Recent hurricanes Harvey, Irma and Maria have been part of an unprecedented year for natural catastrophes, with earthquakes in Mexico only adding to the woe. Luke Holloway looks at the impact on the insurance market.
Claims from Hurricanes Harvey and Irma have already made 2017 one of the worst years for natural catastrophes, and with the addition of Hurricane Maria, the cost of the three disasters is now predicted to exceed $100bn.
JPMorgan warned its clients at the beginning of October that the hurricane's costs will hurt many insurance companies' earnings. "We think industry insured losses from the Q3 hurricanes will approach or exceed $100bn, which should be sufficient to result in higher property insurance and reinsurance prices, given it would wipe out most of the industry's excess capital," says analyst Sarah DeWitt of JPMorgan.
Germany's Munich Re warned it could miss its profit target this year, the first major reinsurer to flag a hit to earnings from damage caused by hurricanes Harvey and Irma. Fellow German reinsurer Hannover Re also said it could miss its 2017 profit target because of claims from the natural disasters -- its first such warning since the 2008 financial crisis.
Harvey, which in a week-long period moved across the Caribbean and Latin America before dumping an estimated 27 trillion gallons of rain over Texas and Louisiana in the US, caused an estimated 77 deaths and displaced 30,000 people, with a large portion of the losses sustained by uninsured homeowners.
According to Impact Forecasting, Aon Benfield's catastrophe model development team, the third quarter of 2017 in particular is likely to break a new record as one of the costliest quarters for natural catastrophes.
"The month of September was exceptionally busy and marked by the most active month on record in the Atlantic Ocean for hurricanes based on combined strength and longevity," says Steve Bowen, Impact Forecasting's director and meteorologist.
Mr Bowen's comments coincide with the release of the latest Impact Forecasting report, which discusses the details of September's hurricanes and the Mexico earthquakes.
Kent Adams, regional managing partner for Wilson Elser's Houston and Beaumont, Texas offices, stated that US media reports had estimated Hurricane Harvey losses in Texas alone to be in the $190 billion range. "Some London estimates suggest significantly lower numbers for covered losses.
"Unverified estimates of privately insured losses are in the $20 billion range which according to folks we've spoken with in the London Market, are considered manageable and will not have a seismic effect on the market. Business interruption, professional liability associated with placing cover and novel liability theories advanced by Plaintiff's counsel to date are all potential wild card losses not yet fully assessed."
Hurricane Irma crossed through the Caribbean as a Category 5 hurricane, before making landfall in the US to become the first Category 4 landfall in Florida since 2004.
At least 132 people were killed or are missing, with hundreds more injured. Major damage caused by torrential rains and inland flooding occurred in the US, Cuba, Barbuda, the Virgin Islands, and the northern Leeward Islands.
Hurricane Maria became the second landfalling Category 5 hurricane in a matter of weeks, when it hit Dominica. The storm later crossed Puerto Rico -- the strongest to hit the island in more than 80 years -- resulting in catastrophic damage. Additional damage was noted in the Dominican Republic and Haiti. At least 78 people were confirmed to have died.
Hiscox has put the expected cost of claims it will incur from Hurricane Harvey in the US at about $150m, as it warns natural disasters would mean a big bill for insurers this year.
"2017 will be an expensive year for natural catastrophes but the industry can cope," says Hiscox chief executive, Bronek Masojada.
"Insurance remains a cyclical business and after a long period of price reductions, insurance rates in the affected areas and in specific sectors such as large property are likely to increase. In the wider global insurance market for large risks, we expect rates to stabilise and begin to increase."
There were also warnings that Harvey is set to cause hugely significant losses for property and casualty insurers and reinsurers, in addition to direct losses. Julian Miller, partner at DAC Beachcroft LLP, said that although there is already high awareness of the short tail property losses, history shows that when dealing with these large catastrophes there is a tail of claims which can develop in ways which aren't immediately foreseeable. "The London Market will pick up the exposures in a variety of ways, both through property insurance and reinsurance, but also liability exposures," said Mr Miller. "In a sense, it is the unexpected liabilities that could well be most significant for the London Market.
