Observers said insurance companies learned from the enormous costs inflicted on them beginning with Hurricane Andrew in 1992, whose severity ($25 billion in losses in 2017 dollars) caught many companies by surprise and bankrupted 11 insurers.
“After Andrew, there was greater attention paid to concentration of risk,” said Howard Mills, former New York State Superintendent of Insurance and now Deloitte’s global insurance regulatory leader. “Companies did a very good job of not having too much concentration in any one geographic region.”
Seven of the 10 costliest hurricanes in U.S. history have hit Florida, six of which came in a two-years span of 2004-05.
Mills said insurers pulled back from insuring Long Island post-2005 after witnessing the devastation from the triple-whammy of Katrina, Rita and Wilma in what was the most active Atlantic hurricane season recorded up to that time.
Insurers have grown smarter and more sophisticated when it comes to how much to charge and how many policies to issue in hurricane-prone regions like the Gulf of Mexico.
Weisbart said state regulators have tightened up on insurers, instituting stress tests to make sure they can cover claims. Insurers are also more cognizant about the individual risks, such as not insuring entire residential communities that could bankrupt them if they are wiped out.
“The way you prevent it is you insure one property in Miami, one in Tampa, one in Jacksonville,” Weisbart said.
“We have dramatically more capital in our industry than in the days of Hurricane Andrew,” said Mike O’Malley of the American Insurance Association. “Carriers are well prepared. We have dramatically better technology where we can track and manage risk aggregation, in particularly geographic risk.”
Florida had not suffered a major hurricane in 12 years, helping insurers generate profits.
That doesn’t mean insurers aren’t feeling some pain, but most of the costs have already been priced in. Big primary insurers such as Assurant, AIG and Travelers have seen their stock drop slightly over the past month.
But the re-insurers, who charge the primary insurers premiums to serve as their backstop for losses, have seen their stocks down over the past month: Everest Re Group is down 12 percent, XL Group is down 10 percent and RenaissanceRe Holdings is down 8 percent, to name a few.
“Overall we would expect this to be a manageable event,” Barclays managing director Jay Gelb said. “Insurance companies know losses are going to happen. It’s just a matter of when. They also have robust risk management frameworks in place to make sure they have enough capital to absorb these types of events.”
Indeed, Gelb and his team of researchers conducted a spot poll of insurance customers following the hurricanes. Half of the risk managers who responded said the hurricane damage was not substantial enough to cause a rise in their property rates. More than half anticipate tighter policy terms are ahead, particularly the way those policies cover wind damage.
The overall conclusion was that the storms will not have much effect on insurance premiums.
Harvey and Irma are very different hurricanes in terms of their effect on insurers. Harvey had less wind damage but more flooding. Irma was mostly wind.
Although the exact amount of insurance losses from each will not be known for awhile, Harvey’s insurable costs could be as high as $25 billion to $30 billion for private market insurers. Much of that cost is the hundreds of thousands of automobiles that are total losses due to flooding. And although most homeowner flood insurance is covered by the federal government, many businesses from the florist on main street to the multinational corporation in the 50-story skyscraper buy flood and business interruption insurance through the private market.
The thousands of homes resting underwater from the torrential rains that came with Harvey are insured by the National Flood Insurance Program under the Federal Emergency Management Agency.