blew westward so that seawater wasn’t being pushed directly into the city from the bay.
The market for catastrophe bonds, an alternative form of reinsurance sold in capital markets, will also be affected. However, it currently seems that there might be no total defaults, although again it will be a while before that can be confirmed.
The scale of losses, even when combined with the costs of Hurricane Harvey last month, are small enough that they are unlikely to mean a big loss of capital from the industry.
Analysts have widely forecast that around $100 billion of catastrophic damages would be needed to trigger an increase in reinsurance rates. That is a mixed blessing for the industry, which has been feeling pressure on prices and coverage for years.
Reinsurance rates spiked after Hurricane Katrina in 2005, but have steadily declined ever since. The Guy Carpenter index of global property catastrophe reinsurance rates is down 42% from its 2006 peak. This environment has allowed property and casualty insurers to remain solidly profitable and build up capital, despite a competitive, buyer-friendly market for policies.
There are still two months to go of the hurricane season and more large storms could appear. But a fundamental reordering of the insurance landscape now seems remote.