Mr Miller continued, "At the time of the disasters we heard about price gouging, which may well trigger third-party liability claims, but there are also liability claims which will arise within the context of the reconstruction. Therefore, the London Market may well be picking up claims from these storms for several years to come."
Lloyd's of London has now started paying out $4.5bn of Harvey and Irma claims. Dame Inga Beale, the Lloyd's of London chief executive and president of the CII, says: "The market is assessing claims and starting to make payments that will help local communities and businesses get back on their feet as quickly as possible."
THIRD TIME UNLUCKY
The market is still working out its liability for Hurricane Maria, which recently tore through Puerto Rico, but this catastrophe is estimated to have caused $40bn-$85bn in insured losses.
Manufacturing goods like pharmaceuticals and electronics are actually the island's main business, rather than tourism, which will mean increased payouts for business interruption as well as property damage caused by the storm itself.
Firms' lost income while their businesses are closed makes up a significant portion of overall losses after a natural disaster. Hurricane Katrina in 2005, for example, caused about $25bn in insured commercial losses, of which, according to information published by catastrophe risk modelling company AIR, up to $9bn was attributed to business interruption.
With assessments still ongoing for both Irma and Maria, Impact Forecasting says, it remains too early to provide a specific economic or insured loss estimate -- especially given the prolonged business interruption impact. In each instance, public and private insurers face payouts expected to considerably exceed $10bn.
CCRIF (formerly the Caribbean Catastrophe Risk Insurance Facility) paid out $19,294,800 to the region of Dominica following Hurricane Maria, under its tropical cyclone policy.
CCRIF was designed to provide quick liquidity to governments of the Caribbean and Central America following catastrophic impacts from tropical cyclones, earthquakes and excess rainfall. Dominica also holds an excess rainfall policy with CCRIF.
The claim brought the total CCRIF's payouts since its inception in 2007 to approximately $120 million. Isaac Anthony, CEO of CCRIF, said, "This provides some strong evidence that our model is a benefit to the region as well as a template that can be adopted and adapted by other regions of the world."
Earthquakes have also been the cause of massive disasters this year. The quake in early October in Mexico was the strongest of 2017, recorded at a magnitude of 8.1, striking offshore of the state of Chiapas. At least 103 people are known to have been killed.
A magnitude 7.1 earthquake then struck central Mexico, killing at least 369 people and injuring thousands more. Total combined economic damage is expected to reach into the billions of US dollars.
In Mexico City, 52 buildings collapsed, including a 10-unit apartment building, and a four-storey school; about 500 more buildings were damaged throughout the capital, including hospitals, several churches and a sports arena.
AIR Worldwide estimates that industry insured losses from the second earthquake alone could be more than $1.9bn. The cost of property insurance cover in the US is likely to rise "materially" as a result, but Asian prices should remain unaffected.
In mid-October, Mexico's finance ministry announced it was receiving a $150m insurance payout, "by the activation of 'catastrophic bonds'".
The insurance was acquired by Mexico several years ago with the help of the World Bank, through which the funds were planned to be transferred. The insurance was renewed at the beginning of August, just over a month before the earthquake.
Arguments regarding climate change and its role in such disasters has been revived, with many experts claiming that although not the sole cause of these catastrophes, the effects were certainly made worse. "It's important to note that climate change has already caused higher sea levels, so any storm surge is happening on top of a higher initial level, leading to more coastal flooding," says Chris Holloway, a tropical storm expert at the University of Reading.
"Also, climate change leads to increased rainfall for a storm of a given strength, leading to increased freshwater flooding. Climate change also likely increases the probability of storms reaching an extremely high intensity."
Mr Adams said that in response to such unprecedented natural catastrophes, insurers are investing in analytics, satellite and drone surveying and imaging, and blockchain technology to help insurance companies cope with such events.
"Laws and regulations will need to be adapted to facilitate these innovations, which seek to improve rate setting and claims handling, while cutting costs," Mr Adams said. "Such innovations also seek to reduce questionable losses and add to insurer's bottom lines. Such gains might ameliorate some premium increases through cost savings."
Overall, 2017 has been an unprecedented year for natural catastrophes. However, it is possible that recent events are something the insurance market will have to get more used to dealing with.