Hurricane Florence May Be Material for the NFIP

According to Fitch Ratings, Hurricane Florence is expected to represent an earnings event for the private insurance industry with limited or no rating actions due to the event. Substantial insured losses from water-related claims are likely to be incurred by the National Flood Insurance Program (NFIP), private flood insurers, and auto insurers, with a modest level of losses ceded to the traditional reinsurance and insurance-linked securities (ILS) markets.

Fitch said loss estimates are difficult to surmise given that substantial portions of the Carolinas remain difficult to access. Catastrophe modeling firm AIR Worldwide previously stated that insurance industry losses from Florence would range between $1.7 billion and $4.6 billion. These figures excluded the impact of ongoing flooding from precipitation. Willis Towers Watson estimated that losses would fall between $2.5 billion and $5.0 billion, while Karen Clark and Co. estimated that insured losses would be $2.5 billion. Company-specific insured loss estimates remain uncertain, and information will be more forthcoming as third quarter financial results are announced.

Wind speeds from Florence diminished as the storm approached the US coast, and Florence was downgraded to a Category 1 hurricane before making landfall in North Carolina. The level of wind-related damage to property is expected to be modest as a result of the significant decline in wind speeds, limiting losses to primary property insurance writers.

Flood losses are expected to significantly contribute to overall losses from Florence as storm surge and historic levels of rainfall have inundated coastal areas as well as a significant number of inland counties. Flood risk in the United States is almost entirely assumed by the NFIP as standard homeowners insurance policies typically do not cover the peril. The private market for flood insurance is limited to a handful of surplus lines writers, admitted companies, and Lloyd's of London syndicates. Additionally, a significant portion of total flood-related losses will likely be uninsured as the take-up rate for flood insurance in the affected counties is relatively low, particularly for inland areas that are not typically considered at high risk.

Flood losses from storm surge and torrential rain may lead to a material event for the NFIP, which counts the most affected states—North Carolina, South Carolina, and Virginia—each among the organization's top 10 largest exposures by policies in force.

The NFIP has added considerable risk transfer mechanisms to its structure in the last 18 months, which has helped the organization shift a portion of its risk to traditional reinsurers as well as the capital markets. The NFIP 2018 reinsurance program covers the organization for 18.6 percent of losses between $4 billion and $6 billion and 54.3 percent of losses between $6 billion and $10 billion. If the heavy flood damage from Florence breaches the attachment level of the program, it would be the second consecutive year that the program experienced losses. The NFIP recovered its entire $1.042 billion layer of coverage in 2017, largely as a result of losses from Harvey.

The ILS market is not expected to be materially exposed to Hurricane Florence. Collateralized reinsurance and ILS funds that participate on lower layer quota share reinsurance or retrocession agreements with cedents that were particularly exposed to the region would be the most likely source of potential modest loss in the ILS market.

The catastrophe bond market is most directly exposed to US wind-related risks with transactions typically attaching higher in cedents' risk transfer programs. The diminished level of expected wind losses from Florence limits the catastrophe bond markets' exposure to the storm. One catastrophe bond that the market is watching is the NFIP's FloodSmart Re 2018–1, issued in August 2018, which provides the organization with $500 million of third-party collateralized limit. If flood losses incurred by the NFIP from Florence increase past the bonds' attachment point of $5 billion, third-party investors could be at risk of partial loss of principal.